‘Wither’ the Equity Powers of the Bankruptcy Court

posted in: Cramdown and Priority | 0

Author: Mark N. Berman, Nixon Peabody LLP

The United StaMark Bermantes Supreme Court’s Law v. Siegel decision has been explained away as an understandable limitation of a bankruptcy court’s use of Bankruptcy Code Section 105(a)’s expansive authority based on conventional techniques of statutory construction. Bankruptcy courts will not be able to use Section 105(a) to authorize an order that is otherwise prohibited by another section of the Bankruptcy Code.  However, it is also possible to read the decision as yet another stop on the road to limiting the ability of the bankruptcy courts to ‘do equity.’

Revisiting Professor Levitin’s 2006 law review article entitled Toward a Federal Common Law of Bankruptcy: Judicial Lawmaking in a Statutory Regime, 80 Am. Bankr. L.J. 1-87 (2006), I posit that the equity jurisdiction of the bankruptcy courts has already been statutorily restricted and the United States Supreme Court has made it clear that everyone should be prepared for further limitation of what has historically been its power. The Supreme Court’s warning is repeated in this latest decision.

The full alert is available here.

[Editor: The full text of Professor Adam Levitin’s noted article, Toward a Federal Common Law of Bankruptcy: Judicial Lawmaking in a Statutory Regime, can be found here.]

Breaking Bankruptcy Priority: How Rent-Seeking Upends the Creditors’ Bargain

posted in: Cramdown and Priority | 0

Post by Frederick Tung, Professor at Boston University School of Law

In “Breaking Bankruptcy Priority:  How Rent-Seeking Upends the Creditors’ Bargain,” recently published in the Virginia Law Review, Mark Roe and I question the stability of bankruptcy’s priority structure and suggest a new conceptualization of bankruptcy reorganization that challenges the long-standing creditors’ bargain view. Bankruptcy scholarship has long conceptualized bankruptcy’s reallocation of value as a hypothetical bargain among creditors: creditors agree in advance that if the firm falters, value will be reallocated according to a fixed set of statutory and agreed-to contractual priorities.

In “Breaking Priority,” we propose an alternative view. No hypothetical bargain is ever fully fixed because creditors continually attempt to alter the priority rules, pursuing categorical rule changes to jump ahead of competing creditors. These moves are often successful, so creditors must continually adjust to other creditors’ successful jumps. Because priority is always up for grabs, bankruptcy should be reconceptualized as an ongoing rent-seeking contest, fought in a three-ring arena of transactional innovation, doctrinal change, and legislative trumps.

We highlight a number of recent and historical priority jumps. We explain how priority jumping interacts with finance theory and how it should lead us to view bankruptcy as a dynamic process. Breaking priority, reestablishing it, and adapting to new priorities is part of the normal science of Chapter 11 reorganization, where bankruptcy lawyers and judges expend a large part of their time and energy. While a given jump’s end-state (when a new priority is firmly established) may sometimes be efficient, bankruptcy rent-seeking overall has significant pathologies and inefficiencies.

The paper is available here.

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