Party Commitment and Flexibility in Corporate Restructuring

Emory Bankruptcy Developments Journal Emory Bankruptcy Developments Journal

Party Commitment and Flexibility in Corporate Restructuring Party Commitment and Flexibility in Corporate Restructuring

Robert K. Rasmussen

Part of the Bankruptcy Law Commons

PARTY COMMITMENT AND FLEXIBILITY IN CORPORATE RESTRUCTURING

Robert K. Rasmussen*

INTRODUCTION ............................................................................................... 425

REORGANIZATION AND RESTRUCTURING FIELD ................................. 426 A. The Trust Indenture Act ............................................................... 427 B. Venue in United States Courts ..................................................... 427 C. Which Country Should Take the Lead in Handling

the Restructuring of a Multi-National Company? ....................... 429 D. The Mandatory Nature of Bankruptcy Law ................................. 432 II. THE COMMON THEME IN THE DEBATES .............................................. 434 III. LESSONS FROM THE DEBT MARKET .................................................... 439 CONCLUSION ................................................................................................... 448

The thesis of this Essay is straightforward: Many of the debates in the corporate restructuring and reorganization field have, at their foundation, a tradeoff between commitment and flexibility. Ironclad commitments allow parties to plan their affairs without fear of change. Flexibility allows changes in response to new information but can raise the possibility of opportunism. The most durable type of commitment is a mandatory rule imposed by the government. Such rules specify what will occurs upon financial distress. For example, the Bankruptcy Code’s (the “Code”) chapter 11 provides a restructuring framework. The rule provides for no flexibility. All companies facing financial distress have the ability to invoke its provisions.

Yet there is no guarantee that a government will provide an efficient mandatory rule. For example, most view the enactment of the Chandler Act in the 1930s as putting in place a regime that was inferior to the prior one.1 The Chandler Act was predicated on the government taking over the reorganization of large companies. The Securities and Exchange Commission (“SEC”) was to appoint an outside trustee to come in and run the business. The reorganization would take place under the watchful eye of the bankruptcy court. It did not go well.

One response to a less-than-ideal mandatory rule is to replace it with a better mandatory rule. The move from the Bankruptcy Act (the “Act”) to the Bankruptcy Code can be seen as such a switch.2 But government processes can be slow—there was a four-decade interregnum between the passage of the Act and the passage of the Code. The Code itself is now in its fifth decade. Moreover, government-provided rules tend to be one-size-fits-all solutions. There is little attempt to craft regimes that reflect the heterogeneity of businesses in financial distress. To address these shortcomings, proposals have been made to allow parties to choose the rule that will apply when a company becomes financially distressed. The parties have better information as to how they will be affected by any given rule than the government.

The time at which the parties make the choice matters. A party that has the legal right to select a governing rule will pick the rule that maximizes its own

interest. When a party must deal with those who will be affected by the choice, it will consider how the choice will influence future interactions. For example, a company that is allowed to make a choice over some aspect of a future restructuring will consider different factors when it makes that choice before having to borrow money than it will if it makes the choice after the money has been lent. A party that makes a credible commitment to an efficient rule entices creditors to loan money at a lower cost than they otherwise would. Creditors can anticipate how they will be treated should there be a need to revamp the balance sheet of the business and price their loans accordingly.

A simple regime allowing parties to make binding commitments may not be the best that we can do. A commitment on the part of the borrower may be optimal when it was made but circumstances may change, and a new set of rules could better advance the joint interests of the parties. However, flexibility invites the potential for opportunism. A borrower that has total freedom to alter the governing rules after it has received the lender’s money has the incentive to do so in its favor, even if the change decreases the overall value of the business.

The basic tension between commitment and flexibility permeates debates in corporate bankruptcy law. These debates include: how one should handle the financial distress of a multi-national business; in which venue should a company seeking chapter 11 relief in the United States be allowed to file; how constraining should federal bankruptcy law be; and whether bonds should have procedures that allow changes to certain terms without the consent of each bondholder. Each of these debates can be understood as reflecting a fundamental tension between commitment and flexibility in lending contracts. Moreover, we can draw lessons from the lending market and the recent spate of liability management exercises as to the efficacy of private ordering of commitment and flexibility; unforeseen events will happen, but that private actors responding to them after they arise may well be the best solution available.

This Part briefly lays out the current debates over many parts of restructuring

law.

A. The Trust Indenture Act

One of the longest standing debates in restructuring is over section 316(b) of the Trust Indenture Act. This provision requires that for a bond to be issued, the governing indenture has to provide that a bondholder’s right of payment of principal and interest, and the right to be paid at the time set forth in the indenture, cannot be changed without the consent of the bondholder.3 The effect of this law is that a bond indenture cannot provide that a vote of the other bondholders by a specified majority (say, more than half or sixty-seven percent) can alter the terms of the bond held by someone who did not vote in favor of the change. As to other terms, the indenture could specify how they should be altered. The indenture could set a voting threshold to do things such as remove covenants or release collateral. But this is not so for principal, interest, and time of payment. The goal of the drafters of the Trust Indenture Act in including this limitation on voting was to make it harder for companies to restructure their debt outside of bankruptcy.4 To the extent that the company could only survive with a reduction in the amount it owed on its bonds, it would have to either convince a sufficient number of bondholders to reduce what they were owed (knowing the holdouts would still be entitled to payment in full) or to reorganize in bankruptcy court.

Mark Roe questioned the efficacy of this commitment.5 He argued that the prohibition inhibited workouts and should be repealed. Others, however, have rallied to the provision’s defense.6

B. Venue in United States Courts

The venue provision in the Code provides an interesting example of commitment and flexibility. The current provision is a mandatory rule: a commitment. Unlike many commitments which constrain future behavior, it is a commitment that provides almost unfettered choice to the debtor. It is, in

effect, a commitment to have no constraints on future choice. The Code provides that a company can file where it is incorporated, where its headquarters are located, where its principal assets are located, or in any jurisdiction in which an affiliate has already filed.7 Most companies have little trouble filing in the venue that they desire.8 We thus have a mandatory rule that provides no commitment and unconstrained flexibility. The debtor can pick whichever of the ninety-four bankruptcy courts suits its interests.

The most vocal criticism of this situation is not only that this is forum (and sometimes judge) shopping, but that bankruptcy courts compete for cases by bending the law in ways that favor those making the venue decision.9 Unchecked flexibility in this regard has led to a system where those filing a petition select a venue that elevates their interests above other parties in interest. One proposed response to this perceived problem is to retain a government-supplied rule but to eliminate the current flexibility. Suggestions along these lines include creating a nationwide bankruptcy court for large cases and tightening the venue rules to constrain the number of choices. These efforts share the goal of limiting the extent to which a debtor has a choice among venues at the time that it files its chapter 11 petition.10

Others have defended the current practice.11 The basic argument here is that a party will choose a venue based on things such as the experience of the judges (no one wants their case to be a learning experience for a new judge who has no

background in restructuring large companies), precedent, and speed in handling matters, all of which are positive attributes of a court. These attributes should be retained rather than tossed aside by constraining available venue drastically; if anything, the system should be tweaked to enhance these benefits.12

Still others argue that a company should commit to a specific venue that would handle a future bankruptcy case before financial distress is on the horizon. Under this proposal, a company would specify in its charter where it will file for bankruptcy should the need arise.13 Two-party contracts often specify where a future dispute will be heard. Such clauses are enforced routinely in both state and federal courts.14 The proposal here would be to extend the concept to bankruptcy. Because a debtor makes multiple contracts with its creditors, it cannot specify in which venue it will file in these documents. There is the risk that the debtor may provide inconsistent contracts, promising some creditors to file a case in one venue and promising other creditors to file in another. The venue selection should be placed in the company’s charter to ensure that all creditors are bound by the same selection. Moreover, putting the commitment in the charter would allow any interested creditor the ability to ascertain quickly where any bankruptcy case would end up. There is no reason to assume that the company would commit to a single venue; one could imagine the company committing to a limited subset of venues. The company would then pick among this limited group should it need to seek chapter 11 relief.

C. Which Country Should Take the Lead in Handling the Restructuring of a

Multi-National Company?

The debate above is wholly domestic. It is about where in the United States a company should be allowed to file a bankruptcy petition. Yet financial distress is not a United States-only phenomenon. Large corporations and even smaller ones have operations that take place in more than one country. A product

manufacturer can have manufacturing facilities in a number of countries and distribution chains in even more. An airline has operations that cross national borders daily. A construction company can build across the globe. Some of these businesses are going to encounter financial distress, and the question arises as to where the insolvency proceeding should take place.

If anything, this decision about which court a reorganization occurs is of greater import than the U.S. venue dispute just discussed. A court that oversees a restructuring will apply the rules of its country. The venue dispute in the United States is about which American court will apply American bankruptcy law. The question of in which country a dispute is resolved is in large part a question of which country’s law will apply. Bankruptcy judges differ in their interpretation of the Code, but the Code still supplies the basic framework. Countries, on the other hand, can take very different approaches to reorganization altogether.

For centuries, the governing law of how the affairs of a distressed multinational business would be handled could be best described as territorial.15 Each country would administer the assets within its borders. A business would file for bankruptcy in the country that it was located. Even if a business did have assets in another country, these assets could be administered in the courts of the country in which the assets were located.16 In a world where few businesses crossed national boundaries, this system worked well enough.

As businesses grew and began to have assets in multiple countries, the fear arose that the territorial system would lead to inefficient liquidations. As each country focused only on the assets in its borders, no court had control over the business as a whole. A company where there was value in keeping the assets working together could be dismembered as each country narrowly gazed on the subset of assets that fell within its jurisdiction.17 One of the great accomplishments of the past few decades has been the creation of a system of cooperation among countries. The United Nations Commission on International Trade adopted the Model Law on Cross-Border Insolvency (the “Model Law”)

in 1997.18 Over sixty countries, including the United States, have put its provisions into positive law.19 While this is not the time to dive into the details of the Model Law, its underlying goal is to provide for coordination among courts when a business extends across multiple countries. One nation’s courts take the lead, and the courts of other countries assist in implementing the decisions reached there.

But which country’s courts take the lead? Current law is that the country that is the Center of Main Interest (“COMI”) of the business should be the site of the restructuring effort.20 This is an attempt, unlike the Code’s capacious venue provisions, to identify a single place where a bankruptcy case should be filed. Yet it is far from clear that this approach is the best one available. Despite its goal of identifying one jurisdiction to take the lead in restructuring a multinational enterprise, the COMI of a business is not always obvious. Moreover, COMI can be manipulated by the company to select one country’s court to take the lead.21

There is a current debate over whether COMI should remain as the basis for deciding the proper location of restructuring efforts. Even the proponents of COMI recognize that the current state of affairs produces uncertainty as to where a case is going to be launched and that some rethinking of the concept is needed.22 Another suggestion, quite similar in motivation and spirit to the ones for domestic venue, is that companies should be allowed to specify in their corporate charter which country would host the main proceeding.23

Allowing commitment has a benefit for countries that do not have a robust restructuring ecosystem. Most if not all countries have systems to shut down failing companies and distribute proceeds and assets to the creditors. Liquidation procedures can be relatively simple and straightforward, but not every country

has a full-blown restructuring system. Such systems are expensive to create and maintain. Rather than having each country create its own system, it is better if a small number of countries establish such regimes and companies are allowed to select from this modest number of options. The gain from creating, say, the 150th comprehensive restructuring regime may not be all that much. For many countries, resources at the margin are better spent elsewhere.

D. The Mandatory Nature of Bankruptcy Law

The two prior debates take government-provided insolvency law as a given. In the domestic setting, the question is what freedom should a company have in choosing among domestic bankruptcy courts. In the transnational setting, the question is which country’s law should provide the basis for any reorganization effort. The overall structure of any actual proceeding is then provided by a set of state-supplied laws. These laws are mandatory in that their provisions cannot be altered by choices made by the debtor and its creditors before bankruptcy.24

For years, scholars have debated the merits of chapter 11. Should we stay with absolute priority or move to relative priority?25 Should we amend the Code to make it even easier to handle mass torts in a fair and efficient way?26 Should we revamp the debtor-in-possession (“DIP”) financing system?27 These questions tend to assume that the government remains the sole provider of bankruptcy rules. Yet there have been calls to relax this assumption. Rather than having choice over which court to file in or which country will supply the governing rules, perhaps a debtor should be allowed to specify how its financial distress will be resolved.28 There has been no shortage of proposals for better systems to deal with a company’s financial distress. Rather than having Congress select what options are available, a company should decide which

bankruptcy regime is in place. In terms of choices, one could imagine a debtor selecting from various options or even making its own bespoke regime.

Of course, so that I am not misunderstood here, even those who advocate for greater flexibility in selecting insolvency regimes readily insist on the protection of certain interests. That much of bankruptcy’s mandatory nature should be rethought does not mean that there are no mandatory rules in this area. Just as environmental law, properly designed, safeguards those outside of the corporation from the decisions made by those inside the corporation, insolvency law needs to attend to those who could be harmed systematically from a rule allowing businesses to commit to the regime they view as the best. It is like the old line, when you are not at the table, you are on the menu.29 Systematically extracting value from one group that cannot safeguard its interests has little to commend it as a matter of public policy.

The one group on every list for mandated protection is involuntary creditors. The prime example of such creditors are tort victims. They did not make a decision to lend to the company—it was involuntary. They run the gamut from single individuals who are injured by the company to victims of mass torts such as exposure to asbestos. These creditors cannot protect themselves through decisions not to contract with a company, contractual safeguards for when they do so, and price terms to compensate them for the risks they are taking. Whether one takes an economic approach to law, a moral approach, or some approach in between, it is difficult to countenance an argument that those injured by a company should not get paid while voluntary creditors receive hefty payments when the company is restructured.

Tort victims may not exhaust the list of creditors who should have their interests protected by a mandatory rule. To the extent that one believes that workers and certain creditors such as trade creditors also deserve protection in a restructuring, there should be mandatory rules to do so. The point here is not to debate the precise specification of the list of protected creditors; rather, it is to underline that all agree that such a list needs to exist.

In thinking about those who should receive protection in the case of financial distress, it is important that this protection comes not from part of an insolvency regime but as part of general law. Not all financial distress gets resolved through insolvency. If a state is serious about protecting certain parties, that protection

should apply regardless of whether the business triggers a formal restructuring mechanism.30

These disparate areas of bankruptcy law and the suggestions for change have a basic tradeoff at their center. It is the tension between allowing parties to make commitments in advance and yet allowing for flexibility should situations change.

There is a standard argument running through these debates, mostly associated with those identified as law and economics scholars, that runs as follows. Sophisticated creditors, when they lend money, are aware of how their claims against the borrower will be handled should the borrower run into financial distress and not have the liquidity to pay its debts.31 This insight applies whether the creditors are negotiating the loan with the debtor or whether they are buying a loan on the secondary market.

Lenders can structure and price their loans in response to this regime. They can insist on being paid sooner (temporal seniority), having collateral back their debt (asset-based priority), having withdrawal rights, obtaining a contract for priority, or having their loan placed in an entity in the corporate structure that accords them structural priority. These arrangements will then be reflected in the interest rate that they charge. Some lenders have a high tolerance for risk and prefer to be lower in the capital stack, anticipating that the increased interest they will collect will compensate them for the added risk. Other lenders will prefer a safer return in exchange for a lower rate of interest. In the end, however, lenders must compete with other lenders when offering to loan money to borrowers. Price your loan too high, and the borrower will go elsewhere. For this reason, lenders expect to get a market rate of return, and no more.

The borrower is the party that is most affected by the applicable restructuring and reorganization regime. A regime that destroys enterprise value in times of distress will cause the lenders as a group to raise the rate of interest that they charge. Conversely, a regime that increases enterprise value will lower interest rates. Either way, lenders will get a market, risk-adjusted return. But a regime that lowers overall interest rates, will benefit the borrower in the first instance. The lower the interest rate, the more projects a borrower can undertake with an expectation of making a profit. The cumulative effect of an increased funding for projects with a positive expected value is to benefit the economy and society as a whole.32

Of course, this is not an insight that is unique or even original to bankruptcy law. Much scholarship in corporate law is based on the same premise.33 For example, the argument that there is a race among states to provide better corporate law (a “race to the top”) is based on this same foundation. Companies—at least before they have to raise capital—will select a regime that increases their value through their chosen state of incorporation, thus reducing the cost of capital. Reducing the cost of capital, in turn, increases their value.

Central to the magic of commitment is the restraint on actions that, after the commitment is made, would allow a party to escape the commitment. If one party can unilaterally change the negotiated deal with few, if any impediments, the magic evaporates.34 Once all parties know that commitments are not durable, they are just cheap talk, no one will rely on them at the contracting stage. Parties may well expect that there will be some deviation from the outcome for which they have contracted. These deviations will happen when they matter most; they will occur when one party can take advantage of the other. In the extreme, a

party may place no value on the other side’s commitment. A promise to pay back a loan “if I feel like it” offers little confidence to the putative lender. It will price its loan with the expectation that it will be treated as poorly as it can imagine.

To put this observation into the language of the debates described above, companies committing to an efficient venue at the time a loan is made would receive no benefit in reduced lending costs if they could ignore the commitment and file in another jurisdiction that perhaps does not enhance enterprise value but does provide benefits for the managers. A promise at the time of borrowing to conduct a reorganization proceeding in Singapore would not benefit a borrower if it could later decide to seek refuge in other courts that may be hostile to foreign creditors. A promise to auction the company in the case of financial distress would not benefit a borrower if it retained the freedom to seek a courtbased reorganization instead.

The argument here is not that parties are omniscient. They are not. Rather, the argument is that they have some knowledge about the nature of the business including its possible future; that knowledge can be used to make a valueenhancing commitment. Parties may have experience and an expectation as to how things will unfold with the company. The professionals that they hire have knowledge of the efficacy of various legal options. Still, none of these parties know the future with precision. This does not mean that they need a statesupplied set of rules to handle matters when conditions change. They know what they do not know, and that things will need to be adjusted along the way. To say that parties can contract for an insolvency is not to say that they can forecast the future. Rather, they can ascertain what set of rules would best guide future decisions.

Those who object to calls to allow for more party commitment raise at least two important points that need to be taken seriously. The first is that circumstances change. Even if a borrower can with some degree of certainty opt for the right rule today—be it venue, majority voting in bond contracts, which country should lead the reorganization effort, which reorganization regime should govern—what if circumstances change and another rule is better tomorrow. An attractive venue may become an unattractive one; a country may revamp its insolvency regime in a way that leads to destruction of value; a company that promised to put itself up for auction should it not be able to meet its obligations may benefit from restructuring instead.

This concern may not loom that large in practice. Consider, for example, the risk that a country may radically overhaul its insolvency system in a way that

decreases the value of companies that use its procedures. The old system may have been the best available choice, but now the new one is not as good as other options. How real of a threat is this? To be sure, the New Deal bankruptcy reforms were a step backwards.35 But by and large, there are incentives in the political system to improve matters, not make matters worse. To the extent that a country hosts a robust and effective insolvency regime, vested interests would seek to maintain and even improve that system. Restructuring professionals do not wish to see their livelihood diminished by ill-considered changes. They may not be the most powerful interest group imaginable, but they have incentives to safeguard the system.

The same is true with respect to venue. One thing that makes a venue attractive is experienced judges who will handle a case. Chapter 11 cases are complex undertakings. The statutory provisions are long and detailed; the financing involved can be head scratching to outsiders; debt contracts that set out the entitlements of the lenders run for scores of pages. A good judge can create value through the effective administration of their court. But the identity of judges changes. Bankruptcy judges are appointed for fourteen-year terms; even ones that get reappointed to subsequent terms do not preside forever.

There is a modest safeguard in the way that bankruptcy judges are appointed that decreases the risk that a new judge will not be up to the task. The process of appointing bankruptcy judges differs from that for appointing Article III judges. The appointment is not made by an elected representative that may be influenced as to whom they bestow a life-time appointment; rather, the appointment of bankruptcy judges is made by the circuit court in which the bankruptcy court is located.36 Those wanting to be a bankruptcy judge apply for the position. The circuit court then appoints a merit review panel to make recommendations as to which people should be appointed judges.

The composition of the merit panels and their effect on the bankruptcy bench is an understudied area of bankruptcy law. One thing that seems to be the case is that the panel often includes leading members of the local bar. To the extent that this is true, there will be an incentive to recommend attorneys who can maintain a high level of efficacy for their local courts. This is especially the case if the bankruptcy court has a reputation for being effective. If the bankruptcy

court is attracting cases, this creates a constituency of local bankruptcy attorneys with a vested interest in continuing that tradition.

These modest safeguards, of course, are no blanket guarantee against a country’s insolvency regime becoming less attractive or the decline of a previously efficacious venue. Moreover, the company itself may change in ways that make the initial choice inappropriate. It seems inevitable that if we had a system that allowed debtors to make some ex ante choices (e.g., which country to start a proceeding, venue in the United States, what bankruptcy rules should apply, voting rules on bonds) some debtors will end up with a choice that may have been the best choice for the company when made but no longer is.

The challenge is how to introduce some flexibility into a regime that is built upon a theoretical foundation that a company has made a binding commitment. Allowing the debtor to make unilateral changes based on its own assertion that things have changed has little appeal. The opening for opportunism is obvious. A debtor could use such flexibility to change prior commitments in a way that benefits the debtor at the expense of its creditors.

The other extreme would be to allow no changes at all. Maybe the risk of change is not great. To be sure there will be some cases where the initial choice is no longer the optimal one. Maybe these situations are infrequent enough that the best answer is to just live with them rather that installing a system for allowing changes that may create more problems than it solves.

Most who have argued for allowing commitments have eschewed both extremes. They have attempted to specify when a commitment can be changed. One suggestion is to allow the parties to include with their commitment the process by which it can be changed.37 The intuition is that parties would craft procedures that limited changes to ones that would be value enhancing. Others have suggested a range of possible solutions: allow the debtor to amend but give the affected parties a sufficient time to object; allow amendments only with a prescribed level of creditor support; allow amendments but delay the effective date.38 The fact that we see a number of solutions to the flexibility problem suggests that there is no rule that is clearly the right one.

The problem of changed circumstances bedevils all proposals that allow for a binding choice to be made well in advance of its actual implementation. There is a second problem for the proposal that a debtor be allowed to select its own bankruptcy regime. Bankruptcy regimes have become incredibly complex over the years. The Code runs for scores of pages. Even single sections can cover multiple pages. The caselaw interpreting the Code is itself another source of complexity. Allowing debtors to make bespoke insolvency regimes runs the risk that, in any given transaction, the creditors will not have the incentive to understand the nuances of the system that the debtor has selected. Most companies do not go bankrupt. Even for those that do, the variation in recovery to any given creditor is probably not its entire investment. The gains from scrutinizing the choice that the debtor has offered may be less than the cost of interrogating that choice. Faced with these costs of ascertaining precisely what has been selected, it may be rational for some lenders to spend no effort on this aspect of the loan. There are often hundreds of loans backing a collateralized loan obligation. The issuer that is gathering the loans probably will not spend much if any time looking at a bespoke provision that only applies if a borrower becomes distressed. This problem could be ameliorated if there were a set of standard terms that a borrower could choose from, but it is unclear where such a set would come from.

On both the issue of how much flexibility should there be and what to do about the need for standardization, the experience of the debt market, both in the past and recently, provides helpful insights.

Consider lending contracts outside of bankruptcy. Lenders and borrowers know no more about the future with regards to financial challenges outside of bankruptcy than they do about such challenges inside of bankruptcy. While the Trust Indenture Act places some limitations on the contracting space for debt issued in the United States, parties are otherwise accorded a good deal of contractual freedom, certainly more than they are allowed with respect to the Code. The documents that the parties draft and execute are complex. They can easily run for over one hundred pages of single-spaced type.

In two-party contracts, there is little need to establish at the time of contracting extensive mechanisms to change commitments that later become suboptimal. The parties are free to alter their deal at any time. If the circumstances change, and they decide that another course of action best

maximizes their joint welfare, they can just amend the contract. They may dicker over how the surplus created by the amendment should be divided between the two of them, but they should agree to the amendment itself.

Things become more challenging when more parties are in involved in the initial loan. An example comes from the world of syndicated lending. The original syndicated loans that took hold in corporate lending in the 1980s were designed to set the rules of the game for the life of the loan (usually between five and seven years) but be flexible when the facts on the ground changed.39 These loans were substitutes for a loan made by a single bank. Single bank loans have an inviting characteristic. When the loan is made, the terms are set at what the two parties to the loan view as optimal. The parties know that things will change, but they also know that the two parties could renegotiate as necessary. Moreover, given that it was often the case that a borrower would look to the same lender for a subsequent loan, both had incentives not to behave opportunistically. Of course, mistakes were made; people are fallible, but the general structure worked fairly well.

One defining aspect of a simple two-party loan is that the lender takes the entire risk of that loan. When banks were almost exclusively the lenders to companies, the bank would make the loan and hold the loan to maturity. Loans grew in size, and sensible bankers realized that they should not expose the bank to too much risk from a single loan. Banks are constrained by regulations as to how much they can lend, and tying up a substantial portion of lending capacity with a single borrower could threaten the bank with ruin should that borrower default. To diversify the risk of a single loan negatively impacting the health of a bank, the syndicated loan evolved.40 The members of the syndicates were virtually all banks when these loans became common in financing American businesses.41

The experience of bankers when they had held single loans was that often adjustments needed to be made during the life of the loan. Once the loan was held by multiple parties, the parties had to create a structure as to how the loans were to be amended when necessary. These provisions worked relatively well. The members of the syndicate were all part of the same fraternity, and the norm was that when changes had to be made to a loan, the lead bank who put together the loan originally would negotiate with the borrower. A proposed amendment would be put to a vote, but by and large the expectation and experience was that the members of the syndicate would defer to the decision of the lead bank.42

The leveraged buyout boom of the 1980s greatly increased demands for long-term loans to fund the buyouts. Initially, much of this financing came from the public markets through high-yield bond offerings.43 Eventually, the demand for funds increased the demand for syndicated loans as well. As demand increased, the identity of those funding the loans needed to expand in order to provide more liquidity to the market. Nonbanks became members of the syndicate.44

At the same time as syndicated lending increased, both banks and nonbanks adopted business models that were not predicated on holding loans to maturity. Indeed, part of the challenge that Continental Bank faced in the mid-1980s was that, as its fortunes declined, it had no market into which it could sell some of its loans in order to shore up liquidity as depositors fled.45 Shortly after Continental failed, a secondary market in bank loans developed.46 This was good

for lenders as it gave them a way to reduce their risk and to generate funds if they were no longer comfortable with a credit that they owned. They could trust the lead bank to work with the borrower as necessary, but the secondary market gave them an exit option. Indeed, having a secondary market made it more attractive to lend in the primary market in the first instance because they knew that they did not have to hold the loan to maturity.

For present purposes, one notable aspect of the evolution of the secondary loan market is the creation of the Loan Syndications and Trading Association (“LSTA”) in 1995. It is easier to trade loans on the secondary market when there is some standardization among lending documents. If every loan document differs in material ways, prospective purchasers will have to invest more resources in ascertaining the terms of the deal. The added transaction cost would reduce the amount of trading. The LSTA was created in part to help the thennew market. It provides some degree of standardization. Today the LSTA describes part of its mission as being “committed to providing the critical leadership that is essential for the continuation of the corporate loan market’s strong growth through thought leadership from industry experts, sharing industry best practices and by establishing standards and standardization.”47

One concern with allowing private parties to contract over insolvency law is that there needs to be off-the-rack choices that parties can select. It makes little sense to force parties to come up with new contract provisions for each contract. The creation of the LSTA suggests that the private market can provide standardization where needed. The LSTA provides templates that the parties can use, but it does not mandate them. Somewhat similarly, the Practical Law Institute provides contract drafters with selections of terms that have been used in the market. Both institutions often provide a range of potential language so that parties can select the terms that work best for their transaction. While there is no guarantee that a similar organization would arise that would provide for choices of insolvency law, or that the existing ones would take on the task, the experience in the credit markets suggest that it is a serious possibility.

The creation of the secondary market in syndicated lending eventually led to opportunism. Buyers in the secondary market were no longer just other banks or sedate institutions, such as pension funds or insurance companies. New, more aggressive players emerged. Funds developed that were not looking to just follow the recommendation of the lead bank. They were looking for substantial

returns—no more clubby relationship lending. An outsider would be able to acquire sufficient funds to block amendments that would prevent a default. The default or threat of default would then force the company to reorganize in chapter 11. In some cases, the lenders who bought the loan on the secondary market would end up as the majority equity holder of the reorganized firm.

As the demand for financing increased, syndicated loans expanded. Rather than a small group of repeat players who could discipline each other through a tit-for-tat strategy over repeated interactions, the syndicates became more dispersed with hundreds of lenders in the group. Some of the lenders actively monitored the borrower, some did not. In some ways, syndicated loans moved closer to bonds. The newer loans had fewer covenants, they were harder to amend, and they were more liquid due to the growth of the secondary market.

At the same time, we saw the nature of the creditor base evolve. “Buy and hold to maturity” was no longer the single strategy used by the holders of syndicated loans. Distressed investors often bought troubled debt with a hope of gaining control of the company. The rise of collateralized loan obligations (“CLOs”) created more demand for debt. Of course, all prospective borrowers knew of these folks; they did not want their loan to end up in the hands of such investors. Syndicated loans historically barred competitors and firm insiders from buying the loan on the secondary market. When aggressive distressed investors arrived on the scene, some new loans added these funds to the disqualified lenders list.48

Central to the rise of the syndicated lending market was the creation of mechanisms to allow the terms of the deal to be adjusted in response to changing circumstances. Lending contracts, even in the absence of financial distress, are amended frequently.49 Loan contracts would specify which terms could be adjusted by a less-than-unanimous creditor vote and which terms were inviolate. For terms that could be changed, the credit agreement would specify what voting threshold was needed, often in a provision defining “required lenders.” Those provisions that could not be changed absent unanimous consent were known as “sacred rights.”50

Recent events show both the challenges that private agreements can create for the parties that use them, as well as the capacity they have to respond to these challenges. These events, in turn, provide some evidence as to the possible efficacy of allowing parties to balance commitment and flexibility. There has always been jockeying for position among creditors in a restructuring—juniors pressed for high valuations of the business that would leave more value for them, they questioned the validity and extent of the priority of others, etc.51 But throughout all of this, there was the universally accepted norm that creditors in the same loan holding the same interest in the debtor shared the same economic interests. It was junior creditors versus senior creditors. But each creditor group had cohesion. To be sure, there were conflicts when a creditor would hold multiple loans with differing priorities,52 but there was otherwise a unity of purpose inside the creditor group.

Such unity of interest is no longer the case. Recent years have seen a series of developments that have put pressure on the norm of creditors holding the same debt having the same economic interest.53 One is the rise of ad hoc groups. As syndicated debt became more broadly distributed, ad hoc groups of lenders holding the same interest began to form well in advance of any financial distress. These ad hoc groups tended to have sufficient size so that in any subsequent restructuring, the members of the group could control or at least have substantial input in any discussion over the terms of the restructuring. For example, for a class of creditors in a bankruptcy proceeding to accept a plan of reorganization, one half of the creditors holding two-thirds of the debt had to approve the plan. To change many terms in a debt instrument outside of bankruptcy, it is common to require the vote, by dollar amount, of a majority of the debt. Ad hoc groups formed so that they were in the vicinity of or above the necessary amount.

Another change in the past decade was the rise of the private equity sponsor as an aggressive player in a bankruptcy restructuring.54 Boards of directors of

public companies tend to hew to the fiduciary duties established by Delaware law. While they promote the interests of shareholders in good times, they owe allegiance to the entire firm in a restructuring setting.55 Private equity sponsors, on the other hand, tend to put their interests (and those of their investors) above all others. Having made a large bet on the company, they seek to retain as much control as possible in a restructuring.

The formation of ad hoc groups and the rise of equity sponsors created an environment where new transactions flourished. The sponsors, their advisors, and their lawyers created a bevy of what are now called liability management exercises. While they take different forms, liability management exercises can split creditors who were once natural allies. The sponsor can work with an ad hoc group on a transaction that benefits that group and itself at the expense of the other creditors holding the same debt. Consider, for example, an uptier transaction. The economics of the transactions are that the company gets a fresh infusion of capital from those in the favored group, giving it more time to address its challenges outside of bankruptcy. The creditors who provide this money are a subset of existing creditors who hold debt in the company. The favored creditors, in exchange for their new investment, have been promised a higher return on their old investment. They exchange their old debt for new, higher priority debt. Those holding the same debt instrument but not in the favored group are not offered this opportunity. Rather than having the same priority as their fellow creditors, those left out now find themselves behind them. They see the value of their investment plummet.56

The ability to do these transactions was not known at the time of the original loan. In the lending transaction, buyers of the debt thought that they were in the same boat as their fellow creditors. After all, the notion of pro rata sharing was a fundamental commitment. The basic understanding is that the lending group were all making the same loan and they shared the same economics.

Yet this commitment of equality within the lending group has been eroded.57 To be sure, it is often the case that when an enterprising consultant devises a new liability management exercise, the terms of future loans are adjusted so as to prevent that maneuver going forward. But there seems to be little end to the creativity of this segment of the market. What started with drop downs58 and then added uptiers now has double dips59 and staggered reprioritization.

Two things to note about these dynamics. The first is that, even if one needed additional confirmation of the point, private parties are not omniscient. No one buying into the issuance of a syndicated loan a decade ago could have foreseen the rise of liability management exercises. Clever professionals ex post found ways to exploit contractual language that ex ante lenders believed protected them.60 The second thing is that parties to future loans adjusted quickly. One can easily tweak the contractual language to prevent these maneuvers. Indeed, the trade press highlighted this potential immediately, and many deals changed their language to adopt this protection and to revert to the original understanding.61 The market responded much more quickly than Congress does when a court adopts an unexpected reading of the Code.62

Liability management exercises, however, do not exhaust the changes roiling commercial lending markets. The lending world has continued to evolve. As syndicated loans began to look more like bonds—fewer covenants and more and different entities owing part of the loan—this created an opening that has been

filled, at least in part, by private credit.63 Private credit, in some ways, harkens back to the old days of syndicated lending. There is a small group of investors who are on the same page about the prospects for a company. Those making the loan intend to hold the loan to maturity. There is active monitoring of the debtor and the ability to adjust the terms of the loan as necessary. What has changed is the source of the funds. The original syndicated loans by and large involved a consortium of banks. Banks are not a direct part of the private credit deal. Rather, nonbanks are advancing the funds.64 Indeed, echoing the evolution of the syndicated lending market, there is a nascent secondary market in private credit loans.65 While borrows prefer a small, cohesive group of lenders to work with should adjustments become necessary, some lenders’ need for liquidity suggests that history could well repeat itself.

The lesson from the continuing growth, development, and change in the private lending markets is that parties seem capable of navigating the inevitable tension between commitment and flexibility. A decade ago, no one could have foreseen the rise of liability management exercises or the creation of a deep and robust market in private credit. Unforeseen events happened. With the rise of liability management exercises, there were winners and losers in the short-term on loans that had already been made. Those on the losing end of a liability management exercise understandably argue that the reality of how their debt was handled when the borrower became financially distressed did not meet their expectations when they entered the loan. That said, markets adjust, and one can expect going forward to the extent that these transactions are problematic for the lenders, they will be brought to heel.66 Private credit, on the other hand, seems at least for the moment to have added a new financing source that companies find attractive. To be sure, there will be unexpected bumps in the road. Private credit has yet to be stress-tested by broad financial distress. It is likely that tweaks will have to be made along the way. Still, the takeaway is that debt markets can flourish even when unexpected events happen, and we should

expect the same to be the case if parties had similar freedom when it comes to the contested issues in modern bankruptcy scholarship and practice.

Debt contracts have an inherent tension between the need for durable commitments and flexibility. Many debates in the corporate reorganization and restructuring literature are, at the most basic, debates about the extent to which private parties can strike the right balance. The evolution of private lending markets suggests that they can.

--- FOOTNOTES ---

* J. Thomas McCarthy Trustee Chair in Law and Political Science. Prior versions of this essay were presented at the Tomorrow’s Insolvency Law Conference at Goethe University Frankfurt and the Who Governs Debt’s Dominion Symposium at Bingham Young University.

TABLE OF CONTENTS

I. THE CURRENT DEBATES IN THE CORPORATE

INTRODUCTION

1 For a description of the formulation of the Bankruptcy Act, see DAVID A. SKEEL, JR., DEBT’S DOMINION: A HISTORY OF BANKRUPTCY LAW IN AMERICA 101–27 (2001); Mark J. Roe, Three Ages of Bankruptcy, 7 HARV. BUS. L. REV. 196, 197 (2019); Douglas G. Baird & Robert K. Rasmussen, Boyd’s Legacy and Blackstone’s Ghost, 1999 SUP. CT. REV. 393 (1999).

2 See generally SKEEL, JR., supra note 1, at 130–39.

I. THE CURRENT DEBATES IN THE CORPORATE REORGANIZATION AND RESTRUCTURING FIELD

3 The Trust Indenture Act of 1939, Pub. L. No. 117-103, § 316, 53 Stat. 1149. 4 SKEEL, JR., supra note 1, at 121. 5 See generally Mark J. Roe, The Voting Prohibition in Bond Workouts, 97 YALE L.J. 232, 234 (1987). 6 See, e.g., Stephen J. Lubben, Protecting Ma and Pa: Bond Workouts and the Trust Indenture Act in the 21st Century, 44 CARDOZO L. REV. 81 (2022); Victor Brudney, Corporate Bondholders and Debtor Opportunism: In Bad Times and Good, 105 HARV. L. REV. 1821, 1834–35 (1992). For an analysis of the current effect of section 316(b) on out-of-court restructurings, see Wiliam W. Bratton & Adam J. Levitin, The New Bond Workouts, 166 U. PA. L. REV. 1597 (2018) (reporting that in many cases issues have been able to complete bond restructurings out-of-court but still urging the repeal of section 316(b) because it offers few to no benefits to bondholders).

7 28 U.S.C. § 1408. 8 A recent paper by Lynn LoPucki asserts that in some cases companies file in a chosen venue even if the venue is not appropriate under the venue statute. See generally Lynn M. LoPucki, False Venue Claims Signed Under Penalty of Perjury, BUS. LAW. (forthcoming 2025).

9 Lynn LoPucki has been the most persistent critic. See Lynn M. LoPucki & William C. Whitford, Venue Choice and Forum Shopping in the Bankruptcy Reorganization of Large, Publicly Held Companies, 1991 WIS. L. REV. 11, 12–13 (1991); Theodore Eisenberg & Lynn M. LoPucki, Shopping for Judges: An Empirical Analysis of Venue Choice in Large Chapter 11 Reorganizations, 84 CORNELL L. REV. 967, 968 (1999); Lynn M. LoPucki & Sara D. Kalin, The Failure of Public Company Bankruptcies in Delaware and New York: Empirical Evidence of a “Race to the Bottom”, 54 VAND. L. REV. 231, 323–33 (2001); LYNN LOPUCKI, COURTING FAILURE: HOW COMPETITION FOR BIG CASES IS CORRUPTING THE BANKRUPTCY COURTS (2005). He is by no means alone. See, e.g., Samir D. Parikh, Modern Forum Shopping in Bankruptcy, 46 CONN. L. REV. 159, 159 (2013); Adam J. Levitin, Judge Shopping in Chapter 11 Bankruptcy, 2023 U. ILL. L. REV. 351, 351 (2023).

10 LYNN M. LOPUCKI, supra note 10, at 252 (suggesting that Congress substantially narrow the venue rules); Laura N. Coordes, The Geography of Bankruptcy, 68 VAND. L. REV. 381, 387–88 (2015) (arguing venue transfer should be considered at the start of every large bankruptcy case).

11 See, e.g., Harvey Miller, Chapter 11 Reorganization Cases and the Delaware Myth, 55 VAND. L. REV. 1987, 1989 (2002); David A. Skeel, Jr., What’s so Bad About Delaware?, 54 VAND. L. REV. 309, 312 (2001); Jared A. Ellias, What Drives Bankruptcy Forum Shopping? Evidence from Market Data, 47 J. LEGAL STUD. 119, 120 (2018) (arguing predictability of outcomes explains forum shopping in Delaware and the Southern District of New York).

12 See generally Brook E. Gotberg, The Market for Bankruptcy Courts: A Case for Regulation, Not

Obliteration, 49 BYU L. REV. 647 (2024).

13 Anthony J. Casey & Joshua C. Macey, Bankruptcy Shopping: Domestic Venue Races and Global Forum Wars, 37 EMORY BANKR. DEV. J. 463, 498–99 (2021); Robert K. Rasmussen & Randall S. Thomas, Timing Matters: Promoting Forum Shopping by Insolvency Corporations, 94 NW. U. L. REV. 1357, 1357–58 (2000). A very useful summary of the debate on the Bankruptcy Code’s venue provisions can be found in Terrence L. Michael et al., NCBJ Special Committee on Venue: Report on Proposal for Revision of the Venue Statute in Commercial Bankruptcy Cases, 93 AM. BANKR. L.J. 741 (2019).

14 See John F. Coyle & F. Andrew Hessick, Erie and Forum Selection Clauses, 2024 U. ILL. L. REV. 777, 802–04 (2024) (reporting that in a sample of cases between 2010 and 2020 state courts enforced forum selection clauses seventy-nine percent of the time and federal courts had an enforcement rate of ninety percent).

15 See, e.g., John Lowell, Conflict of Laws as Applied to Assignments for Creditors, 1 HARV. L. REV. 259,

260 (1888).

16 See Charles D. Booth, Recognition of Foreign Bankruptcies: An Analysis and Critique of the Inconsistent Approaches of the United States Courts, 66 AM. BANKR. L.J. 135, 135–47 (1992); Donald T. Trautman et al., Four Models for International Bankruptcy, 41 AM. J. COMP. L. 573, 574–75 (1993).

17 See Jay Lawrence Westbrook, Theory and Pragmatism in Global Insolvencies, 65 AM. BANKR. L.J. 457, 464–66 (1991); Lucian A. Bebchuk & Andrew T. Guzman, An Economic Analysis of Transnational Bankruptcies, 42 J. L. & ECON. 775, 776 (1999). For a contrary view, see generally Lynn M. LoPucki, The Case for Cooperative Territoriality in International Bankruptcy, 98 MICH. L. REV. 2216 (2000).

18 UNCITRAL Model

Law

on

Cross

Border

Insolvency,

UNITED

NATIONS

https://uncitral.un.org/en/texts/insolvency/modellaw/cross-border_insolvency (last visited Mar. 17, 2025).

19 For an introduction to chapter 15 of the Bankruptcy Code, which implements the Model Law on Cross-

Border Insolvency, see Jay Lawrence Westbrook, Chapter 15 at Last, 78 AM. BANKR. L.J. 713 (2005).

20 See Commission on International Trade Law, Model Law on Cross-Border Insolvency, Art 16(3) (2014). For an early critique of COMI, see Robert K. Rasmussen, A New Approach to Transnational Insolvencies, 19 MICH. J. INT’L L. 1 (1997). A more recent analysis of the harmful effects of COMI can be found in AURELIO GURREA-MARTÍNEZ, REINVENTING INSOLVENCY IN EMERGING ECONOMICS 248–72 (2024).

21 For an analysis of these and other problems with COMI, see Anthony J. Casey, Aurelio Gurrea-Martínez

& Robert K. Rasmussen, A Commitment Rule for Insolvency Forum, 4 U. CHI. BUS. L. REV. 51 (2025).

22 See International Insolvency Institute-III, Prof Jay Westbrook Moss Fletcher Lecture June 2023,

YOUTUBE (Aug. 14, 2023), https://www.youtube.com/watch?v=kb7nG21cUUU.

23 Casey, Gurrea-Martínez, & Rasmussen, supra note 21.

24 See THOMAS H. JACKSON, THE LOGICS AND LIMITS OF BANKRUPTCY LAW 17 (1986) (“[T]his system works only if all the creditors are bound to it. To allow a debtor to contract with a creditor to avoid participating in the bankruptcy proceeding would destroy the advantages of a collective system.”)

25 See, e.g., Douglas G. Baird, Priority Matters: Absolute Priority, Relative Priority, and the Costs of Bankruptcy, 165 U. PA. L. REV. 785 (2017); Mark J. Roe & Michael Simkovic, Absolute Priority, Relative Priority, and Valuation Uncertainty in Bankruptcy, 173 U. PA. L. REV. 389 (2024).

26 See, e.g., Samir D. Parikh, The New Mass Torts Bargain, 91 FORDHAM L. REV. 447 (2022); Anthony J.

Casey & Joshua C. Macey, In Defense of Chapter 11 for Mass Torts, 90 U. CHI. L. REV. 973 (2023).

27 See, e.g., Kenneth Ayotte & Alex Zhicheng Huang, Standardizing and Unbundling the Sub Rosa DIP

Loan, 39 EMORY BANKR. DEV. J. 523 (2023).

28 See Robert K. Rasmussen, Debtor’s Choice: A Menu Approach to Bankruptcy, 71 TEX. L. REV. 51, 53 (1992); Alan Schwartz, A Contract Theory Approach to Business Bankruptcy, 107 YALE L.J. 1807, 1810–11 (1998).

29 This quote has been attributed to many people.

II. THE COMMON THEME IN THE DEBATES

30 Douglas Baird was the first to focus attention on the pernicious effects that can occur when a party receives different treatment in bankruptcy than it does when a company is liquidated under state law. See generally Douglas G. Baird, Loss Distribution, Forum Shopping, and Bankruptcy: A Reply to Warren, 54 U. CHI. L. REV. 815 (1987).

31 See, e.g., Frank H. Easterbrook, Is Corporate Bankruptcy Law Efficient, 27 J. FIN. ECON. 411, 414 (1990) (“[A]lthough [bankruptcy] law creates losers given that a firm becomes a debtor in bankruptcy, it does not create loser ex ante. . . [C]reditors will charge more money, emerging no worse off across their portfolio of loans.”); Rasmussen, supra note 29, at 55–58; Vincent S.J. Buccola & Greg Nini, The Loan Market Response to Dropdown and Uptier Transactions, 53 J. LEGAL STUD. 489, 492 (2024) (“Optimal contract theory predicts that, absent bargaining impediments, loan agreements should constrain borrowers in a way that maximizes the parties’ expected joint surplus.”); Alan Schwartz, A Normative Theory of Business Bankruptcy, 91 VA. L. REV. 1199 (2013).

32 See Robert K. Rasmussen, An Essay on Optimal Bankruptcy Rules and Social Justice, 1994 U. ILL. L.

REV. 1, 42; Schwartz, supra note 28, at 1814.

33 The canonical statement can be found in Ralph K. Winter, Jr., State Law, Shareholder Protection, and the Theory of the Corporation, 6 J. LEGAL STUD. 251, 275 (1977) (“The chartering decision . . . so far as the capital market is concerned, will favor those states which offer the optimal yield to both shareholders and management.”). Judge Frank Easterbrook has called this paper “the most important contribution to the economic analysis of corporate law since Ronald Coase’s The Nature of the Firm in 1937.” Frank H. Easterbrook, The Race for the Bottom in Corporate Governance, 95 VA. L. REV. 685, 686 (2009). For an extended analysis of how managers have an incentive to select efficient corporate law, see Frank H. Easterbrook & Daniel R. Fischel, THE ECONOMIC STRUCTURE OF CORPORATE LAW (1991), and for how Delaware has made a credible commitment to provide such law, see Roberta Romano, THE GENIUS OF AMERICAN CORPORATE LAW (1993).

34 See Lucian A. Bebchuk, Limiting Contractual Freedom in Corporate Law: The Desirable Constraints on Charter Amendments, 102 HARV. L. REV. 1820 (1989) (showing that managers would have an incentive to move away from efficient provisions after they raise capital if such a change would benefit their interests and not the interests of the corporation as whole).

35 See SKEEL, JR., supra note 1, at 160–83. 36 28 U.S.C. § 152(a).

37 This position was first stated in Casey & Macey, supra note 14, at 498. See also Casey, Gurrea-Martínez,

& Rasmussen, supra note 21.

38 Rasmussen, supra note 28, at 119; Rasmussen & Thomas, supra note 13, at 1358; Casey, Gurrea-

Martínez, & Rasmussen, supra note 21.

III. LESSONS FROM THE DEBT MARKET

39 One practitioner with over four decades experience in representing parties to syndicated loans told me

that not a single loan that he worked on was not amended at least once during the life of the loan.

40 For discussion of the evolution of the syndicated loan market, see Elisabeth de Fontenay, Do the Securities Laws Matter? The Rise of the Leveraged Loan Market, 39 J. CORP. L. 725 (2014); Katerina V. Simons, Why Do Banks Syndicate Loans, NEW ENG. ECON. REV., Jan.–Feb. 1993, at 45; Arthur E. Wilmarth, Jr., The Transformation of the US Financial Services Industry 1975-2000: Competition, Consolidation, and Increased Risk, 2002 U. ILL. L. REV. 215 (2002).

41 For descriptions of the syndicated loan market at the turn of the century, see Steven A. Dennis & Donald J. Mullinex, Syndicated Loans, 9 J. FIN. INTERMEDIATION 404 (2000) and Blaise Gadanecz, The Syndicated Loan Market: Structure, Development and Implications, BIS Q. REV. 75 (2004).

42 See Amir Sufi, Information Asymmetry and Financing Arrangements: Evidence from Syndicated Loans,

62 J. FIN. 629 (2006).

43 See Steven N. Kaplan & Jeremy C. Stein, The Evolution of Buyout Pricing and Financial Structure in the 1980s, 108 Q. J. ECON. 313, 336–40 (1993) (documenting the increased reliance on high-yield debt to management-led buyouts beginning in 1985).

44 See Iñaki Aldasoro et al., Non-bank lenders in the syndicated loan market, BIS Q. REV. 15 (2022) (reporting that non-bank participation in syndicated loans increased from less than $300 billion in 1990 to approximately $4,750 billion in 2019); Mitchell Berlin et al., Concentration of control rights in leveraged loan syndicates, 137 J. FIN. ECONS. 249, 249 (2020) (noting that over a trillion dollars in syndicated loans issued in the United States on a yearly basis).

45 The failure of Continental Bank in 1984 was at the time the largest bank failure in American history. The Federal Reserve prevented collapse of the bank with a $2 billion loan and promises to guarantee all deposits. This action is generally pointed to as the origin of the Fed’s “too big to fail” policy. For a history of the crisis and the events that triggered it, see Continental Illinois: A Bank That Was Too Big to Fail, FED. RSRV. HIST. (May 15, 2023), https://www.federalreservehistory.org/essays/continental-illinois.

46 See Continental Bank: Pioneering Desk Launched Market, Careers, GLOB. CAP.: SECURITIZATION (May AM),

11, https://www.globalcapital.com/securitization/article/28mwrwhgdgtq7o0vbv7r4/securitization-polls-andawards/continental-bank-pioneering-desk-launched-market-careers.

12:00

2007,

47 About, LSTA, https://www.lsta.org/about/ (last visited Feb. 21, 2025).

48 See Sydney P. Levinson & Mitchell Carlson, The evolving scope and application of ‘Disqualified Lender’ lists, ALT. INV. MGMT. ASS’N (Nov. 18, 2024), https://www.aima.org/article/the-evolving-scope-andapplication-of-disqualified-lender-lists.html.

49 See David J. Denis & Jing Wang, Debt Covenant Renegotiations and Creditor Control Rights, 113 J.

FIN. ECONS. 348, 348–50 (2014).

50 See Douglas G. Baird, Three Faces of Creditor-on-Creditor Aggression, 97 AM. BANKR. L.J. 213, 230

(2023).

51 See Harvey M. Miller, Chapter 11 in Transition – From Boom to Bust and into the Future, 81 AM. BANKR. L.J. 375, 389 (2007); Kenneth M. Ayotte & Edward M. Morrison, Creditor Control and Conflict in Chapter 11, 1 J. LEGAL ANALYSIS 511, 512–13 (2009); Jared A. Ellias, Do Activist Investors Constrain Managerial Moral Hazard in Chapter 11? Evidence from Junior Activist Investing, 8 J. LEGAL ANALYSIS 493, 493–94 (2016); Mark J. Roe & Frederick Tung, Breaking Bankruptcy Priority: How Rent-Seeking Upends the Creditors’ Bargain, 99 VA. L. REV. 1235, 1253–54 (2013).

52 See Douglas G. Baird & Robert K. Rasmussen, Antibankruptcy, 119 YALE L.J. 648, 686 (2010). 53 For a recognition of this emerging dynamic, see Diane Lourdes Dick, Hostile Restructurings, 96 WASH.

L. REV. 1333 (2021).

54 The foundational paper on this change is Vincent S.J. Buccola, Sponsor Control: A New Paradigm for

Corporate Reorganization, 90 U. CHI. L. REV. 1 (2023).

55 See N. Am. Cath. Educ. Programming v. Gheewalla, 930 A.2d 92, 99 (Del. 2007). As aggressive attempts to keep privately-owned companies out of bankruptcy court become common, it could well create a norm that public directors have a duty to explore such transactions as well.

56 Perhaps the most prominent uptier transaction involved Serta Simmons. See Excluded Lenders v. Serta Simmons Bedding (In re Serta Simmons Bedding, LLC), 125 F4th 555 (5th Cir. 2024) (holding that this transaction violated the credit agreement). While the court in Serta found that that uptier transaction violated the credit agreement, a New York court upheld an uptier transaction where the credit agreement had different language. See Ocean Trails CLO VII v. MJN Topco Ltd., 233 A.D.3d 614 (N.Y. App. Div. 2024).

57 See generally Diane Lourdes Dick, Alliance Politics in Corporate Debt Restructurings, 39 EMORY

BANKR. DEV. J. 285 (2023); Baird, supra note 51.

58 For a description the drop-down transaction in J. Crew, see Robert K. Rasmussen & Michael Simkovic,

Bounties for Errors: Market Testing Contracts, 10 HARV. BUS. L. REV. 117 (2020).

59 See Mark Maurer, The Latest Tool to Refinance Short-Term Debt: Double Dip Financing, WALL ST. J. (Oct. 3, 2023, 5:30 AM), https://www.wsj.com/articles/the-latest-tool-to-refinance-short-term-debt-double-dipfinancing-4cfe96ff.

60 One unexplored question is to what extent are there or should there be professional obligations to not engage in transactions that violate widespread understandings of what is allowed by a contract. Is there or should there be limits on creative readings of documents when all agree that the reading upends settled expectations?

61 See Buccola & Nini, supra note 32, at 493–94. 62 Courts take an exceedingly textualist approach when reading debt contracts. Liability management exercises have arisen in part because courts follow the text with little attention to what common understandings may have existed at the time a loan was made. See Eric L. Talley & Sneha Pandya, Debt Textualism and Creditor-on-Creditor Violence: A Modest Plea to Keep the Faith, 171 U. PA. L. REV. 1975, 2000-03 (2023). Drafters of loan documents seem to prefer choice of law clauses that embrace states which take a strict textualist approach to such matters while avoiding those where the approach is to ascertain the likely expectations of the parties.

63 On the rise of private credit, see Jared A. Ellias & Elisabeth de Fontenay, The Credit Markets Go Dark,

134 YALE L.J. 696 (2025).

64 See id.; Traditional banks do play a secondary role in private credit. The private credit funds often borrow from a bank. See Bank funding of private credit grows rapidly, in step with sector’s capital-raising, MOODY’S (Oct. 15, 2024), https://www.moodys.com/web/en/us/private-credit/bank-survey.html.

65 See Private Credit Loans Increasingly Traded in the Secondary Market, STRUCTURED FIN. ASS’N (Apr.

5, 2024), https://structuredfinance.org/private-credit-loans-increasingly-trading-in-the-secondary-market/.

66 See Vincent S.J. Buccola, Efficacious Answers to the Non-Pro Rata Workout, 171 U. PA. L. REV. 1859

(2023).

CONCLUSION