The New and Improved Chapter 11

Abstract

Chapter 11 has healed itself. According to some of its leading critics, chapter 11 is no longer the long, expensive process that it was in the 1980s - when storied companies like Pan Am slowly wasted away their remaining value in a vainglorious attempt to survive in a changed marketplace. Today's chapter 11 is a swift, market driven process that quickly moves troubled companies into more capable hands. And the credit for this change goes to control rights. In particular, advances in financial contracting are said to allow the parties to agree about who should exercise control over the firm's assets in any particular state of the world. Chapter 11 has then become a system of corporate reorganization that is dominated by a single creditor, or at least a small group of sophisticated creditors. In this paper I examine this putative new chapter 11. Unlike Baird, Rasmussen, and Skeel before me, I express some skepticism about the new state of affairs. I begin by addressing two basic questions: should chapter 11 be dominated by a parochial group and who might suffer under such a regime? In particular, I look at whether chapter 11 is appropriately deployed to address a firm's financial distress when that firm has already allocated its control rights to a single actor or a concentrated group of actors, like a DIP lender. I conclude that if the control rights description of the new chapter 11 is accurate, chapter 11 will only be used when it benefits the controlling creditor, and we should expect these sorts of creditors to capture most or all of these benefits. Moreover, we should expect that in some number of cases, the use of chapter 11 under a control rights regime will not be overall efficient, in that any gains come with corresponding losses to non-consenting parties. I then consider whether the empirical story told by these authors is plausible. Again in contrast to the leading scholars, I argue that control in a large modern firm is often inherently ambiguous and that control rights are always relative and state-dependant. Formal control may have little relation to actual, functional control. In this context, chapter 11 provides a forum for an organized resolution of these competing claims.