Post by Jonathan C Lipson on Oct 1, 2010 7:08:02 GMT 4
Controlling Creditor Opportunism
Jonathan C. Lipson
University of Wisconsin Law School
August 19, 2010
Univ. of Wisconsin Legal Studies Research Paper No. 1129
Abstract:
This paper addresses problems of creditor opportunism. “Distress investors” such as hedge funds, private equity funds, and investment banks are opportunistic when they use debt to obtain control of a financially troubled firm and extract improper gains at the expense of the firm and its other stakeholders. Examples include the misuse of private information to short-sell a borrower’s securities and creditor self-dealing.
Creditors can act opportunistically because legal doctrines that historically checked such behavior – e.g., “lender liability” – have not kept pace with fundamental changes in the market for control of distressed firms. The recent Dodd-Frank financial reform is not likely to change this. Thus, creditor opportunism will remain a problem for courts to solve.
This article makes three basic contributions. First, it develops a tractable definition of creditor opportunism and offers examples of its destructive capacity; second, it explains why existing doctrine cannot adequately identify or remedy such behavior; third, it develops a new and more robust model of good faith review that will enable courts to manage problems of creditor opportunism.
papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID1666905_code546503.pdf?abstractid=1662127&mirid=2
Jonathan C. Lipson
University of Wisconsin Law School
August 19, 2010
Univ. of Wisconsin Legal Studies Research Paper No. 1129
Abstract:
This paper addresses problems of creditor opportunism. “Distress investors” such as hedge funds, private equity funds, and investment banks are opportunistic when they use debt to obtain control of a financially troubled firm and extract improper gains at the expense of the firm and its other stakeholders. Examples include the misuse of private information to short-sell a borrower’s securities and creditor self-dealing.
Creditors can act opportunistically because legal doctrines that historically checked such behavior – e.g., “lender liability” – have not kept pace with fundamental changes in the market for control of distressed firms. The recent Dodd-Frank financial reform is not likely to change this. Thus, creditor opportunism will remain a problem for courts to solve.
This article makes three basic contributions. First, it develops a tractable definition of creditor opportunism and offers examples of its destructive capacity; second, it explains why existing doctrine cannot adequately identify or remedy such behavior; third, it develops a new and more robust model of good faith review that will enable courts to manage problems of creditor opportunism.
papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID1666905_code546503.pdf?abstractid=1662127&mirid=2