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Abstract:
This Article questions the widely held view that the fiduciary duties that corporate directors ordinarily owe to or for the benefit of shareholders should shift to creditors when the corporation is in financial distress. This view suffers from two important flaws. First, it mistakenly assumes a strong connection between duty and priority in right of payment. Thus, the thinking goes, as the corporation approaches insolvency, creditors should displace shareholders as the residual claimants, to whom duties should run. While this may make sense when a corporation liquidates, it ignores the fact that priority is a distributional doctrine, and therefore functions very differently than does duty.

The second, and more important, mistake is that linking priority and duty causes us to ignore the deeper normative concerns that should animate duty in the corporate context. These normative concerns usually respond to power imbalances expressed as disparities of volition (voluntariness), cognition (information), and exit (access to secondary markets).

On this view, it is apparent that not all creditors of the distressed corporation are equal. Creditors who lack volition, cognition, and exit - and thus should benefit from directorial duties - might include tort creditors, terminated at-will employees, taxing authorities and certain trade creditors. Other creditors - chiefly banks and bondholders - neither need nor deserve directorial duties. They typically benefit from high levels of volition, cognition, and exit, as expressed in both the heavily negotiated contracts that govern their relationships with the corporate debtor and their access to well-established secondary markets. This Article contains a proposal for adjusting directors' duties accordingly.

Fiduciary duty, directors' duties, directorial duties, duty of care, duty of loyalty, insolvency, creditors, shareholders, priority, volition, cognition, exit

Abstract:
Information technologies - intellectual property and data - will often be a business's most valuable assets. Thus, a business could easily grant a security interest in its copyrighted software or its proprietary customer database under Article 9 of the Uniform Commercial Code (which has recently undergone a significant revision). Yet, we understand only vaguely how to treat such security interests, especially as against third parties asserting rights in the same collateral. Because information technology assets are uniquely mobile and infinitely replicable - think of Napster - third parties will almost always have rights in these assets, setting the stage for staggeringly complex disputes.

For example, if the third parties are other creditors or a bankruptcy trustee of the debtor, the security interest will have priority in the debtor's software and database if the secured party has perfected its security interest. Unfortunately, perfecting a security interest in intellectual property has become a notoriously complex and unpredictable process. Secured parties that finance intellectual property often have been (unhappily) surprised to learn that their attempts to perfect security interests in copyrights, for example, have been preempted by federal law, leaving them subordinate to the debtor's bankruptcy trustee. Different rules apply to other forms of intellectual property, leaving us with no discernible principle governing the perfection of security interests in intellectual property.

If, instead, the third parties are purchasers or licensees of the software or database, the secured party will have priority unless certain special rules apply to limit the security interest. Unfortunately, these special rules probably will not apply to intellectual property or data, in which case the security interest will continue long after these forms of information have left the debtor's computer. In either case, a secured party would have the right, on a debtor's default, to "take" the collateral and dispose of it to satisfy the debtor's obligations, even though the third party may have no direct relationship with the secured party - or even the debtor.

I propose a functional solution to these problems, although I use the term "function" in two different ways. First, a functional approach would recognize that intellectual property law and Article 9 serve different purposes, and should therefore peacefully co-exist. Thus, a number of decisions to the contrary should be reconsidered. Second, a functional approach would limit the rights of secured parties as against third-party purchasers and licensees of information technology assets. As information technology comes to dominate our economy, it will function like tangible collateral - e.g., inventory, equipment or consumer goods - in which a secured party would often have limited rights. I propose that, as information technologies come to function like tangible collateral, we consider corresponding limits on the rights of secured parties.

Secured Transactions, Security Interests, Article 9, Uniform Commercial Code (UCC), Information Technology, Intellectual Property, Data, Copyright, Patent, Trademark, Trade Secret, Proceeds

Abstract:
This Article offers an explanation of the doctrine of directors' duties to creditors. Courts frequently say - but rarely hold - that corporate directors owe duties to or for the benefit of corporate creditors when the corporation is in distress. These cases are puzzling for at least two reasons.

First, they link fiduciary duty to priority in right of payment, effectively treating creditors as if they were shareholders, at least for certain purposes. But this ignores the fact that priority is a complex and volatile concept. Moreover, contract and other rights at law usually protect creditors, even (especially) when a firm is distressed. It is thus not surprising that courts do not in fact want to treat directors as fiduciaries for creditors, except in extreme cases. But this leaves us with the second puzzle: If directors are rarely treated as fiduciaries for creditors, why have the Delaware courts bothered to say so much about this, especially in their recent opinions?

This Article explores these two puzzles, and argues that these cases are best understood as examples of expressive judging, exhortations to good behavior not necessarily tethered to meaningful instrumental consequences. It identifies four expressive themes in these decisions on, among other things, director discretion, the boundaries of acceptable conduct towards creditors, the role of contract, and the educative function of courts. The Article concludes by noting several doctrinal gaps created by some of the recent case law, and suggests ways that the better expressive aspirations of the Delaware opinions can fill these gaps in fair and efficient ways.

corporate governance, reorganization, corporate debt, directors' duties to creditors, fiduciary duty, priority, director discretion, conduct toward creditors, role of contract, courts' educative function, expressive law, expressive adjudication, dicta, duty of loyalty, duty of care, Delaware, equity

Abstract:
This article considers the effect that rules on the continuity of security interests and proceeds under Article 9 of the Uniform Commercial Code will have on the negotiability (i.e., free alienability) of information assets, such as data and biotechnologies. The continuity of interest rules provide that a security interest will presumptively continue in collateral, even after disposition by the debtor. The proceeds rules provide that a security interest will automatically attach to, among other things, rights arising out of collateral, and to whatever is received upon the disposition of the collateral.

Information assets, such as data and biotechnology assets, are often highly mobile, mutable and replicable. Thus, security interests in these assets will arise readily and will endure, even as these assets may travel through the chain of commerce, into the hands of good faith purchasers remote from the debtor and secured party that created the interest in the first place. This article calls the power to assert a security interest in assets at such a remove remote control.

The article then considers arguments against remote secured party control under these circumstances. Among other things, remote secured party control presents challenges to historic understandings of the treatment of bona fide purchasers, and to doctrinal and theoretical approaches to property.

This article concludes by suggesting that courts can mitigate the problem of remote control by relaxing the definition of property in this context. If data and biotechnology assets are property at all - a contested claim - it is not clear that they should be treated as such for the benefit of remote, prior secured parties in disputes with later bona fide purchasers.

Secured transactions, security interests, Article 9, uniform commercial code, collateral, proceeds, intellectual property, information technologies, biotechnologies, private property

Abstract:
This Article explores certain important constitutional challenges presented by bankruptcy. Article I, Section 8, Clause 4 of the Constitution provides that Congress shall have the power to make uniform Laws on the subject of Bankruptcies. While there are many good social, political, and economic theories of bankruptcy, there has been comparatively little effort to address broadly what it means to have constitutionalized financial distress. This Article is a first step in that direction.
Constitutional problems with bankruptcy are not new, but present three underappreciated puzzles: First, why did the Framers put a bankruptcy power in the Constitution, and how broadly should we construe its peculiar language today? Second, how should this power interact with structural features of our constitutional system, whether vertical (vis-à-vis states) or horizontal (vis-à-vis other branches)? Third, how should we resolve competitions between this power and substantive protections involving, for example, property, due process, and religious liberties? Recent Supreme Court decisions broadly interpreting the Bankruptcy Clause, the 2005 amendments to the Bankruptcy Code, and the continuing spate of Catholic diocese bankruptcies, among other things, give these puzzles some urgency.
This Article identifies an important, and thus far undeveloped, theme in the constitutional implications of bankruptcy: bankruptcy exceptionalism. Bankruptcy exceptionalism is an operating principle that helps to explain why we have a Bankruptcy Clause and how it has sometimes permitted or compelled exceptions to constitutional rules, standards, norms, and values in order to accommodate the exigencies of financial distress. The Article argues that the bankruptcy power gives Congress broad discretion to legislate in response to financial distress, subject to certain important democratic and countermajoritarian protections

bankruptcy law, commercial law, constitutional law, courts, jurisdiction, religion, secured transactions, bankruptcy exceptionalism, Bankruptcy Clause, financial distress, constitutional theory of bankruptcy, religious liberty, due process, sovereign immunity, bankruptcy reform

Abstract:
This article exposes and explores a puzzle at the heart of the current economic crisis: The surprising under-use, and increasing misuse, of Chapter 11 of the United States Bankruptcy Code, the principal legal system for salvaging troubled businesses. The answer offered here: The rise of the shadow bankruptcy system. "Shadow bankruptcy" describes the severely under-regulated non-bank financial institutions (e.g., hedge funds, private equity funds and investment banks) that increasingly dominate and manipulate Chapter 11 reorganizations.

Like the "shadow banking" system for which it is named, shadow bankruptcy thrives on and promotes opacity and undisclosed, possibly perverse, incentives. Shadow bankruptcy players exploit regulatory gaps to conceal their identities and motives, and so increase the uncertainty, complexity - and thus the cost - of negotiations to restructure distressed firms; they burden judicial resources through internecine fights of little benefit to reorganizing debtors; they have complex, multi-faceted hedging strategies that may effectively short-sell the debtor's reorganization effort, resulting in depressed asset values and the premature liquidation of otherwise viable firms.

Shadow bankruptcy threatens Congress' basic aspiration in creating Chapter 11: preserving going concerns and jobs through negotiated reorganizations. Shadow bankruptcy thus promises to do for corporate reorganization what shadow banking did for the global financial system: privatize gains and socialize losses.

This article explores the contours and costs of the shadow bankruptcy system. It also suggests some cures.

bankruptcy, reorganization, chapter 11, shadow banking, credit crisis, financial regulation, securities regulation, hedge funds, investment banks, private equity funds,

Abstract:
This article provides a qualitative empirical analysis of third-party closing opinion practice. This practice has recently generated some controversy because, among other reasons, many of the transactions in issue in Enron were supported by closing opinions. Interviews with lawyers around the nation suggest that the traditional academic view of opinion practice - that it promotes economic efficiency - is helpful but incomplete. Many features of closing opinion practice persist despite demonstrable inefficiencies. Moreover, when the practice improves, it is often non-market forces that create the change. Based on these interviews, the article offers some initial thoughts on why the practice exists, and certain of the functions that it may perform.

Closing opinions, corporate governance, legal ethics, corporations, due authority, enforceability, Enron, economic analysis

Abstract:
This brief essay responds to Yair Listokin's article, "Paying for Performance in Bankruptcy: Why CEOs Should Be Compensated with Debt," 155 U. PA. L. REV. 777 (2007).

Professor Listokin argues that we should give official creditors' committees the power to pay management of reorganizing debtors with corporate debt. This, he argues, would properly align their incentives with those who are most likely affected, the "residual claimant" unsecured creditors. Although Professor Listokin's proposal is a welcome addition to our literature on corporate reorganization, this essay points out several basic problems with it:

• First, nothing currently prevents parties from doing this through a reorganization plan; it is thus not clear why there is a problem.

• Second, the uncertain nature of bankruptcy recoveries would make the proposal implausible in the large and complex cases where it would presumably be needed most.

• Third, by giving creditors' committees the power to issue corporate debt, the proposal would empower them to reduce their constituents' recoveries, thus creating new agency problems.

The essay closes by observing that Professor Listokin's proposal is nevertheless an important addition to a long line of thoughtful scholarship on corporate reorganization.

bankruptcy, corporations, reorganization plan, corporate debt, creditors' committees, residual claimant unsecured creditors, executive compensation, chief restructuring officer

Abstract:
This article examines the doctrinal and constitutional dilemmas created when a religious organization goes into bankruptcy, through the lens of the Chapter 11 reorganizations recently commenced by Catholic dioceses in Oregon, Washington and Arizona. The doctrinal dilemma in these cases forces judges to choose between the rules and norms of bankruptcy law, on the one hand, and religious liberty, on the other. The constitutional dilemma forces courts to choose between respecting the Free Exercise (and related) rights of parishioners and Establishment Clause-based protections for tort creditors. The article argues that solutions to these dilemmas may be found through creative use of conflict-of-laws doctrine and what the article calls purposive equity.

Bankruptcy, reorganization, Chapter 11, religion, religious liberty, church, free exercise, establishment, RFRA, conflict-of-laws, equity

Abstract:
Practitioner literature and bar association reports frequently exhort lawyers and clients to use cost-benefit analysis (CBA) to answer important questions about third-party closing opinion practice, including whether to have an opinion in a given transaction at all. Yet, this literature rarely considers seriously what is meant by cost-benefit analysis, or whether it is in fact an appropriate decision tool in this context. This essay fills that gap, by examining what CBA can - and cannot - do for third-party closing opinion practice. Among its benefits, CBA should help to orient discussions about whether to have a closing opinion around an opinion's economic and informational value, rather than claims that an opinion is (or is not) traditional or market in a particular context. But, CBA is an imperfect tool. Cost-benefit analyses can be manipulated to mask costs or to exaggerate benefits. More fundamentally, CBA may treat ethically questionable practices as cost-justified, and may fail to account for certain important professionalizing benefits of closing opinion practice. The essay suggests ways that CBA can and cannot help to improve closing opinion practice.

legal opinion, closing opinion, opinion letter, cost benefit analysis, benefit cost analysis, Pareto, Kaldor-Hicks, professionalism, professional ethics, legal malpractice, legal ethics

Abstract:
This article examines important, recent changes in commercial finance law that reduce or eliminate the obligation to give notice of nonpossessory interests in personal property. To the extent we weaken notice rules, we increase the likelihood of secret liens, interests in property that are neither recorded nor otherwise readily observable.

Historically, the problem of secret liens - and indeed notice of nonpossessory interests in personal property, generally - was addressed by notice-filing systems, such as that created by Article 9 of the Uniform Commercial Code. Yet, two recent sets of legislative developments suggest that we may care much less about the problem of secret liens than we might acknowledge.

First, recent revisions to Article 9 of the U.C.C. (which governs many commercial finance transactions) tolerate secret liens as to such increasingly important assets as data, intellectual property, bank accounts, and securities.

Second, states have recently begun to enact non-uniform legislation designed to promote "asset securitizations." This legislation gives fully-preemptive effect to the parties' contracts, and would therefore appear to displace rules on notice-filing that might otherwise apply. They effectively end the obligation to give notice.

This article considers how we have come to diminish the role of notice-filing, and what that might mean. I argue that tolerance of secret liens challenges a deeply-held intuition about the relationship between property rights and notice obligations. This intuition enjoys both a new theoretical cache and a long lineage. I also suggest that we have become increasingly tolerant of secret liens because we have been seduced by a series of economic arguments about the alleged inefficiencies of notice-filing. I consider and reject most (but not all) of the economic arguments as incomplete or speculative.

The article then suggests that notice-filing systems may perform at least two important informational functions not fully considered by critics of these systems. First, they will act as proxy for the information that might otherwise be generated within tightly-knit merchant communities. Second, they may have important behavioral consequences both for those required to provide the notice and for the audience for the information thus provided. The article therefore counsels caution in enacting legislation that would diminish or dilute notice-filing in commercial finance transactions.

Security interest, securitization, lien, secret lien, notice-filing, UCC-1, financing statement, bankruptcy, strong-arm power, proceeds, control

Abstract:
This article examines the effect that recent shifts in federalism jurisprudence may have on the chapter 11 reorganizations of large corporate debtors with significant, non-tax debts to states. The thesis of the article is that, by orienting our analysis of state/federal relations around "power," we have made immunity unpredictable in the bankruptcy reorganization context.

Using the example of a tobacco company in a chapter 11 reorganization, this article assesses three strands of the "new federalism": (i) immunity from federal court jurisdiction under such decisions as Alden, Seminole, Florida Prepaid and College Savings Bank; (ii) diminishing Congressional power to regulate within "traditional" state spheres under such cases as Lopez and Morrison; and (iii) state freedom from Congressional "commandeering" under such cases as Printz and New York. If these decisions are about shifting power from the national to the state governments, then it is no longer clear that federal bankruptcy courts have the power to subordinate or discharge claims held by states including, for example, the more than $200 billion in claims held by states against major tobacco companies under the tobacco Master Settlement Agreement.

This article then surveys doctrinal responses to this shift in power. Not surprisingly, courts and commentators have struggled to preserve to chapter 11 debtors (and Bankruptcy Courts) the important power to subordinate and discharge claims, even if held by states. Thus, courts and commentators offer three countervailing doctrines to contain the new federalism in chapter 11: (i) the Ex parte Young doctrine, which permits a federal court to enjoin a state agent prospectively, even if the state "itself" may be immune from suit, (ii) the in rem doctrine, which holds that the subordination and discharge of claims are actions against assets in the constructive possession of courts, and involve no jurisdiction over states; and (iii) the closely related "non-suit" doctrine, which holds that the subordination and discharge of claims is not a "suit," but an "interpretive" process.

A careful analysis of these doctrines in the highly strategized context of a complex corporate reorganization suggests that they are weak, formalistic and unrealistic. Most disputes in chapter 11 reorganizations are settled, not litigated. Thus, rational debtors and creditor-states will settle state claims, but at a premium reflecting the uncertainty created by the new federalism. Since (non-tax) state claims are legally the same as the claims of other, similarly situated unsecured creditors (e.g., tort claimants, in the case of tobacco companies) it is not clear why states should enjoy this preferential treatment.

Rather than linking the important power to subordinate or discharge claims to these doctrinal fictions, I argue that courts can reconcile the new federalism and the bankruptcy framework through the Bankruptcy Clause, which gives Congress power to make uniform laws on the subject of bankruptcy. Uniformity should mean uniformity of result, and (non-tax) state claims should be subject to subordination or discharge just as if they were held by private creditors.

Chapter 11, bankruptcy, reorganization, federalism, sovereign immunity, claims, subordination, discharge, states, tobacco companies, tort claims