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Creditor Control and Conflict in Chapter 11

Kenneth Ayotte

Northwestern University School of Law

Edward R. Morrison

University of Chicago - Law School

August 28, 2009

The Journal of Legal Analysis, Vol. 1, No. 2, pp. 511-551, Summer 2009

We analyze a sample of large privately and publicly held businesses that filed Chapter 11 bankruptcy petitions during 2001. We find pervasive creditor control. In contrast to traditional views of Chapter 11, equity holders and managers exercise little or no leverage during the reorganization process. 70 percent of CEOs are replaced in the two years before a bankruptcy filing, and few reorganization plans (at most 12 percent) deviate from the absolute priority rule to distribute value to equity holders. Senior lenders exercise significant control through stringent covenants, such as line-item budgets, in loans extended to firms in bankruptcy. Unsecured creditors gain leverage through objections and other court motions. We also find that bargaining between secured and unsecured creditors can distort the reorganization process. A Chapter 11 case is significantly more likely to result in a sale if secured lenders are oversecured, consistent with a secured creditor-driven fire-sale bias. A sale is much less likely when these lenders are undersecured or when the firm has no secured debt at all. Our results suggest that the advent of creditor control has not eliminated the fundamental inefficiency of the bankruptcy process: resource allocation questions (whether to sell or reorganize a firm) are ultimately confounded with distributional questions (how much each creditor will receive) due to conflict among creditor classes.

Number of Pages in PDF File: 42

Keywords: creditor, control, conflict, chapter 11, bankruptcy, equity, lenders, Ayotte, Morrison

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Date posted: August 28, 2009  

Suggested Citation

Ayotte, Kenneth and Morrison, Edward R., Creditor Control and Conflict in Chapter 11 (August 28, 2009). The Journal of Legal Analysis, Vol. 1, No. 2, pp. 511-551, Summer 2009. Available at SSRN: http://ssrn.com/abstract=1463413

Contact Information

Kenneth Ayotte (Contact Author)
Northwestern University School of Law ( email )
375 E. Chicago Ave
Unit 1505
Chicago, IL 60611
United States
Edward R. Morrison
University of Chicago - Law School ( email )
1111 E. 60th St.
Chicago, IL 60637
United States
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