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Controlling Creditor Opportunism


Jonathan C. Lipson


Temple University - James E. Beasley School of Law

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.

Number of Pages in PDF File: 58

Keywords: bankruptcy, reorganization, financial regulation, good faith, corporate governance, chapter 11, shadow bankruptcy, opportunism, activism

JEL Classification: K12, K22

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Date posted: August 22, 2010 ; Last revised: September 20, 2010

Suggested Citation

Lipson, Jonathan C., Controlling Creditor Opportunism (August 19, 2010). Univ. of Wisconsin Legal Studies Research Paper No. 1129. Available at SSRN: http://ssrn.com/abstract=1662127 or http://dx.doi.org/10.2139/ssrn.1662127

Contact Information

Jonathan C. Lipson (Contact Author)
Temple University - James E. Beasley School of Law ( email )
1719 N. Broad Street
Philadelphia, PA 19122
United States
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