Abstract

http://ssrn.com/abstract=1662302
 
 

Citations (1)



 
 

Footnotes (178)



 


 



The Creditors' Bargain and Option-Preservation Priority in Chapter 11


Anthony J. Casey


University of Chicago Law School

September 7, 2010

University of Chicago Law Review, Vol. 78, No. 3, 2011

Abstract:     
Corporate reorganization under Chapter 11 of the Bankruptcy Code is built on the foundation of the absolute priority rule, which requires that senior creditors be paid in full before any value can be distributed to junior creditors. The standard law and economics understanding is that absolute priority follows inevitably from the “creditors’ bargain” model. That model tells us that the optimal system of reorganization must respect nonbankruptcy contract rights while maximizing the expected value of assets in bankruptcy. The conventional wisdom is that absolute priority fits this bill as the singular way of protecting creditors’ nonbankruptcy contract rights.

But what if this conventional wisdom is incorrect? A closer look at the structure of corporate debt suggests that it is. Junior creditors issue debt supported by the residual value of the debtor firm. The repayment of that debt is contingent on the future value of the firm: the junior creditors receive any future value that exceeds the face value of the senior debt. It is well recognized that this right is the equivalent of a call option on the firm’s assets. And yet Chapter 11 destroys the value of that call option by collapsing all future possibilities to present-day value.

Thus, absolute priority eliminates the nonbankruptcy contract rights of junior creditors and creates new rights in going-concern value for senior creditors. This Article examines the potential of an alternative priority mechanism that protects both the junior creditors’ call-option value and the senior creditors’ nonbankruptcy contract rights. This mechanism — which I call Option-Preservation Priority — is shown to protect the nonbankruptcy contract rights of all creditors and maximize the expected value of assets in bankruptcy

Number of Pages in PDF File: 49

Keywords: creditors' bargain, absolute priority, bankruptcy, reorganization, option-preservation priority, creditors' bargain revisited, benefit of the creditor's bargain, secured credit

Accepted Paper Series


Download This Paper

Date posted: August 22, 2010 ; Last revised: November 29, 2011

Suggested Citation

Casey, Anthony J., The Creditors' Bargain and Option-Preservation Priority in Chapter 11 (September 7, 2010). University of Chicago Law Review, Vol. 78, No. 3, 2011. Available at SSRN: http://ssrn.com/abstract=1662302

Contact Information

Anthony Joseph Casey (Contact Author)
University of Chicago Law School ( email )
1111 E. 60th St.
Chicago, IL 60637
United States
773.702.9578 (Phone)
HOME PAGE: http://www.law.uchicago.edu/faculty/casey
Feedback to SSRN


Paper statistics
Abstract Views: 1,213
Downloads: 249
Download Rank: 70,525
Citations:  1
Footnotes:  178

© 2014 Social Science Electronic Publishing, Inc. All Rights Reserved.  FAQ   Terms of Use   Privacy Policy   Copyright   Contact Us
This page was processed by apollo3 in 0.344 seconds