The Bankruptcy Exchange
Brooklyn Journal of Corporate, Financial and Commerical Law, Forthcoming
17 Pages Posted: 28 Aug 2009
Date Written: August 28, 2009
The bankruptcy forum has become a marketplace for claims. Those who made the loans are far removed from the players that sit at the negotiating table in the modern corporate reorganization. Instead of stock being traded on the floor of an exchange, claims are traded in bankruptcy court. Investors become residual owners of firms outside of bankruptcy by buying stock. Inside of bankruptcy they do it by buying debt. In both cases, it is a world of professional traders, arbitrageurs, and corporate raiders. Long passed is the time when we could usefully debate whether claims-trading in bankruptcy was a good or a bad thing. We should accept that it has become a fundamental feature of bankruptcy. But it is naive to think that this new market, the bankruptcy exchange, should be unregulated. All markets are regulated. Whether one is a merchant who seeks to sell wool in the twelfth century or a farmer who wants to sell grain in the nineteenth, being subject to regulation is inevitable. Simply providing that the market is open on Wednesdays, but not Saturdays, is a form of regulation that works to the advantage of some and to the disadvantage of others. Regulation of the bankruptcy exchange is similarly inescapable. Every decision in the bankruptcy case affects the bankruptcy exchange, for better or worse. Scheduling a date for a cramdown hearing has the effect of putting an exercise date on an option contract. Every decision a bankruptcy judge affects trading on the bankruptcy exchange - whether she wants it to or not. The question is never whether there should be regulation, but rather what form it should take. This paper reviews the principles that should be at work in regulating the bankruptcy exchange.
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