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Controlling Creditor Opportunism

58 Pages Posted: 22 Aug 2010 Last revised: 20 Sep 2010

Jonathan C. Lipson

Temple University Beasley School of Law

Date Written: August 19, 2010

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.

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

JEL Classification: K12, K22

Suggested Citation

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

Jonathan C. Lipson (Contact Author)

Temple University Beasley School of Law ( email )

1719 N. Broad Street
Philadelphia, PA 19122
United States

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