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