On the Mandatory Stay of Secured Creditors in Bankruptcy

32 Pages Posted: 30 Oct 2017

See all articles by Kenneth Ayotte

Kenneth Ayotte

University of California, Berkeley - School of Law

Date Written: April 1, 2017

Abstract

Subsidiary legal entities can be used to create a path around bankruptcy's automatic stay, giving a secured creditor a free right to withdraw collateral. In some cases, core assets of the firm are made separable from each other. To fully understand the desirability of subsidiaries as a path around the stay, I take a step backward and ask a fundamental question that has not been addressed formally: why do we need a mandatory stay of secured creditors in the first place? The model generates conditions under which a stay of secured creditors can be valuable. Three conditions are necessary: a) the collateral must be firm-specific, b) debt contracts are sequential and incomplete, and c) bargaining at bankruptcy is imperfect. Under these conditions, a debtor may grant withdrawal rights even when they are less efficient than a stay. I discuss ways that a stay might be made applicable to subsidiary creditors in a way that is targeted at the inefficiencies the model identifies.

Suggested Citation

Ayotte, Kenneth, On the Mandatory Stay of Secured Creditors in Bankruptcy (April 1, 2017). Available at SSRN: https://ssrn.com/abstract=3060748 or http://dx.doi.org/10.2139/ssrn.3060748

Kenneth Ayotte (Contact Author)

University of California, Berkeley - School of Law ( email )

215 Boalt Hall
Berkeley, CA 94720-7200
United States

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