Debt Textualism and Creditor-on-Creditor Violence: A Modest Plea to Keep the Faith

40 Pages Posted: 4 Jan 2023 Last revised: 13 Jan 2023

See all articles by Sneha Pandya

Sneha Pandya

Columbia Law School

Eric L. Talley

Columbia University - School of Law; European Corporate Governance Institute (ECGI)

Date Written: January 4, 2023

Abstract

Although debt finance and restructuring rarely command headlines, they collectively comprise some of the most heated corporate battles in recent history. The field’s contemporary participants, including private equity sponsors, banks, and distressed debt investors have increasingly become embroiled in cantankerous conflicts over the division of assets and cash flows of distressed firms. Many of those battles resemble multiplayer chess matches, with parties scouring debt contracts for loopholes and landmines that either enrich themselves or undercut their rivals. The costs of these battles have grown precipitously, even as their outcomes have become less predictable—resulting in undesirable consequences for borrowers, lenders, intermediaries, stakeholders, and the economy at large. In this paper, we advance the thesis that much of our ongoing corporate credit conundrum has been aided and abetted by an unlikely co-conspirator: contract law. In particular, we highlight and document courts’ progression over fifty years towards a sweeping embrace of textualism to interpret credit agreements, and their concomitant rejection of other interpretive schema. Whatever its merits might have been a half century ago, “debt textualism” has catalyzed and fueled an onslaught of inter-creditor warfare, rendering its continued justification questionable. We propose several prescriptions for addressing the current state of play, ranging from doctrinal reform, to legislative/regulatory intervention, to private contractual innovation. If such measures prove unable to dislodge debt textualism from its entrenched perch, however, we also suggest strategies for marshaling it for the greater good, spotlighting the role that debt textualism might play in securing more credible corporate commitments on decarbonization and climate change.

Keywords: Creditor-on-Creditor Violence; Capital Structure; Distressed Debt; Private Equity; Contracts

JEL Classification: K00, K12, K22

Suggested Citation

Pandya, Sneha and Talley, Eric L., Debt Textualism and Creditor-on-Creditor Violence: A Modest Plea to Keep the Faith (January 4, 2023). European Corporate Governance Institute - Law Working Paper No. 673/2023, Available at SSRN: https://ssrn.com/abstract=4317353 or http://dx.doi.org/10.2139/ssrn.4317353

Sneha Pandya

Columbia Law School ( email )

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NEW YORK, NY 10027

Eric L. Talley (Contact Author)

Columbia University - School of Law ( email )

435 West 116th Street
New York, NY 10025
United States

HOME PAGE: http://www.erictalley.com

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
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1000 Brussels
Belgium

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