Revisiting the Creditors' Bargain: The Entitlement to the Going-Concern Surplus in Corporate Bankruptcy Reorganizations
111 Pages Posted: 9 Nov 2006
Bankruptcy literature is increasingly accepting the continued existence of bankruptcy and secured debt and becoming more interested in analyzing specific features thereof. This article undertakes such a task, analyzing the entitlement to the going-concern surplus (GCS) generated during corporate reorganization proceedings, over and beyond the liquidation value of secured creditors' collateral. The GCS question has failed to receive satisfactory judicial attention despite underlying several bankruptcy decisions of the Supreme Court. In Timbers, the Supreme Court implicitly awarded the GCS to the debtor; in Dewsnup, to a secured creditor; in Rash, apparently, to a secured creditor, subject to a confusing footnote; and in LaSalle, the Court chose to sidestep the issue altogether.
The article suggests protecting secured creditors up to the real liquidation value of their collateral. Chapter 11 is a forum for structured negotiations among investors. Bankruptcy law must protect the value of the participants' entitlements at the outset of the case, but go no further in determining their substantive rights. It must provide a set of procedural provisions that ensure a fair and level platform for multiparty negotiations. Limiting senior creditors' priority to the real liquidation value of their collateral facilitates the distribution of the GCS among participants according to their contribution to the firm's rehabilitation. As long as the standard of protection is known in advance, senior lenders can compensate themselves by adjusting the interest rate and terms of their loans. The participation of all parties in such transactions will secure organizational development and innovative growth, thereby enhancing ex ante efficiencies.
Keywords: bankruptcy, reorganization, secured, debt, creditors, debtors, supreme court, surplus, value, chapter 11, secured credit, law and economics
JEL Classification: K00, K11, K19, K20, K22
Suggested Citation: Suggested Citation