The Search for an Unbiased Fiduciary in Corporate Reorganizations

By Harner, Michelle M. | Notre Dame Law Review, March 2011 | Go to article overview
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The Search for an Unbiased Fiduciary in Corporate Reorganizations


Harner, Michelle M., Notre Dame Law Review


President Rejects GM, Chrysler Rescue Plans: Obama Warns Cash Infusion Could Be Last. (1)

When a company experiences financial distress, a control contest often follows. Management fights to remain in control of the company, and shareholders, creditors and others try to influence management's exercise of that control--or wrest it away. This is not a new phenomenon. The degree of influence now exerted by corporate stakeholders in the distressed context, however, is strikingly different than in the past.

Headlines like the one above highlight that stakeholder control issues are at the forefront of financially distressed situations large and small. The U.S. government, as creditor, dictated the terms of Chrysler's and General Motors' bankruptcies. It also demanded and received preferred stock from several troubled financial institutions, giving those institutions little time or flexibility to consider or reject the terms of the government's offer. And the U.S. government is not alone in using high-pressure tactics with distressed companies; stakeholders--particularly lenders and other significant creditors--employ such tactics consistently and routinely.

This Article analyzes the intensified contest for control in corporate reorganizations and whether, as a result, existing bankruptcy laws adequately protect the interests of all of a debtor's stakeholders. Efforts by a stakeholder to influence control often lead to conflicts of interests and multiple, competing demands on bankruptcy fiduciaries, i.e. debtors in possession and statutory committees. In theory, these fiduciaries should shun their personal interests and any undue influence by particular stakeholders. In practice, however, debtors and committees frequently are unable or unwilling to do so, and bankruptcy courts often do not learn of conflicts, if at all, until it is too late. Accordingly, this Article suggests the use of a third-party neutral to correct information asymmetry and promote objectivity and fairness in the bankruptcy process.

INTRODUCTION
I. THE NATURE AND SCOPE OF THE PROBLEM
II. THE DEVELOPMENT OF U.S. CORPORATE REORGANIZATION
    LAWS
A. Equity Receiverships and Protective Committees
B. Federal Corporate Reorganization Law
   1. The Chandler Act
   2. Chapter 11 of the Bankruptcy Code
   3. Bankruptcy Fiduciaries
III. CONFLICT AND CONTROL CONTESTS IN CHAPTER 11
   A. Creditor Conflict
   B. Debtor-Committee Conflict
   C. Weaknesses in Existing Chapter 11 Process
IV. ALTERNATIVES TO CHAPTER 11
   A. The Canadian Monitor
   B. The French Judicial Administrator
   C. The U.K. Administrator
   D. Observations Regarding Chapter 11 Alternatives
V. THE CASE FACILITATOR PROPOSAL
   A. The Basic Elements of the Proposal
      1. The Case Facilitator's Primary Objectives
      2. The Case Facilitator's Role
      3. The Case Facilitator's Compensation
   B. The Third-Party Neutral Panel
   C. Case Facilitator and Prepackaged Bankruptcies
   D. Value of the Case Facilitator Proposal
      1. Using Mediation to Control Costs
      2. Response to Potential Increased Costs
   E. The Case Facilitator Versus the Chapter 11 Trustee/Examiner
   F. Fostering the Dual Goals of Chapter 11
CONCLUSION

INTRODUCTION

The Washington Post reported: "President Obama's harsh attack on hedge funds [that] he blamed for forcing Chrysler into bankruptcy yesterday sparked cries of protest from the secretive financial firms that hold about $1 billion of the automaker's debt." (2) The article was discussing the status of restructuring negotiations among the U.S. government, banks holding seventy percent of the secured debt, hedge funds holding a minority of the secured debt and Chrysler itself. The automaker filed for bankruptcy and ultimately sold most of its assets to the Italian automaker Fiat on terms negotiated by the U.S. and Canadian governments, the United Auto Workers, certain lenders and, to some extent, the company.

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