When Bankruptcy Meets Antitrust: The Case for Non-Cash Auctions in Concentrated Banking Markets
Hahn, David, Stanford Journal of Law, Business & Finance
"The scarcity of money that dampened auction prices was, of course, the same scarcity of money that inhibited paying debts in the first place"**
Just about three years ago, in light of the financial collapse of Enron, Douglas Baird and Robert Rasmussen dramatically announced that the U.S. privately negotiated reorganization regime, known worldwide simply as Chapter 11,1 is effectively dead.2 Two of the most notable bankruptcy law scholars of the last two decades, Baird and Rasmussen have continuously criticized the fundamental principles of Chapter 11 and have called for its replacement by market-based bankruptcy regimes.3 In The End of Bankruptcy they argued that the actual practice proves that most Chapter 11 cases are streamlined towards a public sale of the corporate debtor, either as a sale of its assets or as a sale of the equity interests therein. Thus, in their eyes, the contours of Chapter 11, envisioning an internally negotiated reorganization plan between the debtor and its creditors, no longer rule and rightfully so.4 Others disagree with the generalization reflected in Baird and Rasmussen's contention. For example, Lynn LoPucki has countered by contesting Baird and Rasmussen's argument in light of a systematic compilation of corporate bankruptcy data that he has accumulated over the years.5 The broad strokes with which Baird and Rasmussen chose to depict contemporary U.S. bankruptcy law notwithstanding, the practice appears to indeed mitigate the theoretical dichotomy between a prototypical private-bargaining bankruptcy regime and a market-based bankruptcy regime. Yet, the strong academic debate concerning the superiority of any of these prototypes seems to live on.6
The academic debate surrounding the normative bankruptcy law seems at times to touch the most sensitive nerves of political and social science, confronting orthodox libertarians and modern liberals and socialists.7 Close examiners of the themes underlying the grand academic debate over bankruptcy law will quickly identify the specific flavor of U.S. bankruptcy law. The debate has always been all about Chapter 11. Either a scholar liked it or opposed it all together. In recent years, Chapter 11 has become a measuring stick against which various Western World countries examine their own bankruptcy laws. Many countries have considered enacting a corporate reorganization regime which would follow, at least partially, the model of Chapter 11. Accordingly, the grand academic debate has been exported to other continents as well. With respect to this fascinating and heated academic debate, this article follows the realistic acknowledgement of prominent scholars such as Mark Roe and Oliver Hart, who understand that innovative theoretical models for bankruptcy reform, which have been proposed over the years, may be inapplicable for certain countries because they are either politically unacceptable8 or incompatible with those countries' economic structures.9 Thus, once one overcomes the urge to single-handedly save the world by introducing an ultimately triumphant bankruptcy model, the debate merits concretization and focus on actual countries or economic environments.
This article focuses on a wide spectrum of countries, the common denominator of which is that their economy is considerably characterized by the dominant role the local banks play in financing most of the corporate activity. The article will demonstrate the realistic relationship between banking dominance and the functioning of various bankruptcy law models. In concentrated banking economies, banks are strongly involved in two phases of a typical corporate bankruptcy case. First, they stand to collect from the firm as the senior secured creditors of the corporate debtor. Secondly, often those banks are the financing sources for the operation of the distressed firm while it undergoes bankruptcy and for the emergence of that firm out of bankruptcy. In concentrated banking, the number of banks available for corporate financing is rather limited. …