The corporate governance and public policy implications of activist distressed debt investing

Fordham Law Review

Volumn 77, Issue 2, 2008, Pages 703-773

  Harner, Michelle M ^a  

^a UNIVERSITY OF NEBRASKA LINCOLN   (United States)

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EID: 58149112792     PISSN: 0015704X     EISSN: None     Source Type: Journal    
DOI: None     Document Type: Conference Paper

References (407)

1. Disclosure Statement for Joint Plan of Reorganization of Allied Holdings, Inc. and Affiliated Debtors Proposed by the Debtors, Yucaipa and the Teamsters National Automobile Transportation Industry Negotiating Committee at 14-15, In re Allied Holdings, Inc., No. 05-12515 (Bankr. N.D. Ga. Mar. 2, 2007) (Docket No. 2562) [hereinafter Allied Disclosure Statement].
2. Allied Holdings, Inc., Current Report (Form 8-K), at 2 (May 24, 2007).
3. Allied Disclosure Statement, supra note 1, at 5, 7-9, 19-20, 40 (showing total of $196.6 million in general unsecured claims, which includes $150 million in unsecured notes).
4. Id. at 20-21.
5. Id. at 3-4.
6. Id. at 34-35, 45; see also John R. Emshwiller, Controversy, by the Truckload, WALL ST. J., May 2, 2007, at A4 (explaining that Allied first "allowed Yucaipa to assist the company in talks seeking contract concessions from the Teamsters," and then "Yucaipa began negotiating with the Teamsters on its own").
7. See Allied Sys. Holdings, Inc., Current Report (Form 8-K), item 1.01 (June 4, 2007); Allied Sys. Holdings, Inc., Current Report (Form 8-K), at 2 (May 31, 2007); Allied Holdings, Inc., Current Report (Form 8-K), item 1.03 (May 24, 2007).
8. See, e.g., Michelle M. Harner, Trends in Distressed Debt Investing: An Empirical Study of Investors' Objectives, 16 AM BANKR. INST. L. REV. 69 (2008) (discussing the changing dynamics in U.S. corporate restructurings and the potential implications for cases under Chapter 11 of the Bankruptcy Code).
9. See, e.g., DAVID A. SKEEL, JR., DEBT'S DOMINION 212-32 (2001) (discussing prodebtor aspects of Chapter 11 in an historical context); id. at 216 (noting that Chapter 11 of the Bankruptcy Code adopted "an explicitly manager-friendly approach to corporate reorganization"); J. Bradley Johnston, The Bankruptcy Bargain, 65 AM. BANKR. L.J. 213, 293-301 (1991) (explaining management control in Chapter 11 process and observing that "[m]anagement's postpetition control of a debtor's operations is complemented by specific. individual Code provisions which give management substantial control over the reorganization process itself); Lynn M. LoPucki & William C. Whitford, Corporate Governance in the Bankruptcy Reorganization of Large, Publicly Held Companies, 141 U. PA. L. REV. 669, 688-94 (1993) (explaining historical grounds for management control in Chapter 11 context); see also George W. Kuney, Hijacking Chapter 11, 21 EMORY BANKR. DEV. J. 19, 21-23 (2004) (explaining that "[s]ince [the Bankruptcy Code's enactment,] it has been portrayed as a debtor-friendly statute featuring a fresh start for debtors and the prospect of reorganization for businesses" and positing that such portrayal may be erroneous (footnote omitted)).
10. See, e.g., Douglas G. Baird & Robert K. Rasmussen, Private Debt and the Missing Lever of Corporate Governance, 154 U. PA. L. REV. 1209, 1237 n.85 (2006) ("'Chapter 11. like many takeover defensive measures, is justified by its supporters as a mechanism to preserve and protect valuable corporate assets.'" (quoting Michael Bradley & Michael Rosenzweig, The Untenable Case for Chapter 11, 101 YALE L.J. 1043, 1050 (1992))); David A. Skeel, Jr., Doctrines and Markets: Creditors' Ball: The "New" New Corporate Governance in Chapter 11, 152 U. Pa. L. REV. 917, 918 (2003) ("Chapter 11 no longer functions like an anti-takeover device for managers; it has become, instead, the most important new frontier in the market for corporate control, complete with asset sales and faster cases.").
11. See, e.g., Baird & Rasmussen, supra note 10, at 1237-42 (explaining increased creditor control exercised through financing contracts); Skeel, supra note 10, at 923-27 (same).
12. See, e.g., Nathalie Martin, Common-Law Bankruptcy Systems: Similarities and Differences, 11 AM. BANKR. INST. L. REV. 367, 392-97 (2003) ("Although major strides have been made toward allowing a business to rehabilitate, the new [U.K.] laws attempt to achieve these goals through proceedings that are entirely creditor driven."); Karin S. Thorburn, Corporate Governance Practices in Europe: Antidote to Enron?, 27 VT. L. REV. 887, 891 (2003) ("Creditors, and in particular secured lenders, are comparatively well protected in the United Kingdom. The U.K. insolvency procedures are strictly creditororiented."); see also Andy Scruton & Lee Smith, Introduction to the United Kingdom's Enterprise Act 2002, AM. BANKR. INST. J., July-Aug. 2004, at 36, 36 ("The United Kingdom has historically been perceived as a creditor-friendly jurisdiction, particularly with respect to secured creditors.").
13. See, e.g., Bruce A. Markell, White's Wheel, 12 AM. BANKR. INST. L. REV. 193, 197-98 (2004) (discussing adoption of U.S. bankruptcy customs by other countries); Nathalie Martin, The Role of History and Culture in Developing Bankruptcy and Insolvency Systems: The Perils of Legal Transplantation, 28 B.C. INT'L & COMP. L. REV. 1, 4 (2005) ("As a result, many countries have attempted to create a reorganization scheme for failing enterprises like Chapter 11 of the U.S. Bankruptcy Code (Chapter 11), in which management stays in place and manages the reorganizing company."); Todd J. Zywicki, Legal History: The Past, Present, and Future of Bankruptcy Law in America, 101 MICH. L. REV. 2016, 2033 (2003) (reviewing SKEEL, supra note 9) ("All around the world, other nations are beginning to adopt some of the features of U.S. bankruptcy law."); see also Kurt A. Mayr, Enforcing Prepackaged Restructurings of Foreign Debtors Under the U.S. Bankruptcy Code, 14 AM. BANKR. INST. L. REV. 469, 470-71 (2006) ("[A] few countries have recently adopted expedited bankruptcy procedures akin to the U.S. prepack."). U.K. bankruptcy laws were amended in 1986 and 2002 to adopt a more "rescue-oriented" approach for corporate reorganizations. See Martin, supra note 12, at 392; see also infra Part III.A.2.
14. See, e.g., In re FiberMark, Inc., 339 B.R. 321 (Bankr. D. Vt. 2006) (FiberMark case); Phyllis Berman, XO Communications KOs Allegiance Bidders, FORBES.COM, Feb. 13, 2004, http://www.forbes.com/2004/02/ 13/cz-pb-0213allegiance.html (XO Communications case); Terry Brennan, JLL Partners Keeps New World Pasta, DAILY DEAL, NOV. 18, 2005 (on file with the Fordham Law Review) (New World Pasta case); Lisa Gewirtz, Equipment Rental Firms a Hot Item, DAILY DEAL, Mar. 24, 2006 (on file with the Fordham Law Review) (National Equipment Services case); Kmart Exits Chapter 11, Names New Chairman, CHI. TRIB., May 7, 2003, at 5 (Kmart case); Peter Lauria & Kelly Holman, Patience Pays for Onex, DAILY DEAL, June 21,2004 (on file with the Fordham Law Review) (Loews case); Judy McDermott, BNP Paribas Slips into Maidenform Financing, BANK LOAN REP., Apr. 5, 2004, at 3 (Maidenform case); John E. Morris, LPs Go Down-Market, DAILY DEAL, Apr. 26, 2004 (on file with the Fordham Law Review) (Regal Entertainment Group case); Chris Nolter, McLoedUSA to Seek Lenders' OK, DAILY DEAL, Oct. 19, 2005 (on file with the Fordham Law Review) (McLeod case); Prepacks Offer Creditors Unusual Opportunity for 100% Recovery, MANAGING CREDIT RECEIVABLES & COLLECTIONS, Mar. 2003, at 1 (Rand McNally case).
15. See, e.g., £800M Tag on Energis as Banks Plan an Exit, DAILY MAIL, Feb. 12, 2005, at 105, available at LEXIS, The Daily Mail and Mail on Sunday (London) File (Energis case); Roger Baird, Debt Restructuring Helps Get Jarvis Back on Track, FIN. WK. (U.K.), May 4, 2005, at 10, available at http://www.financeweek.co.uk/item/1333 (Jarvis case); Liz Chong, US Hedge Fund Stalks MyTravel, TIMES (London), July 24, 2006, at 40 (MyTravel case); Bill Condie, Cordiant Aussie Buyout Saved, EVENING STANDARD (U.K.), May 14, 2003, at 32, available at http://www.thisislondon.co.uk/news/article-4820382-details/ Cordiant+Aussie+buyout+saved/article.do (Cordiant case); Ambrose Evans-Pritchard, German Bankruptcy Laws Drive Car Mirror Firm to UK, DAILY TELEGRAPH (London), Nov. 8, 2006, at 2, available at http://www.telegraph.co.uk/finance/2950351/German-bankruptcylaws-drive- car-mirror-firm-to-UK.html (Schefenacker case); James Quinn, Damovo Failure to Be First of Many,' DAILY TELEGRAPH (London), Dec. 23, 2006, at 25, available at http://www.telegraph.co.uk/finance/2952830/ Damovo-white-flag-to-be-first-of-many.html (DaMovo case); UK's Drax Group Rejects £1.9 Billion Hedge Fund Offer as Too Low, EURO. DAILY ELECTRICITY MARKETS, Sept. 20, 2005, available at 2005 WLNR 14814487 (Drax case); John Waples, Marconi Sells Off Tech Arm for £50 Million, SUNDAY TIMES (London), June 16, 2002, at Business 3 (Marconi case); Press Release, Polestar Group, Polestar Group Agrees Recapitalisation (Aug. 12, 2006), available at http://www.tmlserver.co.uk/polestarnews.nsf/polestarpr/ 98C5E3440D8DlF4D8025723E003982DC!OpenDocument (Polestar case); Gate Gourmet Says Lenders Not Calling in Debts, FORBES.COM, Aug. 17, 2005, http://www.forbes.com/markets/feeds/afx/2005/08/17/afx2183232.html (Gate Gourmet case); Katherine Griffiths, Telewest Deal Gives Bondholders 98.5%, INDEPENDENT (London), Sept. 16, 2003, http://www.independent.co.uk/ news/business/news/telewest-deal-gives-bondholders-985-580077.html (Telewest case).
16. See infra Part III.B.
17. Much of the existing legal scholarship focuses on either lender control through financing contracts or increased creditor influence in the Chapter 11 context. See, e.g., Douglas Baird & Robert Rasmussen, The Prime Directive, 75 U. CIN. L. REV. 921 (2007); Baird & Rasmussen, supra note 10; Stuart C. Gilson & Michael R. Vetsuypens, Creditor Control in Financially Distressed Firms: Empirical Evidence, 72 WASH. U. L.Q. 1005 (1994); Frank Partnoy & David A. Skeel, Jr., The Promise and Perils of Credit Derivatives, 75 U. CIN. L. REV. 1019 (2007); Skeel, supra note 10; George G. Triantis & Ronald J. Daniels, The Role of Debt in Interactive Corporate Governance, 83 CAL. L. REV. 1073 (1995); Greg McGlaun, Lender Control in Chapter 11: Empirical Evidence (Feb. 5, 2007) (working paper), available at http://papers.ssrn.com/sol3/papers.cfm?abstract-id=961365. Edward I. Altman, the Max L. Heine Professor of Finance at the Stern School of Business, New York University, and Stuart C. Gilson, Professor of Finance at the Harvard Business School, have conducted extensive research on the distressed debt market, and this Article references their respective works throughout. See, e.g., infra notes 23, 26, 32, 43, 347 (Altaian); infra notes 22, 46, 226 (Gilman).
18. For a detailed discussion of the survey and its results, see Harner, supra note 8, pts. III, IV. The case studies are set forth in Part II infra.
19. See infra Part III.B.
20. See infra Part III.C. This Article uses the phrase "restructuring process," as opposed to "restructuring law" or "restructuring culture," because, as discussed below, differences continue to exist between U.S. and U.K. corporate bankruptcy laws and cultures. See infra Part III.C.5.
21. See generally John Armour et al., Corporate Ownership Structure and the Evolution of Bankruptcy Law: Lessons from the United Kingdom, 55 VAND. L. REV. 1699 (2002) (describing management-driven process prevalent in the United States and managementdisplacing process prevalent in the United Kingdom).
22. The practice of buying distressed debt in the United States began in the early 1930s in the aftermath of the Great Depression. See HILARY ROSENBERG, THE VULTURE INVESTORS 7-10 (rev. ed. 2000); see also Jay Krasoff & John O'Neill, The Role of Distressed Investing and Hedge Funds in Turnarounds and Buyouts and How This Affects Middle-Market Companies, J. PRIVATE EQUITY, Spring 2006, at 17, 17. It then morphed into a more sophisticated and activist investment practice with the stock failure of 1987 and the corporate failures that followed. See STUART C. GILSON, CREATING VALUE THROUGH CORPORATE RESTRUCTURING 188-90 (2001); ROSENBERG, supra, at 16-17. Corporate debt defaults in the U.S. soared from $4 billion in 1988 to over $18 billion in 1991, and corporate bankruptcy filings increased from 18,889 to 27,493 during the same period. See ROSENBERG, supra, at 16; Gilson, supra, at 189 (noting that, in 1992, "one estimate placed the total amount of U.S. corporate debt that was either distressed or in default at $159 billion (face value)"). "Large [junk bond] issuers such as LTV, Eastern Airlines, Texaco, Continental Airlines, Allied Stores, Federated Department Stores, Greyhound and Pan Am filed for protection of Chapter 11 of the US Bankruptcy Code." FRANCOIS-SERGE LHABITANT, HEDGE FUNDS: MYTHS AND LIMITS 101 (2002).
23. See EDWARD I. ALTMAN, NYU SALOMON CTR., ARE HISTORICALLY BASED DEFAULT AND RECOVERY MODELS IN THE HIGH-YIELD AND DISTRESSED DEBT MARKETS STILL RELEVANT IN TODAY'S CREDIT ENVIRONMENT? 5 fig.3 (2006), available at http://pages.stern. nyu.edu/~ealtman/Are- Historical-Models-Still-Relevantl.pdf (showing spike in the size of the defaulted and distressed debt market during 2000-2003, which peaked at over $900 billion in face value in 2002).
24. See Heidi Moore, Distressed Debt Fundraising Hits Record, FIN. NEWS ONLINE. July 13, 2007, http://www. efinancialnews.com/usedition/index/content/2448303706.
25. Id. ("Dow Jones Private Equity analyst found that distressed-debt firms raised $23.7 billion in the first six months of 2007, which is the highest volume of fundraising in any full year to date.").
26. See, e.g., EDWARD I. ALTMAN & JEFFREY SWANSON, NYU SALOMON CTR., THE INVESTMENT PERFORMANCE AND MARKET SIZE OF DEFAULTED BONDS AND BANK LOANS: 2006 REVIEW AND 2007 OUTLOOK 3 (2007), available at http://pages.stern.nyu.edu/~ealtman/2006%20InvestPerf.pdf ("The return of the Combined Altman NYU Salomon Center [longonly, gross return] Index was 23.40%. . . . [The index] outpaced the good performances of the S&P 500 Stock Index (+15.80%) and Citigroup's High-Yield Bond Index (+11.85%)."); see also HEDGEFUND.NET, HFN AVERAGES: APRIL PERFORMANCE REPORT 3 (2007), available at http://www.hedgefund.net/dailyemailreports/HFN-Averages- April-07-Report.pdf (showing annual returns for 2005 and 2006 for hedge funds investing in distressed debt as 14.91% and 8.23%, respectively, compared with an aggregate average return for all hedge funds of 11.99% and 8.99%).
27. See, e.g., Moore, supra note 24 ("The drumbeat of disaster around the credit markets has been growing louder and more insistent."); see also Kabir Chibber & John Glover, Looming Crash Prompts Jump in Distressed Debt Hiring, BLOOMBERG, May 30, 2007, http://www.bloomberg.com/apps/news?pid=20601087&sid= as41gwxvySrnQ&refer=h ome ("Restructuring groups are growing faster in Europe than in the U.S. as companies in the U.K., France and Germany pile on record amounts of debt, according to Standard & Poor's."); Helen Fowler, Wind of Change for Distressed Debt, FIN. NEWS ONLINE, Mar. 1, 2007, http://www.efinancialnews.com/usedition/index/ content/1047285255 ("Private equity firms, hedge funds, traditional long-only equity managers and fixed income managers are moving into distressed debt in preparation for a potential credit market downturn."). Interestingly, investors' interest levels have remained high despite a slower distressed market. For example, in the United States, distressed bonds were reported at 4.4% of all non-investment grade bonds in April 2006, down from averages of 6.2% in 2005 and 7% in 2004. See Liz Moyer, Dunking Distressed Debt, FORBES.COM, May 2, 2006, hrtp://www.forbes.com/funds/2006/05/ 01/distressed-debt-hedge-funds-cx-lm-0502debt.html; STANDARD & POOR'S, U.S. DISTRESSED DEBT MONTHLY MONITOR: GLOBAL FIXED INCOME RESEARCH (Apr. 2006), available at http://www2.standardandpoors. com/spf/pdf/fixed income/DistressReport_April2006.pdf. Nevertheless, observers predict that "the size of the defaulted and distressed markets will increase considerably in the next two years as both new defaults and an increasing distress ratio add to the supply of distressed debt." ALTMAN & SWANSON, supra note 26, at 3. In addition, distressed debt investors are "poised to buy distressed commercial real-estate assets from ailing institutions" and become more active participants in that particular distressed space. Lingling Wei & Peter Grant, Some Vulture Funds Set to Buy, WALL ST. J., Sept. 29, 2008, at A10.
28. Liz Moyer, THE HEIRS OF MICHAEL MILKEN?, FORBES.COM, Mar. 7, 2006, http://www.forbes.com/business/2006/03/06/junk-bond-funds-cx-lm- 0307junk.html; see also Moore, supra note 24 (noting new distressed debt funds established by Centerline Capital Group, Cerberus Capital Management, and Oaktree Capital Management, among others); The Vultures Take Wing, ECONOMIST, Mar. 31, 2007, at 77, 77 (noting that Barclays hired an entire team from Oaktree Capital Management to head up a new distressed fund).
29. '"The level of stress or distress can range from companies underperforming relative to expectations all the way through the default and bankruptcy spectrum to postreorganization equities.'" Emma Trincal, The Sunny Side of Distressed Debt, THESTREET.COM, Apr. 3, 2006, http://www.thestreet.com/story/10276903/l/the-sunny-sideof-distressed- debt.html (quoting Katalin Kutasi of Kellner DiLeo Cohen & Co.).
30. See, e.g., Lhabitant, supra note 22, at 99; Hedge Fund Consistency Index, Distressed Securities, http://www.hedgefund-index.eom/ SectorDefinitions.asp#Distressed Securities; see also ALTMAN, supra note 23, at 4 (using this narrow definition to reference only "defaulted" debt).
31. See, e.g., LHABITANT, supra note 22, at 99; Libby Bruch, Standard & Poor's U.S. Distressed Debt Monthly Monitor: Distressed Debt No Threat for Now, INVESTING IN BONDS, available at http://www.investinginbonds.com/news.asp?catid=36&id=1387; see also ALTMAN, supra note 23, at 4 (using this broader definition to reference all "distressed" debt); Marykay Fuller, The Distressed Debt Market-a Major Force That's Here to Stay, RECOVERY, Spring 2006, at 15, 15, available at http://www.r3.org.uk/uploads/documents/spring2006.pdf ("Historically, 'distress' has been defined as debt trading between 80 per cent and 90 per cent of par value but the European market with its excess liquidity recently has seen 'distressed' debt trading between 90 per cent and 95 per cent of par.").
32. The U.S. defaulted junk bond market alone has grown to over one trillion dollars in 2006. See EDWARD I. ALTMAN, NYU SALOMON CTR., ABOUT CORPORATE DEFAULT RATES 2 (2007), available at http://pages.stern.nyu.edu/~ealtman/AboutCorporateDefaultRates.pdf.
33. See, e.g., LHABITANT, supra note 22, at 100 (explaining that a distressed debt investor may purchase "bank debt, corporate debt, trade claims, lease contracts, private placements, common or preferred stock and/or warrants").
34. See, e.g., ALTMAN, supra note 23, at 3 ("Syndicated lending has risen more than 60 percent in the last three years and rose to total outstandings of $1.5 trillion in 2005."); Sandeep Dahiya et al., Bank Borrowers and Loan Sales: New Evidence on the Uniqueness of Bank Loans, 76 J. Bus. 563, 563-64 (2003), available at http://www.journals.uchicago.edu/doi/pdf/10.1086/377031 (explaining the secondary market for syndicated and distressed loans); Hugh Thomas & Zhiqiang Wang, The Integration of Bank Syndicated Loan and Junk Bond Markets, 28 J. BANKING & FIN. 299, 301-05 (2004) (explaining development of loan syndication market and noting that "the volume of trading of syndicated loans on the secondary market rose from $8 billion (of mostly distressed debt) per year in 1991 to $110 billion (of mostly par loans) in 2001"); see also THEODORE M. BARNHILL ET AL., HIGH YIELD BONDS 40-43, 59-72 (1999) (explaining the leveraged loan market in U.S. and . markets). In 2006, approximately $40 billion in distressed loans traded in the secondary market. See Reuters Loan Pricing Corporation, U.S. Secondary Loan Market Volume, http://www.loanpricing.com/analytics/pricing-service-volumel.htrn (last visited Oct. 20, 2008).
35. See, e.g., Mark Thompson, Recent Developments Involving Distressed Bank Debt, in XVII BANKING AND COMMERCIAL LENDING LAW, ALI-ABA RESOURCE MATERIALS 427, 429, 454 (1996); Krasoff & O'Neill, supra note 22 (noting trend among regulated banks to sell distressed loans quickly); see also John Houghton, A Fresh Approach, LEGAL WK., Sept. 28, 2006, at 28, 28 (noting similar trend in U.K.); ROUNDTABLE: THE RESTRUCTURING ELITE AWAIT THEIR NEXT BOOM, BANK LOAN REP., Apr. 2, 2007, at 14, 14 ("Most of the banks have flushed their workout departments as they have increased their syndication departments and they have, as a matter of conscious risk management, reduced their exposure to the credits they are syndicating." (interview with Jim Millstein, Lazard Freres & Co.)).
36. Bankruptcy claims trading is big business. See, e.g., Robert K. Rasmussen & David A. Skeel, Jr., The Economic Analysis of Corporate Bankruptcy Law, 3 AM. BANKR. INST. L. REV. 85, 101-02 (1995) (discussing volume of claims trading); Frederick Tung, Confirmation and Claims Trading, 90 NW. U. L. REV. 1684, 1685-89 (1996) ("The size of the market was estimated to run as high as $300 billion."); see also Andrew Africk, Trading Claims in Chapter 11: How Much Influence Can Be Purchased in Good Faith Under Section 1126?, 139 U. PA. L. REV. 1393, 1393 (1991); Chaim J. Fortgang & Thomas Moers Mayer, Trading Claims and Taking Control of Corporations in Chapter 11, 12 CARDOZO L. REV. 1, 8 (1990); Adam J. Levitin, Finding Nemo: Rediscovering the Virtues of Negotiability in the Wake of Enron, 2007 COLUM. BUS. L. REV. 83, 86-98.
37. See, e.g., Tung, supra note 36, at 1702 (explaining that suppliers often prefer cash rather than a debtor's securities, which might be distributed under a plan); see also Marcia Pledger, Shopping for Ideas: Homeplace Looking for Ways to Improve, PLAIN DEALER (Cleveland), Jan. 17, 1999, at 1-H ("Generally, vendors sell their claims at a substantial discount because they prefer to get some cash quickly instead of being involved in bankruptcy proceedings.").
38. Rule 3001(e) of the Federal Rules of Bankruptcy Procedure specifically contemplates and governs claims trading in U.S. bankruptcy cases. FED. R. BANKR. P. 3001(e).
39. See ALTMAN, SUPRA note 23, at 11 (noting trend of distressed companies turning to nontraditional lending sources, which now offer rescue financing); see also Kit R. Roane, Hedging Their Debts, U.S. NEWS & WORLD REP., Apr. 10, 2006, at 38, 38-39 ("Some hedge fund companies, like Ritchie Capital Management, have formed new divisions that focus only on direct lending.").
40. See ALTMAN, supra note 23, at 11 ("These loans are being made at 350-450 bp over LIBOR in 2006 and in order to hit the funds' target rates of return, leverage of two to three times the investment is commonly utilized."); see also The Vultures Take Wing, supra note 28, at 78 (noting that, in one "loan-to-own" situation, "[t]he hedge fund charged a creditcard-like rate of interest.... [and] secured the right for ten years to buy over 3 m[illion company] shares for $10 each").
41. This phrase also is used to describe the practice of buying distressed debt to acquire ownership of the company, as discussed further, infra in Part II!.B. See Krasoff & O'Neill. supra note 22, at 19.
42. See, e.g., ALTMAN, supra note 23, at 4 (noting that nonbank institutions now provide "more than three-quarters of the funds" for highly leveraged syndicated loans); WILLIAM MAY ET AL., FITCH RATINGS, LOAN ISSUANCE BOOM SHIFTS REFINANCING RISK STRONGLY TO LOAN MARKET 5 (2007), available at http://www.fitchratings.com/dtp/pdf3-07/iloa0726.pdf (noting that nonbank institutions held over 70% of the leveraged loan market in the first quarter of 2007); see also The Vultures Take Wing, supra note 28, at 77 ("According to Standard & Poor's ..., non-banks such as hedge funds now make roughly half of all highyielding leveraged loans and hold the lion's share of the secondary market."). Certain highprofile individuals, such as Carl Icahn and Wilbur Ross, have established their own firms to facilitate distressed debt investments. See Phyllis Berman & Lea Goldman, Let Us Prey. FORBES, Apr. 2,2001, at 138.
43. Pension funds and certain other institutional investors often are prohibited under their charters or applicable regulations from holding below investment grade securities. Mutual funds, on the other hand, typically can, but choose not to, invest in distressed debt. See, e.g., Iman Anabtawi, Some Skepticism About Increasing Shareholder Power, 53 UCLA L. REV. 561, 580 (2006) ("Hedge funds, like mutual funds, hold pools of assets. Unlike mutual funds, they engage in a wide variety of investment strategies, including investing in distressed securities, illiquid securities, securities of companies in emerging markets, derivatives, and arbitrage opportunities."). Nevertheless, some mutual funds do hold small distressed investments. See Berman & Goldman, supra note 42, at 140 ("A few [mutual funds], like Third Avenue Value and Fidelity Capital & Income, have been known to dabble in defaulted bonds, but only have tiny portions of their portfolios there."); see also Rich Pickings, FUND STRATEGY, Apr. 3, 2006, at 20, 24 (noting existence of some mutual funds engaged in distressed debt investing, including in the United Kingdom). In addition, pension funds may invest indirectly in the distressed market through hedge funds or other distressed debt funds. See, e.g., EDWARD I. ALTMAN & SHUBIN JHA, NYU SALOMON CTR., MARKET SIZE AND INVESTMENT PERFORMANCE OF DEFAULTED BONDS AND BANK LOANS: 1987-2002, at 11 (2003), available at http://pages.stern.nyu.edu/~ealtman/MIP-87-02.pdf ("Several domestic pension funds and foreign portfolios have effectively used this strategy by allocating a portion of their total investments to defaulted debt money managers."); Africk, supra note 36, at 1393 ("Pension funds and other institutional investors have contributed more than $3 billion to 'vulture' or 'debt raider' funds, which buy strategic blocks of debt issued by companies facing bankruptcy."); see also William J. Crerend, Institutional Investment in Hedge Funds, in HEDGE FUNDS: INVESTMENT AND PORTFOLIOSTRATEGIES FOR THE INSTITUTIONAL INVESTOR 21, 21-23 (Jess Lederman & Robert A. Klein eds., 1995) (explaining general investment practices of pension funds with respect to hedge funds); Berman & Goldman, supra note 42, at 140.
44. In fact, these institutional investors often are among the original par investors in an issuance who later sell to distressed debt investors when the issuer experiences financial distress. See, e.g., Stephen J. Lubben, Some Realism About Reorganization: Explaining the Failure of Chapter 11 Theory, 106 DICK. L. REV. 267, 301 (2001) ("As the issuing firm's prospects fade, and the firm becomes a 'fallen angel,' the original institutional holders will sell their debentures to the distressed securities arms of major investment banks, and other 'vulture' investors.").
45. Aaron Siegel, Hedge Funds Turn Up the Volume, INVESTMENTNEWS, Sept. 14, 2006, http://www.investmentnews.com/apps/pbcs.dll/ article?AID=/20060914/REG/609140707/1094/INDaily03&ht=; see also Michael Murphy, A Transition Year for the Middle Market Distressed Debt Arena, HIGH YIELD REP., Mar. 13, 2006, at 3, 3 ("Hedge funds are estimated to hold over 80% of the middle market second liens . .. ."); Press Release, Greenwich Assocs., U.S. Fixed Income Trading Volumes Climb (Sept. 14, 2006) (on file with the Fordham Law Review). A similar trend exists in Europe. See Gillian Tett, Who Owns Your Loan? Why Europe's Businesses Face Surprise when Trouble Hits, FIN. TIMES (London), July 29, 2005, at 15 ("[Hedge funds] now represent 35 per cent of the [primary leveraged European loan] market. And when secondary loan trading is considered, the proportion can be much higher at distressed companies.").
46. See, e.g., LHABITANT, supra note 22, at 100; see also GILSON, supra note 22, at 198 ("After publicly traded bonds go into default, they typically trade at about 30 percent of their face value; the average discount for more-junior bonds is even larger."). For example, before their restructurings, Kmart Corp.'s and Schefenacker plc's bonds traded at approximately 20% of face value. See Here to Stay, INT'L FIN. L. REV., Mar. 2007, at 24, 24 (discussing Schefenacker); Joann Muller, A Fix-Up on Fast Forward, BUS. WK., Oct. 14, 2002, at 101, 101-02 (discussing Kmart). Before the Jarvis restructuring, its bank debt was trading around 70% and then dropped to between 45-50%, of face value. See Jarvis Plummets After Bank Meeting, LOAN MARKET WK., May 2, 2005, at 2.
47. See, e.g., LHABITANT, supra note 22, at 100.
48. Distressed debt investors also may invest in both the debt and equity of the distressed company. "Distressed arbitrage" is a form of combination investing that "involves purchasing publicly traded bonds of bankrupt companies and selling their common stock short." Donna Klinger, Here Be Dragons, NACUBO BUS. OFFICER, Apr. 2002, at 33, 33. For a general description of hedge fund investment strategies, see generally HEDGE FUNDS: INVESTMENT AND PORTFOLIO STRATEGIES FOR THE INSTITUTIONAL INVESTOR, supra note 43.
49. See, e.g., ALTMAN & SWANSON, supra note 26, at 25 app. D; LHABITANT, supra note 22, at 100; ROSENBERGC SUPRA NOTE 22, AT 29-30; SEE ALSO SIMON GRANGER, UNDERSTANDING THE DISTRESSED INVESTOR, RECOVERY, Spring 2006, at 20, 20, available at http://www.r3.org. uk/uploads/documents/ spring2006.pdf (explaining the strategy of "trad[ing] the debt... at a higher price within a short time frame").
50. See, e.g., ROSENBERG, supra note 22, at 29 ("[These investors], also known as speculators and traders, are the traditional type of vultures who dart in and out of securities looking for a good trade.").
51. See ALTMAN & SWANSON, supra note 26, at 25 app. D (describing "[h]olding period of 6 months to [one] year").
52. See, e.g., id.; LHABITANT, supra note 22, at 100; ROSENBERG, supra note 22, at 29-33.
53. See ALTMAN & SWANSON, supra note 26, at 25 app. D (referring to these types of investors generally as "Active/Non-Control" and noting that they typically hold debt for one to two years); LHABITANT, supra note 22, at 100-01; ROSENBERG, supra note 22, at 29-33.
54. See ROSENBERG, supra note 22, at 29-33; see also DEBTWIRE, NORTH AMERICAN DISTRESSED DEBT MARKET OUTLOOK 2008, at 16 (2008) (on file with the Fordham Law Review) [hereinafter DISTRESSED DEBT MARKET Outlook 2008] (reporting that, "[w]hile hedge funds expressed the least interest in loan-to-own, they were the most comfortable with swapping debt for minority equity stake"); DEBTWIRE, NORTH AMERICAN DISTRESSED DEBT MARKET OUTLOOK 2007, at 20 (2007) (on file with the Fordham Law Review) [hereinafter DISTRESSED DEBT MARKET OUTLOOK 2007] (reporting that over 40% of survey respondents indicated that they do not "seek equity control via a 'loan to own' strategy," but "are interested in acquiring non-control positions via debt-for-equity swaps").
55. See ALTMAN & SWANSON, supra note 26, at 25 app. D (referring to these types of investors generally as "Active/Control" and noting that they typically exit the investment after two to three years); LHABITANT, supra note 22, at 100; ROSENBERG, supra note 22, at 29 ("As restructuring proceeds, [the debtholders] negotiate a plan of reorganization that casts them in a leading role. These vultures then run the company themselves or bring in experienced management."); Granger, supra note 49, at 20 (explaining strategy of "controlling] the debt and ultimately tak[ing] the equity upside in a business, through either a consensual or non-consensual route").
56. In addition, investors may hold and try to use a company's debt and equity to influence affairs prior to any restructuring or exchange. For example, distressed debt investor Third Point LLC held both the equity and debt of Salton, Inc. When Third Point was unable to influence corporate affairs to its satisfaction as an equity holder, it warned the company that it would seek to do so as a debtholder. Salton Inc., Amended Statement of Beneficial Ownership (Sched. 13D/A), exhibit 1 (Apr. 27, 2005) (explaining, in a letter from Third Point to Salton's CEO, that "[i]n the likely event that an out of court restructuring is not reached, I look forward to personally dedicating my considerable energy to serving on the creditors committee and seeking your outster at that time").
57. See, e.g., LHABITANT, supra note 22, at 100 (explaining strategy of activist investor to realize value); ROSENBERG, supra note 22, at 29 (explaining that these investors "throw their fate in with a company for the long term, staying with it after it has climbed out of the depths"); see also William W. Bratton, Hedge Funds and Governance Targets, 95 GEO. L.J. 1375, 1418-20 (2007) (providing empirical evidence on hedge fund shareholder activism and noting that "[h]edge fund activism, by its own terms, is about shareholder value creation").
58. See, e.g., Igino Beverini & Bruno Cova, How Hedge Funds Are Changing Distressed Debt, INT'L FIN. L. REV., June 2006, at 12 (explaining convergence in activities between hedge funds and private equity funds); Matthew Judd, Hedge Funds and Private Equity Converge, INT'L FIN. L. REV., Jan. 2006 supp., at 14 (explaining that "[s]ome have described hedge funds as value finders and private equity funds as value creators" and exploring the trend of hedge funds doing both); see also Gemma Westacott, Private Equity Funds Bristle as Hedge Funds Muscle In, LAWYER (U.K.), Feb. 13, 2006, at 13, 13; Duncan Kerr, Private Equity and Hedge Funds Slug It Out, FIN. NEWS ONLINE, Feb. 26, 2007, http://www.efinancialnews.com/usedition/index/content/1047285236.
59. See, e.g., Altman & SWANSON, supra note 26, at 25 app. D (noting that "Active/Control" investors generally need to acquire at least one-third of the target company's distressed debt).
60. See infra Part III.B.3.
61. See infra Part II.
62. See infra Part III.
63. See generally Harner, supra note 8.
64. See supra Part I.A.
65. See ROSENBERG, supra note 22, at 7-24.
66. See id.
67. Allied Disclosure Statement, supra note 1, at 20-21 (stating that Yucaipa holds $98.8 million of the $150 million in outstanding unsecured notes). Thus, Yucaipa held approximately 50% of all of Allied's unsecured debt. See id. at 7, 20-21, 40 (estimating $196.9 million in total general unsecured claims and explaining that the stock of reorganized Allied would be distributed on a pro rata basis to the holders of allowed general unsecured claims).
68. Allied Sys. Holdings, Inc., Current Report (Form 8-K), item 1.01 (June 4, 2007); Allied Sys. Holdings, Inc., Current Report (Form 8-K), item 2.03 (May 31, 2007); Allied Holdings, Inc., Current Report (Form 8-K), at 2 (May 24, 2007).
69. Allied Disclosure Statement, supra note 1, at 18 (noting that Yucaipa holds a majority ownership position in Performance Transportation Services); see also Performance Transportation Services, Inc. Emerges from Chapter 11, AUTOMOTIVE.COM, Jan. 29, 2007, http://www.automotive. com/auto-news/02/26054/index.html.
70. See Emshwiller, supra note 6 ("Allied and Performance together account for an estimated 50% of the new vehicles hauled by truck in the U.S."); Thomas L. Gallagher, Yucaipa to Acquire Allied, TRAFFIC WORLD, Mar. 5, 2007, available at 2007 WLNR 4237546 (noting that, after the Allied acquisition, Yucaipa "would control more than 60% of the U.S. new-car hauling market"); Allied Holdings to Be Taken over by Yucaipa Cos., TRANSPORT TOPICS ONLINE, Mar. 5, 2007, http://www.ttnews.com/articles/basetemplate.aspx? storyid= 17090 (noting that Yucaipa "would control 60% to 70% of the U.S. new-car hauling market").
71. Allied Disclosure Statement, supra note 1, at 21-23.
72. Id.
73. Id. at 34-35.
74. In re Allied Holdings, Inc., No. 05-12515, slip op. at 1 (Bankr. N.D. Ga. May 2, 2006) (Docket No. 1461).
75. Allied Disclosure Statement, supra note 1, at 21.
76. Id. at 34-35; see also Emshwiller, supra note 6 (explaining that Allied first "allowed Yucaipa to assist the company in talks seeking contract concessions from the Teamsters" and then "Yucaipa began negotiating with the Teamsters on its own").
77. Allied Disclosure Statement, supra note 1, at 34-35; See also Emshwiller, supra note 6 ("The International Brotherhood of Teamsters, which represents about 3,300 Allied workers in the U.S., agreed to back a 15% wage cut for those workers."); Allied Holdings to Be Taken over by Yucaipa Cos., supra note 70 ("Allied . . . approved the deal in spite of a 15% wage cut.").
78. See Press Release, Int'l Brotherhood of Teamsters, Allied Management Asks for More Time to Review Yucaipa Plan (Feb. 14, 2007), available at http://www.teamster.org/press-release.aspx?id= 7670&terms=allied+management+asks+for+ more+time* (noting that Allied's management requested more time to review plan of reorganization incorporating terms agreed to by Yucaipa and Teamsters).
79. Complaint-Class Action at 1-2, Hawk Opportunity Fund, L.P. v. Yucaipa Am. Alliance Fund I, L.P., No. l:07-CV-0907 (N.D. Ga. Apr. 23, 2007).
80. Objection of the Rutland Family to Confirmation of the Joint Plan of Reorganization of Allied Holdings, Inc. and Affiliated Debtors Proposed by the Debtors, Yucaipa and the Teamsters National Automobile Transportation Industry Negotiating Committee, In re Allied Holdings, Inc., No. 05-12515 (Bankr. N.D. Ga. Apr. 30, 2007) (Docket No. 2958).
81. Allied, No. 05-12515, slip op. at 23, 27, 28 (May 18, 2007) (Docket No. 3113) (confirming plan of reorganization and overruling objections to plan).
82. Notice of Dismissal Without Prejudice, Hawk, No. l:07-CV-0907 (May 18, 2007) (Docket No. 3).
83. Allied Sys. Holdings, Inc., Current Report (Form 8-K), item 5.01 (June 4, 2007).
84. Allied Disclosure Statement, supra note 1, at 18, 49.
85. Id. at 45 (noting that Yucaipa played a "key role" in obtaining exit financing); Allied Sys. Holdings, Inc., Current Report (Form 8-K), item 2.03 (May 31, 2007).
86. See Evans-Pritcha.'d, supra note 15.
87. See Verified Petit on for Order, Pursuant to 11 U.S.C. §§ 105(a), 1507, 1517, 1520, and 1521, Recognizing Company Voluntary Arrangement as Foreign Main Proceeding, Enforcing Company Voluntary Arrangement in the United States, and Granting Other Appropriate Relief, exhibit A-l, at 21, In re Schefenacker plc, No. 07-11482 (Bankr. S.D.N.Y. May 15, 2007) (Docket No. 2) [hereinafter Schefenacker CVA] (Company Voluntary Arrangement, cated Mar. 9, 2007, included as exhibit A-l to the Verified Petition for Order); Evans-Pritchard, supra note 15.
88. See Evans-Pritchard, supra note 15; See also Schefenacker CVA, supra note 87, at 22-25 (explaining financial issues leading to restructuring).
89. See Evans-Pritchnrd, supra note 15 ("German banks sold off most of their Schefenacker loans to UK hedge funds and institutions, so more than 90[%] of creditors are now based in London."); Kevin Reed, German Business Avoids Insolvency in UK Move, ACCOUNTANCY AGE, Nov 8, 2006, http://www.accountancyage.com/accountancyage/news/ 2168185/german-business-ducks (same); See also Oliver Wihofszki, Hedge Funds to Hold Majority in Schefenacker, FIN. TIMES DEUTSCHLAND, Feb. 12, 2007, available at LEXIS, Europe Intelligence Wire File (abstract) (same and noting that "in the last few months Schefenacker has had two new CEOs").
90. See Evans-Pritchard, supra note 15; Colin Whitbread, Schefenacker Transfers Operating Subsidiaries to the U.K., WORLD MARKETS RESEARCH CENTRE, Nov. 3, 2006 (on file with the Fordham Law Review).
91. See Evans-Pritchard, supra note 15.
92. Schefenacker CVA, supra note 87, at 23.
93. Id. at 23, 29-30.
94. Id. at 25 ("Intensive negotiations were conducted among the representatives of the Term Lenders, the representatives of the OEMs and representatives of Dr. Schefenacker in order to determine whether agreement could be reached on the provision of further funding and terms for a financial restructuring ... .").
95. See id. at 25, 43.
96. Id. at 28.
97. Id. at 28-29.
98. See Here to Stay, supra note 46, at 24.
99. See Verified Petition for Order, Pursuant to 11 U.S.C. §§ 105(a), 1507, 1517, 1520, and 1521, Recognizing Company Voluntary Arrangement as Foreign Main Proceeding, Enforcing Company Voluntary Arrangement in the United States, and Granting Other Appropriate Relief at 2, 8-9, In re Schefenacker plc, No. 07-11482 (Bankr. S.D.N.Y. May 15, 2007) (Docket No. 2) [hereinafter Schefenacker Verified Petition].
100. Id. at 2-3, 7-9.
101. Schefenacker CVA, supra note 87, at 31-34.
102. Schefenacker Verified Petition, supra note 99, at 7-9; See also Schefenacker, No. 07-11482, slip op. (June 14, 2007) (order recognizing proceeding relating to Schefenacker CVA as a foreign main proceeding, issuing injunction, and closing case). A group of Schefenacker's bondholders objected to the Verified Petition, alleging that Schefenacker failed to provide full disclosure of information relevant to the restructuring and that Germany, not England, is Schefenacker's center of main interest. See Bondholder Group Objection to Chapter 15 Petition at 1-3, Schefenacker, No. 07-11482 (June 11, 2007) (Docket No. 40) [hereinafter Schefenacker Bondholder Objection]. These bondholders appealed the Schefenacker Approval Order, but subsequently withdrew the notice of appeal. See Notice of Appeal, Schefenacker, No. 07-11482 (June 25, 2007) (Docket No. 88); Notice of Withdrawal of Appeal, In re Schefenacker plc, No. 07-CV-06598-SAS (S.D.N.Y. Aug. 10, 2007) (Docket No.5).
103. See Eric A. Simonsen & Brian Cassady, From 'Off-the-Rails' to 'Back-on-Track': The Collapse and Rescue of Jarvis PLC, J. Private Equity, Spring 2007, at 113, 114-15.
104. Id. at 113.
105. Id at 114.
106. Id. at 114-15.
107. See id. at 115 (explaining that, in mid-2004, "Jarvis had £4 million of cash, £132 million of trade payables averaging more than 60 days past due, and was in default on all of its £310 million of institutional debt"); See also JARVIS PLC, Annual Report and Accounts 2004, at 18-19, 26-27, available at http://www.jarvis-uk.com/jarvisplc/investor/reports/ar04/ar04.pdf; Richard Wray, Jarvis Seeking Extra £20 Million Loan, THE GUARDIAN (London), May 7, 2005, at 26.
108. See Simonsen & Cassady, supra note 103, at 117 (explaining banks' demands for time and additional liquidity Jarvis needed to accomplish restructuring); See also JARVIS PLC, PRELIMINARY ANNOUNCEMENT OF UNAUDITED RESULTS FOR THE YEAR ENDED 31 MARCH 2005, at 11-12 (2005) [hereinafter JARVIS UNAUDITED RESULTS FOR 2005], available at http://www.jarvis-uk.com/jarvisplc/tools/pdfs/p- announcement.pdf (providing timeline of key events in restructuring).
109. See, e.g., John Waples, Lovell Fights to Keep Jarvis on the Rails, SUNDAY TIMES (London), Dec. 12, 2004, at 10 ("[Lovell] was encouraged to take the post by Royal Bank of Scotland, one of the lead creditors at Jarvis and a former lender to both Costain and Dunlop Slazenger.").
110. See Simonsen & Cassady, supra note 103, at 120; Press Release, Jarvis plc, Jarvis PLC Statement Re Transactions (Jan. 31, 2005) [hereinafter Statement Re Transactions], available at http://www.jarvis-uk.com/jarvisplc/investor/news/rnsitem?id=l 107154853nRN Se9698H (explaining terms of sale of tube line operations); See also JARVIS UNAUDITED RESULTS FOR 2005, supra note 108, at 11.
111. See Simonsen & Cassady, supra note 103, at 117.
112. See id. at 120; Statement Re Transactions, supra note 110 (explaining terms of settlement); See also JARVIS UNAUDITED RESULTS FOR 2005, supra note 108, at 11-12.
113. See Jarvis Takes Battering as US Sharks Circle, BIRMINGHAM POST (U.K.), Apr. 19, 2005, at 17, available at LEXIS, Birmingham Post File; Lucy Smy, Jarvis Reveals Details of £350m Debt Swap, FIN. TIMES (London), July 13, 2005, at 24.
114. See Simonsen & Cassady, supra note 103, at 121.
115. Baird, supra note 15.
116. See, e.g., Simonsen & Cassady, supra note 103, at 121; Hugh Tomlinson, Back from the Brink: Alasdair Marnoch at Jarvis, FIN. WK. (U.K.), May 23, 2006, http://www.financeweek.co.uk/ item/3677; Turnaround for Jarvis, DAILY MAIL (London), Dec. 1, 2005, at 79, available at LEXIS, Daily Mail and Mail on Sunday (London) File.
117. See Simonsen & Cassady, supra note 103, at 120-21; See also Michael Harrison, Shareholders Wiped Out in Jarvis Debt Restructuring, INDEPENDENT (London), May 24, 2005, at 58.
118. See JARVIS UNAUDITED RESULTS FOR 2005, supra note 108, at 1, 12.
119. Id. at 12.
120. See Press Release, Jarvis plc, Jarvis PLC Completion of Restructuring (Sept. 29, 2005) [hereinafter Completion of Restructuring], available at http://www.jarvis-uk.com/jarvisplc/investor/news/rnsitem?id= 1128009524nRNSc9827R (announcing completion of restructuring and noting that shareholders approved restructuring plan on August 4, 2005).
121. See, e.g., Kmart Corp., Quarterly Report (Form 10-Q), at 9 (Dec. 23, 2002).
122. See, e.g., Kmart Corp., Annual Report (Form 10-K), at 5 (Mar. 24, 2003).
123. See, e.g., Kmart Creditor Trust v. Conaway, 307 B.R. 586, 590 (Bankr. E.D. Mich. 2004); John Kostrzewa, Arbitration Panel Clears Former Kmart Executive, PROVIDENCE J. (R.I.), Aug. 21, 2005, at F2; Kathleen Kerwin, Creditors Take on Kmart's "Frat Boys," BUS. WK., NOV. 21, 2003, http://www.businessweekxom/ bwdaily/dnflash/nov2003/nf20031121-5491-db035.htm.
124. See, e.g., Kostrzewa, supra note 123 (reporting exoneration of Kmart CEO from charges of mismanagement by a three-member arbitration panel).
125. See SEC v. Conaway, No. 05-40263, 2006 WL 2828569, at *1, 8 (E.D. Mich. Sept. 29, 2006) (denying defendants' motion to dismiss).
126. Disclosure Statement with Respect to First Amended Joint Plan of Reorganization of Kmart Corporation and Its Affiliated Debtors and Debtors-in-Possession at 74, In re Kmart Corp., No. 02-02474 (Bankr. N.D. I11. Feb. 26, 2003) (Docket No. 8894) [hereinafter Kmart Disclosure Statement].
127. Id. at x-xvii, 54, 74.
128. Id. at 74.
129. Id. at vii, 74-77.
130. Id. at 18. The law firm Jones Day represented the Financial Institutions' Committee. I was a lawyer at Jones Day at the time, but I did not work on the engagement. My husband also was a lawyer at Jones Day at the time and did actively work on the engagement. Nonetheless, my knowledge of, and all information in this Article regarding, the Kmart cases is based on the publicly available sources cited herein.
131. See, e.g., Muller, supra note 46.
132. Kmart Corp., Current Report (Form 8-K), item 5 (Jan. 28, 2003).
133. Kmart Disclosure Statement, supra note 126, at 94, app. A, at A-15.
134. Id.
135. Kmart Holding Corp., Statement of Beneficial Ownership (Sched. 13D), at 11 (May 15,2003).
136. See Kmart Holding Corp., Statement of Ownership (Sched. 13G), item 4 (Mar. 10, 2004); Kmart Holding Corp., Statement of Beneficial Ownership (Sched. 13D), at 2, 15 (May 15,2003).
137. Kmart Corp., Current Report (Form 8-K), exhibit 4.1, at 8 (Jan. 28, 2003) (Investment Agreement).
138. Kmart Holding Corp., Statement of Beneficial Ownership (Sched. 13D), at 12 (May 15,2003).
139. Yuval Rosenberg, The Man Behind the Deal, CNNMONEY. COM, NOV. 17, 2004, http://money.cnn.com/2004/11/17/news/ newsmakers/lampert/index.htm.
140. See Sears Holdings Corp., Annual Report (Form 10-K), at 2, 4-5 (Mar. 28, 2007).
141. Id. at 9.
142. See, e.g., Sears Holdings Profit Drops; Stock Tumbles, CNNMoney.com, Aug. 30, 2007, http://money.cnn.com/2007/08/30/news/ companies/sears/index.htm.
143. David M. Berkowitz, Kmart: A Case for the Bankruptcy History Books?, Hedgefund J., Jan. 2006, available at http://www.thehedgefundjournal.com/commentary/index.php?articleid=22794666.
144. Under both U.S. and U.K. law, secured creditors generally have superior rights to payment and to the collateral securing their loans. See, e.g., BRUCE G. CARRUTHERS & TERRENCE C. HALLIDAY, RESCUING BUSINESS 162-63 (1998) (discussing the benefits to security and noting that "[s]ecurity helps a creditor in relation to the debtor but equally important, protects a creditor from other creditors"); See also VANESSA FINCH, CORPORATE INSOLVENCY LAW 75-79 (2002) (providing an overview of secured creditors' rights in United Kingdom); IAN F. FLETCHER, INSOLVENCY IN PRIVATE I NTERNATIONAL LAW 188-91 (James J. Fawcett ed., 2d ed. 2005) (same); Ingrid Michelsen Hillinger & Michael G. Hillinger, 2001: A Code Odyssey (New Dawn for the Article 9 Secured Creditor), 106 COM. L.J. 105 (2001) (providing an overview of secured creditors' rights in the United States outside of bankruptcy). These rights give secured creditors substantial leverage in restructuring negotiations, particularly if the creditors' claims are undersecured or just fully secured and leave little value for other stakeholders. For an overview of creditor priorities in both U.S. and U.K. insolvencies, See CARRUTHERS & HALLIDAY, supra, at 39-40.
145. See infra Part III.A.1-2.
146. See supra Part II.A, D.
147. See supra Part II.B-C.
148. See supra Part II.
149. See, e.g., FLETCHER, supra note 144, at 4-8 ("[D]espite numerous general resemblances, national insolvency laws and procedures differ from one another almost infinitely in ways both great and small.").
150. See, e.g., Erin K. Healy, All's Fair in Love and Bankruptcy? Analysis of the Property Requirement for Section 109 Eligibility and Its Effect on Foreign Debtors Filing in U.S. Bankruptcy Courts, 12 AM. BANKR. INST. L. REV. 535, 542 & n.41 (2004) ("While a bankruptcy filing in other countries continues to carry significant stigma, U.S. companies and individuals are not subjected to the same shame merely as a result of filing a petition for bankruptcy."); Martin, supra note 13, at 25-26 ("There See ms to be less stigma associated with a failing business in the United States than with a personal bankruptcy, probably due to the U.S. notion that some risk is good and necessary to a well-functioning capitalist economy.").
151. See Brian S. Katz, Single-Asset Real Estate Cases and the Good Faith Requirement: Why Reluctance to Ask Whether a Case Belongs in Bankruptcy May Lead to the Incorrect Result, 9 BANKR. DEV. J. 77, 77 n.2 (1992) (citing Chapter 11 cases of Texaco, Revco, and Continental for similar proposition).
152. 11 U.S.C. §§101-1532 (2006) (Bankruptcy Code). For a discussion of the history to, and the development of, the Bankruptcy Code, See CARRUTHERS & HALLIDAY, supra note 144, at 63-106. The Bankruptcy Code was amended in 2005. See Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, Pub. L. No. 109-8, 119 Stat. 23 (codified as amended in scattered sections of 11 U.S.C). The 2005 Amendments largely addressed consumer bankruptcy. Nevertheless, certain changes also were made to the corporate reorganization provisions of the Bankruptcy Code. These changes did shorten a debtor's exclusive period to file a reorganization plan and limit the types of retention and severance benefits available to a debtor's top management. See 11 U.S.C. §§ 503(c), 1121(d). These changes, however, did not alter the basic management-driven structure of Chapter 11.
153. See generally 11 U.S.C. §§ 1101-1146 (general Chapter 11 provisions of Bankruptcy Code).
154. See generally id. § 701-727 (general Chapter 7 provisions of Bankruptcy Code).
155. Id. § 1107 (discussing duties of company as a debtor in possession).
156. Id. §§ 701-704 (discussing selection of trustee and duties of trustee).
157. Id. § 303 (discussing involuntary bankruptcy case).
158. Id. § 301 (discussing voluntary bankruptcy case).
159. Id. § 1104 (discussing appointment of trustee or examiner).
160. See Gilson & Vetsuypens, supra note 17, at 1012 (explaining that, in an empirical study, in "twenty-five percent of cases involving bankrupt firms, creditors threatened to petition the court to have a trustee appointed unless managers resigned"; however, a trustee was appointed in only one of these cases); See also Peter Edmonston, Atkins Cleared to Emerge, DAILY DEAL, Dec. 22, 2005 (on file with the Fordham Law Review) (noting that unsecured creditors threatened to sue debtor regarding prepetition transactions, but then dropped suit for concessions in plan); Adina Genn, Hurting Firms Dart for Bankruptcy Protection, LONG ISLAND BUS. NEWS (N.Y.), Sept. 30, 2005, at 5A ("'The threat of creditorproposed plans may be daunting enough to persuade companies in bankruptcy to reach a consensus with their creditors more quickly ....'" (quoting Rick Antonoff, Pillsbury Winthrop Shaw Pittman LLP)).
161. See Alexander L. Paskay & Frances Pilaro Wolstenholme, Chapter 11: A Growing Cash Cow-Some Thoughts on How to Rein in the System, 1 AM. BANKR. INST. L. REV. 331, 337 (1993) ("There are several areas within bankruptcy litigation that lead to excessive costs. These include bad faith litigation, unnecessary stay litigation under section 362(d)(2), adequate protection and cash collateral litigation, and disclosure statement litigation."); See also Stewart L. Cohen & David Peress, Administrative Insolvency: What's a Secured Creditor to Do?, AM. BANKR. INST. J., July/Aug. 2001, at 34, 34 ("[L]itigation over issues such as conversion, dismissal and adequate protection leads to the incurrence of additional expenses as time marches on and ultimately contributes to administrative insolvency."); Bruce V. Bigelow, Reorganization Cost Peregrine $54.7 Million; Final Accounting Given in Bankruptcy Filings, SAN DIEGO UNION-TRIB., July 8, 2006, at C-1 (explaining large fees and delay incurred in the Peregrine Systems, Inc. Chapter 11 case because of '"hostile and contentious' litigation").
162. 11 U.S.C. § 1123 (describing contents of plan).
163. Id.
164. Id. § 1121(c)-(d). This "exclusivity" period may be extended or shortened. The appointment of a Chapter 11 trustee terminates the debtor's exclusivity.
165. See, e.g., ROSENBERG, supra note 22, at 30. Distressed debt investors have several options for purchasing a seat at the negotiating table, including by buying into a distressed loan or bond issuance or directly lending to the debtor. See supra Part I.A. 1; See also Suniati Yap, Investing in Chapter 11 Companies: Vultures or White Knights?, 2 SW. J.L. & TRADE AM. 153, 163 (1995) (noting that, in certain circumstances, an investor may be able to purchase a debtor's debt through a tender offer).
166. The automatic stay of section 362 of the Bankruptcy Code prohibits a debtholder- even a secured debtholder-from taking any action against a debtor or its property on account of a prepetition debt without prior bankruptcy court approval. 11 U.S.C. § 362. In addition, a debtor must obtain the debtholder's consent or bankruptcy court approval to use the debtholder's cash collateral. Id. § 363. As noted above, a debtholder also may request the appointment of a trustee or examiner in the debtor's Chapter 11 case. Id. § 1104. These sections provide a debtholder with standing to be heard before the bankruptcy court on issues often central to the debtor's restructuring efforts. Id. § 1109. Activist investors also may file objections to relief being requested by the debtor to assert their position and interest in the debtor's case. See, e.g., Second Lien Committee's: (1) Objection to Debtors' Motion for Authority to Enter into Conditional Waiver and Forbearance Agreement with the DIP Lenders; and (2) Notice of Offer to Purchase Substantially All of the Debtors' Assets for $175 Million Under Bankruptcy Code Section 363 and to Act as Stalking Horse Bidder in Court Authorized Auction Process, In re Werner Holding Co. (DE), Inc., No. 06-10578(KJC) (Bankr. D. Del. Jan. 18, 2007) (Docket No. 940) (objecting to debtors' requested relief under DIP Loan and making offer to purchase debtors' assets).
167. See supra Part II.A.
168. 11 U.S.C. § 1103; see also ROSENBERG, supra note 22, at 30.
169. 11 U.S.C. § 1102(b)(1); Greg M. Zipes & Lisa L. Lambert, Creditors' Committee Formation Dynamics: Issues in the Real World, 77 AM. BANKR. L.J. 229, 255 n.116 (2003).
170. See supra Part II.D.
171. A committee member's access to nonpublic information and fiduciary duties to other creditors may restrict the creditor's ability to pursue its own interests. See, e.g., ROSENBERG, supra note 22, at 31 (explaining conflict for committee members created by holding nonpublic information); Zipes & Lambert, supra note 169, at 244-49 (explaining potential issues raised by claims trading and committee members who represent specific interests).
172. 11 U.S.C. § 1122 (discussing plan classification); see also ROSENBERG, supra note 22, at 32-33 (explaining blocking tactics in Chapter 11 context).
173. 11 U.S.C. § 1126 (discussing plan voting requirements).
174. ESL Investments, Inc. (ESL) joined forces with Third Avenue Trust (Third Avenue) in Kmart to create a blocking position. See supra Part II.D; see also ROSENBERG, supra note 22, at 32 (explaining the blocking tactics of one distressed debt investor as follows: "If he cannot for some reason build the required position in the bonds, he will link arms with other investors whose holdings can make up the difference").
175. For a general discussion of issues relating to plan classification, see Peter E. Meltzer, Disenfranchising the Dissenting Creditor Through Artificial Classification or Artificial Impairment, 66 AM. BANKR. L.J. 281 (1992).
176. Joint Plan of Reorganization of Allied Holdings, Inc. and Affiliated Debtors Proposed by the Debtors, Yucaipa and the Teamsters National Automobile Transportation Industry Negotiating Committee at 25, In re Allied Holdings, Inc., No. 05-12515 (Bankr. N.D. Ga. Mar. 2, 2007) (Docket No. 2563) [hereinafter Allied Plan].
177. Id.
178. Id.
179. Id.
180. Id.
181. 11 U.S.C. § 1129(a)(8) (2006) (discussing general plan confirmation requirements).
182. Id. § 1129(b) (discussing cramdown requirements).
183. Id.
184. See supra note 144 (discussing rights of secured creditors in the United States and United Kingdom).
185. For a discussion of credit bidding in the context of debtor-in-possession financing, see infra Part III.A.1.a.ii.
186. If a debtholder holds a blocking position in all impaired classes of claims, or at least the significant classes, the debtor most likely will be unable to cram down the plan over the debtholder's objection. See 11 U.S.C. § 1129(b) (discussing cramdown requirements).
187. Kmart Disclosure Statement, supra note 126, at xi-xiv.
188. For a discussion of ESL and Third Avenue debt holdings, see supra Part II.D.
189. See generally Baird & Rasmussen, supra note 10, at 1236-42 (describing the mechanics and use of DIP Loans in Chapter 11 cases); Kuney, supra note 9, at 46-74 (same); David A. Skeel, Jr., The Past, Present and Future of Debtor-in-Possession Financing, 25 CARDOZO L. REV. 1905, 1917-22 (2004) (same).
190. See, e.g., In re Ames Dep't Stores, Inc., 115 B.R. 34, 36 (Bankr. S.D.N.Y. 1990) ("It is given that most successful reorganizations require the debtor-in-possession to obtain new financing simultaneously with or soon after the commencement of the Chapter 11 case.").
191. 11 U.S.C. § 364(c)(1)-(3) (allowing the debtor, under certain circumstances, to offer a debtor-in-possession financing loan (DIP Loan) lender priority ahead of all administrative claims and a security interest in encumbered assets or a junior interest in encumbered assets).
192. Id. § 364(d)(1) (allowing the debtor, under certain circumstances, to offer a DIP Loan lender a first security interest in encumbered assets).
193. See Kuney, supra note 9, at 56 ("A violation of these covenants is typically an event of default under the DIP loan documents entitling the lender to relief from the stay and the ability to immediately realize upon its security, begin assessing default interest rates and penalty fees, and terminate any further financing."); see also Baird & Rasmussen, supra note 10, at 1239-40; Skeel, supra note 189, at 1918-19.
194. See Baird & Rasmussen, supra note 10, at 1239; Kuney, supra note 9, at 68-69.
195. See Kuney, supra note 9, at 52-57.
196. See Baird & Rasmussen, supra note 10, at 1245-46 (observing that entrenched management "will readily agree to covenants that give them breathing space today even if these terms promise to deliver the business to the creditors should current efforts not pan out").
197. See Kuney, supra note 9, at 52-53.
198. Id. at 53-54 & nn.162-64; see also Sris Chatterjee et al., Debtor-In-Possession Financing, 28 J. BANKING & FIN. 3097, 3108 (2004) ("In 90% of the cases, DIP loans have restrictions on specified operating expenses and operating activities.").
199. 11 U.S.C. § 363(k) (2006); see also David Peress & Thomas C. Prinzhorn, Nontraditional Lenders and the Impact of Loan-to-Own Strategies on the Restructuring Process, AM. BANKR. INST. J., Apr. 2006, at 48 (discussing loan to own strategies); infra Part IH.A.1 .a.ii (discussing Werner's and Radnor's Chapter 11 cases).
200. See, e.g., Skeel, supra note 189, at 1920-21, 1931 (suggesting that DIP Loans have replaced claims trading as the control mechanism of choice for distressed debt investors and citing U.S. Air's parent company UAL Corp. and TWA as two cases in which the DIP Loans were used to dictate the terms of the Chapter 11 cases and give the DIP Loan lenders control of the debtors).
201. Press Release, Werner Co., Werner Completes Asset Sale and Emerges from Bankruptcy (June 11, 2007), available at http://wernerladder.mediaroom. com/index.php? s=press-releases&item=31.
202. Company's Press Release Announcing Chapter 11 Filing, WERNER LADDER BANKR. NEWS (Bankruptcy Creditors' Service, Inc., Fairless Hills, Pa.), June 14, 2006, at 3, 3, available at http://bankrupt.com/werner.txt; see also Debtors' Motion for Order (I) Authorizing Debtors (A) to Obtain Post-petition Financing Pursuant to 11 U.S.C. §§ 105, 361, 362, 364(c)(1), 364(c)(2), 364(c)(3), and 364(d)(1) and (B) to Utilize Cash Collateral Pursuant to 11 U.S.C. § 363, (II) Granting Adequate Protection to Pre-petition Secured Parties Pursuant to 11 U.S.C. §§ 361, 362, 363 and 364, (III) Scheduling Interim and Final Hearings Pursuant to Bankruptcy Rules 4001(B) and (C), and (IV) Approving Re-Purchase of Certain Accounts Receivable Pursuant to 11 U.S.C. §§ 363 and 105(a), at 2-3, 12-23, In re Werner Holding Co. (DE), Inc., No. 06-10578(KJC) (Bankr. D. Del. June 12, 2006) (Docket No. 18).
203. See Press Release, Werner Co., supra note 201 (describing closing of sale); Michael Roknick, Werner Sale a Done Deal; Jobs Safe Under Terms of Sale, HERALD (Sharon, Pa.), June 11, 2007, available at http://www.sharon-herald.com/homepage/local-story-162214545.html?keyword= leadpicturestory (noting that Werner "completed its sale to a multiinvestment group in a deal valued at $270 million"); see also Werner, No. 06-10578(KJC), slip op. (Apr. 26, 2007) (Docket No. 1366) (order approving sale); Debtors' Motion for Entry of an Order (I) Approving Sale of Substantially All of Debtors' Assets Free and Clear of Liens, Claims, Interests, and Encumbrances; (II) Authorizing and Approving the Purchase Agreement; (III) Authorizing and Approving the Assumption and Assignment and Sale of Certain Executory Contracts and Unexpired Leases in Connection with Such Sale; (IV) Authorizing the Exemption of the Sale from Stamp and Similar Taxes and (V) Granting Related Relief, Werner, No. 06-10578 (KJC) (Mar. 27, 2007) (Docket No. 1231) [hereinafter Werner Sale Motion] (explaining terms of proposed sale).
204. See In re Radnor Holdings Corp., 353 B.R. 820, 830 (Bankr. D. Del. 2006) (explaining prepetition relationship between debtors and Tennenbaum Capital Partners LLC (Tennenbaum)); see also Disclosure Statement with Respect to Joint Plan of Liquidation of Radnor Holdings Corporation and Its Affiliated Debtors and Debtors in Possession at 12-13, Radnor, 353 B.R. 820 (No. 06-10894 (PJW)) (Docket No. 1080) [hereinafter Radnor Disclosure Statement] (same).
205. See Radnor, 353 B.R. at 830-33; Radnor Disclosure Statement, supra note 204, at 12-13.
206. See Radnor, 353 B.R. at 836-37; Radnor Disclosure Statement, supra note 204, at 18-19.
207. See Radnor Disclosure Statement, supra note 204, at ii-iii (explaining that the bankruptcy court approved the debtors' motion to sell substantially all of their assets to Tennenbaum and that "[t]he Debtors closed on the Sale on November 29, 2006").
208. See supra notes 193-99 and accompanying text (discussing leverage accompanying such provisions); see also David Line Batty & Jo Ann J. Brighton, "Silent" Second Liens- Will Bankruptcy Courts Keep the Peace?, 9 N.C. BANKING INST. 1, 8-29 (2005) (explaining the enforcement of subordination and intercreditor agreements in prepetition loan documents); David Gray Carlson, A Theory of Contractual Debt Subordination and Lien Priority, 38 VAND. L. REV. 975, 983-89, 996-1007, 1019-24 (1985) (discussing enforcement of debt and lien subordination provisions in bankruptcy).
209. See, e.g., 11 U.S.C. §§ 362, 1124 (2006) (describing automatic stay and reinstatement provisions of Bankruptcy Code); see also Paul Baisier, Second-Lien Financing-More Good, Bad and Ugly: A Decision at Last, AM. BANKR. INST. J., Apr. 2007, at 50, 50 (2007) (noting that "substantial case law says that pre-petition agreements that change substantive bankruptcy rights are not enforceable"); infra note 396 (noting judicial restraints on lender influence of corporate affairs).
210. Vendors and suppliers can incur significant monetary losses on prepetition claims in a bankruptcy case. In addition, these parties can incur significant expenses if they try to participate in the debtor's Chapter 11 case. Consequently, these parties may prefer not to do business with a bankrupt or potentially bankrupt business. See generally Jon M. Labovitz, Taking a Fresh Look at DIP Budgeting, AM. BANKR INST. J., Mar. 2005, at 34, 34 n.35 (describing factors that may strain relations between debtors and their vendors, suppliers, and customers).
211. See generally Conrad B. Duberstein, Out-of-Court Workouts, 1 AM. BANKR. INST. L. REV. 347, 349-51 (1993) (providing a general overview of out-of-court restructuring agreements and noting that these "agreement[s] may eíther provide an extension of the time period in which the debtor's obligations become due, without altering the amount of the claims of the creditors, or fashion a settlement, sometimes known as a composition agreement, which will reduce the amount to be paid to creditors with provisions for payment either in cash or over a period of time").
212. See, e.g., Richard E. Mendales, We Can Work It Out: The Interaction of Bankruptcy and Securities Regulation in the Workout Context, 46 RUTGERS L. REV. 1211, 1222-23 (1994) ("[I]f a debtor lacks ready cash or its financial distress is too acute in other ways, immediate bankruptcy reorganization may be preferable to attempting a workout."); James H.M. Sprayregen et al., Chapter 11: Not Perfect, but Better than the Alternative, AM. BANKR. INST. J., Oct. 2005, at 1, 60 ("[C]hapter 11 is but one, albeit a critical, part of a broader restructuring market that also includes a vast number of out-of-court workouts because it serves as a critical court-supervised market of last resort when a consensual deal is not made.").
213. See supra Part III.A.l.a.ii; see also C. Edward Dobbs, Negotiating Points in Second Lien Financing Transactions, 4 DEPAUL BUS. & COM. L.J. 189 (2006) (describing provisions that maintain secured lenders' rights in intercreditor agreements).
214. See, e.g., Efrat Lev, The Indenture Trustee: Does It Really Protect Bondholders?, 8 U. MIAMI BUS. L. REV. 47, 84-85 (1999) (noting trend away from protective bondholder covenants); Steven L. Schwarcz, Rethinking a Corporation's Obligations to Creditors, 17 CARDOZO L. REV. 647, 660-61 (1996) (explaining covenants in bond indentures); F. John Stark et al., "Marriott Risk": A New Model Covenant to Restrict Transfers of Wealth from Bondholders to Stockholders, 1994 COLUM. BUS. L. REV. 503, 544-46 (explaining covenants typically included in bond indentures and noting that "[b]ond indenture covenants traditionally occupied a middle ground between comprehensiveness and the relative absence of restrictions which is typical in investment grade bonds today").
215. See, e.g., Mendales, supra note 212, at 1227-33.
216. 15 U.S.C. §§ 77aaa, 77ddd(a) (2006); see also George W. Shuster, The Trust Indenture Act and International Debt Restructurings, 14 AM. BANKR. INST. L. REV, 431, 437 (2006) ("Section 316(b) was adopted with a specific purpose in mind-to prevent out-ofcourt debt restructurings from being forced upon minority bondholders."). Interest payments can be suspended, however, with a supermajority (75%) vote of the bondholders. See 15 U.S.C. § 77ppp(a)(2) to (b).
217. 15 U.S.C. §77ppp(b).
218. See, e.g., Gilson & Vetsuypens, supra note 17, at 1007 ("Out-of-court restructuring is economically equivalent to formal bankruptcy, because the firm's fixed claims are either renegotiated or replaced with new claims on terms that reduce the firm's overall fixed payment burden."); Mendales, supra note 212, at 1223-33 (describing common obstacles to out-of-court restructurings).
219. See, e.g., John D. Ayer et al., Out-of-Court Workouts, Prepacks and Pre-Arranged Cases: A Primer, AM. BANKR. INST. J., Apr. 2005, at 16, 56 (explaining that a successful prepackaged plan requires a small, concentrated creditor group).
220. See, e.g., id. at 16 ("'Pre-packaging' a chapter 11 reorganization enables a debtor to minimize the impact to its ongoing business operations by combining many of the best aspects of out-of-court workouts-cost-efficiency, speed, flexibility and cooperation-with the binding effect and structure of a conventional bankruptcy."); Yap, supra note 165, at 173 ("Second, only by filing a Chapter 11 proceeding and obtaining the protection of the court, can a company reject disadvantageous contracts and experience limited liability.").
221. See 11 U.S.C. § 1126(b)(1) (2006) (discussing plan solicitation provisions).
222. See id. § 1126(b)(1), (c) (discussing plan solicitation provisions).
223. See id. §§ 1129(a)-(b), 1141 (explaining requirements for, and impact of, plan confirmation).
224. See Disclosure Statement with Respect to Joint Prepackaged Chapter 11 Plan of Reorganization of Bally Total Fitness Holding Corporation and Its Affiliate Debtors at 20-49, In re Bally Total Fitness of Greater New York, Inc., No. 07-12395 (BRL), 2007 WL 2779438 (Bankr. S.D.N.Y. June 27, 2007) (Docket No. 36) [hereinafter Bally Disclosure Statement] (explaining terms of prepackaged plan of reorganization); Motion of Debtors for Order, Pursuant to Section 1127(A) of the Bankruptcy Code and Bankruptcy Rule 3019, Authorizing the Debtors to Modify Their Joint Prepackaged Chapter 11 Plan of Reorganization, Bally, No. 07-12395 (BRL) (August 13, 2007) (Docket No. 179) [hereinafter Bally Motion to Modify] (explaining terms of modified prepackaged plan of reorganization); see also infra note 340.
225. See, e.g., Ayer et al., supra note 219, at 16.
226. See, e.g., Yap, supra note 165, at 173 (explaining requirements for prepackaged Chapter 11 plan); see also GILSON, supra note 22, at 192 ("Prepacks work best for firms whose problems are more financial than operational in nature and that have relatively less trade and other nonpublicly traded debt outstanding.").
227. See Ayer et al., supra note 219, at 56.
228. See id. (describing the prenegotiated or "pre-arranged" plan process).
229. See id. ("The most significant procedural difference between a pre-arranged plan and a prepackaged plan is that solicitation occurs after the bankruptcy case has been filed and after the court has approved a disclosure statement.").
230. See 11 U.S.C. § 1125 (2006) (describing postpetition plan disclosure and solicitation procedures).
231. See, e.g., Jonathan Berke, Trump Filing Relatively Drama Free, DAILY DEAL, NOV. 22, 2004 (on file with the Fordham Law Review) (describing prenegotiated plan between Trump Hotels & Casino Resorts and its bondholders); Ben Fidler, Judge to Rule on Granite Plan, DAILY DEAL, May 1, 2007 (on file with the Fordham Law Review) (describing prenegotiated plan between Granite Broadcasting and Silver Point); Peter J. Howe, Shame- Free Bankruptcy, Telecom Companies Pursue a 'Drive-Through Chapter 11' Strategy in Prearranged Deals with Their Creditors, BOSTON GLOBE, July 8, 2002, at D1 (describing prenegotiated plan between McLeodUSA and its bondholders).
232. See, e.g., FINCH, supra note 144, at 197 ('"In England insolvency, including corporate insolvency, is regarded as a disgrace. The stigma has to some extent worn off but it is nevertheless still there as a reality.'"); see also Vantis Warns on Companies Calling Themselves Bankrupt, FIN. ADVISER, Mar. 9, 2006, available at http://www.ftadviser.com/FinancialAdviser/Archive/Features/ article/20060309/da8e7a88-ea 43-11 dc-ab39-0015171400aa/Vantis-warns-on- companies-calling-themselves-bankrupt.jsp ('"While bankruptcy can relieve uncertainty and stress, it also has a stigma associated with it. Directors may find it virtually impossible to raise future credit.'" (quoting Adrian Doble of Vantis)).
233. See Martin, supra note 12, at 370-78, 392-98 (explaining history behind U.K. bankruptcy law and observing that, "[w]hile English laws themselves became more lenient over time, this unforgiving attitude toward unpaid debt and credit never really changed"). See generally CARRUTHERS & HALLIDAY, supra note 144.
234. See, e.g., Richard Tyler, Monday View: Show Some Enterprise and Help Entrepreneurs, DAILY TELEGRAPH (London), Nov. 13, 2006, at 4, available at http://www.telegraph.co.uk/finance/2950576/ Monday-view-Show-some-enterprise-and-help-entrepreneurs.html (describing the 2002 amendments to the Insolvency Act and noting that "[they] aimed to reduce the stigma of bankruptcy and encourage the sort of serial entrepreneurship enjoyed by the US").
235. See generally Enterprise Act, 2002, c. 40 (Eng.); Insolvency Act, 1986, c. 45 (Eng.); Insolvency Act, 1985, c. 65 (Eng.).
236. In addition to amending the United Kingdom's bankruptcy laws, the Enterprise Act also reformed U.K. competition policy with respect to mergers. See generally Enterprise Act. 2002, c. 40.
237. For a discussion of the history to, and the development of, the Insolvency Act, see CARRUTHERS & HALLIDAY, supra note 144, at 106-49; and FINCH, supra note 144, at 7-24.
238. The Insolvency Act offers a company three forms of liquidation: members' voluntary winding up; creditors' voluntary winding up; and winding up by the court. See Insolvency Act, 1986, c. 45, pt. IV.
239. Id. sched. Bl, paras. 2, 59 (as amended by Enterprise Act, 2002, c. 40, sched. 16) (explaining who may appoint an administrator and the general powers of an administrator).
240. See, e.g., Tett, supra note 45 (noting the unpredictability of U.K. bankruptcy law and its impact on U.K. restructurings).
241. Insolvency Act, 1986, sched. Bl, para. 12 (as amended by Enterprise Act, 2002, c. 40, sched. 16) (describing parties that may seek administration order).
242. Id. para. 2 (describing parties that may appoint administrator).
243. "The floating charge ... attaches to a class of the company's assets, both present and future, rather than to a stipulated item of property." FINCH, supra note 144, at 80.
244. Insolvency Act, 1986, sched. Bl, para. 3(1) (as amended by Enterprise Act, 2002, c. 40, sched. 16) (describing objectives of administration).
245. Vernon Dennis, Insolvency: Evolution Not Revolution, LEGAL WK. (U.K.), May 8. 2003, at 23, 23.
246. See Alan Tilley, European Restructuring: Restructuring Professionals Must Adapt to New Opportunities, J. PRIVATE EQUITY, Spring 2006, at 102, 103 (noting that, historically, "[a]ppointed administrators tend to dismiss key management immediately and replace them with their own staff," and suggesting that administrators may have to change practice going forward).
247. Likewise, management may use its debtholders' concerns regarding U.K. bankruptcy law to its advantage. For example, management may cite its potential liability under the United Kingdom's wrongful trading laws and threaten administration as a means to obtain necessary waivers or additional liquidity for the company. See Insolvency Act, 1986, c. 45, § 214 (imposing liability on directors under certain circumstances for wrongful trading).
248. See id. sched. Bl, paras. 100-03 (as amended by Enterprise Act, 2002, c. 40, sched. 16) (describing appointment of joint administrators).
249. Id. paras. 3(2), 5 (describing role of administrators).
250. Id. paras. 59-64 (describing powers of administrators).
251. See id. para. 73(1). An administrator can, however, sell assets subject to a floating charge without court approval and assets subject to a nonfloating (fixed) charge with court approval, provided that the creditor's priority in the sale proceeds is maintained. Id. paras. 70,71.
252. Id. paras. 14(1), 36(1); see also Mark Broude et al., An Overview of Global Insolvency Regimes, in THE GUIDE TO DISTRESSED DEBT AND TURNAROUND INVESTING 31, 40-41 (Kelly Deponte ed., 2007) (describing administration process and noting that a floating charge holder "is entitled to advance notice and is given the ability to appoint its own choice as administrator").
253. Notably, the 2002 amendments to the Insolvency Act were intended to weaken the influence of secured debtholders with floating charges in a company's rescue efforts. See U.K. DEPT. OF TRADE & INDUS., PRODUCTIVITY AND ENTERPRISE: INSOLVENCY-A SECOND CHANCE (2001); Tyler, supra note 234 ("The Act weakened the rights of unsecured creditors, including the Crown, [and] made it easier for directors to call in an administrator when their businesses ran into trouble."). For example, the amendments severely limit a floating charge holder's ability to invoke administrative receivership. See Insolvency Act, 1986, c. 45, § 72A (as amended by Enterprise Act, 2002, c. 40, § 250). For a general discussion of administrative receivership, see FINCH, supra note 144, at 234-72. Nevertheless, opportunities still exist for secured debtholders to influence the administration process. See, e.g., Insolvency Act, 1986, sched. Bl, paras. 14, 35-37 (as amended by Enterprise Act, 2002, c. 40, sched. 16); see also Dennis, supra note 245, at 23 (explaining that banks and other financial institutions participated in amendment process and certain concessions, which "have the effect of retaining much of the power in the insolvency process in the hands of secured creditors").
254. Insolvency Act, 1986, c. 45, sched. B1, paras. 52(2), 56, 57 (as amended by Enterprise Act, 2002, c. 40, sched. 16) (describing procedures for creditors' meeting and appointment of creditors' committee).
255. Insolvency Rules, 1986, S.I.1986/1925, pt. 2, para. 2.43 (U.K.); see also Broude et al., supra note 252, at 41.
256. See, e.g., Broude et al., supra note 252, at 41 ("While restructurings can be, and occasionally are, accomplished in an administration through a 'company voluntary arrangement' or 'scheme of arrangement,' the more likely outcome by far will be either the going-concern sale on a relatively accelerated basis or the piecemeal liquidation of the debtor's assets.").
257. Insolvency Act, 1986, c. 45, §§ 1-7B (as amended by Insolvency Act, 2000, c. 39, sched. 2, pt. 1, para. 10 (Eng.)) (CVA procedures).
258. Companies Act, 2006, c. 46, §§ 895-900 (Eng.) (Scheme procedures). The Companies Act of 1985 (Companies Act 1985) was substantially amended on November 8, 2006, resulting in the Companies Act of 2006 (Companies Act 2006). The majority of the provisions of the Companies Act 2006, however, did not go into effect until October 2008. See Companies Act, 2006, c. 46, § 1300; see also Sandy Shandro & Paul Sidle, Reforms to English Company Law, AM. BANKR. INST. J., Feb. 2007, at 34, 34. Until that time, the Companies Act 1985 continued to govern. Section 425 of the Companies Act 1985 governs Schemes. The Companies Act 2006 "restates the regime currently provided by section 425 of the Companies Act 1985." Shandro & Sidle, supra, at 35.
259. Except in the context of a CVA for small businesses, neither a CVA nor a Scheme includes a pre-effective date moratorium on the enforcement of creditors' rights. Consequently, a CVA or a Scheme may be coupled with an administration. See Insolvency Act, 1986, c. 45, § 1A, sched. Al (as amended by Insolvency Act, 2000, c. 39, sched. I, paras. 2, 4 (Eng.)); see also id. sched. B1, para. 42 (as amended by Enterprise Act, 2002, c. 40, sched. 16) (describing moratorium available in an administration); FINCH, supra note 144, at 328, 332-33.
260. See infra Part III.A.2.b.iii.
261. See, e.g., Peter J.M. Declercq, Restructuring European Distressed Debt: Netherlands Suspension of Payment Proceeding. .. The Netherlands Chapter 11?, 77 AM. BANKR. L.J. 377, 380-81 (2003) ("Whereas bond indentures for U.S. high yield bonds must comply with the provisions of the Trust Indenture Act of 1939, bond indentures for European high yield bonds generally do not have to comply with a similar European statute.").
262. See id. at 381 (noting that most European indentures require only a supermajority vote (i.e., 75%) to restructure the economic terms of the bonds); see also Kenneth Kletzer, Resolving Sovereign Debt Crises with Collective Action Clauses, FRBSF ECON. LETTER, (Fed. Reserve Bank of S.F., S.F., Cal.), Feb. 20, 2004, at 1, available at http://www.frbsf.org/publications/economics/letter/2004/el2004-06.pdf (explaining, in the context of sovereign bonds, collective action clauses and noting studies comparing "interest rate premiums between bonds issued with and without CACs, focusing on bonds issued in the UK with those issued in the US").
263. Insolvency Act, 1986, c. 45, § 5(2)(b); see also Broude et al., supra note 252, at 42-43; FINCH, supra note 144, at 332.
264. See Insolvency Act, 1986, c. 45, § 1 (discussing appointment of trustee).
265. Id. §§ 2(2), 4(6) (indicating, in the first report, the voting deadlines and terms and purpose of CVA and, in the second report, the results of vote).
266. Id. § 6. A company is not required to separate creditors into separate classes under a CVA, and a CVA is approved if creditors holding at least 75% in value of unsecured claims and at least 50% of equity holders vote in favor of the CVA. Insolvency Rules, 1986, S.I.1986/1925, pt. 1, paras. 1.19(1), 1.20(1) (U.K.); see also FINCH, supra note 144, at 332. If creditors, but not equity holders, approve the CVA, the company may still seek to implement the CVA. Insolvency Act, 1986, c. 45, § 4A(3) (as amended by Insolvency Act, 2000, c. 39, sched. 2, pt. 1, paras. 1, 5 (Eng.)). A CVA cannot bind secured creditors without their consent. Id. § 4(3)-(4).
267. See supra Part II.B.
268. Schefenacker CVA, supra note 87, at 26-31.
269. Id. at 23; see also Schefenacker Extends Moratorium with Creditors, EUR. INTELLIGENCE WIRE, Nov. 28, 2006, available at LEXIS, Europe Intelligence Wire File.
270. Schefenacker Bondholder Objection, supra note 102, at 7-8.
271. Declaration of Mark Sterling in Further Support of the Verified Petition for Order. exhibit A, at 12-13, In re Schefenacker plc, No. 07-11482 (Bankr. S.D.N.Y. June 13, 2007) (Docket No. 75) (indenture dated as of Feb. 11, 2004).
272. See Mayr, supra note 13, at 505 ("For example, the U.K. 'scheme of arrangement' procedure, which exists in some form in numerous jurisdictions, provides a mechanism to obtain expeditious court approval of consensual reorganization plans.").
273. See Companies Act, 2006, c. 46, § 899(1), (3) (Eng.); see also FINCH, supra note 144, at 325 ("One advantageous feature of the scheme of arrangement is that, if the arrangement is approved, it may modify the rights of shareholders and creditors and may do so without their consent.").
274. See Companies Act, 2006, c. 46, §§ 895-897; see also FINCH, supra note 144, at 325.
275. See, e.g., Broude et al., supra note 252, at 42 ("Unlike CVAs, however, Schemes are court-intensive procedures which are more difficult and expensive to implement.").
276. Companies Act, 2006, c. 46, §§ 895-900 (section 900 relates to the reconstruction or amalgamation of any company or companies); see also FINCH, supra note 144, at 324-31 (describing generally the procedures).
277. See Companies Act, 2006, c. 46, § 899(1); see also Broude et al., supra note 252, at 42 ("Also unlike in a CVA, where all creditors vote as part of a single class, creditors in a Scheme will vote in separate classes of creditors holding common interests.").
278. Companies Act, 2006, c. 46, § 899(1), (3) (discussing voting requirements).
279. Id.
280. See, e.g., William Underhill & Caroline Edwards, What MyTravel Means for Bondholders: The Timeframe Imposed on the MyTravel Restructuring by Regulatory Considerations Forced the Company to Take a Tough Line with Bondholders, INT'L FIN. L. REV., Mar. 2005, at 33, 34.
281. See Telewest Global, Inc., Current Report (Form 8-K), exhibit 99.1 (July 15, 2004) (announcing that Telewest Communications plc had completed its financial restructuring).
282. The bondholders in Telewest disputed classification based on the conversion rate applied to the bonds; the bondholders in MyTravel disputed the company's ability to accomplish a reconstruction or scheme without classifying bondholders and giving them a vote on the proposed plan. See, e.g., Underhill & Edwards, supra note 280, at 34-36 (same); Fraser Hern, Courting Hope, LEGAL WK. (U.K.), Feb. 2, 2006, at 26 (describing bondholder disputes in MyTravel and Telewest); Bondholders' Opposition to Schemes of Arrangement, BLG BANKING L. BRIEFING (Barlow, Lyde & Glibert, London, U.K.), Mar. 2005, at 4, 4, available at http://www.blg.co.uk//pdf/Banking%20Law%20Briefing-17-01. 03.2005.pdf (same).
283. See Underhill & Edwards, supra note 280, at 36; Hern, supra note 282; Bondholders' Opposition to Schemes of Arrangement, supra note 282, at 4.
284. See Companies Act, 2006, c. 46, §§ 336-340; see also FINCH, supra note 144, at 229-31.
285. See supra Part II.C.
286. See JARVIS UNAUDITED RESULTS FOR 2005, supra note 108, at 1, 11-12; Completion of Restructuring, supra note 120.
287. See generally Broude et al, supra note 252, at 40-43 (discussing use of prepackaged administrations).
288. See id.
289. See id. In a prepackaged administration, the administrators still owe a duty to all creditors. Thus, the administrators need to perform sufficient due diligence regarding the company's affairs and the proposed sale to satisfy their duty. Some observers criticize the prepackaged administration process for, among other things, lack of transparency. See, e.g., Carolyn Swain, Mind the Pre-pack, LAWYER (U.K.), July 3, 2006, at 32, 32.
290. Press Release, Polestar Group, supra note 15.
291. See, e.g., Nick Hassell, Polestar Investors Lose Millions, TIMES (London), Dec. 8, 2006, at 62 (explaining that Polestar's senior debtholders were "asked to write off two third of their investment, or £250 million," which would have reduced their total outstanding debt to approximately £125 million); Publishing Firm Once Owned by Maxwell Slashes Debts by £550m, BIRMINGHAM POST (U.K.), Dec. 9, 2006, at 22, available at LEXIS, Birmingham Post File; Grant Ringshaw, Printer to Write Off £300m, SUNDAY TIMES (London), Oct. 22, 2006, at 3.
292. See Sandy Shandro, Golden Oldies: How Traditional Insolvency Law Concepts Are Invaluable in Restructuring, AM. BANKR. INST. J., Mar. 2007, at 30, 30 ("The restructuring plan that was adopted involved the sale of the group to a bank-owned Cayman investment vehicle and its recapitalisation via a debt-for-equity swap and the provision of new monies to the group so as to reduce its bank indebtedness by approximately US $1.4 billion.").
293. See supra note 291.
294. See supra note 291.
295. See, e.g., Richard Tett & Charles Magoffin, The Living Dead: How Pension Trustees Have Become Active, Even Accepting Creative Solutions, in Major Restructurings, INT'L FIN. L. REV., Apr. 2007, at 24, 25 ("After extensive discussions, a creative solution was agreed whereby the Polestar pension scheme and deficit was transferred to a separate SPV company ringfenced away from the Polestar Group.... In exchange, Polestar agreed to pay the pension scheme a total of £45 million over 12 years.").
296. See, e.g., Shandro, supra note 292, at 30-31; Receiver Key to Polestar Rejig, PRINTWEEK (U.K.), Dec. 21, 2006, at 3.
297. Prepackaged administrations are feasible because, among other things, "the administrator has the power to sell the company's business without court review of the sale process or court approval of the sale." Broude et al., supra note 252, at 41. Troubled companies and their debtholders are using this restructuring mechanism more frequently. See, e.g., Costcutter Helps with Stocks as FreshXpress Takes Shape, GROCER (U.K.), July 28, 2007, at 4 ("FreshXpress purchased 56 Kwik Save stores in an £18m pre-pack administration deal, earlier this month."); Precedent Set for Private Equity Restructuring, INT'L FIN. L. REV., July 2007, at 8, 8 [hereinafter Private Equity Restructuring] (describing Damovo prepackaged administration and explaining that '"this is the first time that European holding companies have been placed in administration in England under the EC Regulation in order to implement a bondholder restructuring through a pre-packaged administration sale'" (quoting Stephen Peppiatt of Bingham McCutchen LLP)).
298. See infra Part III.B.2.
299. See supra Part I.B.
300. One report estimates approximately 170 U.S.-based distressed debt investors. See ALTMAN & SWANSON, supra note 26, at 3; see also Harner, supra note 8, at 88 (data reporting that approximately 24% of respondents invest in distressed debt).
301. See Harner, supra note 8, at 84 (data reporting that, of those respondents who invested in distressed debt and responded to the applicable question, approximately 65.5% attempt to influence board or management decisions at the company).
302. See id. at 85 & n.71 (data reporting that, of those respondents who invest in distressed debt, approximately 29% attempt to influence management personnel changes and approximately 24% attempt to influence management compensation changes).
303. See id. at 86 & n.76 (data reporting that, of those respondents who invest in distressed debt, approximately 29% attempt to influence management personnel changes and approximately 37% attempt to replace certain key members of management in efforts to acquire control of the company).
304. Calpine Corp., one of the United States' largest owners of natural gas-fired power plants, is a good example of this type of conflict. Calpine's bondholders disagreed with the CEO and CFO's operation of the company. The bondholders thus froze approximately $400 million in escrow and forced litigation over the escrow and related operational issues, which ultimately triggered the CEO and CFO's resignation and Calpine's Chapter 11 case. See Disclosure Statement for Debtors' Joint Plan of Reorganization Pursuant to Chapter 11 of the United States Bankruptcy Code at 13-14, 53, In re Calpine Corp., No. 05-60200(BRL), 2007 WL 4565223 (Bankr. S.D.N.Y. June 20,2007) (Docket No. 5016); Affidavit of Eric N. Pryor Pursuant to Local Bankruptcy Rule 1007-2, at 34, 42, Calpine, No. 05-60200(BRL) (Dec. 21, 2005) (Docket No. 2); see also Roane, supra note 39, at 39 (noting hedge funds' role in management's resignation and the company's bankruptcy filing); Jim Polson & Bradley Keoun, Calpine Executives Ousted as Bankruptcy May Be Near, BLOOMBERG, Nov. 29, 2005, http://www.bloomberg.com/apps/ news?pid=10000103&sid=aPn9hGDV3YiM&refer=us (noting that the CEO and CFO of Calpine "'were the primary drivers keeping the company out of bankruptcy for the past three years"' (quoting Jeffrey Wolinsky, Standard & Poor's)).
305. See, e.g., Muller, supra note 46, at 101-02.
306. Id. at 101.
307. See, e.g., Mitchell Pacelle & Amy Merrick, Salvage Operation: Behind Kmart Exit from Chapter 11: Investor's Big Bet-As Debt He Held Lost Value, Mr. Lampert Forced Out CEO, Pushed Up Timetable-Still Facing Wal-Mart, Target, WALL ST. J., May 6, 2003, at A1 ("[Lampert's solution for Kmart was to] [g]et the company out of bankruptcy court fast. Mr. Adamson said he would do his best to accelerate events,... [b]ut Mr. Lampert was already losing confidence in the Kmart chief. And within weeks, he made his decision known: Management had to change."); see also Kmart Corp., Annual Report (Form 10-K), at 77-78 (Mar. 24, 2003) (describing former CEO James Adamson's resignation from, and severance agreement with, Kmart).
308. See, e.g., Waples, supra note 109 ("[Lovell] was encouraged to take the post by Royal Bank of Scotland, one of the lead creditors at Jarvis and a former lender to both Costain and Dunlop Slazenger.").
309. See Allied Plan, supra note 176, at 42; Allied Holdings, Inc., Current Report (Form 8-K) (May 25, 2007).
310. See Harner, supra note 8, at 87-88 (data reporting that, of those respondents who invest in distressed debt and responded to applicable question, approximately 43% seek control of the board of directors at least 1% of the time, with approximately 16% doing so more than 50% of the time).
311. See In re Radnor Holdings Corp., 353 B.R. 820, 829-30 (Bankr. D. Del. 2006) (explaining prepetition relationship between debtors and Tennenbaum).
312. An investor's representative must be mindful of its fiduciary duty of loyalty to the corporation. See id. at 844-45 (explaining that Tennenbaum's representative acted appropriately by abstaining from certain votes).
313. Schefenacker CVA, supra note 87, at 105.
314. Id.
315. Id. Similar explicit provisions were included in the Allied and Kmart plans of reorganization. See Allied Plan, supra note 176, at 42 (Yucaipa received the right to appoint four of five postpetition board members); First Amended Joint Plan of Reorganization of Kmart Corporation and Its Affiliated Debtors and Debtors-in-Possession, supra note 126, at 35 (ESL and Third Avenue received the right to appoint four of nine postpetition board members).
316. An increasing operational play for activist investors in Europe is to encourage the company to relocate its country of incorporation (or centre of main interests) to a country that is viewed as more creditor-friendly. See supra Part II.B (discussion of Schefenacker); see also Ken Baird & Paul Sidle, Insolvency: Flitting Boom, LAWYER (U.K.), July 2, 2007, at 29, 29 (describing the move of Deutsche Nickel and Schefenacker's country of incorporation from Germany to the United Kingdom); Private Equity Restructuring, supra note 297, at 8 (describing the move of Damovo's country of incorporation from Luxembourg to the United Kingdom). The location of a company's centre of main interest is important under the European Union Regulation on Insolvency Proceedings because it determines jurisdiction in conflict of law situations. See, e.g., Broude et al., supra note 252, at 39-40. This migration of distressed companies from one country to another is similar to the forum shopping that may take place in connection with a company's Chapter 11 filing in the United States.
317. See Hamer, supra note 8, at 85 (data reporting that, of those respondents who invest in distressed debt and responded to the applicable question, approximately 40% attempt to acquire a controlling ownership interest in the company at least 1% of the time); see also DISTRESSED DEBT MARKET OUTLOOK 2008, supra note 54, at 16 (reporting that "there was a pick up of direct lending to distressed issuers in 2007, particularly those issuers linked to commodities or the housing downturn"); DISTRESSED DEBT MARKET OUTLOOK 2007, supra note 54, at 20 ("Only 20% of respondents said they would never pursue such a strategy, while over 40% said lending into situations for equity control was either part of their core strategy or a course of action they would consider on an exceptional basis in 2007.").
318. See supra Part III.A. 1 .a.i, c.
319. See supra Part III.A.2.b.iii.
320. See, e.g., Matt Miller, The Property Play, DAILY DEAL, May 26, 2006 (on file with the Fordham Law Review) ("In 2004 [after emerging from bankruptcy], Kmart booked more than $1 billion through property sales, primarily to Home Depot and Sears. The retailer ended its year with a $1.1 billion profit.").
321. See, e.g., Lauria & Holman, supra note 14 (explaining that distressed debt investors who acquired Loews through a debt-for-equity exchange made a substantial profit on subsequent sale of Loews Cineplex Entertainment Corp. (Loews) to private equity buyers; one such investor reportedly made over $200 million on the sale); Morris, supra note 14 (explaining that distressed debt investors who acquired Regal Entertainment Group through a debt-for-equity exchange realized, in one instance, sevenfold gain through special dividends and other value appreciation).
322. See supra Part I.A.
323. See, e.g., Griffiths, supra note 15 (explaining contemplated merger of NTL and Telewest upon completion of debt-for-equity exchange and noting that analysts argue a merger of Telewest and NTL would create a company better able to take on the United Kingdom's dominant pay-TV operator BSkyB).
324. See Harner, supra note 8, at 83 tbl.2 (data reporting that, of those respondents who invest in distressed debt and responded to the applicable question, approximately only 13% were willing to maintain an equity investment longer than three years, with approximately 58% wanting to be out of the investment in one to three years); see also ALTMAN & SWANSON, supra note 26, at 25 app. D; LHABITANT, supra note 22, at 100; ROSENBERG, supra note 22, at 29-33 .
325. See ALTMAN & SWANSON, supra note 26, at 25 app. D; ROSENBERG, supra note 22, at 29-33; Harner, supra note 8, at 83 tbl.2; see also Houghton, supra note 35 (noting IPO as an exit strategy for distressed debt investors). The investors in Loews used the private sale vehicle to realize gain on their investment. See, e.g., Lauria & Holman, supra note 14 (explaining that distressed debt investors who acquired Loews through a debt-for-equity exchange made a substantial profit on subsequent sale of Loews to private equity buyers).
326. See supra Part I.B (discussing investment strategies).
327. See, e.g., Partnoy & Skeel, supra note 17, at 1034-35 (explaining, in the context of the Tower Automotive Chapter 11 cases, how hedge funds and other distressed lenders may have incentive to destroy, rather than create, corporate value).
328. Directors generally owe their fiduciary duties to the company and the shareholders, as the residual owners of the company. If a company is almost, but not completely, insolvent (often referred to as the "zone of insolvency"), the directors may still owe duties to shareholders. See Companies Act, 2006, c. 46, § 170 (Eng.) (directors owe duties to the company); see also id. §§ 171-177 (detailing directors' duties).
329. See infra note 370.
330. For a discussion of management fiduciary duties, see infra Part III.C.4.
331. See, e.g., ROSENBERG, supra note 22, at 32, 89-91, 99 (noting that "to some [investors],... blocking tactics lengthened the bankruptcy process," and describing several cases where such delay materialized, including Coleco Industries and Wheeling-Pittsburgh Steel Corporation); see also Roane, supra note 39, at 38-39 (noting that the distressed debt investors dispute in the FiberMark Chapter 11 case cost "about $60 million over the course of seven months").
332. Motion for Order Authorizing and Approving (A) An Asset Purchase Agreement Subject to Higher and Better Offers, (B) Sale of Substantially All of the Debtors' Assets, Free and Clear of Liens, Claims, Encumbrances and Interests, (C) Assumption and Assignment of Certain Executory Contracts, (D) Assumption of Certain Liabilities, and (E) Granting Related Relief at 3, In re Am. Remfrs, Inc., No. 05-20022 (PJW) (Bankr. D. Del. Nov. 7, 2005) (Docket No. 17) [hereinafter Am. Remfrs. Original Sale Motion].
333. Motion for an Order Pursuant to Sections 361, 363 and 364 of the Bankruptcy Code (1) Authorizing the Debtors to Obtain Postpetition Financing, (2) Authorizing the Use of Cash Collateral, (3) Authorizing Repayment of Certain Prepetition Secured Debt, (4) Granting Liens and Superpriority Administrative Expense Status, (5) Providing Adequate Protection and (6) Scheduling and Approving the Form and Method of Notice of Final Hearing at 7, Am. Remfrs., No. 05-20022 (PJW) (Docket No. 14) (describing maximum borrowing amount under DIP Loan as $31 million); Am. Remfrs. Original Sale Motion, supra note 332, at 9 (describing the purchase price as amounts outstanding under the DIP Loan, plus $1.1 million).
334. Objection of DDJ Capital Management, LLC and Arlie Opportunity Master Fund Ltd. to the Debtors' Motion for an Order Pursuant to Sections 361, 363 and 364 of the Bankruptcy Code (1) Authorizing the Debtors to Obtain Postpetition
335. See Am. Remfrs., No. 05-20022 (PJW), slip op. at 2 (Nov. 17, 2005) (Docket No. 88) (converting Chapter 11 cases to Chapter 7 cases); see also Peress & Prinzhom, supra note 199, at 57 ("After four days of confusing disputes about definitions of third parties, priming and subordination, the company lawyers informed the court that the company had run out of cash and converted to a chapter 7 liquidation."); FITCH RATINGS, A CASE STUDY APPROACH TO U.S. SECOND-LIEN LEVERAGED LOAN RECOVERY EXPECTATIONS 5 (2007) [hereinafter A CASE STUDY APPROACH], available at http://fitchratings.com (subscription required, on file with the Fordham Law Review).
336. See A CASE STUDY APPROACH, supra note 335, at 5 ("A member of the company's senior lender group subsequently purchased the company's inventory assets at a fire sale for $7.7 million.").
337. See, e.g., Harvey R. Miller & Shai Y. Waisman, Does Chapter 11 Reorganization Remain a Viable Option for Distressed Businesses for the Twenty-First Century?, 78 AM. BANKR. L.J. 153, 183 (2004) (noting that "a single investor or a single group of investors [including hedge funds and other distressed debt investors] may amass funds to purchase an entire firm (or its assets) at costs that may exceed $1 billion, thus removing risk of potential losses due to dismemberment of the firm (or its assets) and the increased costs associated with breakups"); Yap, supra note 165, at 158-61 (suggesting that distressed debt investors add corporate value through offering otherwise unavailable financing and monitoring management).
338. This technique involves the creation of a new company to serve as an acquisition vehicle. The new company is owned by the distressed debt investors, who can, among other things, contribute their debt holdings to the company for purposes of credit bidding. For an example of this technique in practice, see Werner Sale Motion, supra note 203, at 1-4, 6-11, which describes the structure of a sale facilitated by a new acquisition company.
339. See, e.g., Roknick, supra note 203 (noting that the "[t]erms of the [Werner] sale also call for the retention of managers and employees" and that unsecured creditors reached a deal with the company and purchasers whereby they would receive "a piece of proceeds from lawsuits that will emerge under a reorganization plan"); Tett & Magoffin, supra note 295 (describing value created for Polestar pension beneficiaries).
340. Bally Total Fitness originally filed a prepackaged plan of reorganization in its Chapter 11 case that contemplated a debt-for-equity exchange with its distressed debt investors. Subsequently, Bally Total Fitness received and accepted an offer for the company that exceeded the value of the original plan and even provided a small return to existing equity holders. See Bally Motion to Modify, supra note 224, at 8-12.
341. See, e.g., Baird & Rasmussen, supra note 10, at 1245-46 (noting that "[t]he crucial question is the extent to which private lenders' self-interest is aligned with the interests of all the investors in the corporation" and answering this question with cautious optimism); see also Henry T.C. Hu & Bernard Black, The New Vote Buying: Empty Voting and Hidden (Morphable) Ownership, 79 S. CAL. L. REV. 811, 820-22 & n.22 (2006) (noting issue of short-termism with respect to institutional investors such as hedge funds). For a discussion of the general debate regarding value creation and institutional investors such as hedge funds, see Thomas W. Briggs, Corporate Governance and the New Hedge Fund Activism: An Empirical Analysis, 32 IOWA J. CORP. L. 681, 682-84 (2007), and Marcel Kahan & Edward B. Rock, Hedge Funds in Corporate Governance and Corporate Control, 155 U. PA. L. REV. 1021, 1083-87 (2007).
342. See Fuller, supra note 31, at 17 (explaining the conflicts that may arise in the distressed debt investing context, including a "divergence in time horizons when determining a value realisation").
343. See supra note 324.
344. The long-term value creation issue is less troubling on the back end of restructurings involving debt-for-equity exchanges. Distressed debt investors, as owners of the reorganized company, should invest efficiently in positive net present value transactions, meaning that surplus cash is distributed to shareholders, including the investor. See, e.g., Mihn Van Ngo, Agency Costs and the Demand and Supply of Secured Debt and Asset Securitization, 19 YALE J. ON REG. 413, 422 (2002) ("In order to maximize returns, shareholders desire that managers invest corporate funds in all available positive net present value projects."); see also E.C. Lashbrooke, Jr., The Divergence of Corporate Finance and Law in Corporate Governance, 46 S.C. L. REV. 449, 449-50 (1995) ("The basic finance theory that managers should maximize the value of the corporation by investing in all positive net present value projects serves the dual purpose of maximizing the value of the corporation and the wealth of shareholders."). This efficient investing strategy is in contrast to that sometimes pursued by management, where "managers have an incentive to retain an extra amount of cash beyond levels necessary to fund positive net present value projects" and invest it in negative net present value projects. See, e.g., Ngo, supra, at 422-23. This strategy also should provide at least short-term value to other stakeholders. Those stakeholders must then assess whether this strategy causes the company to pass over long-term growth opportunities to their detriment. Cf. Lashbrooke, supra, at 450 (providing other examples and explanations for managers passing over positive net present value opportunities).
345. See, e.g., Rich Pickings, supra note 43, at 20 ("Vultures are basically value investors, trying to buy an asset for a price well below its intrinsic or fair value.").
346. For a discussion of claims trading, see supra Part I.A. 1.
347. See, e.g., Beverini & Cova, supra note 58 (noting move of U.S. funds into European markets); Tett, supra note 45 (same); see also Fuller, supra note 31, at 15 (noting U.S. influence on European distressed debt market). "There is now more than $1.1 [trillion] (£579 [billion]) worldwide under hedge fund management, with London at the centre of Europe's hedge fund management industry, responsible for approximately two-thirds of the $325 [billion] (£171 [billion]) in funds under management in Europe." Houghton, supra note 35, at 28; see also Edward I. Airman & William Stonberg, The Market in Defaulted Bonds and Bank Loans: 2005 Review and 2006 Predictions, J. PORTFOLIO MGMT., Summer 2006, at 93, 94 ("We know of 160 distressed debt investors. At least two dozen operate outside of the United States, and another 10-15 European-based investors who do not have a U.S. operation."); Rich Pickings, supra note 43, at 22 ("Analysts say Europe still lags behind America in the opportunities it provides for distressed debt investors, but that this situation is changing as its high-yield corporate bond market and national insolvency laws evolve.").
348. For a discussion of Chapter 11 and administration, see supra Part III. A.
349. See supra Part III.A.
350. See Armour et al, supra note 21, at 1727-28.
351. See id. at 1735-36, 1745-46, 1761-62.
352. Management turnover in connection with a Chapter 11 case is not a new development. Lenders (primarily banks) have long had the ability through their financing contracts and general influence over the debtor to cause the board of directors to replace the debtor's CEO. See, e.g., Baird & Rasmussen, supra note 17, at 937-39. The successor CEO and the board, however, traditionally were then permitted to retain control of the debtor's business and restructuring. Activist investors typically are not willing to leave either historical or new management with this type of control.
353. See, e.g., Broude et al., supra note 252, at 41 ("Under a court approved protocol, it is possible that the administrator may leave much of the day-to-day management decisions to existing management under the administrator's supervision . .. .").
354. THE OXFORD AMERICAN DICTIONARY OF CURRENT ENGLISH 530 (1999).
355. This Article uses the term "management" to mean historical management, as opposed to restructuring professionals placed on the management team in a CRO or CFO capacity. A restructuring professional does not face the same pressures as historical management, who has a history and presumably wants a future with the company. Restructuring professionals also are typically placed on the management team at the behest of, or to appease, lenders and distressed debt investors.
356. Typically, distressed debt investors will encourage only a change at the CEO level or the engagement of an outside restructuring professional as CRO or CFO at the beginning of a restructuring. See, e.g., supra Part II (discussing case studies); see also Bally Total Fitness Holding Corp., Current Report (Form 8-K) (Apr. 30, 2007) (announcing change in top management approximately one month before announcement of restructuring deal with debtholders); Quinn, supra note 15 (noting change in Damovo's chairman of the board in connection with restructuring). Alternatively, as in Gate Gourmet, distressed debt investors may not seek any change in top management. Press Release, Gate Gourmet, Gate Gourmet Names David N. Siegel Chairman and CEO (June 8, 2004), available at http://www.gategourmet.com/about/pressreleases/ 2004/pr-2004-0608-seigelarmouncement.html (noting that Mr. Siegel remained with Gate Gourmet throughout the restructuring announced in 2005 and thereafter).
357. See supra note 303.
358. This process, described herein as a management-neutral process, also could be described as a creditor-controlled process. However, this Article uses the term managementneutral process to highlight the changing role of management in corporate restructurings. This term is more illustrative of potential issues with the emerging process given management's role as the company's agent and its corresponding fiduciary duties.
359. See supra Part II.A (discussion of Allied restructuring).
360. See supra Part II.A.
361. See supra Part II.A.
362. See supra Part II.A.
363. See supra Part II.B (discussion of Schefenacker restructuring).
364. See supra Part II.B.
365. See supra Part II.D (discussion of Kmart restructuring). Other examples in the United States include the restructurings of Bally Total Fitness and Dana Corporation. In Bally Total Fitness, the company's senior noteholders and subordinated noteholders, led by "Anschutz Investment Company, Goldman Sachs & Co. and funds advised by Tennenbaum Capital Partners, LLC," entered into extensive restructuring negotiations. Bally Disclosure Statement, supra note 224, at 18-19, 29; see also Stephen Taub, Bally Aims for Chapter-11 Fitness, CFO.COM, June 4, 2007, http://www.cfo.com/article. cfm/9281617?f=search. In Dana, hedge fund Centerbridge Capital Partners, L.P., two of the company's labor unions, and an ad hoc committee of the company's four largest debtholders negotiated an investment agreement that largely dictated the terms of the company's restructuring plan. See, e.g., Dana Corp., Current Report (Form 8-K) (July 31, 2007); see also Appaloosa Says Dana Pact Is Flawed, BOSTON.cOM, July 24, 2007, available at http://www.boston.com/business/articles/2007/07/24/appaloosa-says-dana-pact-is- flawed/(explaining the terms of the investment agreement and shareholders' criticism of same).
366. See supra Part II.C. Other examples in the United Kingdom include Damovo and Gate Gourmet. In Damovo, distressed debt investors purchased a majority of the company's bonds when they dropped in value. See Quinn, supra note 15. They then negotiated a restructuring plan that included exchanging £240 million in bonds for a majority ownership position in the company. See id; see also Guy Dixon, Damovo to Retain Glasgow HQ as Creditors Move In, SCOT. ON SUNDAY, Dec. 24, 2006, at Business 1, available at http://business.scotsman.com/ energyutilities/Damovo-to-retain-Glasgow-HQ.2837810.jp. In Gate Gourmet, distressed debt investors purchased the company's mezzanine debt and then negotiated a majority ownership position in the restructured company. See Houghton, supra note 35; Heather Timmons, Big Airline Catering Service Faces Trouble at Every Turn, N.Y. TIMES, Aug. 16,2005, at C7.
367. With respect to U.K. law, see Companies Act, 2006, ch. 46, § 170 (Eng.) (U.K. directors owe duties to the company). See also id. §§ 171-177 (detailing U.K. directors' duties); 7(2) LORD MACKAY OF CLABTERN, HALSBURY'S LAWS OF ENGLAND § 1083 (4th ed. 2004) [hereinafter HALSBURY'S LAWS OF ENGLAND] ("The directors of a company owe a fiduciary duty to act bona fide in what they consider to be the interests of the company (and not for any collateral purpose); and to make full and honest disclosure to the shareholders before they vote on a resolution."). With respect to U.S. law, see N. Am. Catholic Edu. Programming Found., Inc. v. Gheewalla, 930 A.2d 92, 101 (Del. 2007) ("It is well settled that directors owe fiduciary duties to the corporation."). See also Floyd v. Hefner, No. H-03-5693, 2006 U.S. Dist. LEXIS 70922, at *21 (S.D. Tex. Sept. 29, 2006) (noting that officers and directors generally owe duties to the corporation). In both the United States and the United Kingdom, officers generally are held to the same fiduciary standard as directors. See Donovan Waters, Property Management Concepts and the Entity Trust in the Common Law Setting, J. INT'L TRUST & CORP. PLANNING, June 2007, at 73, 78 (discussing general corporate law principles in common law countries, including the United States and the United Kingdom, and noting that "there is [a] fiduciary obligation that attaches to both directors and executives vis-à-vis the corporation"); see also Lyman P.Q. Johnson & David Millon, Recalling Why Corporate Officers Are Fiduciaries, 46 WM. & MARY L. REV. 1597, 1610-11 (2005) (arguing for a more detailed and thoughtful analysis of officers' fiduciary duties and noting that "although officers and directors occupy distinctive roles in corporate governance, most corporate law authority uncritically obliterates that distinction when it comes to fiduciary duties").
368. See, e.g., Hallinan v. Republic Bank & Trust Co., No. 06 Civ. 185 (HB), 2007 U.S. Dist. LEXIS 503, at *32 (S.D.N.Y. Jan. 8, 2007) (noting that "management owes a fiduciary duty to its shareholders"); see also N. Am. Catholic, 930 A.2d at 97-99. In the United Kingdom, "[i]n general, directors do not, solely by virtue of the office of director, owe fiduciary duties to shareholders, collectively or individually." HALSBURY'S LAWS OF ENGLAND, supra note 367, § 1083.
369. See, e.g., N. Am. Catholic, 930 A.2d at 101 ("When a corporation is insolvent, however, its creditors take the place of the shareholders as the residual beneficiaries of any increase in value."); see also HALSBURY'S LAWS OF ENGLAND, supra note 367, § 1083 ("The directors' obligation to act... in the interests of the company includes an obligation to have regard to the interests of the creditors generally when the company is insolvent...."); Shandro & Sidle, supra note 258, at 34-35 (explaining this rule under English common law and speculating that the rule continues under Companies Act 2006).
370. See, e.g., Hallinan, 2007 U.S. Dist. LEXIS 503, at *32 n.29 (noting that once a corporation enters the zone of insolvency, the directors owe fiduciary duties to the corporations' creditors, in addition to its shareholders (internal quotation marks omitted)); see also HALSBURY'S LAWS OF ENGLAND, supra note 367, § 1083 ("The director's obligation to act... in the interests of the company includes an obligation to have regard to the interests of the creditors generally when the company is ... of doubtful solvency or on the verge of insolvency since in such circumstances it is the creditors' money which is at risk."); Shandro & Sidle, supra note 258, at 35 (explaining U.K. law and noting that "[t]here is no indication as to the time when directors should cease to act in the interests of the company (taking into account the other interests) and consider or act in the creditors' interests"). For a general discussion of management's fiduciary duties in the zone of insolvency under U.S. law, see Rutheford B. Campbell, Jr. & Christopher W. Frost, Managers' Fiduciary Duties in Financially Distressed Corporations: Chaos in Delaware (and Elsewhere), 32 J. CORP. L. 491 (2007). Notably, the Delaware Supreme Court has held that directors owe no fiduciary duties to creditors in the zone of insolvency. See N. Am. Catholic, 930 A.2d at 101 ("When a solvent corporation is navigating in the zone of insolvency, the focus for Delaware directors does not change: directors must continue to discharge their fiduciary duties to the corporation and its shareholders....").
371. BLACK'S LAW DICTIONARY 658-59 (8th ed. 2004); see also HALSBURY'S LAWS OF ENGLAND, supra note 367, § 1083 n.5 ('"[A] fiduciary is someone who has undertaken to act for or on behalf of another in a particular matter in circumstances which give rise to a relationship of trust and confidence.'" (citation omitted)).
372. See supra note 369 and accompanying text (discussion of management's fiduciary duties to creditors).
373. See ADOLF A. BERLE, JR. & GARDINER C. MEANS, THE MODERN CORPORATION AND PRIVATE PROPERTY 6 (1933) ("The separation of ownership from control produces a condition where the interests of owner and of ultimate manager may, and often do, diverge, and where many of the checks which formerly operated to limit the use of power disappear."); Edward S. Adams, Governance in Chapter 11 Reorganizations: Reducing Costs, Improving Results, 73 B.U. L. REV. 581, 601 (1993) (explaining that "the agency relationship [in the corporate form] exposes owners to the risk that managers will use owners' funds for management's benefit, thereby creating agency costs-the costs to the principal of obtaining faithful and effective performance by its agent").
374. See supra notes 367-70 and accompanying text (discussion of fiduciary duties). This concern is particularly acute in the United Kingdom, where management's duties are owed to the corporation and not specifically to shareholders or creditors. HALSBURY'S LAWS OF ENGLAND, supra note 367, § 1083.
375. See, e.g., David F.W. Cohen & Maxine M. Kerr, An Overview and Comparison of the Canadian and American Corporate Reorganization Regimes, BUS. CREDIT, Jan. 2003, at 65, 65 ("American reorganization proceedings are, typically, litigious and protracted in nature."); Naomi Rownick, UK Law Firms Fail to Cash in on Insolvency and Restructuring, LAWYER (U.K.), June 9, 2003, at 2 (noting that the American culture is more litigious than the U.K. culture); see also Katherine Yung, Aggressive Approach: Dallas Firm Is Intense- Whether It's Hiring, Investing or Litigating, DALLAS MORNING NEWS, Sept. 3, 2006, at 1D (explaining the legal strategies of U.S.-based distressed debt investor, Highland Capital Management LP, as "filing numerous lawsuits and forcing troubled companies into involuntary bankruptcy").
376. "Commentators have described the U.K.'s culture generally as being polite, secretive, and conflict adverse." Kerry Shannon Burke, Regulating Corporate Governance Through the Market: Comparing the Approaches of the United States, Canada and the United Kingdom, 27 J. CORP. L. 341, 373 (2002).
377. See, e.g., Miller & Waisman, supra note 337, at 181 ("The sooner a trader or group of traders can force a debtor out of Chapter 11, the sooner they can monetize their claim and obtain a return on their speculation, without regard to any other factor, including whether or not the debtor had been fully rehabilitated when it was pushed out of Chapter 11.").
378. In re Granite Broad. Corp., 369 B.R. 120, 136 (Bankr. S.D.N.Y. 2007).
379. See supra Part III.A.2.a; See also Broude et al., supra note 252, at 43 ("As a result of the many practical difficulties involved in trying to achieve an in-court restructuring in the UK, consensual out-of-court restructurings[] are the preferred approach whenever practical.").
380. See, e.g., FINCH, supra note 144, at 219-29 (explaining the London Approach).
381. See, e.g., id. at 220 (explaining role of the Bank of England).
382. See Armour et al., supra note 21, at 1757-59 (explaining London Approach and role of concentrated debt in that process).
383. See, e.g., FINCH, supra note 144, at 224-25 (discussing limits on approach).
384. Telephone Interviews with U.K. restructuring professionals (June 25, 2007; June 29, 2007; July 13, 2007).
385. Re Colt Telecom Group plc, [2002] EWHC (Ch) 2815, [14] (Eng.) ("What is not in issue is that a key object of the proposed administration is to achieve what Highberry call[s] 'a restructure.' What they actually mean is a transfer of value in the company from the shareholders to the bondholders-either by conversion of debt to equity or simply by payment from Colt's cash or both.").
386. See id. at [109] (rejecting administration petition).
387. For a general discussion of proxy solicitation rules and the use of proxy contests by hedge funds, See Briggs, supra note 341.
388. See supra note 373 and accompanying text.
389. See supra Part III.B.3.
390. See supra Part III.C.4.
391. See, e.g., Douglas G. Baird, The New Face of Chapter 11, 12 AM. BANKR. INST. L. REV. 69, 72-81 (2004) (citing the increase in prenegotiated plans and section 363 asset sales in Chapter 11 cases as signaling the end of traditional corporate reorganizations under the Bankruptcy Code).
392. See, e.g., Douglas G. Baird & Robert K. Rasmussen, The End of Bankruptcy, 55 STAN. L. REV. 751 (2002); Lynn M. LoPucki, The Nature of the Bankrupt Firm: A Response to Baird & Rasmussen's The End of Bankruptcy, 56 STAN. L. REV. 645 (2003); Harvey R. Miller & Shai Y. Waisman, Is Chapter 11 Bankrupt?, 47 B.C. L. REV. 129 (2005); Sprayregen et al., supra note 212, at 60.
393. For a general discussion of administrative receivership, See FINCH, supra note 144, at 234-72.
394. See supra Part III.C.5.
395. See Harner, supra note 8, at 105-06 (discussing potential legislative responses to activist distressed debt investing in the United States in light of the Bankruptcy Code's dual goals of debtor rehabilitation and creditor recovery maximization).
396. Lender involvement in the affairs of a distressed company currently is subject to judicial restraint under theories such as lender liability, equitable subordination, recharacterization, and deepening insolvency. See Baird & Rasmussen, supra note 17, at 939-40. In addition, in Chapter 11, a court can designate an entity's vote on the plan if the entity's acceptance or rejection of the plan was not in good faith. 11 U.S.C. § 1126(e) (2006).
397. See C. COM. art. L620-1 (Fr.), translated in THE FRENCH COMMERCIAL CODE IN ENGLISH 423 (Philip Raworth trans., Oxford Univ. Press 2006); See also 2 DOING BUSINESS IN FRANCE § 18.03 (2006), available at LEXIS, Doing Business in France File (explaining safeguard procedure).
398. Broude et al., supra note 252, at 44; See also 2 DOING BUSINESS IN FRANCE, supra note 397, §§ 18.03[2], [3][g][ii].
399. See Broude et al., supra note 252, at 44; 2 DOING BUSINESS IN FRANCE, supra note 397, § 18.03[2].
400. Eurotunnel's chairman, Jacques Gounon, controlled Eurotunnel's restructuring and managed to retain 13% of the company for existing shareholders. See, e.g., Alistair Osborne, 'How We Won Fight to Save Eurotunnel,' DAILY TELEGRAPH (London), June 30, 2007, at 33, available at http://www.telegraph.co.uk/finance/markets/2811328/ %27How-we-won-fightto-save-Eurotunnel%27.html (explaining Gounon's control over the process); Ian Watson, Light at the End of the Chunnel, BUSINESS (U.K.), June 2, 2007, available at LEXIS, The Business File ("Gounon has given the business world a virtuoso performance in arm-twisting and brinkmanship."). Gounon used France's safeguard procedure to Eurotunnel's advantage. See Osborne, supra (explaining that "[t]he [safeguard] procedure gave judicial teeth to Mr. Gounon's brinkmanship and bravado").
401. See 2 DOING BUSINESS IN FRANCE, supra note 397, § 18.03[3][g].
402. See id.
403. See Broude et al, supra note 252, at 49.
404. The scheme suggested here would be designed to facilitate quick approval and implementation of prenegotiated asset sales. The specifics of the scheme could be varied to add protection for minority interests or to enable further sales to new investors. For a proposed legislative scheme that would permit nonplan asset sales under the current Chapter 11 process, See George W. Kuney, Let's Make It Official: Adding an Explicit Preplan Sale Process as an Alternative Exit from Bankruptcy, 40 HOUS. L. REV. 1265 (2004).
405. Whether the market sufficiently protects minority interests is open to debate. For example, if the market determines that the value of the company is insufficient to provide a return on minority interests, then presumably minority interests are not entitled to a return. This position, however, relies on existing priority schemes and on the validity of market indicators. For a discussion of a market approach to value maximization in corporate restructurings, See Sprayregen et al., supra note 212, at 60-62. See also Harner, supra note 8, at 105-06 (suggesting that markets complement, but should not replace, legislation governing the debtor-creditor relationship, at least in the context of activist distressed debt investing).
406. See supra note 395 and accompanying text.
407. See supra Part III.A.2.