IN THEIR ARTICLE “One
Dollar, One Vote: Mark-to-Market Governance in
Bankruptcy,” 104 Iowa Law
Review 1857 (2019), Edward
Janger, David M. Barse
Professor of Law, and Adam
J. Levitin, professor of law,
Georgetown University
Law Center, seek to address
the problem of creditor
opportunism in Chapter 11
bankruptcy cases. Scholars
and practitioners have
observed a phenomenon known as the “empty creditor.”
Empty creditors may use credit default swaps or other financial
instruments to accumulate an economic “short” position and
then purchase claims at a discount, allowing them to use their
voting rights to frustrate a reorganization.
Janger and Levitin propose a solution to this problem, which
they call “mark-to-market governance.” Under their proposal,
the governance rights of hedged creditors would be diluted
to reflect the creditor’s true net economic position. Although
their distributional rights would be left undisturbed, hedgers
and shorts would be subject to dilution or designation; claims
purchasers would have their governance rights discounted based
on purchase price; and secured creditors would have their credit
bidding rights limited to the realizable value of their collateral.
The mark-to-market proposal remedies the problem of
“schadenfreude investors,” who benefit from the debtor’s
misfortunate; “bullies,” who seek control by purchasing claims
at a discount; and “Trojan horse” claimants—shorts who
purchase a blocking position on the cheap.
According to Janger, “Our proposal aligns creditors’ voting
power with their economic interests. Indeed, in proper
circumstances the bankruptcy code already gives the judge
the power to engage in ‘mark-to-market governance.’ Courts
have disallowed the votes of competitors who purchase
claims to block a debtor’s reorganization and limited credit
bidding rights of secured creditors who sought to grab value
from other creditors. We believe that our proposal will help
judges limit the power of creditors who are simply trying to
obstruct confirmation or who are trying to distort the Code’s
distributional scheme.”