BROOKLYN LAW NOTES
Fall 2019

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.”