As bankruptcy filings increase in the wake of the current recession, the buying and selling of distressed debt presents opportunities for investors to profit. At Brooklyn Law School’s symposium, “Bankruptcy Claims Trading and Securities Regulation,” a group of distinguished academics, practitioners, and judges debated the value and risks of bankruptcy claims trading. Held on February 27, the symposium was co-sponsored by the Brooklyn Journal of Corporate, Financial & Commercial Law and the Dennis J. Block Center for the Study of International Business Law. It was organized by Brooklyn Law School Professors Edward Janger and Michael Gerber.
The first panel, “Capital Markets Before and During Bankruptcy,” addressed how the trading of debt inside of bankruptcy has come to resemble the trading of equity securities outside of bankruptcy. Panelists David Barse, president and CEO of Third Avenue Management LLC and a member of the Brooklyn Law School Board of Trustees, Professor David Skeel of the University of Pennsylvania Law School, Donald Bernstein of Davis Polk & Wardwell, and BLS Professor Roberta Karmel explored how the purchase of bankruptcy claims has increasingly become a method for creditors to gain equity in the debtor company and potentially gain control. The potential to purchase such “fulcrum securities” gives immense power to new creditors with unknown intentions and economic interests that may run counter to those of the debtor, or other creditors holding similar claims.
In the second panel, which focused on “Liquidity, Transparency and Regulation,” panelists questioned the particular pros and cons of claims trading. Professor Douglas Baird of the University of Chicago Law School agreed that that a market for claims provides useful information about the value of the debtor. He noted that increasing the information about claims traders, by requiring them to disclose their positions, might paradoxically reduce the amount of information available relating to the value of the debtor. U.S. Bankruptcy Judge Allan L. Gropper of the Southern District of New York cautioned against overvaluing such liquidity. Professor Janger and his colleague Professor James Fanto also advocated for considering the costs of liquidity and the need for full disclosure of positions. The panelists generally agreed that while enhancements of liquidity may improve valuation of bankruptcy claims, the failure to properly regulate claims trading will decrease transparency and, in turn, allow for the distortion of monitoring incentives within the bankruptcy process.
Finally, after Professor Gerber provided a background of current bankruptcy law and Professor Susan Block-Lieb of Fordham University School of Law addressed claims trading in consumer cases, the third panel provided a reminder that considerations of fairness and efficiency must be counterbalanced in claims trading. Debtors in the field of claims trading are typically running a business, ostensibly making claims trading an appropriate transaction. However, said Professor Adam Levitin of Georgetown University School of Law, such trading should be regulated primarily as a judicial process instead of a market one.
In the end, panelists implicitly acknowledged that there may not be a clear solution for bankruptcy claims trading regulation. According to Melanie Cyganowski, former Chief Bankruptcy Judge for the Eastern District of New York and currently a member at Otterbourg, Steindler, Houston & Rosen, P.C., “It’s at least clear that claims trading complicates an already complex bankruptcy process.”
Read articles from the Symposium.