AuthorLipson, Jonathan C.
SubjectGood faith (Law)
Laws, regulations and rules
Breach of contract
Permanent link to this recordhttp://hdl.handle.net/20.500.12613/6661
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AbstractFirms rarely go from solvency to Chapter 11 in an instant. Instead, the slide into bankruptcy will be marked by a period (the “zone of distress”) that begins with the breach of a lending contract and ends, perhaps months or even years later, with either a formal bankruptcy case or some other resolution, such as a nonbankruptcy restructuring or liquidation. In this period, the firm’s governance will be up for grabs. Doctrinally, state corporate law gives directors the power and responsibility to manage the firm for the benefit of shareholders, subject to fiduciary review. In fact, however, real control shifts away from directors and shareholders to creditors. Yet, the law offers little to check this control. Creditors are not generally viewed as fiduciaries, and so they owe their borrowers neither duties of care nor loyalty. In theory, regulation or contract could channel creditor conduct in the zone of distress, but three fundamental changes in the dynamics among distressed firms and their investors have weakened these constraints.
CitationJonathan C. Lipson, Governance in the Breach: Controlling Creditor Opportunism, 84 S. Cal. L. Rev. 1035 (2011).
Available at: https://southerncalifornialawreview.com/2011/07/03/governance-in-the-breach-controlling-creditor-opportunism-article-by-jonathan-c-lipson/