Volume 2015, Number 2
The Moral Vigilante and Her Cousins in the Shadows
Paul H. Robinson | 2015 U. Ill. L. Rev. 401
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By definition, vigilantes cannot be legally justified—if they satisfied a justification defense, for example, they would not be lawbreakers— but they may well be morally justified, if their aim is to provide the order and justice that the criminal justice system has failed to provide in a breach of the social contract. Yet, even moral vigilantism is detrimental to society and ought to be avoided, ideally not by prosecuting moral vigilantism but by avoiding the creation of situations that would call for it. Unfortunately, the U.S. criminal justice system has adopted a wide range of criminal law rules and procedures that regularly and intentionally produce gross failures of justice. These doctrines of disillusionment may provoke vigilante acts,
but not in numbers that make it a serious practical problem. More damaging is their tendency to provoke what might be called “shadow vigilantism,” in which civilians and officials feel morally justified in manipulating or subverting the criminal justice system to compel the system to deliver the justice that it appears reluctant to impose. Unfortunately, shadow vigilantism can be widespread and impossible to effectively prosecute, leaving the system’s justness seriously distorted. This, in turn, can provoke a damaging antisystem response, as in the “Stop Snitching” movement, that further degrades the system’s reputation
for doing justice, producing a downward spiral of lost credibility and deference. We would all be better off—citizens and offenders alike—if this dirty war had never started. What is needed is a reexamination of all of the doctrines of disillusionment, with an eye toward reformulating them to promote the interests they protect in ways that avoid gross failures of justice.
The Controlling Shareholder's General Duty of Care: A Dogma That Should Be Abandoned
Jens Dammann | 2015 U. Ill. L. Rev. 479
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It is a frequently repeated dogma in corporate law that controlling shareholders have a general fiduciary duty of care towards the corporation. This Essay, however, argues that the case for such a duty is exceedingly weak. Given that controlling shareholders are heavily invested in the controlled corporation, they already have a strong financial incentive to make well-informed decisions. Accordingly, there is no need for a
general duty of care. In fact, the general duty of care for corporate controllers owes its existence to little more than poor doctrinal reasoning: courts have suggested that, in order to protect minority shareholders, corporate controllers who direct the actions of the corporation
must assume the fiduciary duties of corporate directors. This argument, however, is flawed for many reasons. In particular, it overlooks the fact that controlling shareholders and corporate directors face vastly different incentives.
It is time, therefore, to abandon this line of reasoning and, with it, the idea of a general duty of care for corporate controllers.
The Commission to Study the Reform of Chapter 11 and the University of Illinois College of Law co-sponsored an academic symposium held April 3–5, 2014 at the Chicago offices of Kirkland & Ellis LLP. That symposium brought together dozens of academics in conversation with Commissioners, members of the Commission’s advisory committees, and other interested observers and participants in the Commission’s work. We are pleased and proud to publish the articles presented at that academic conference in this symposium issue of the University of Illinois Law Review.
The Value of Soft Variables in Corporate Reorganizations
Michelle M. Harner | 2015 U. Ill. L. Rev. 509
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When a company is worth more as a going concern than on a liquidation basis, what creates that additional value? Is it the people, management decisions, the simple synergies of the operating business, or some combination of these types of soft variables? Perhaps more importantly, who owns or has an interest in these soft variables? This Article explores these questions under existing legal doctrine and practice norms. Specifically, it discusses the characterization of soft variables under applicable law and in financing documents, and it surveys related judicial decisions. It also considers the overarching public policy and Constitutional implications of the treatment of soft variables in and outside of the federal bankruptcy scheme. The Article concludes by considering the optimal treatment of soft variables in corporate reorganizations.
Statutory Erosion of Secured Creditors' Rights: Some Insights From the United Kingdom
Adrian J. Walters | 2015 U. Ill. L. Rev. 543
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As the American Bankruptcy Institute’s Commission to Study the Reform of Chapter 11 considers the state of business bankruptcy in this country, the narrative on chapter 11 is well-established and oft repeated. According to this narrative, whereas in the past firms filing for chapter 11 came into the bankruptcy process with at least some unencumbered assets, modern firms tend to have capital structures that are entirely consumed by multiple layers of secured debt. Moreover, as secured creditors have come to dominate capital structures, conventional wisdom has it that they have “captured” chapter 11 to the detriment of unsecured creditors. This development has justifiably troubled many scholars on both efficiency and distributional grounds. However, it remains an open question whether the perceived downsides of secured creditor control can be satisfactorily addressed through bankruptcy law reform. In this Article, Professor Walters examines English attempts to use bankruptcy law to adjust the priority and control rights of secured creditors with the aim of improving the welfare of unsecured creditors. The Article starts from the premise that lenders that are powerful enough to bargain for superior control and priority rights inside or outside of bankruptcy will be equally capable of adjusting to legal changes that affect, or are perceived as affecting their interests. Four ways in which lenders will adjust to “adverse” bankruptcy reform are identified: (i) metabargaining; (ii) adjustments to prebankruptcy behavior; (iii) transactional innovation; and (iv) “shape shifting”. In Parts II and III, the Article then illustrates how English lenders have successfully adjusted to statutory erosion of their priority rights through transactional innovation and to statutory attempts to curb their control rights through “shape shifting”. Walters’ conclusion on the efficacy of bankruptcy law reform is cautionary and skeptical. He assesses English attempts to improve the position of unsecured creditors by dampening the rights of secured creditors as a failed conceit.
In this symposium dedicated to the American Bankruptcy Institute’s Commission on Chapter 11 Reform, whose proposals remain a secret at the time of this writing, Professor Jacoby argues that doctrinal reforms to corporate bankruptcy are incomplete without considering the role of institutional actors, particularly judges and courts. The judge’s role tends to receive too-limited attention. First, chapter 11 is often characterized as an extension of corporate transacting rather than as complex federal court litigation. In addition to overemphasizing the corporate law elements of chapter 11 to the exclusion of other intersections, this view overlooks the fact that many civil and even criminal actions before the district court have strong transactional elements, Second, the 1978 Bankruptcy Code drafters exhorted judges to be no more or less than umpires of discrete disputes, perhaps leading some reformers to believe the question to be already asked and answered. Yet, the modern bankruptcy system, as evolved, encourages bankruptcy judges to accomplish divergent objectives: promote quick resolution of disputes through party settlement, and exercise independent duties even in the absence of party objection—issues with which the federal district court also continues to wrestle.
Thomas Jackson, in his iconic book, The Logic and Limits of Bankruptcy Law, seeks to establish both a distributional baseline for bankruptcy reorganizations and a normative set of limits for bankruptcy policy. Nonbankruptcy entitlements should establish both the distributional priorities and the distributional floor in a bankruptcy case. A number of normative prescriptions follow. Equity should not seek reorganization on the backs of the unsecured creditors. Bankruptcy-specific priorities should be avoided, to the extent possible to avoid “forum shopping” into bankruptcy (unless, of course, bankruptcy is a more efficient forum). Most importantly, however, the rights of secured creditors should be respected. Professor Janger argues that, paradoxically, bankruptcy courts have become the preferred venue for realizing value on a secured creditors’ collateral, and that Jackson’s rhetoric has allowed secured creditors to capture bankruptcy created value that is not necessarily allocated to them by the statute. Specifically, undersecured creditors argue that they have a blanket lien on all of the debtor’s assets and should have the power to determine their disposition. This article first seeks to reestablish the Jacksonian balance by arguing that state law security schemes do not provide for the creation of blanket liens that capture enterprise value, but instead create asset specific security devices that are limited in scope, and are not calculated to maximize value. It then seeks to establish three key points, and develop their implications. The points are (1) an ownership rule, (2) a realization rule, and (3) an equitable tracing—or “no moving up”—rule. The ownership rule is that baseline entitlements of a secured creditor in bankruptcy are established by what could have actually been realized by that creditor outside of bankruptcy. The realization rule is that, unless the statute specifies otherwise, the baseline entitlement is valued as of the petition date. The equitable tracing rule recognizes the limits of the state law definition of proceeds and the limits of equitable tracing to freeze the relative position of creditors on the date of the bankruptcy filing, and limit the ability of secured creditors to use their property-based claims to “roll up” all of the bankruptcy-created value. These three rules, if applied consistently, should encourage efficient value-maximizing governance of the debtor firm and fair allocation of bankruptcy-created value among its creditors.
This Article shows that as Bankruptcy Code section 506(b) is currently written, postdefault interest rates are prohibited when the default is an “ipso facto event”—a filing for bankruptcy or insolvency as the event of a default. Yet some courts have insisted on postdefault interest in situations reinstating a loan agreement and have been ignoring restrictions on pendency interest to permit oversecured creditors from obtaining penalty rates of interest. This Article argues that those holdings violate section 506(b) and Supreme Court precedent. It begins with an analysis of ipso facto defaults, showing that the Bankruptcy Code prohibits ipso facto clauses even in nonexecutory contracts. The Article then examines regular monetary defaults. Noting that the Supreme Court only allows compensatory market rates to oversecured creditors, high default interest rates will never be a proxy for the market rate as they constitute penalties. Similarly, the Article argues that the “cure” of loan agreements allowed by reorganization chapters is a compensatory concept, also requiring the market rate of interest. Finally, the Article concludes by arguing that the Bankruptcy Code applies to solvent and insolvent debtors, and thus ipso facto clauses are prohibited and section 506(b) requires compensatory, not punitive, rates even in solvent bankruptcy cases.
When Does Some Federal Interest Require A Different Result?: An Essay on the Use and Misuse of Butner v. United States
Juliet M. Moringiello | 2015 U. Ill. L. Rev. 657
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Thousands of judges and scholars have relied on the statement in the 1979 Supreme Court opinion in Butner v. United States that “property interests are created and defined by state law . . . unless some federal interest requires a different result.” Often, they cite to the statement as a policy constraint that elevates state property law over federal bankruptcy law. This Article posits that the Butner rule is not as broadly applicable as commonly believed. To do so, the Article surveys some notable uses and misuses of the Butner rule in the thirty-five years since the case was decided and concludes that so long as Congress clearly states a federal purpose for modifying a party’s state law property rights at the moment a bankruptcy case is filed, such a modification is permissible.
This Article considers two related sets of questions that have recently taken center stage in the municipal bankruptcies of Detroit and other cities. First, what is the relationship between liens and lien substitutes, such as priorities and exceptions from bankruptcy’s automatic stay? As similar as liens and priorities are, the bankruptcy laws have long drawn a sharp distinction between state-created liens, which are honored in bankruptcy; and state-created priorities, which are not. The second question is the question in the Article’s title: what is a lien? Whether a purported lien actually is a lien is not always clear, especially if the lien is created by statute rather than by the parties themselves. The Article attempts to make sense of existing law, advocates a functional approach to liens and priorities, and questions whether courts should honor a statutory lien that lacks the key attributes of a lien.
Derivatives and Collateral: Balancing Remedies and Systemic Risk
Steven L. Schwarcz | 2015 U. Ill. L. Rev. 699
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U.S. bankruptcy law grants special rights and immunities to creditors in derivatives transactions, including virtually unlimited enforcement rights. This Article examines whether exempting those transactions from bankruptcy’s automatic stay, including the stay of foreclosure actions against collateral, is necessary or appropriate in order to minimize systemic risk.
Intercreditor agreements frequently restrict the extent to which subordinated creditors can participate in the bankruptcy process by, for example, contesting liens of senior lenders, objecting to a cash collateral motion, or even exercising the right to vote on a plan of reorganization. Because intercreditor agreements can reorder the bargaining environment in bankruptcy, some judges have been unsure about their enforceability. Other judges have not hesitated to enforce the agreements, at least when they do not restrict the voting rights of subordinated creditors. This essay argues that intercreditor agreements are controversial because they pose a trade-off: they reduce bargaining costs (by limiting the participatory rights of subordinated creditors), but can give senior lenders outsized influence over the bankruptcy process, to the detriment of investors who were not party to the intercreditor agreement. The essay proposes several rules of thumb that might help judges navigate this trade-off.
The (Il)legitimacy of Bankruptcies for the Benefit of Secured Creditors
Charles W. Mooney, Jr. | 2015 U. Ill. L. Rev. 735
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The desirability of secured creditor bankruptcies is undoubtedly a polarized issue. On one hand, some argue that secured creditor bankruptcies should be dismissed outright. On the other, others assert that secured creditor bankruptcies should not be automatically dismissed because they can be beneficial in certain circumstances. This Article explores this tension by initializing a dialog between the advocates and the critics of secured creditor bankruptcies. Through this dialectic approach, this Article concludes that, even though secured creditor bankruptcies may have the capacity for mischief, they should still be permitted so long as they are governed by carefully drawn limitations.
The Bankruptcy Clause, the Fifth Amendment, and the Limited Rights of Secured Creditors in Bankruptcy
Charles J. Tabb | 2015 U. Ill. L. Rev. 765
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It is a commonly held belief that the Fifth Amendment’s Takings Clause limits the Bankruptcy Clause and that secured creditors have a constitutional right to receive the full value of their collateral when a debtor declares bankruptcy. This Article rejects this received wisdom: the Fifth Amendment does not—and should not—constrain Congress’s ability to define the contours of the Bankruptcy Clause. As revealed by a close examination of the historical evolution of bankruptcy
jurisprudence, the Fifth Amendment is not even helpful or relevant in considering the constitutional rights of secured creditors in bankruptcy. As such, the only meaningful limitation on Congress is the Bankruptcy Clause itself. This Article deconstructs this established paradigm and offers a nuanced account of Congress’s capacity for reform through its broad authority to modify secured creditors’ rights.
There is a debate about whether a corporate debtor’s going-concern surplus over liquidation value, preserved by the bankruptcy process, should be distributed entirely to senior claims that are not paid in full or should, instead, be shared to some extent with junior claims. To protect the advantages of priority credit for debtors, this debate should be resolved in favor of the senior claims unless the junior claims are nonconsensual.
It is widely believed that large chapter 11 cases are now routinely handled via a quick 363 sale, followed by a not so quick liquidation of the residue of the debtor, along with a distribution of the sale proceeds. Indeed, commentators widely bemoan the fact that debtors arrive in chapter 11 with no choice but to do a quick sale because their lenders will not permit anything else. In this paper, Professor Lubben argues that the root of the issue lies in corporate governance, and not bankruptcy. If leaving debtors in chapter 11 only with the option to engage in a quick sale process is decidedly a problem, then that problem has its roots in nonbankruptcy corporate law. He argues that ultimately this is a question of state law fiduciary duties; the foundation for this duty already exists in the Delaware Supreme Court’s oft-maligned Omnicare, Inc. v. NCS Healthcare, Inc. In short, state corporate law imposes a duty on the board to carefully consider any decision that will foreclose a future board’s choices. In times of financial distress, this duty includes an obligation
to carefully consider the effects of a particular decision on future restructuring options.
Secured Creditor Control and Bankruptcy Sales: An Empirical View
Jay Lawrence Westbrook | 2015 U. Ill. L. Rev. 831
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Since the early 2000s, the conventional view held by bankruptcy scholars is that the bulk of Chapter 11 cases are dominated by secured creditors, especially in large cases with more than $20 million of debt. It has been claimed that this creditor domination is so complete that it has been called “The End of Bankruptcy.” It is often claimed that this domination in turn has greatly increased sales of entire businesses under section 363 of the Bankruptcy Code in lieu of traditional reorganization. Analysis of a dataset from a cross section of 2006 Chapter 11 cases reveals that secured creditor control is important, but it is certainly not as pervasive as is commonly believed. This Article makes two major points: first, that the conventional picture of secured creditor control and section 363 sales is misleading and overstated; second, that the focus on very large cases instead of a cross section of Chapter 11 cases leaves a hole in the current research because our data suggest that dominant security interests are not strongly related to the size of the case. The data also make it clear that much more research will be necessary to understand the effects of secured credit on Chapter 11 cases and their outcomes.
This Article explores the extent of secured creditor’s rights in bankruptcy through an examination of In re Residential Capital. In
particular, ResCap is used to ask whether secured creditors should have a right to value that comes into being solely by virtue of the bankruptcy process. Ultimately, this question is intertwined with the inquiry of whether bankruptcy reorganization needs to be treated as a day of reckoning at all.
CERCLA Section 309 and Beyond: Statutes of Limitations, Rules of Repose, and the Broad Implications of CTS Corp v. Waldburger Outside the Context of Environmental Law
Alex Garel-Frantzen | 2015 U. Ill. L. Rev. 865
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On June 9, 2014, the U.S. Supreme Court, in CTS Corp. v. Waldburger, held 7-2 that CERCLA Section 309 preempts only state statutes of limitations, not rules of repose. Previously, there was a split among federal courts of appeals as to whether CERCLA Section 309, a liberal discovery rule applying to certain toxic tort claims, preempted state statutes of repose. The Fifth Circuit had held that section 309 did not preempt state statutes of repose because the provision’s plain language, including the repeated use of “statute of limitations,” precluded a contrary interpretation. The Ninth and Fourth Circuits, however, held that CERCLA Section 309 preempted state statutes of repose in light of the Act’s legislative history and the ambiguity of the term “statute of limitations” at the time of CERCLA’s enactment. Federal courts have used these CERCLA Section 309 cases, as well as CTS Corp. v. Waldburger, to resolve the same question of statutory interpretation found in statutes relating to securities law, including the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 and the Housing and Economic Recovery Act of 2008. This Note analyzes the circuit split regarding the proper interpretation of CERCLA Section 309, as well as the potentially far-reaching impact of CTS Corp. v. Waldburger outside of the environmental context. It begins by examining the legislative history of CERCLA Section 309 and the distinction between and meaning of “statutes of repose” and “statutes of limitations.” Next, this Note analyzes judicial interpretation of CERCLA Section 309, from the early cases to CTS Corp. v. Waldburger. It then evaluates the judicial use of the CERCLA Section 309 cases to resolve the same question of statutory construction presented in statutes relating to securities law and the recent housing crisis. This Note acknowledges that in considering whether the term “statute of limitations” encompasses rules of repose in various securities law extender provisions, the courts must consider the Supreme Court’s analytical approach to CERCLA Section 309 in CTS Corp. v. Waldburger. Nevertheless, this Note urges that courts should still conduct their own independent, rigorous analysis of the provision at issue. Such an approach will ensure the proper interpretation of unique extender provisions enacted by Congress at different times throughout history.
The Constitutional "Terra Incognita" of Discretionary Concealed Carry Laws
Brian Enright | 2015 U. Ill. L. Rev. 909
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Despite federal appellate court attempts to provide clearer, though tentative, outlines of the Second Amendment’s scope in the public sphere, the states’ ability to regulate public carry remains ambiguous. Reflecting this ambiguity, state laws remain divergent; some states require that licenses be issued to those who qualify, while others grant issuing agencies discretion in deciding whether to issue a license to otherwise qualified applicants. Further contributing to this confusion are federal appellate court decisions holding disparate opinions of Second Amendment rights in the public realm. In the state of Illinois, gun policy must be structured with conscious regard for Chicago, a city plagued by gun violence. It is only within the last year that Illinois has extended the right to public carry to its citizens, the result of a Seventh Circuit decision declaring Illinois’ categorical ban on public carry unconstitutional. By examining the new Illinois Concealed Carry Act, and comparing it to other state laws in light of the constitutional analyses that Heller and McDonald require, this Note will assess the extent to which public safety issues can guide gun policy. In analyzing attempts to strike this balance, this Note will also examine the constitutionality of two types of concealed carry laws that states have enacted. This Note concludes that both the text and a historical analysis of the Second Amendment support the conclusion that the Amendment protects the right to bear arms in public. It also concludes that the Supreme Court will likely hold that the more restrictive concealed
carry laws are unconstitutional, as such laws grant issuing authorities the power to deny most law-abiding citizens of the right to carry a gun in public.
Removing the Cloak of Amateurism: Employing College Athletes and Creating Optional Education
Jamie Nicole Johnson | 2015 U. Ill. L. Rev. 959
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National Collegiate Athletic Association (“NCAA”) grant-in-aid athletes are not currently considered employees. As such, they are not presently afforded protection under worker’s compensation laws and cannot leverage their full bargaining power to protect their economic interests. However, the relationship between student-athletes and their universities clearly meets the requirements of both common law and statutory law tests for an employment relationship. Consequently, Congress should recognize student-athletes as employees under the Fair Labor Standards Act, and the NCAA should adopt a new model that includes an athlete compensation plan and optional educational activities. This model will result in athletes who are not only fairly compensated for the risks inherent in their participation in collegiate athletics but also better prepared for their chosen career paths. This model will also allow universities’ resources to be allocated more efficiently in pursuit of the institutions’ core educational purpose. The “cloak of amateurism” must be removed in order for both athletes and universities to most efficiently pursue their interests.