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We ordinarily assume that a central objective of every voting process is assuring an undistorted vote. Recent developments in corporate bankruptcy, which culminates with an elaborate vote, are quite puzzling from this perspective. Two strategies now routinely used in big Chapter 11 cases, restructuring support agreements (“RSAs”) and “deathtrap” provisions, are intended to, and clearly do, distort the voting process.

This Article offers the first comprehensive analysis of the new distortive techniques. One possible solution is simply to ban them. Although an anti-distortion rule would not be difficult to implement, I argue this would be a mistake. The distortive techniques respond to developments such as claims trading that have made reorganization difficult, and Chapter 11’s baseline was never intended to be neutral: it nudges the parties toward confirmation of a reorganization plan. There also are independent justifications for some distortive techniques, and the alternative to using them might be even worse—it could lead to more fire sales of debtors’ assets.

How can legitimate use of the new distortive techniques be distinguished from more pernicious practices? To answer this question, I outline four rules of thumb to assist in the process. Courts should consider whether holdouts are a serious threat, the magnitude of coercion, any independent justifications, and (in rare cases) the nature of the parties’ contracts. I then apply the rules of thumb to four prominent recent cases. I conclude by considering two obvious extensions of the analysis, so-called “gifting” transactions in Chapter 11 and bond exchange offers outside of bankruptcy.

Publication Citation

Yale L. J., forthcoming