Anti-Bankruptcy

In large Chapter 11 cases, the prototypical creditor is no longer a small player holding a claim much like everyone else's, but rather a distressed debt professional advancing her own agenda. Secured creditors are more pervasive and enjoy much more control than they had even a decade ago. Moreover, financial innovation has dramatically increased the complexity of each investor's position. As a result of these and other changes, the legal system faces today a challenge that is much like assembling a city block that has been broken up into many parcels. There exists an anti-commons problem, a world in which ownership interests are fragmented and conflicting. This is quite at odds with the standard account of Chapter 11 - that it solves a tragedy of the commons, the collective action problem that exists when general creditors share numerous dispersed, but otherwise similar, interests. This paper draws on the lessons of cooperative game theory to show how in combination these recent changes are toxic. They undermine the coalition formation process that is a foundational assumption of Chapter 11