Does claims trading impede chapter 11 reorganizations? And, if so, would disclosure of additional information about traded claims remove the impediments it creates?
Kenneth A. Rosen answers “yes” to both questions. He argues that ownership of an in-the-money claim incentivizes liquidation and thus encourages bad-faith rejections. Disclosure, he contends, would enable courts to assess more accurately whether a party’s rejection of a plan was made in good faith.
Elliot Ganz disagrees on both scores. He maintains that claims traders try to maximize a debtor’s going-concern value rather than immediately lock in paper gains. In so doing, they provide liquidity and expertise that improves the reorganization process. Disclosure, however, would publicize their strategies and thus chill their participation.
Who has the better argument? The Wall Street Journal’s expert panel of Examiners agrees with Mr. Ganz.
Marc Leder, Brett Miller, Anders J. Maxwell, Sharon Levine, Jack Butler, and Mark Roe all agree that claims trading is generally beneficial and that current disclosure requirements are adequate. Mr. Butler also details the history of claims trading to show that Congress was aware of the practice when it adopted the Bankruptcy Reform Act of 1978.
Finally, Mark Roe addresses a common criticism of claims trading–namely, that it hinders resolution via a negotiated plan because claims traders, fearful of insider trading liability and other risks, will not participate in plan formation. He argues that 363 sales ameliorate this problem because such sales may proceed absent negotiation among the various classes of creditors.
(This post was authored by Ben A. Sherwood, J.D. ’17.)