Kenneth Ayotte

Why Do Bankrupt Firms Have Such Complex Capital Structures?

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Complex capital structures are prevalent in many recent high-profile Chapter 11 bankruptcy cases.  One recent example is Toys ‘R’ Us, whose debt structure was, as characterized by Bloomberg Businessweek, “as complex and precarious as a Jenga tower. [1]” It included dozens of subsidiary entities, with separate debt facilities against entities owning the intellectual property, the real estate, and international operations, among other asset groups.  Why do capital structures become fragmented and complex in this way, and what are the implications for bankruptcy law?

In my working paper, Disagreement and Capital Structure Complexity,  I suggest one reason why a firm’s … Read more

Valuation Disputes in Corporate Bankruptcy

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In bankruptcy, as in corporate law, valuation drives disputes. Prior bankruptcy scholarship points to disagreements about valuation and judicial valuation error as key drivers of Chapter 11 outcomes, including the decision whether to reorganize the distressed firm or sell it off pursuant to a Section 363 sale. Avoiding valuation disputes and valuation errors is also the underlying driver of most proposed reforms to Chapter 11, from Douglas Baird’s mandatory auctions to Lucian Bebchuk’s options approach.

In a new paper, we undertake a detailed examination of bankruptcy court opinions involving valuation disputes. We study all reported cases filed between 1990 and … Read more

Bankruptcy on the Side

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Side agreements between creditors of a corporate debtor can dictate how those creditors act when the debtor files for bankruptcy. For example, intercreditor agreements commonly include a promise by one party to remain silent – to waive some procedural right that the party would otherwise have under the Bankruptcy Code – at potentially crucial points in the reorganization process. Because these agreements can alter bankruptcy outcomes even for those outside of the agreement, they are controversial. In a forthcoming article, “Bankruptcy on the Side,” we provide a framework for analyzing these agreements.

Using simplified examples, we show that side agreements … Read more