The second topic our Contributors take on is the practice of appointing “independent directors” for troubled companies, often on the eve of bankruptcy. We received a wide range of responses from our Contributors with many feeling the process is “at least superficially, if not substantively, flawed” (Albanese). That was not a uniform reaction though and the diversity of our Contributors showed the differing views of the market. Many did not want the actions of a few bad apples to overshadow the essential role independent directors can play in “stabilizing” an uncertain situation (Heimowitz) and for calling out “bullsh*t” if necessary (Lederman).…
In my view, independent directors can play a necessary role in Chapter 11 cases of corporate debtors. U.S. bankruptcy law does not require that a trustee be appointed whenever a corporation files for reorganization. Instead, the debtor typically remains “in possession” – i.e., officers continue to run the company and directors continue to oversee management (subject to bankruptcy court approval for transactions outside the ordinary course of business).
Tell us what you think of recent decisions by the District Courts in the SDNY and EDVA reversing plan confirmation based on presence of non-consensual third-party releases? Did these Judges get it right? How do non-consensual third-party releases affect creditor rights (both positively and negatively)? What are the implications of these decisions more broadly for the efficacy and integrity of the Chapter 11 process?
The propriety of non-consensual third-party releases, and the decisions in Purdue and Ascena,can be analyzed on many different levels. One is a question of policy, more than law: Should Congress permit plans of reorganization that release claims by creditors, without their consent, against non-debtors? My personal view is that it should, but that it should prescribe exacting standards for such plans in order to ensure that they are very much the exception, not the rule, and that, in particular, such plans are confirmed only where the non-consensual third-party releases are truly necessary to maximize value for creditors and to enable the debtor’s businesses to reorganize.