Reorganization By Force

Nearly every Chapter 11 filing is “voluntary,” in that it’s initiated by the company’s managers. Yet the Bankruptcy Code also allows unsecured creditors to force a company to reorganize under an “involuntary Chapter 11.” Involuntary Chapter 11s are rare and largely ignored by scholars. That’s potentially because bankruptcy and corporate law largely defer to managers’ business judgment on how to maximize the company’s value, and investors have several contract and corporate law tools designed to discipline underperforming managers. So, what work can involuntary Chapter 11s do?

This Article shows that an involuntary Chapter 11 can be the optimal solution for a company with going-concern value that simultaneously faces two kinds of distress: financial distress ⎯ such as running out of cash or taking on too much debt ⎯ and managerial distress ⎯ such as deadlocked, absent, or dysfunctional leadership that can’t run the company. When both kinds of distress simultaneously set in, ordinary contract and corporate law solutions misfire, jeopardizing the company’s value. The company then needs an external party to force it into Chapter 11, which provides a toolkit designed to comprehensively address both financial and managerial distress.

This Article makes three main contributions. First, it shows that involuntary Chapter 11s have an important, but underappreciated, role to play in salvaging firms that have going-concern value. Second, it reveals how the current involuntary Chapter 11 system isn’t geared to serve that role because it allows a narrow class of investors to throw a company into Chapter 11 without having to show that the company faces managerial distress. Third, it sketches a new involuntary Chapter 11 system that incentivizes a wide range of investors to file involuntary Chapter 11s against companies facing both kinds of distress, while penalizing them for filing such cases against companies that face only one or neither kind of distress.

Table of Contents Show

Introduction

Even the best of companies falls on hard times. One way it can rally in response is to file a “voluntary” Chapter 11. “Voluntary” is a technical term, which means that the company’s managers decide if, when, and where the company should file for Chapter 11.[1]

The Bankruptcy Code nevertheless also allows unsecured creditors to force a company into Chapter 11 through an “involuntary Chapter 11.”[2] Though involuntary bankruptcies historically predate voluntary ones, involuntary Chapter 11s are rare in contemporary bankruptcy practice.[3] An estimated 32,087 voluntary Chapter 11s were filed between 2019 and 2023, while only 278 involuntary Chapter 11s were filed during the same period.[4] Involuntary Chapter 11 filings, then, account for less than 1 percent of all Chapter 11 filings during that time frame. Sure, some have suggested that involuntary bankruptcies can save valuable firms.[5] Yet scholars have largely ignored involuntary Chapter 11s.

This Article suggests that this scholarly oversight is a mistake. An involuntary Chapter 11 can be uniquely useful when a company has going-concern value and faces two kinds of distress simultaneously: (1) financial distress, which is financial difficulty that threatens the company’s value, and (2) managerial distress, which is when a company’s management is so deadlocked, absent, or dysfunctional that it can’t run the company. When both kinds of distress take hold, the company has serious financial problems that it must solve, but its managers aren’t able to help the company tackle its financial problems. Thus, the company needs someone else to force it into Chapter 11 so that it can resolve both kinds of distress in a single, comprehensive forum.

If involuntary Chapter 11s can do this dual, distress-breaking work, why have scholars ignored them? That might be for two intersecting reasons. First, both corporate and bankruptcy law generally defer to managers’ business judgment on how to maximize a company’s value so long as they “act[] on an informed basis, in good faith[,] and in the honest belief that the action taken [is] in the best interests of the company.”[6] This deferential posture stems from the fact that managers have far more information about the company’s operations relative to courts or the company’s stakeholders. That epistemic advantage holds true even if the company is insolvent or otherwise financially distressed. Though managers may make incorrect or foolish decisions, the company would be worse off if stakeholders and courts could second guess managers’ decisions when they don’t pan out. Such interference would press managers to “take decisions that minimize risk, not maximize value.”[7]

Second, investors have several ways of disciplining managers who fail to make the company profitable.[8] Institutional investors ⎯ such as secured lenders, venture capital firms, private equity firms, and hedge funds ⎯ police managerial misconduct and help navigate the company through turbulent times. When mismanagement becomes so aggravated that the company becomes managerially distressed, investors can petition courts to appoint a custodian or receiver to supplement or supplant the company’s management. If those interventions don’t work, investors can instead cut their losses by asking courts to wind up the company’s business and shut it down.

Involuntary Chapter 11 sits uneasily with these insights. If a company solely faces financial distress, then courts ought to defer to its managers’ business judgment absent extraordinary circumstances that render the managers unable or unwilling to run the company. And when those circumstances materialize, investors can spring into action to discipline the managers, replace them, or just shut the company down. If that’s so, there’s little work for an involuntary Chapter 11 to do.

This Article challenges that line of thought. It shows that an involuntary Chapter 11 can help save a company’s going-concern value when it simultaneously faces financial and managerial distress. When both kinds of distress take hold, the usual solutions designed to tackle them won’t work because each kind of distress fuels the other.[9] The company can’t act decisively to address its financial distress because its management is unable to run the company. Nor can the company afford to respond to its managerial distress first, because it must act quickly to quell its financial distress and preserve its going-concern value. When both kinds of distress materialize, investors’ policing tactics misfire (if they are deployed at all). What’s more, ordinary courts can’t capture the company’s going-concern value because they aren’t equipped to rapidly alleviate both sources of distress.

Symbiont.io, Inc. v. Ipreo Holdings, LLC illustrates these dynamics.[10] In 2015, Symbiont and Ipreo created a joint venture, Synaps Loans LLC, to improve trading in secondary loan markets by harnessing blockchain and smart-contract technology.[11] If successful, the joint venture would have challenged Markit, whose ClearPar product captured 99 percent of the market.[12] Yet the joint venture faced financial trouble from the outset; for instance, Symbiont and Ipreo each had to provide the joint venture with a $250,000 bridge loan.[13] Fortunately, the joint venture garnered interest from U.S. Bank, State Street, Credit Suisse, and Barclays, and several of them sought to invest in it.[14]

Just as the banks were about to invest, Markit bought Ipreo and consequently Ipreo’s stake in the joint venture.[15] While Markit had several reasons for purchasing Ipreo, one of them was ensuring that the joint venture didn’t compete with ClearPar.[16] Because the joint venture wouldn’t develop its technology while Markit owned part of it, the banks abandoned their prospective investment.[17] Markit then lured the joint venture’s CEO away, causing the joint venture’s two remaining directors ⎯ one appointed by Symbiont and one appointed by Ipreo ⎯ to deadlock and leaving the joint venture dead in the water.[18]

After a maelstrom of litigation, the Delaware Court of Chancery dissolved the joint venture.[19] While Symbiont hoped to reanimate it and its promising technology, the joint venture didn’t have cash, revenue, or a CEO.[20] Its technology wouldn’t be developed so long as Markit could effectively block any future efforts to do so.[21] All that was left to do was wind up the joint venture’s business and dissolve it.

Symbiont is a cautionary tale, and its lesson is that addressing financial and managerial distress one at a time won’t do. The joint venture needed to get cash and melt its ever-ossifying deadlock in one fell swoop. Yet Symbiont isn’t alone. This Article highlights three other case studies in which companies with going concern were plagued with financial and managerial distress.[22] Like Symbiont, they tried to solve both problems by first addressing their managerial distress in the Delaware Court of Chancery, but that court could only do so much. By the time the court rendered its verdicts, there was no going-concern value left to save. What these companies needed was a comprehensive solution designed to cure both kinds of distress together.

Involuntary Chapter 11 is that solution.[23] As the name suggests, an involuntary Chapter 11 is initiated by someone other than the company’s managers.[24] That’s a feature, not a bug, when the company faces financial and managerial distress. When someone files an involuntary Chapter 11 petition, the automatic stay kicks in, preventing parties from extracting assets from the company.[25] Once the court decides to keep the company in Chapter 11, the bankruptcy court can install a Chapter 11 trustee to temporarily solve the company’s managerial distress.[26] Chapter 11 also allows the company to concurrently quash financial distress by obtaining new credit,[27] clawing back value that was fraudulently transferred from the company,[28] and assuming or rejecting executory contracts.[29] The parties can then broker long-term solutions to the company’s financial and managerial distress through a plan of reorganization,[30] or a sale of substantially all of the company’s assets to a third-party buyer.[31]

These tools could have turned the tide in Symbiont. Armed with them, Symbiont and the banks could have provided the joint venture with new cash. They also could have solved the fundamental conflict between Markit and Symbiont by pressing the bankruptcy court to appoint a trustee to break the deadlock, sell the joint venture to a third-party buyer, or approve a plan of reorganization. These interventions would have given Symbiont and the banks a shot at salvaging Synaps’s promising technology.

Using involuntary Chapter 11 to do this work isn’t merely hypothetical. This Article presents two further case studies illustrating how parties have used involuntary Chapter 11s to preserve going-concern value when companies faced financial and managerial distress.[32] Though by no means perfect, involuntary Chapter 11s can give companies that have going-concern value but suffer from financial and managerial distress the best chance of rehabilitating themselves.

Nevertheless, the current involuntary Chapter 11 system isn’t geared to live up to that potential.[33] Under the current system, only unsecured creditors may initiate involuntary Chapter 11 cases, and they must show either that the company generally isn’t paying its debts as they become due or that a court recently appointed a custodian, receiver, or trustee over the company.[34] These constraints do little to facilitate the speedy resolution of financial and managerial distress and fail to limit involuntary Chapter 11s to when, and only when, companies face both kinds of distress.

This Article consequently envisions what an involuntary Chapter 11 system designed to do that work would look like. Such a system would encourage a wide range of investors ⎯ not just unsecured creditors ⎯ to force the company into Chapter 11 if, and only if, they could show that the company simultaneously faces financial and managerial distress.[35] It would also deter parties from filing (or threatening to file) involuntary Chapter 11s against companies that face only one or neither kind of distress.[36] Finally, the involuntary Chapter 11 system would give the Chapter 11 trustee a more pronounced role in helping parties craft both short- and long-term solutions to the company’s managerial distress.[37]

The Article proceeds as follows. Part I provides background on involuntary Chapter 11s and why scholars have largely overlooked them. Part II highlights the unique difficulty of resolving financial and managerial distress when they simultaneously set in. It then sheds light on how involuntary Chapter 11 can provide the sweeping relief that’s needed to tackle both kinds of distress and preserve going-concern value. Part III shows how the current involuntary Chapter 11 system falls short of doing this work and what a cogent involuntary Chapter 11 system would look like. The Article then concludes by highlighting next steps for future research.

I. The Overlooked Involuntary Chapter 11

Understanding why involuntary Chapter 11 has been all but ignored requires some background on how it works. Starting a Chapter 11, whether voluntary or involuntary, requires clearing two checkpoints. First, a Chapter 11 petition must be filed in the district in which venue is proper.[38] Second, the court must enter an order for relief, which allows the company’s bankruptcy case to proceed.[39] In voluntary cases, the two checkpoints collapse because a voluntary petition “constitutes an order for relief.”[40] That means that when the company voluntarily chooses to reorganize, it has all of the Bankruptcy Code’s tools at its disposal from the outset. Though a bankruptcy court may dismiss a Chapter 11 for “cause,”[41] the court won’t dismiss it if the company has financial issues that Chapter 11 can help mitigate.[42]

Involuntary Chapter 11s work differently. Filing an involuntary Chapter 11 petition commences a process that looks similar to, yet is fundamentally different from, ordinary litigation against the company.[43] Once creditors file an involuntary Chapter 11 petition against the company, the company must respond and move to dismiss the petition if it wishes to stay out of Chapter 11.[44] The period of time between when the creditors file the involuntary bankruptcy petition on the one hand, and the court enters an order for relief or dismisses the case on the other, is known as the “gap period.”[45] During that time, the automatic stay kicks in, preventing parties from taking away the company’s assets without the court’s permission.[46] The company may nevertheless continue to operate in the ordinary course of business “as if an involuntary case . . . had not been commenced.”[47] Only after the parties litigate the matter, or the petition goes unanswered, may the court enter the order for relief or dismiss the case, as appropriate.[48]

The substance of the petition requires creditors to demonstrate that the company is indebted to them and financially faltering. Specifically, three creditors must band together and show that they have at least $21,050[49] in unsecured, noncontingent claims against the company that aren’t in bona fide dispute.[50] And if the company moves to dismiss the involuntary petition, the petitioning creditors must show that it’s “generally not paying [its] debts as [they] become due” or that a court appointed a custodian, trustee, or receiver over it within 120 days before they filed the petition.[51]

Little has been said about when the involuntary Chapter 11 is and ought to be used. Perhaps that’s because involuntary Chapter 11s are rare, which in turn might be due to section 303’s convoluted scheme and the risks it imposes on creditors who might otherwise want to file.[52] And because “[t]he line between voluntary and involuntary filings is an ambiguous one,” the threat of filing involuntary Chapter 11s may induce companies to file voluntary Chapter 11s when they may otherwise be reticent to do so.[53]

That neglect might be motivated by two more fundamental reasons that get to the heart of both corporate and bankruptcy law alike. First, both bankruptcy and corporate law make clear that it’s the company’s managers who are charged with deciding what the company should do in the face of financial distress, including if and when the company should file for Chapter 11. Second, investors have several ways of disciplining underperforming or wayward managers, including by seeking recourse through state courts. If both intuitions hold true, then involuntary Chapter 11s have little role to play. The following sections unpack each line of thought.

A.   Managerial Expertise and Financial Distress

A firm may begin to falter because it faces financial distress. Financial distress is a company’s inability to manage its financial obligations in a way that ultimately threatens its going-concern value. One court identified several factors that contribute to, or constitute, a firm’s financial distress:

solvency; cash reserves; recent financial performance and profitability; the proportion of debt owed to insiders; realistic estimates of actual or likely liability; the threat of litigation; whether a debt is fixed, substantial, and imminent; current cash position or current liquidity; ability to raise capital; and overdue debts or the ability to pay debts as they come due.[54]

Delaware corporate law presupposes that managers will be the ones to decide how the firm should operate even when mired in financial distress. Delaware corporate law embraces the “business judgment rule,” under which courts will defer to managers’ informed business judgments that were made in good faith and with the belief that such judgments were in the company’s best interest.[55] That deference holds even when the company is insolvent.[56] Intervening in corporate affairs would require judges to access nonverifiable information that likely only managers and investors have.[57]

Chapter 11 harbors its own deferential approach to addressing a firm’s financial distress, and that approach is management-centric by design.[58] Both the Code’s text and legislative history confirm as much. Section 1107 of the Bankruptcy Code provides that, unless a bankruptcy court mandates otherwise, the company “shall have all the rights . . . and powers, and shall perform all the functions and duties . . . of a trustee serving in a case under this Chapter.”[59] Those powers and obligations include reporting to the court, investigatory obligations, and operating the debtor’s business.[60] The House Judiciary Committee Report on the Bankruptcy Reform Act of 1978 explains that Congress deliberately vested incumbent managers with control over the debtor’s business in Chapter 11. The Committee’s view was that financial distress often stems from industry downturns and honest, but unprofitable, business decisions rather than managerial fraud and incompetence.[61] Congress began to see managers not quite as heroes, but as indispensable assets ⎯ and certainly not as villains ⎯ in the story of financial distress. Stripping management of control in Chapter 11 would consequently be more likely to do harm than good.

Managerial discretion in Chapter 11 extends to deciding whether to file the company for Chapter 11 at all.[62] A firm doesn’t need Chapter 11 to iron out every rough patch. It may not be financially distressed but rather facing a short-term downturn or a hiccup in its operations. Filing the company for Chapter 11 could drain its cash and going-concern value alike.[63] After all, Chapter 11 is costly. Professional fees can quickly balloon in Chapter 11.[64] Some estimates put the direct costs of Chapter 11 at “1-2 percent [of] the value of a debtor’s assets in larger cases and 4-5 percent in smaller cases.”[65] This is to say nothing of the less tangible, but quite real, costs of involuntary Chapter 11s, “such as loss of credit standing, inability to transfer assets and carry on business affairs, and public embarrassment.”[66]

Recent developments in the credit markets and venture capital space reveal companies’ appetite for addressing financial distress without filing for bankruptcy. Over the past decade, several companies engaged in what are known as “liability management exercises,” in which “leveraged companies secure fresh capital to support the transformation of the business, at times over the objections of some creditors.”[67] Startups, which are predominantly financed through equity instruments, can be better off resorting to nonbankruptcy mechanisms ⎯ such as mergers and acquisitions, acqui-hire transactions, and assignments for the benefit of creditors ⎯ to tackle financial distress.[68]

Even if a company should file for Chapter 11, timing is everything. Filing too early can spook customers, divert much needed cash away from the company’s operations, and aggrandize challenges that the company can more deftly tackle out of court. Some courts even prohibit a company from filing for bankruptcy unless its financial distress is both evident and imminent.[69] Filing too late can be part of managers’ strategy to excessively delay bankruptcy filing and essentially shift the risk of the company’s failure onto the creditors.[70] What’s more, it can fuel collective action problems where investors will start pursuing their nonbankruptcy remedies, even though doing so will squander the firm’s going-concern value to the detriment of the firm’s investors as a whole.[71]

Beyond deciding whether and when to file for Chapter 11, the company must also determine how best to use it. Chapter 11 is more of a “they” than an “it.” Companies can use Chapter 11 in several ways depending on the particular flavor of financial distress they face. Restructuring support agreements, for instance, allows a company and its most senior creditors to bind each other to a gameplan for how the company will use Chapter 11 to resolve its financial distress.[72] A “prepackaged” or “prepack” Chapter 11 allows the debtor to circulate and solicit votes on a proposed plan of reorganization prior to filing for Chapter 11, vastly increasing the case’s speed.[73] These innovations contributed to reducing the length of the median Chapter 11 case from over three years to roughly one hundred days.[74]

To be sure, managers have incentives to delay filing for bankruptcy.[75] Bankruptcy may lead to management’s ultimate ouster, and managers seldom have an appetite for showing themselves the door.[76] Additionally, bankruptcy law is home to the absolute priority rule, under which equity holders aren’t entitled to any of the firm’s value if there’s insufficient value to fully satisfy the firm’s creditors.[77] Since managers are beholden to the equity holders, whose option value in the equity effectively collapses when the company files for bankruptcy, they will delay filing the company for Chapter 11 in order to allow equity holders to hang onto their stakes in the company, even though delaying filing would reduce the company’s going-concern value.[78] Scholars have consequently devised several ways to align managers’ incentives with reorganizing the company at the optimal time, such as paying bounties to managers for filing for Chapter 11,[79] and deviating from the absolute priority rule to give managers a part of the reorganized company’s value.[80]

It’s nevertheless far from obvious that creditors have better incentives than managers to force the company into Chapter 11. Quite the opposite. When financial distress looms large over a firm, its creditors are generally incentivized to pursue their respective nonbankruptcy remedies. This would, in expectation, allow creditors to recover more relative to what they would get through the bankruptcy process.[81] There are exceptions: Creditors may benefit from having a collective proceeding, for instance, if one creditor has seized, or is on the cusp of seizing, the company’s assets.[82] An involuntary bankruptcy, though, “escalate[s] a bilateral/multi-party matter into a collective proceeding” and usually jeopardizes any given creditor’s ability to get paid back in full.[83] As a result, “an involuntary bankruptcy petition,” as two practitioners have put it, “is probably the world’s worst debt collection device.”[84] And all these points focus on creditor recoveries, not maximizing the company’s value. It’s far from clear that creditors are so uniquely altruistic as to care about that.

What’s more, an involuntary Chapter 11 may derail managers’ efforts to subtly mitigate the company’s financial challenges. In re NRG Energy, Inc. illustrates this point.[85] An electric power producer borrowed $11 billion to expand its footprint but began to buckle under that debt as demand for electric power waned.[86] The company initiated confidential negotiations with groups of creditors to address its overwhelming debt burden.[87] Though the parties made substantial progress, several creditors filed an involuntary petition against the company.[88] The bankruptcy court dismissed the involuntary petition, recognizing that the involuntary petition threatened to derail the negotiations by adding time and expense to the process of resolving the company’s financial woes that would make both the company and its creditors worse off.[89]

In short, the key is to file a Chapter 11 petition at the right time and in the right way, if at all. Those decisions require knowing the ins and outs of the company and its business.[90] Since management is armed with that information, it’s best positioned to determine if, when, and how filing for Chapter 11 will maximize the company’s going-concern value.[91]

B.   Investor Oversight and Managerial Distress

Judicial deference to managers presupposes that the company has managers that courts can defer to. Indeed, investors must decide who will make decisions on a company’s behalf; that is, they must allocate control rights. How they allocate those control rights will depend on (among other things) the nature of the company, the industry in which it participates, and its capital structure.[92] By default, some business forms, like the general partnership and the limited liability company (LLC), vest control rights directly in the firm’s owners.[93] Others, like the publicly traded corporation, traditionally divorce ownership from control; directors and officers manage the company, while shareholders own it.[94] The challenge is allocating control rights in a way that will maximize the company’s value. Doing that potentially requires allocating control rights to institutional investors like lenders, venture capital firms (VCs), private equity funds, and hedge funds.[95]

Start with secured lenders. Two mechanisms allow them to capture control rights.[96] First, Article 9 of the Uniform Commercial Code allows lenders to easily obtain security interests in substantially all of their borrowers’ assets, including borrowers’ cash flows.[97] Second, covenants in loan documents enable lenders to tighten the “slack” that the borrowers’ managers have.[98]

These tools operate most effectively when used in tandem. With a tight grip on a borrower’s cash, lenders can effectively grind the borrower’s operations to a halt.[99] Lenders can also use their control over cash to fund only those projects that would maximize the value of the borrower’s assets.[100] If the borrower violates a covenant, lenders can negotiate for greater control over the firm’s finances and governance.[101] Even before a covenant is breached, the parties may renegotiate the loan’s terms if the sirens warning of the borrower’s unprofitability begin to sound.[102] As they ring ever louder, lenders may insist that the company replace its CEO or appoint a chief restructuring officer.[103] From there, they may virtually compel the company to trim its bloated capital structure or sell substantially all of its assets.[104]

Lenders also have more direct ways of commandeering the company’s management. They can insist that the borrower’s equity holders pledge their governance and voting rights as collateral for the loan. If the borrower defaults, the lender can exercise those rights and tailor the borrower’s management to its satisfaction.[105] Yet the lender may want even more. They may demand that equity holders pledge their equity in the company ⎯ the full gamut of cash flow and control rights associated with it ⎯ as collateral, authorizing the lender to foreclose if the company defaults.[106]

VCs play a similar, but distinct, role in governing startups. VCs are best known for providing startups with capital in exchange for control rights.[107] Startup boards frequently change as VCs and startup founders battle for control.[108] Founders and VCs may disagree over fundamental matters such as the startup’s strategic vision and approach to finances.[109] However, consistent with VCs’ status as repeat players among entrepreneurs, VCs incentivize founders and shareholders to exit their startups by promising them proceeds from the sale that they would otherwise not be entitled to.[110] VCs may even decide to fire the startup’s management, including its CEO, if they’re convinced that the startup has outgrown them.[111]

Private equity sponsors similarly ensure that the managers of their portfolio companies (PortCos) run tight ships. Those managers are beholden to the sponsors and “charged with monitoring the strategy and operational performance of the [PortCo’s C-suite].”[112] They meet frequently, even weekly, to address the PortCo’s financial and operational status.[113] The PortCo’s CEO is also the sponsor’s lackey, although the board can swiftly fire them if their business strategy proves unfruitful.[114] Additionally, the sponsor oversees both the managers and CEO, devoting thousands of hours to scrutinizing the PortCo’s performance.[115]

Hedge funds, too, use aggressive tactics to ensure that managers lead firms towards profitability, at least in the short run.[116] As owners of large chunks of publicly traded companies, hedge funds will use their clout to change a company’s course by resorting to proxy fights and shareholder litigation.[117] Take Southwest Airlines, for instance. After excoriating Southwest’s board for mismanaging the company, the hedge fund Elliott Investment Management obtained roughly an 11 percent stake in Southwest and sought to propose ten nominees to the company’s board of directors.[118] The company eventually announced that seven of its directors, including chairman of the board Gary Kelly, would resign and four new independent board members would be appointed.[119]

These mechanisms allocate control rights among several parties, which is bound to gin up “conflict costs”: the costs associated with disagreement and self-dealing and the prophylactic measures taken to prevent them.[120] Such conflict costs include the risk that managers won’t be able to settle a fundamental business dispute among themselves.[121] In closely held companies, for instance, conflict among several owners can leave the business unable to adopt a plan of action, especially when the underlying governance documents require a supermajority or unanimous vote to do so.[122] Indeed, one study reported that 67 percent of directors have been unable to decide issues during board meetings, and 30 percent recall facing a dispute during a board meeting that “affect[ed] the survival of an organization.”[123]

When left to fester, conflict costs can metastasize into managerial distress. Managerial distress occurs when a company’s management is deadlocked, absent, or otherwise dysfunctional. What separates managerial distress from suboptimal governance more broadly is that managerial distress effectively prevents management from governing the company.

Shawe v. Elting illustrates the destructive potential of a company’s management in deadlock.[124] TransPerfect Group, LLC, offered translation, website localization, and litigation support services to its clients.[125] Shawe and Elting jointly owned and managed the company, with the pair serving as the company’s co-CEOs and only co-directors.[126] They bickered over routine matters such as employee compensation, tax distributions, and the logistics for the annual senior executives meeting.[127] Their endless feuds started to take a toll on the company. Senior executives at the company called the relationship “the biggest problem the company face[d].”[128] The company’s vice president of human resources resigned and condemned the company’s “completely toxic” culture.[129] Some of the company’s most notable clients, such as Bank of America and Shell Oil, also voiced concern about Shawe and Elting’s bickering.[130] Shawe and Elting’s acrimony left them deadlocked and prevented the company from making any further acquisitions, which accounted for 16.5 to 20 percent of the company’s revenue.[131] And the company’s top competitor capitalized on this state of affairs by poaching several of the company’s clients.[132]

A company can also face managerial distress because its management is absent. While rare, managers are most likely to be absent when they divert their attention to other opportunities. Consider Venture Sales, LLC v. Perkins.[133] Perkins, Fordham, and Thompson jointly conveyed approximately 465 acres of land and $157,000 to Venture Sales LLC in exchange for equal shares of the LLC.[134] Given Fordham’s and Thompson’s experience in real estate development, Perkins anticipated that he would be something of a silent partner and that Fordham and Thompson would devote themselves to developing the land.[135] Those hopes were soon dashed.[136] Fordham and Thompson blamed the lack of progress on rezoning, Hurricane Katrina, and the 2007 housing market collapse.[137] Fordham and Thompson nevertheless successfully created housing developments without Perkins only twenty-five miles from where the Venture Sales property sat in the same timeframe.[138]

Finally, a company can be managerially distressed when its management is simply dysfunctional. A detailed definition of “dysfunctional” is elusive, but limiting principles are easy to identify. Management isn’t dysfunctional for making mistakes or exercising poor business judgment.[139] Even if a particular transaction is tarnished with self-dealing, that alone wouldn’t show that the company’s management is dysfunctional. Delaware courts can fashion bespoke remedies to mitigate and deter wrongdoing,[140] but wrongdoing doesn’t inherently suggest that the managers can’t run the company.[141] For management to be truly dysfunctional, then, it must be so utterly unable or unwilling to run the company for the purpose for which it was created, such as by engaging in management-wide fraud or repeated, egregious breaches of fiduciary duties.[142]

Francis v. United Jersey Bank is a good example.[143] The Pritchard family ⎯ consisting of Lilian Pritchard and her two sons Charles and William ⎯ owned and operated Pritchard & Baird Intermediaries Corp., a reinsurance brokerage company.[144] The custom in the reinsurance industry was for parties to give funds to the reinsurance broker to hold in separate escrow accounts, and for funds to be withdrawn only to pay monthly premiums, reinsurance payments, or broker commissions.[145] To put it mildly, the Pritchards flouted this custom; they commingled their clients’ funds with the firm’s funds, and Charles and William repeatedly withdrew “loans” from that cash pool.[146] The company’s corporate governance was equally abysmal. The board’s perfunctory minutes didn’t discuss the company’s financial condition, let alone mention any of Charles and William’s “loans.”[147] Charles also ensured that he, alone, reviewed the company’s financial statements.[148] For her part, Lilian, grief-stricken after her husband’s death, drank heavily and neither knew about, nor participated in, the company’s corporate governance.[149] Eventually, the company fell into such financial disarray that involuntary bankruptcy proceedings were commenced against it and trustees were appointed over it.[150]

If institutional investors’ control rights aren’t available or sufficient to put managerial distress to bed, state courts can try to resolve it by appointing a custodian over the company. Delaware law authorizes a stockholder to petition the Delaware Court of Chancery to appoint a custodian over a corporation if “the corporation is suffering or is threatened with irreparable injury” because there’s unsolvable deadlock among (1) the directors and (2) the stockholders that prevents them from electing new directors.[151] A stockholder or creditor can similarly petition the Delaware Court of Chancery to appoint a receiver over an insolvent corporation.[152] The court is further authorized to dissolve a corporation and appoint a receiver to help it wind up its business.[153] The Delaware Court of Chancery has similar authority for LLCs and limited partnerships. Through its equitable powers, the court may appoint a receiver over an LLC or limited partnership.[154] A court can dissolve an LLC or limited partnership if “it is not reasonably practicable to carry on the business in conformity with” the operating agreement or partnership agreement, respectively.[155]

The conventional wisdom amounts to this: Financial distress is difficult to navigate, and managers are essential in deciding what to do when a company faces it. Prying their hands from the levers of corporate control risks making the firm and its investors significantly worse off. Institutional investors do their part to keep managers in line ⎯ going so far as to replace them if need be ⎯ and help the company maximize its value when it faces financial hardship. If institutional investors aren’t present or their control rights don’t work, investors can petition a state court to appoint a custodian or receiver over the company. And if the distress has taken such a hold over it, the state court can wind up its business and shut it down. Involuntary Chapter 11s, then, threaten to either foment mutiny against managers or duplicate what investors could do through contract or entity law.

Even if one thinks that Chapter 11 is especially well-suited to handle financial distress, one must wonder if the firm is worth saving once managerial distress sets in. Companies, especially closely held companies, may have a “relational governance” structure, as David Skeel once put it.[156] Stakeholders may expect to work closely with the corporation’s managers (who themselves are likely equity holders) and liquidate the corporation if they believe the managers are mismanaging or expropriating funds from the company.[157] That relational governance structure suggests that liquidation may be appropriate when a firm faces managerial distress because, otherwise, the managers will soon drain whatever going-concern value it has to its name.[158] For instance, two friends might start a trucking business that they soon ruin through bickering and self-dealing.[159] Several brothers might jointly own an auto body shop, but between endless fighting, loss of employees, and macroeconomic shocks, there may be little going-concern value left.[160] These firms would be best handled through state receivership or dissolution proceedings. Involuntary Chapter 11 would only delay the inevitable.

II. The Case for Involuntary Chapter 11

This Section will make the case for involuntary Chapter 11s. Part II.A will first show that the tools currently fashioned to separately address financial and managerial distress don’t work when both sources of distress simultaneously set in. It will then provide three case studies showing how companies were drained of their going-concern value because those tools were insufficient to address their financial and managerial distress. Part II.B will reveal how the involuntary Chapter 11 system can do better by providing a single comprehensive forum in which to address both kinds of distress, using two recent involuntary Chapter 11s as case studies.

A.   Insufficient Responses to Financial and Managerial Distress

When a company faces only financial or managerial distress, the solutions outlined in Part I work fairly well. They allow the company to tackle the particular kind of distress it faces while maximizing its value. But when financial and managerial distress simultaneously plague the company, those solutions don’t work. Because each solution is designed to mitigate only one kind of distress, each one presupposes that the company doesn’t face the other kind of distress.

Consider financial distress. Financial distress seldom cures itself. Handling it demands that management be alert, aware, and ready to take decisive action. Management is none of the above when the company is managerially distressed. Similarly, resolving managerial distress is feasible only if the company is financially stable. Otherwise, the company’s financial distress will metastasize. Products will go undeveloped; vendors will change their terms to cash on delivery, if they deliver at all; employees and customers will flock to competitors; and so on. Investors will then battle for larger slices of an ever-diminishing pie.

One may worry that using ex post mechanisms like involuntary Chapter 11 to salvage firms that face financial and managerial distress, even if they have going-concern value, will create costly distortions ex ante. Ex post mechanisms create a bailout system that could encourage excessively risky behavior, discourage investment, and increase the cost of capital ex ante.[161] Binding oneself to the mast ex ante can help avoid these ex post distortions.

Carelessness is a particularly salient risk because it’s possible for parties to draft governance provisions and loan covenants ex ante that can avert managerial distress. They can draft state-contingent governance mechanisms that impose one rule for when the parties have a positive relationship and one for when their relationship sours.[162] The managers and owners, for instance, can operate by unanimous vote until deadlock sets in, in which case the parties can trigger a deadlock-breaking mechanism that vests managerial authority in one of the parties.[163] Lenders can felicitously exercise their proxy rights or foreclose on equity pledges, sweeping the company’s management out of the boardroom at the first sign of distress.[164] If these mechanisms can efficiently reallocate control rights when the firm faces financial or managerial distress, there’s little for entity law, let alone bankruptcy law, to do.[165]

But letting the company falter neglects the inherent incompleteness of ex ante contracts and the relationship-specific investments that parties make in their wake.[166] In a Coasean world, parties may be able to efficiently allocate their entitlements, including control rights over a firm.[167] Yet even in that world, parties may still withhold information to gain strategic advantages over each other.[168] There’s consequently a risk of holdout behavior, in which a party demands a ransom for its continued cooperation when the contractual gap comes to light.[169] The ransoming party is likely one who didn’t make a relationship-specific investment and can therefore credibly threaten to divest from the firm.[170] To avoid this problem and incentivize parties to make relationship-specific investments in the company, parties may negotiate for equal control over the enterprise, but allocating control rights equally risks leaving the firm dead in the water.[171] Left unchecked, strategic behavior and the unanimity requirement designed to solve for holdout behavior may actually disincentivize parties from making relationship-specific investments in the first place.[172]

Those lessons hold all the more true in our world, which is rife with transaction costs that leave “the cognitive task of drafting a truly optimal contract . . . too complex for any real-world actor to achieve.”[173] As such, financial distress is too diverse for parties to completely address ex ante.[174] And since each episode of financial distress is the product of different causes, “every firm is distressed in its own way.”[175] For example, among other things, cyclical downturns, exogenous shocks to the company’s operations, liquidity droughts, poor management, and rapid technological change can all cause financial distress in their own way.[176]

Contractual incompleteness also fuels managerial distress. Parties may systematically underestimate the risk of managerial distress when they create or invest in a business because it’s too far on the horizon.[177] For instance, they may not foresee that a member of a joint venture will get into trouble with the IRS, undercutting the company’s key partnerships;[178] or they may overlook the possibility that the intellectual property that their joint venture relies on belongs to someone else.[179]

Closely held companies may be especially susceptible to managerial distress. Closely held companies are those “where management and ownership are substantially identical” and where equity holders can’t easily alienate their shares.[180] They may be governed by “relational governance” structures[181] that are rooted in family and business relationships, which the parties don’t expect to sour.[182] As such, the investors in those companies might systematically underinvest in mechanisms designed to prevent or combat managerial distress. Indeed, the very bonds of family or friendship that may initially motivate the parties to create the business may mask the risk of managerial distress.

Even if parties craft a managerial distress-breaking mechanism, it can misfire due to unforeseen circumstances or poor design. They may fail to make it mandatory,[183] overlook how financial circumstances can frustrate it,[184] or neglect different interpretations as to how to implement it.[185]

Even lenders’ muscular control rights aren’t guaranteed to work. Lenders may underspecify their rights to, or fail to properly perfect their security interests in, collateral.[186] More broadly, the lenders’ arsenal isn’t a panacea against opportunism,[187] which can vitiate the covenants’ monitoring and control benefits if left unchecked.[188] And since courts are inclined to enforce contracts as written,[189] opportunism perennially lies around the corner.[190]

Lenders can draft around those errors, to be sure; there’s always slack to be tightened or another covenant to be added. But every loan operates in the shadow of opportunity costs. Haggling over covenants comes at the cost of putting capital to good work. Competition on the supply side of credit markets may induce lenders to bargain for fewer control rights (or less effective ones) than they otherwise could.[191]

When private ordering fails, why not first address the company’s managerial distress and then have the court-appointed receiver or custodian file the company for voluntary Chapter 11, if needed? The current involuntary Chapter 11 system even contemplates that possibility.[192] That order of operations nevertheless squanders precious time. Assets can rapidly depreciate, and counterparties may count down the days until they can terminate their contracts with the company. Meanwhile, the parties will have to litigate whether the court should appoint a custodian or receiver over the company. State courts only have a fraction of the power that bankruptcy courts wield to alleviate a firm’s financial and managerial distress, both during the litigation and after it.[193] That state court litigation can take a significant amount of time that the company simply can’t afford to waste when it’s also mired in financial distress.

Even if the financial distress doesn’t threaten imminent financial catastrophe for the company, there’s almost always more value to preserve if the company can tackle its financial distress sooner rather than later.[194] Resolving the company’s managerial and financial distress seriatim may leave the company with less going-concern value than it could have preserved, if any at all.[195]

These worries about the confluence of financial and managerial distress, and the failure of traditional tools to mitigate them, aren’t hypothetical. Three case studies below profile companies that faced financial and managerial distress that in turn dissipated their going-concern value even though these companies availed themselves of deadlock-breaking mechanisms or state court proceedings (or both). In these cases, institutional investors were either absent or their control rights misfired. Indeed, in some instances, institutional investors’ control rights are precisely what contributed to the company’s financial or managerial distress. The lesson is that if financial and managerial distress arise all at once, they must be solved all at once, too.

1.   Kleinberg v. Cohen

Financial and managerial distress can each cause a company to delay addressing the other problem, rendering the company worthless, even with a court-appointed custodian. Consider Kleinberg v. Cohen.[196] Refael Aharon formed Applied Cleantech, Inc., a Delaware corporation, to market the technology he developed to harvest valuable materials from wastewater.[197] Applied Cleantech featured a six-seat board and Aharon as CEO.[198] Aharon had the right to appoint three members to the board but initially only appointed himself and Baruch Dill to the board.[199] Saturn Partners, a venture capital firm that invested in the company, filled the remaining board seats with Daniel Kleinberg, Tomer Herzog, and Ed Lafferty.[200]

Though Applied Cleantech initially struggled to get projects piloting the technology off the ground, the company obtained its biggest lead in 2015 when Bioform, a Canadian company, sought to license Applied Cleantech’s technology.[201] The parties entered into a license agreement that contemplated that the company would transfer the technology to Bioform, and Aharon would separately enter into a services agreement with Bioform to help set up the technology.[202] Aharon, however, stalled transferring the technology to Bioform and the services agreement negotiations.[203] By July 2016, Aharon—without consulting the board—called the whole deal off.[204]

Aharon similarly shooed away another deal. In January 2015, Applied Cleantech entered a sales agreement with Vertenergy, a Mexican water treatment company.[205] After a Vertenergy employee asked Aharon to pay for services that he previously authorized, Aharon purported to terminate the sales agreement in July 2016.[206]

Applied Cleantech’s board deadlocked around the same time that the Bioform and Vertenergy transactions collapsed.[207] Previously, Dill and Lafferty formed a slim majority of the board when they aligned with Aharon.[208] By 2015, Kleinberg and Herzog lost confidence in Aharon’s capabilities as CEO.[209] After the Vertenergy deal fell through, Lafferty, too, began to doubt Aharon’s business acumen.[210] To prevent a Kleinberg-Herzog-Lafferty majority from forming, Aharon filled the final, vacant seat with his brother-in-law, Boaz Cohen.[211] When the board reconvened in August 2016, it divided three–three on whether to file a lawsuit against Bioform or take a more conciliatory approach.[212] Aharon also tabled discussion of whether to appoint a new CEO and how to handle the fallout from Vertenergy.[213]

Kleinberg, Herzog, and Lafferty filed a petition in the Delaware Court of Chancery to appoint a custodian to break the deadlock,[214] which the court granted.[215] At the last meeting before the petition was filed, the board split evenly on how to address its crumbling deals and ossifying deadlock, risking irreparable harm to the company.[216] While the court considered selling the company or its assets, it determined that “the [c]ompany’s affairs [were] in such disarray that a sale of the [company’s] technology would likely generate only a fraction of its potential value.”[217] Appointing a custodian was the “best route” to break the deadlock.[218]

But breaking the deadlock alone couldn’t save the company. By July 2018, the company filed a voluntary Chapter 7 petition in the United States Bankruptcy Court for the District of Delaware.[219] In Chapter 7, a trustee is automatically appointed over the company[220] and charged with “reduc[ing] to money the [company’s] property . . . as expeditiously as is compatible” with the parties’ interests.[221] Applied Cleantech’s Chapter 7 trustee marketed the company’s wastewater treatment technology, but reported that few potential buyers expressed genuine interest.[222] The few buyers that sought to purchase the assets submitted bids that couldn’t cover the cost of selling the technology.[223] While the company estimated that its intellectual property was worth $60 million, that valuation was based on a report from five years prior that was premised upon the company “continuing operations” and obtaining at least $5 million in new capital.[224] The trustee consequently filed, and the court granted, a motion to abandon the property.[225]

The company’s assets were unmarketable because they were buried under layers of financial and managerial distress. The company desperately needed partnerships to be successful. At the time when all of this came to a head, the company was essentially cash-flow insolvent.[226] Aharon’s acerbic attitude undermined the most promising deals, but the company couldn’t let him go. After all, he controlled half of the board and ensconced himself as CEO, despite Kleinberg, Herzog, and (eventually) Lafferty’s reservations about his leadership. Institutional investors could do little to dig the company out from under both kinds of distress. In fact, the board deadlocked precisely because the company’s institutional investors tried to use their control rights to take the company in a different direction. What the company needed, then, wasn’t just a tiebreaker but a comprehensive set of tools designed to mitigate both financial and managerial distress.

2.   Acela Investments LLC v. DiFalco

Where tie-breaking custodians are unhelpful, conflicts of interest and the litigation initiated in its wake can leave a firm unable to mitigate its financial and managerial distress. Consider Acela Investments LLC v. DiFalco.[227] Inspiron Delivery Sciences, LLC (IDS) was the brainchild of Raymond DiFalco, Manish Shah, and Stefan Aigner.[228] The company was created to develop and commercialize pharmaceuticals designed to prevent opioid abuse.[229] To do so, it had to partner with financiers, contract manufacturing organizations, and sales forces.[230] For instance, the company partnered with Daiichi Sankyo, Inc., where Daiichi commercialized and marketed one of the company’s drugs in exchange for royalties, milestone payments, and reimbursements.[231] The company also contemplated manufacturing its drugs in a facility run by a company called Cerovene.[232]

Aigner discovered, though, that DiFalco and Shah owned Cerovene and the land on which one of its facilities rested.[233] To defuse this conflict of interest, the parties adopted an amended operating agreement that provided that Aigner and at least one of DiFalco or Shah had to agree in order for the company’s board to take action.[234] The operating agreement further named Aigner as the company’s CEO and DiFalco as its president; mandated that each of them consult with the other; and provided that they would share the authority to make decisions on IDS’s behalf.[235] The parties also negotiated a set of written consents specifically designed to settle the Cerovene conflict of interest, which included approving DiFalco and Shah’s work with Cerovene in exchange for Cerovene forgiving $810,000 in payables that IDS owed it.[236] Aigner, however, stonewalled the written consents, even though the amended operating agreement and written consents were a “package deal.”[237]

The amended operating agreement did little to extinguish the flaring tensions between Aigner on the one hand and DiFalco and Shah on the other. Each successive board meeting cemented the board’s deadlock.[238] Initially, Aigner tried replacing IDS’s contract manufacturing organizations with a different contract manufacturing organization named Galephar without telling DiFalco and Shah, who later uncovered Aigner’s scheme.[239] In a subsequent meeting, DiFalco proposed that the company channel more of its production through Cerovene, but Aigner disagreed, likely in an effort to hold the threat of fiduciary duty litigation over DiFalco’s and Shah’s head.[240] A board observer even pleaded with Aigner to agree to DiFalco’s proposal, since any potential fiduciary duty litigation would be “peanuts compared to the value of the Company” when partnered with Cerovene, but Aigner refused.[241] After Aigner threatened to sue Shah unless he joined Aigner’s faction, Shah resigned from his post as one of the company’s managers.[242]

All the while, IDS lumbered under the yoke of several financial and operational setbacks. IDS had $2.9 million in annual revenues, which mainly stemmed from its sales partnership with Daiichi.[243] IDS nevertheless anticipated $7.4 million in total expenses, negative cash flow of roughly $6 million, and a projected cash balance of roughly $4.1 million ⎯ all of which prevented IDS from engaging in further research and development.[244]

After extensive litigation between Aigner on the one hand and DiFalco and Shah on the other, the Delaware Court of Chancery dissolved IDS.[245] The company was clearly deadlocked due to the parties’ mutual distrust and endless scheming.[246] Their petty behavior echoed a broader drift in their respective visions for the company. Aigner on the one hand and DiFalco and Shah on the other disagreed about who the company should partner with and whether the company should create an in-house sales team.[247] What’s more, “time [was] of the essence”; the company had two patents that were soon expiring and the company needed $10 to $15 million to develop and obtain FDA approval for new drugs.[248] A custodian couldn’t help, the court reasoned, because the deadlock and Aigner’s and DiFalco’s veto rights would prevent the custodian from doing much good.[249] As such, the court ordered that the company be dissolved and appointed a liquidating trustee to market the company’s assets.[250]

As the liquidating trustee undertook those efforts, IDS stumbled over additional financial hurdles. Daiichi terminated its agreement with the company, depriving IDS of its top source of revenue.[251] Cerovene did so, too, citing $1.86 million in outstanding payables.[252] The liquidating trustee nevertheless obtained a bid from a company named OHEMO for $4 million in cash plus limited royalties.[253]

Acela Investments illustrates how financial and managerial distress can exacerbate each other, flushing value out of an otherwise promising company. IDS had several promising products but needed to partner with other companies to bring those products to market. While IDS had several commercial partners from which to choose, the company’s managers, myopically focused on personal conflicts and conflicts of interest, prevented the company from adopting a coherent business strategy. Instead, the company vacillated between several different partners, sending overtures to all while maintaining working relationships with none. The company’s terminated partnerships with Cerovene and Daiichi evidenced the company’s incomplete approach to developing and marketing pharmaceutical products. By the time the parties’ deadlock came to a head and the litigation commenced, the company was strapped for cash. This sorry state of affairs, and the insufficient tools used to address it, likely left the company with far less value than it otherwise could have had with a more comprehensive solution.

3.   Seokoh, Inc. v. Lard-PT, LLC

Financial and managerial distress can leave a company in shambles even when the parties carefully craft a deadlock-breaking mechanism. Consider Seokoh, Inc. v. Lard-PT, LLC.[254] Process Technologies and Packaging, LLC (PTP) was founded by Seokoh, a Korean cosmetics company, and Lard in September 2016 to market Korean cosmetics in the United States.[255] Seokoh and Lard had equal control over PTP and negotiated a complicated deadlock-breaking mechanism: If the parties deadlocked over three consecutive meetings, one of the parties could trigger a buy-sell mechanism that called for the triggering party to set a price at which it would either sell its equity or purchase the responding party’s equity.[256] If the responding party refused to cooperate with the buy-sell provision, the triggering party would get a 30 percent adjustment in its favor.[257]

Seokoh and Lard disagreed over the joint venture’s business strategy by mid-2017.[258] What started as an abstract disagreement over PTP’s business philosophy morphed into the company’s catastrophic meltdown. Seokoh invoked the deadlock-breaking procedure in March 2019, but Lard disregarded it.[259] By August 2019, years-long litigation broke out in multiple jurisdictions, including New York and Delaware.[260]

Meanwhile, PTP started to collapse under the weight of its managerial and financial woes. The parties couldn’t agree on who should fill in as CEO, and the company operated without a CEO, COO, and Sales Director. PTP’s losses increased quarter over quarter in 2020.[261] PTP struggled to maintain a loyal customer base, and one of its customers initiated litigation and sought up to $65 million in damages. PTP also lost $20.5 million in lines of credit after defaulting, drying up other sources of credit.[262]

Seokoh petitioned the Delaware Court of Chancery in July 2020 to dissolve PTP and Lard moved to dismiss the petition.[263] In March 2021, the court denied the motion to dismiss.[264] PTP faced a litany of woes in the wake of Seokoh and Lard’s deadlock such that running the business was “no longer reasonably practicable.”[265] The deadlock-breaking mechanism was no solution.[266] In fact, the core problem with that mechanism was that it “presumed that the Members would deal with each other in a commercially reasonable manner,” but the parties’ conduct made that presumption “appear[] to have been wishful thinking.”[267] “With PTP’s value in precipitous decline, litigation between the parties breaking out in courts across the country and no end to the deadlock in sight,” the court found that it was “reasonably conceivable” that dissolution was called for.[268]

Seokoh presents a cocktail of financial distress, managerial distress, and poor timing that resulted in drained value. While the deadlock-breaking mechanism was designed to allow one party to take over the business if both parties couldn’t run it together, Seokoh and Lard nevertheless fought for years, leaving PTP with no cash, customers, key personnel, or lines of credit. If PTP was going to solve these problems, they would have to comprehensively solve them all at once. Waiting to solve one kind of distress after solving the other wouldn’t do.

To recap: When a company stares down financial distress, it needs to take decisive action to prevent a bad financial situation from getting worse. When it also faces managerial distress, the company’s management can’t do very much at all, let alone effectively navigate those turbulent financial times. By the time the company is financially and managerially distressed, institutional investors’ control rights are either nonexistent or have misfired. Trying to solve each kind of distress one by one wastes precious time that the firm doesn’t have, leaving its stakeholders worse off.

B.   Involuntary Chapter 11 as a Solution to Financial and Managerial Distress

Though the standard set of solutions designed to cure financial and managerial distress can destroy firms’ going-concern value, involuntary Chapter 11 provides a comprehensive, ex post solution to the company’s financial and managerial distress when the other mechanisms designed to break either or both kinds of distress fail. It does this work through a suite of tools designed to protect the firm from the immediate effects of its financial and managerial distress and aid the firm in crafting lasting solutions to those sources of distress.

Involuntary Chapter 11’s comprehensive, ex post solution is consistent with the influential creditors’ bargain theory of corporate bankruptcy. That theory hypothesizes that if a firm’s investors could negotiate ex ante over what they would do when the company faces financial distress, they would agree to forego their nonbankruptcy remedies to maximize the value of the company’s assets.[269] While scholars have traditionally applied this analysis to a company that solely faces financial distress, the same analysis holds when it also faces managerial distress. Much as before, investors would agree ex ante to forestall their nonbankruptcy remedies ⎯ including initiating state court litigation to install a custodian or receiver over the company ⎯ when the company has going-concern value that financial and managerial distress jointly threaten, and they would instead pursue collective remedies designed to put the company’s assets to their highest and best uses.

Involuntary Chapter 11 implements the creditors’ bargain theory by providing a forum in which investors can navigate the company’s several sources of distress. Chapter 11 tools are so potent precisely because they’re marshalled all in one place and at one time. The bankruptcy court becomes the single, exclusive forum in which parties’ rights vis-à-vis the company are addressed.[270] Unlike in Kleinberg, Acela Investments, and Seokoh, companies in Chapter 11 need not first solve their managerial distress without tackling their financial distress. The company’s financial and managerial problems can all be addressed under the bankruptcy court’s aegis.

One of the most important tools and one of the “debtor’s key protections” in the involuntary Chapter 11 process is the automatic stay,[271] which kicks in right when the creditors file the involuntary Chapter 11 petition.[272] This injunction bars parties from engaging in “any act to obtain possession of” or “control” over the debtor’s property.[273] Actions that violate the automatic stay are void or voidable,[274] and parties that willfully defy the automatic stay may be sanctioned.[275] The purpose of the automatic stay is to “grant complete, immediate, albeit temporary relief to the debtor from creditors, and also to prevent dissipation of the debtor’s assets before orderly distribution to creditors can be effected.”[276] And by kicking in when the petition is filed and preventing parties from siphoning assets away from the company, the automatic stay immediately stalls those actions that are most likely to exacerbate the company’s financial and managerial distress.

The automatic stay applies to a wide array of stakeholders. For instance, it prevents creditors from terminating their contracts with the company,[277] litigating any claims against it,[278] perfecting any liens on its property,[279] or foreclosing on its property that was pledged as collateral for a loan.[280] The automatic stay’s reach extends to the company’s managers and equity holders, too. It bars them from unilaterally asserting derivative actions.[281] While shareholders are usually allowed to call for shareholders’ meetings in the ordinary course of business despite the automatic stay, courts will prevent shareholders from calling those meetings if doing so would compromise the company’s reorganization efforts.[282]

Another set of unique tools the bankruptcy forum arms the company with are designed to address its financial distress. If the company is short on cash, it can borrow additional money on terms that are designed to incentivize lenders to lend to distressed companies.[283] The company can review its executory contracts and decide whether to assume or reject each of them.[284] It can also sell its other assets, including substantially all of them, free and clear of nearly all interests in them.[285] And bankruptcy law deputizes the company to claw back assets that were transferred on the eve of bankruptcy and for which the company received insufficient value,[286] such as wads of cash that controlling managers took as “payments” for fraudulent “loans.”[287]

Chapter 11 further provides tools for fixing the company’s managerial distress in both the short and long term. In the short term, the bankruptcy court can appoint a Chapter 11 trustee over the company to supplement the board or run the company outright.[288] Doing so can allow competent management to take hold of the company and craft a game plan for how to navigate the business through Chapter 11.

In the long term, Chapter 11 features two ways in which the company can quell its managerial distress. The first long-term solution to managerial distress is to allow the company to sell substantially all of its assets free and clear of most interests.[289] By selling substantially all of its assets to a third-party buyer, the company can resolve its managerial distress by placing the company in the hands of new owners.

The second long-term solution to managerial distress is a plan of reorganization, which is designed to allow the parties to reach a general consensus over how to finance and manage the company once it emerges from Chapter 11.[290] Though a plan needs general consensus from relevant stakeholders before a bankruptcy court can approve it,[291] the approval process is designed to prevent holdouts from quashing a plan that otherwise maximizes the company’s value and benefits its stakeholders as a whole.[292] Thus, the plan of reorganization process can resolve managerial (and financial) distress by allowing parties to vote on plans that change who owns, runs, and finances the company.

Asset sales and plans of reorganization can salvage a firm’s going-concern value when that value isn’t tied to the firm’s exact capital inputs. It can switch some capital inputs for others. Put differently, changing the firm’s ownership or financing can defuse its financial and managerial distress when the firm isn’t dependent on the exact sources of value ⎯ the individuals who own and manage the company, the intellectual property it can use, and so on ⎯ that make it work.

To see this, consider the following scenario.[293] A pop star and a financier form a joint venture in which they agree to produce and market the pop star’s merchandise. They agree that the pop star will license her persona and other intellectual property to the joint venture, and the financier will provide it with cash. If the two parties deadlock, the venture will grind to a halt, and fans will be left without merchandise. Yet the firm needs the pop star in a way that it doesn’t need the financier. The pop star’s licensed persona and intellectual property are core to the joint venture’s business. Without them, the joint venture can’t sell the merchandise; in fact, it would have no business at all. The joint venture needs cash too, but it doesn’t need the exact financier per se. Someone else’s cash is just as good. So, the joint venture has going-concern value that isn’t specifically dependent on both the pop star and the financier.

Asset sales and plans of reorganization in the involuntary Chapter 11 context capitalize upon this insight. They allow a company to save its going-concern value by giving its owners and managers the opportunity to craft long-term solutions to the company’s financial and managerial woes. And crafting solutions to those problems is a sensible and worthwhile thing to do precisely because the firm isn’t beholden to the exact capital inputs it currently has. There’s enough wiggle room in the company’s financial and organizational structures that Chapter 11 can do its distress-breaking work.

The tools involuntary Chapter 11 provides offer an improvement over the suboptimal solution provided by involuntary Chapter 7. Involuntary Chapter 7, much like involuntary Chapter 11, comes armed with several of the tools described above that are designed to alleviate financial and managerial distress.[294] What makes Chapter 7 different is that a trustee is mandatorily appointed over the company with the goal of monetizing the company’s assets as quickly as possible,[295] though the trustee can theoretically facilitate a going-concern sale of the company.[296] But, the fact that closely held companies are most likely to benefit from involuntary Chapter 11 hints at why involuntary Chapter 7 is suboptimal: Chapter 7 liquidation typically forces out managers with institutional knowledge, forgoing benefits that Chapter 11 can net.

Unlike Chapter 11, Chapter 7 forces old managers out by fiat, leaving the company without the kind of operational expertise needed to maximize its value. While the Chapter 7 trustee can theoretically rehire the managers to run and market the company, it seems unlikely that the old managers would be willing to aid the trustee once the trustee stripped them of their previously enjoyed benefits of control. And what’s more, Chapter 7, unlike Chapter 11, doesn’t allow the parties to negotiate a global, consensual resolution, which would include voluntary third-party releases among several stakeholders, such as the debtor’s managers.[297] Involuntary Chapter 11 gives the bankruptcy court the flexibility to work with current management in ways that both harness their managerial expertise and allow the court to create short- and long-term solutions to the company’s several sources of distress. That flexibility, in turn, can inure to investors’ benefit by allowing the company to maximize its value.

To be sure, it’s not always clear whether a firm has going-concern value that involuntary Chapter 11 can save. Financial and managerial distress create “noise,” as it were, which can prevent investors from assessing whether the assets are worth more when liquidated or as part of a going concern. When their control rights are effective, investors can turn that noise down. That noise is dialed up, though, when both (1) financial and managerial distress set in, and (2) investors’ control rights are absent or misfire. By allowing the company to dial down the noise while still retaining the managers’ expertise, involuntary Chapter 11’s tools allow the company’s investors to see whether there’s any going-concern value worth preserving.

Several of Chapter 11’s features allow investors to signal, if not outright voice, to the court whether they think that the debtor has any going-concern value that the involuntary Chapter 11 process can save. The Bankruptcy Code allows creditors to extend debtor-in-possession financing on lucrative terms in order to overcome the debt-overhang and adverse-selection problems that preexisting debt might cause.[298] The company’s inability to secure debtor-in-possession financing might signal that no lender is willing to invest in the company, since the likelihood of repayment is too low to justify extending any credit. Similarly, the Bankruptcy Code allows a debtor to sell substantially all of its assets free and clear of any liens or encumbrances.[299] The company’s inability to find a party willing to purchase those assets as a going-concern signals that the highest and best use of those assets would be to fractionalize or liquidate them. Finally, though the Bankruptcy Code allows a debtor to propose a plan of reorganization,[300] creditors can prevent a court from approving the plan if they can show that the plan would lead to the company’s liquidation or further reorganization.[301]

In short, involuntary Chapter 11 presents an opportunity for investors to force a company into a forum designed to alleviate the company’s financial and managerial distress simultaneously. That opportunity is consistent with the hypothetical bargain investors would strike ex ante as to what they would collectively do if the firm were to face financial and managerial distress. Several of bankruptcy’s tools—including the automatic stay, the appointment of a Chapter 11 trustee, the sale of company assets, and the crafting of a plan of reorganization—are designed to help companies mitigate both kinds of distress. Those tools are best harnessed with the company’s former management in hand, despite the managerial distress that plagues the company. These tools also come equipped with safeguards designed to ensure that the company has going-concern value that involuntary Chapter 11 can save, rather than simply using that system to delay the company’s inevitable liquidation.

Companies have actually used involuntary Chapter 11s to do the dual-distress-breaking work that this Article proposes. Two cases studies, In re Houston Regional Sports Network, L.P. and In re Epic! Creations, Inc., highlight the potential and limits of what involuntary Chapter 11s can do.

1.   In re Houston Regional Sports Network, L.P.

In 2003, the Houston Astros and Houston Rockets formed a television network to broadcast their games and other professional sports events.[302] The network had broadcasting rights with the Astros, in which the network had exclusive rights to broadcast the Astros’ games in exchange for a fee.[303] If the network didn’t pay the fee and failed to cure that nonpayment within sixty days, the Astros could terminate the broadcasting agreement.[304]

Comcast joined the network in 2010, changing the network’s managerial and economic dynamics.[305] The network was organized as a limited partnership, with Houston Regional Sports Network, LLC, serving as its general partner.[306] The general partner was managed by four directors; the Astros and the Rockets each appointed one director, and Comcast appointed the remaining two directors.[307] The board needed unanimous consent to adopt new affiliation agreements.[308] The entity was also largely funded by Comcast and Rockets affiliates.[309]

Comcast also bargained for a “most favored nations” clause, which forced the network to match any rate reductions it would give to other broadcasters (such as DirecTV and Dish Network).[310] This created a conflict of interest between Comcast and the network. Comcast had an incentive to scout out affiliation agreements with lower rates, which would lower Comcast’s rate and rates across the board, making the network unprofitable.[311] To check Comcast’s conflict of interest, the Astros bargained for the right to terminate the agreement if the network proved to be so unprofitable that the network couldn’t pay its fees.[312] But the Astros wasn’t the only party who invested in the network and to whom the network was indebted. The network also had at least $113,606,715 in ongoing obligations to the Rockets, Comcast, and the network’s landlord.[313]

The network’s checks and balances soon broke down. Comcast brought several affiliation agreement proposals to the network, but the Astros believed that those offers’ base rates were too low.[314] Since the network’s directors needed to unanimously consent to any proposed affiliation agreement, the network ground to a standstill.[315] When the network failed to make its scheduled fee payments to the Astros, the Astros saw its way out of the network and called a default, which would terminate the Astros’ media rights agreement with the network on September 29, 2013.[316]

Several Comcast affiliates (later joined by two Rockets entities and the network’s landlord) filed an involuntary petition on September 27, 2013.[317] The Astros filed a motion to dismiss on the grounds that it would veto any proposed plan of reorganization, making a plan of reorganization futile.[318]

The court denied the motion to dismiss.[319] Jim Crane, the Astros’ principal owner, testified that the network could be profitable if run properly.[320] Comcast simply didn’t provide the network with profitable opportunities; the most favored nation clause in Comcast’s affiliation agreement fueled the conflict of interest that undermined the network’s viability.[321] Once in Chapter 11, however, each of the general partner’s directors would owe a fiduciary duty to the network to maximize its value.[322] While the Astros was free to defend its rights under the broadcasting agreement with the network, its representative on the general partner’s board had a fiduciary duty to maximize the network’s value once the court placed the company into Chapter 11.[323]

Involuntary Chapter 11 was a sensible response to the network’s financial and managerial distress. Between the unanimity requirement for obtaining new affiliation agreements and Comcast’s conflict of interest, the network’s management was hopelessly deadlocked. The Astros was on the cusp of terminating its broadcasting agreement, which would have led to the network’s demise.[324] That would’ve been massively wasteful, given the network’s many relationship-specific investments, the significant amount of debt the network owed, and the fact that the network could be profitable as a going concern.[325] Involuntary Chapter 11 afforded the network the opportunity to preserve its going-concern value and alter its governance mechanism so that its managers would maximize its value.

That’s what the network did. On October 30, 2014, the court approved a plan of reorganization,[326] in which AT&T and DirecTV jointly purchased the network in a sixty–forty split.[327] The network, recently rebranded as Space City Home Network, continues to air Astros and Rockets games to this day.[328]

2.   In re Epic! Creations, Inc.

Involuntary Chapter 11 also gives investors an opportunity to salvage a company and its going-concern value from dysfunctional management. In re Epic! Creations, Inc. is a good example. Epic! Creations, Inc., Neuron Fuel, Inc., and Tangible Play, Inc. (collectively, the companies) developed and marketed educational technology for children.[329] All of them were affiliates of BYJU’s Alpha, an Indian technology company that created children’s education products.[330] In 2021, BYJU’s Alpha borrowed $1.2 billion, which was guaranteed by its corporate parent, Think & Learn Private Ltd. (T&L), along with the companies.[331] The lenders for the $1.2 billion loan bargained for, among other things, information rights and the right to take control over BYJU’s Alpha upon its uncured default.[332]

After BYJU’s Alpha repeatedly defaulted on the loan, the lenders accelerated the loan’s roughly $1.25 billion balance, exercised their contractual rights to take control of BYJU’s Alpha, and demanded that BYJU’s Alpha and the guarantors immediately pay back the balance of the loan.[333] After the lenders exercised those remedies, however, T&L refused to give the lenders any information.[334] The lenders thereafter discovered that T&L was seemingly in the process of winding the companies down, and that T&L funneled over $10 million from the companies to other affiliates without any business justification.[335] Indeed, T&L stripped the companies of their software development, undermined their administrative capabilities, and slashed their respective budgets.[336]

By June 2024, several of the lenders had enough. They filed an involuntary Chapter 11 petition against the companies in hopes of clawing back the value that T&L drained from them.[337] The lenders and the companies entered a consent order that prevented the companies from transferring any assets outside of the ordinary course of business and mandated the companies to provide the petitioning creditors with weekly bank statements until the court decided whether to formally place the companies into Chapter 11.[338]

The companies soon refused to cooperate with the consent order and the involuntary Chapter 11 process more broadly. It took a month after the bankruptcy court entered the consent order for the lenders to ask the court to appoint a Chapter 11 trustee over the companies.[339] The lenders alleged that T&L, which owned and controlled the companies, continuously violated the consent order by draining the companies’ cash and refusing to deliver the companies’ weekly bank statements to the lenders.[340]

Even more troubling was the companies’ defiance of the involuntary Chapter 11 process. On August 13, the lenders moved for the court to sanction T&L and the companies for failing to materially comply with the lenders’ discovery requests.[341] The lenders sought peculiar and drastic relief from the court: to force the companies into Chapter 11.[342] The lenders argued that the companies couldn’t ignore the involuntary Chapter 11 process only to later contest it.[343]

After a hearing on September 10, the court agreed, officially placing the companies into Chapter 11 and installing a Chapter 11 trustee over them.[344] The trustee soon got to work keeping the companies on track. The trustee paid the companies’ employees and critical vendors;[345] obtained $3.25 million in new credit;[346] commandeered the companies’ Apple developer accounts, which were essential to marketing their products via Apple’s App Store;[347] and began culling the companies’ books and records from various cloud-service vendors.[348]

The trustee’s appointment didn’t stop the mischief. She learned that Rajendran Vellapalath, Vinay Ravindra, other individuals, and several entities (collectively, the Voizzit Entities) received cash and intellectual property assets siphoned from the debtors.[349] The trustee then initiated several adversary proceedings to claw back those assets.[350] Some of those efforts were successful. For instance, after the trustee showed that the Voizzit Entities commandeered the debtors’ Apple accounts and withdrew over $1 million from those accounts, the bankruptcy court held that the Voizzit Entities violated the automatic stay and awarded the trustee over $3 million in damages.[351] Other efforts were more challenging for the debtors. For instance, the trustee sought to reclaim various Google accounts that the Voizzit Entities transferred.[352] Even though the bankruptcy court issued a preliminary injunction against the Voizzit Entities and fined them $25,000 for each day that they failed to comply with its orders, the Voizzit Entities continued to disregard the bankruptcy court’s commands.[353]

Despite these challenges, the trustee marketed the debtors’ assets in several auctions. Epic! Creations’ assets sold for $95.1 million and Neuron Fuel’s assets sold for $2.3 million.[354] Even here, the trustee faced setbacks. Tangible Play’s assets proved difficult to generate interest in buyers, so the bankruptcy court approved the trustee’s motion to abandon them.[355]

Epic! Creations illustrates how investors can use the involuntary Chapter 11 process to combat managerial dysfunction while preserving a company’s going-concern value. The lenders found themselves without any information about BYJU’s Alpha or its affiliates, let alone whether those entities were going to pay back the loan. Further investigation suggested that management-wide fraud and financial distress took hold across several of those entities. The lenders could have sought to install receivers over the entities and perhaps wind them down. Doing so, though, would have been counterproductive; each of the entities had going-concern value that, if frittered away, would compromise the lenders’ chances of getting paid back. The involuntary Chapter 11 provided a unique solution to ameliorate the companies’ financial and managerial distress. And by installing the Chapter 11 trustee, the court ensured that a faithful fiduciary managed the companies, sought to preserve the companies’ value, and marketed the companies’ assets to the highest and best bidders.

Epic! Creations also highlights the limits of what an involuntary Chapter 11 can do. The automatic stay is crucial to making an involuntary Chapter 11 work. As Epic! Creations illustrates, some parties may flout the automatic stay, especially if they’re engaged in fraudulent behavior or other kinds of managerial dysfunction. After all, the involuntary Chapter 11 process might be the greatest threat to their scheme to siphon further value from the company. The more resistance old management puts up to abiding by the involuntary Chapter 11 process, the more value the company will lose navigating the involuntary Chapter 11 process. Professionals’ fees will likely be a significant source of the cash drain. For instance, the Chapter 11 trustee’s counsel alone obtained $8,557,456.40 in compensation between her appointment and June 23, 2025.[356] While involuntary Chapter 11 contains a helpful set of tools that can mitigate financial and managerial distress better than alternatives, it comes with its own limitations.

III. Toward a Sound Involuntary Chapter 11 System

As the last Section showed, while the current solutions for solving simultaneous financial and managerial distress can leave companies with few avenues for preserving their going-concern value, involuntary Chapter 11s provide them with a single forum that hosts a comprehensive arsenal designed to address both kinds of distress. Our current involuntary Chapter 11 system isn’t quite up to the task, though. Part III.A will highlight how the current involuntary Chapter 11 system isn’t set up to address financial and managerial distress. Part III.B will then sketch a sounder involuntary Chapter 11 system that’s designed to do that work.

A.   Misalignments in the Current Involuntary Chapter 11 System

The current involuntary Chapter 11 system falls short because it largely focuses on financial, not managerial, distress. Its structure doesn’t reckon with the centuries-old balance that courts have struck to solve financial distress on the one hand and preserve managerial discretion on the other. In fact, allowing creditors to throw a company into Chapter 11 solely based on its financial distress undermines the business judgment rule and the managerial expertise that justifies it.

As corporations proliferated throughout the 19th century, courts became skeptical about allowing investors to commandeer a company through a receiver merely because it faced financial distress. That skepticism was fueled by the worry that appointing a receiver over an insolvent corporation would clash with the business judgment rule. New Jersey courts, which were revered in the late 19th century for their corporate law expertise,[357] made clear that they couldn’t indulge requests from disgruntled stockholders or creditors to appoint a receiver over a corporation merely because it fell upon hard times or because its managers made several poor business decisions.[358] Some courts, to be sure, appointed receivers merely upon creditors showing that the corporation was insolvent.[359] Yet even when a corporation became insolvent, courts hesitated to impose receivers so as to not dilute the business judgment rule.[360]

Courts therefore looked for evidence of both financial and managerial distress before appointing a receiver over a corporation. Several cases specifically identified a company’s simultaneous financial and managerial distress as the reason why the court should appoint the receiver.[361] Similarly, Ralph Ewing Clark, who authored a notable treatise on receiverships, explained that “[a] receiver for a business corporation will not be appointed on behalf of general creditors upon mere allegations of insolvency, unaccompanied by any charge of fraud, mismanagement or wasting of assets.”[362]

That may not be surprising at first blush, considering that general creditors had no right to have a receiver appointed because they had no claim at law or in equity to the corporation’s assets. Only secured creditors and judgment creditors could ask courts of equity to appoint a receiver to protect their interests in the corporation’s assets.[363] Even when a secured creditor petitioned for a receiver to be appointed, courts hesitated to do so if the secured creditor couldn’t present evidence that the corporation’s managers were jeopardizing its collateral.[364] So, investors couldn’t point to financial distress alone in order to get a court to appoint a receiver over a corporation; they instead had to show that the corporation lumbered under the yoke of financial and managerial distress. Only under those conditions would it make sense to disregard the managers’ business judgment.

Those themes reverberate under Delaware law to this day. Delaware courts take a starchy approach to appointing custodians, receivers, and trustees over companies. That’s certainly the case when it comes to solvent companies. Though a court can appoint a custodian over a solvent corporation, that is a “radical,”[365] “extraordinary,”[366] “drastic,”[367] and “heroic”[368] remedy. Delaware courts will wind up a solvent corporation “only upon a showing of gross mismanagement, positive misconduct by corporate officers, breach of trust, or extreme circumstances showing imminent danger of great loss to the corporation which, otherwise, cannot be prevented.”[369] They are especially skeptical of stockholder petitions to wind up a solvent corporation when the stock is freely tradeable, since the aggrieved stockholder can exit the firm.[370]

Even when statutorily authorized to appoint receivers for insolvent entities, Delaware courts tread lightly. Insolvency is a “jurisdictional fact” that the plaintiff must prove with clear and convincing evidence before the court has any authority to provide the plaintiff with the relief it seeks.[371] The plaintiff must also show that the company is “irretrievably insolvent” such that there’s little prospect that the company’s management would be able to make the company solvent again.[372] Even if the company is so insolvent, Delaware courts warn that they “should not lightly undertake to substitute a statutory receiver for the board of directors of an insolvent company.”[373] Indeed, “a receiver will never be appointed except under special circumstances of great exigency and when some real beneficial purpose will be served thereby.”[374] Managers’ good faith efforts to negotiate with the company’s creditors and keep the company afloat will generally ward off petitions to appoint a custodian or receiver over the company.[375]

The current involuntary Chapter 11 system doesn’t take these lessons to heart. Showing that a company generally hasn’t been paying its debts as they become due and owes $21,050 in unsecured noncontingent claims, which are not in bona fide dispute, to three creditors may be some evidence that the company’s finances have gone awry.[376] But those data points reveal relatively little about the company. They say nothing about whether the company’s management is taking sufficient steps to address its financial challenges, nor do they show why filing an involuntary Chapter 11 at any given point in timewould be optimal for the company.

To be sure, managerial distress can be part of the involuntary Chapter 11 analysis under some circumstances. Recall how section 303(h)(2) of the Bankruptcy Code allows unsecured creditors to file an involuntary petition by showing that a court appointed a custodian, receiver, or trustee over the company within 120 days before the involuntary Chapter 11 petition was filed.[377] At least Delaware courts ostensibly would evaluate whether a company is financially and managerially distressed before appointing one of those fiduciaries over it. But the involuntary Chapter 11 system can’t take credit for that holistic analysis. After all, the involuntary Chapter 11 system doesn’t mandate that analysis. Only financial distress occupies the involuntary Chapter 11 system’s imagination.

Some may argue that the involuntary Chapter 11 system’s sole focus on financial distress makes sense since companies can engage in value-destructive behavior precisely when they face financial distress and lack managerial distress. The thought goes like this. Suppose an insolvent company has $100 left to its name and $100 in unsecured debts. With its options dwindling and knowing about bankruptcy’s absolute priority rule,[378] the company’s managers decide to gamble with the firm’s $100 by undertaking a long-shot project: There’s a 99 percent chance it will fail (leaving the company with $0) and a one percent chance it will make $9,000. In expectation, that gamble will leave the firm with $90, not $100.[379] The value-maximizing path for the firm is to wind its business up and distribute the $100 to the unsecured creditors. The mischief here doesn’t lie in managerial distress. The company can pull off this gamble only because of the managers’ affirmative, coordinated efforts to do so. So, it’s the company’s financial distress alone that’s driving the managers’ value-destructive behavior.

Or take this setup. Suppose the insolvent company has both secured and unsecured debt. Seeing the writing on the wall, the company’s managers collude with the secured creditors to refinance the company at the expense of the unsecured creditors’ claims so that those claims are worth close to nothing. Much as before, it’s precisely the combination of the company’s financial distress and lack of managerial distress that enables the company to pull this scheme off. Some may consequently claim that the unsecured creditors, as the company’s residual claimants, should be able to throw the company into Chapter 11 to ensure that they are promptly paid and to maximize the company’s value.

Both hypotheticals, though, presuppose that a court would be able to cost-effectively evaluate which course of action would maximize the company’s value. While the first hypothetical makes the financial stakes of the company’s gamble fairly clear, it’s unlikely that a court would be able to quickly and accurately observe the company’s true financial picture and determine the best next steps for the company. The business judgment rule recognizes these limitations and consequently vests much discretion in the company’s managers, regardless of the company’s financial distress.[380]

The challenge is all the greater when companies have several tranches of debt and equity. What made the above example compelling was that, by hypothesis, the unsecured creditors were the firm’s residual claimants; as such, the managers and secured creditors’ machinations siphoned the company’s residual value away from those rightful claimants. But to know if that state of affairs holds true under the absolute priority rule, the court must first put a value on the firm and then figure out which class of investors has residual claims. Valuations are no easy feat.[381] Parties may simply disagree as to a company’s valuation, and, because valuations affect how much of the company’s value each party will receive, parties have incentives to manipulate their estimates in order to grab larger slices of the company’s value for themselves.[382] No wonder these valuations can cost millions of dollars through adversarial processes,[383] and some scholars have sought to give judges guidance over how best to conduct them.[384] So it’s hard to imagine a case where it will be clear from the outset where a company’s unsecured creditors could credibly show both that they are the company’s residual claimants and that the company’s proposed strategy is so faulty as to overcome the business judgment rule.[385]

It’s also hard to assert that the involuntary Chapter 11 system’s myopic focus on financial distress is the product of deliberate congressional design. Congress seemingly thought little about involuntary Chapter 11s, let alone the standards for initiating them. The House Judiciary Committee Report on the Bankruptcy Reform Act of 1978 ⎯ the act that created the Bankruptcy Code ⎯ viewed involuntary bankruptcies as a unified topic that applied to businesses and individuals, liquidations and reorganizations alike. The purpose of involuntary bankruptcies was to give unsecured creditors recourse to a collective proceeding to enrich the creditor body as a whole.[386] Involuntary Chapter 11s received little separate attention. The Committee Report explained that creditors might file involuntary Chapter 11s against companies “in order that creditors may realize on [those companies’] assets through reorganization as well as through liquidation.”[387] That was the depth of the analysis.

Because the current involuntary Chapter 11 regime operates orthogonally to the business judgment rule and managerial distress, it’s not surprising that it generates false positives and false negatives. The false positives include those cases in which unsecured creditors file an involuntary Chapter 11 solely as a debt collection tactic and where the company doesn’t suffer from both financial and managerial distress. The false negatives include cases where the company faces financial and managerial distress, but for some reason the company’s investors can’t force it into Chapter 11. Perhaps that’s because the company’s financial and managerial distress aren’t observable or verifiable. In other instances, the trouble may come from the fact that a significant subset of the company’s investors ⎯ particularly secured creditors and equity holders ⎯ are ineligible to support involuntary Chapter 11s.

To be sure, the current system generates some true negatives and true positives, too. Courts sometimes dismiss involuntary Chapter 11s that are filed merely to resolve managerial (but not financial) distress[388] or to give the petitioning parties another chance at litigating an issue that they previously (and unsuccessfully) litigated in a different forum.[389] The Bankruptcy Code further authorizes a bankruptcy court to dismiss a case, including an involuntary Chapter 11, where “the interests of creditors and the debtor would be better served by such dismissal.”[390] And some involuntary Chapter 11s are filed to resolve companies’ financial and managerial distress; Houston Regional Sports Network and Epic! Creations illustrate as much.

There’s still room for improvement, though. Just because the current involuntary Chapter 11 system isn’t entirely misaligned with a sound involuntary Chapter 11 system’s normative goals doesn’t mean that the current system is well-calibrated to advance them. Sophisticated parties can always jerry-rig statutory requirements to fit their needs. It doesn’t follow that the involuntary Chapter 11 system is geared toward providing firms with a forum in which they can tackle their financial and managerial distress. A well-calibrated involuntary Chapter 11 system would do just that.

B.   Recalibrating the Involuntary Chapter 11 System

A sound involuntary Chapter 11 system would have several features that differ from how the involuntary Chapter 11 system operates today. First, it would expand the set of parties who are eligible to file involuntary Chapter 11 petitions. Second, it would demand those parties show that the companies against which they’ve filed those petitions face both financial and managerial distress. Third, it would give those petitioning parties the right incentives to bring only cases in which companies face both kinds of distress simultaneously. Fourth, and finally, it would contemplate several ways in which the bankruptcy court could install a Chapter 11 trustee to help those companies handle their financial and managerial distress.

1.   Petitioning Parties

Start with who can file involuntary Chapter 11 cases. Why should only unsecured creditors be able to do so? Unsecured creditors were the focus of involuntary bankruptcy regimes over the past century,[391] and some unsecured creditors may have information about a company’s financial and managerial distress. But there’s little reason to think that unsecured creditors, as a class of investors, would be uniquely keyed into the firm’s woes. On the contrary, secured creditors, equity holders, and other investors who wield control rights over the company would likely have better access to information about the company and its several sources of distress. Covenants in loan documents give secured creditors important information about the company.[392] Equity holders have statutory rights to inspect the company’s books and records and are likely closest to the information about the company’s sources of distress.[393] And other parties who hold bespoke control rights, like franchisors who impose quality controls onto their franchisees, will have similar insight into the company’s distress.[394]

Although investors may be well informed about the company and the distress it faces, information wouldn’t be enough to initiate a Chapter 11. The petitioning parties would have to have sufficient stakes in the company so that the company isn’t tossed into Chapter 11 at the whims of fleeting investors, but the stakes shouldn’t be too great to make filing an involuntary Chapter 11 petition practically impossible. This is something of a Goldilocks exercise in finding the optimal level of investment. A workable middle ground might be requiring the petitioning parties to show that they hold 10 percent of the company’s outstanding debt or 10 percent of the company’s issued equity.[395] The number of petitioning parties would be irrelevant. So long as one or more parties meet the requisite threshold, they could sustain the involuntary Chapter 11 petition. Reasonable minds can differ on what the threshold should be, but the core point still stands: Investors would be able to file involuntary Chapter 11 petitions if they were sufficiently invested in the company.[396]

2.   Initiating and Responding to Petitions

To initiate an involuntary Chapter 11, the petitioning parties would have to show that the company is facing both financial and managerial distress. Though “financial distress” and “managerial distress” are vague terms, courts will have sufficient guidance to apply those terms to new cases that come before them. “Financial distress” has a significant pedigree in bankruptcy law, and state receivership, custodianship, and dissolution cases can guide courts as to whether a company faces managerial distress.

Of course, that means that courts would use standards—as opposed to more rigid rules—to determine whether to enter an order for relief against an alleged Chapter 11 debtor. Conventional law and economics analyses note that standards come with the benefit of encompassing many different fact patterns but also high error and adjudication costs.[397] Yet bankruptcy courts use standards all the time to align the particularities of each case with the Bankruptcy Code’s text and the overarching goals of the bankruptcy system.[398] Using standards in adjudicating involuntary Chapter 11 cases fits within this familiar skillset.

One may wonder if bankruptcy courts would be able to do the work that a sound involuntary Chapter 11 system would require of them. After all, the business judgment rule is premised on the notion that judges aren’t institutionally competent to decide which course of action will be best for the company. Why would deciding whether a company faces financial and managerial distress be any different?

The answer lies in the fact that financial and managerial distress generate verifiable information. Financial distress leaves a paper trail. Balance sheets reveal assets and liabilities, cash flow statements capture the company’s liquidity profile, and letters of termination document that the company’s essential counterparties have broken up with the company. Managerial distress has its own conspicuous evidentiary tendencies. The company may be bereft of board minutes or other documentation that shows that managers are actively running the company; if they do exist, they may be rare and threadbare. On the other hand, the minutes may show, perhaps in great detail, that the company’s managers were at constant loggerheads. Of course, to the extent that the managerial distress manifests as fraud, the ease of detecting it depends on how well the fraudsters can keep their scheme a secret. Bankruptcy law can’t do much to detect the undetectable.

To be sure, recalibrating the involuntary Chapter 11 system risks creating its own false positives. A firm may look like it’s facing both problems, but it may actually face one or neither problem. Several of the currently enacted safeguards against wasteful involuntary Chapter 11s make sense as a result. Bankruptcy courts would have the discretion to force petitioning parties to post a bond after filing an involuntary Chapter 11 petition in the event that the court later awards fees and damages after dismissing the case.[399] The company would also be able to operate in the ordinary course of business during the gap period, despite the tension between being able to do so and the automatic stay.[400]

Furthermore, the gap period—and the company’s response—would present an opportunity to sift financially and managerially distressed companies from those that don’t face managerial distress. As is common in Chapter 11, the company could file motions that ask the court to approve specific transactions or bless ongoing business relationships.[401] Filing those motions would suggest to the court that the company isn’t managerially distressed. Recall how managerial distress is when the company’s management is so deadlocked, absent, or otherwise dysfunctional such that it can’t govern the company. It’s hard to imagine how a managerially distressed company could ask the court to approve pending transactions and maintain existing commercial relationships. The gap period would therefore create a separating equilibrium: Companies that file motions seeking immediate relief would signal that they’re not managerially distressed, while those that don’t file those motions would signal that they face managerial distress.

One may worry that companies will try to game this signal. That’s possible, yet unlikely. To do so, a company would have to (1) already have a set of transactions and business relationships that the company wants to preserve and (2) file motions seeking the court’s approval for those transactions and relationships. Meeting both requirements would require the company to have extensive prepetition business that it wants to preserve and to operate nimbly enough to ask the court to preserve that business. It’s unlikely that managerially distressed companies would meet both conditions.

Although a manager’s response to a petition might indicate that the company is not in managerial distress, it does not, on its own, disprove the notion either. After all, a manager might baselessly assert the authority to answer the petition on the company’s behalf.[402] Alternatively, the managers might agree that the company should move to dismiss the petition but might disagree on everything else. Answering the petition could be some, but not dispositive, evidence that the company doesn’t face managerial distress.

3.   Incentives

Beyond their pecuniary stakes in the company, parties need incentives to file meritorious involuntary Chapter 11s. Sensitive to this concern, Richard Hynes and Steven Walt proposed awarding bounties to petitioning parties who successfully force companies into bankruptcy proceedings.[403] Yet they warn of the drawbacks to that approach. It’s difficult to set the right bounty because it presents a double-edged sword. Set it too high and parties will file unmeritorious petitions; set it too low and it won’t sufficiently induce parties to file meritorious petitions.[404] What’s more, the specter of litigation costs might make involuntary bankruptcy a threat to healthy companies that least need that kind of intervention.

Perhaps the optimal inducement would be to award costs and attorneys’ fees to petitioning parties who successfully force a company into Chapter 11. This is where the petitioning parties’ substantial investment in the company does double duty. In addition to protecting the company from the vicissitudes of fair-weather investors, the petitioning parties’ substantial investment in the company also aligns their incentives with maximizing the company’s value. They would therefore already have incentives to file an involuntary Chapter 11 petition if the company faced financial and managerial distress, but for the costs of filing and litigating the case. Removing that barrier only increases those incentives.[405] And since filing a meritorious involuntary Chapter 11 petition helps preserve value for all of the company’s investors, those attorneys’ fees would receive priority payment, too.[406]

This incentive structure also supports banning pro se petitions. As Hynes and Walt argue, filtering out pro se petitions is a sensible, low-cost way to exclude the cases least likely to be meritorious.[407] That’s all the more true if attorneys can get compensated for filing meritorious petitions. An attorney’s unwillingness to file an involuntary Chapter 11 petition would support the inference that the petition is meritless and the court should automatically dismiss it.

The involuntary Chapter 11 system would also penalize parties for filing petitions in bad faith. Under the current system, bad faith is grounds for shellacking petitioning creditors with actual and punitive damages.[408] Congress was concerned that creditors would file value-destroying involuntary petitions and hence it included those provisions (among others) to deter such filings.[409] Bad faith remains murky, though. A leading bankruptcy treatise has identified six different ways courts have defined bad faith.[410] Some courts hold that a petitioning creditor’s self-interest in filing the involuntary petition can constitute bad faith.[411] Others even hold that bad faith is grounds for dismissing an involuntary bankruptcy petition that otherwise meets the Bankruptcy Code’s requirements.[412]

Though it casts a long shadow, “bad faith” really captures two different kinds of socially costly conduct. One is forcing a company into bankruptcy knowing that it faces only one or neither kind of distress, or without previously obtaining information about the company’s financial and managerial status.[413] In a world with a sound involuntary Chapter 11 system, courts would impose costs, attorneys’ fees, and actual damages onto petitioning parties who knew the company didn’t face financial and managerial distress or failed to investigate whether the company faced both kinds of distress.[414]

The other is creating the company’s financial or managerial distress and then filing an involuntary petition to gain a windfall.[415] A company’s competitor may buy some of the company’s equity, sow the seeds of financial and managerial distress, and file an involuntary Chapter 11 petition in hopes of rent-seeking or purchasing the company’s assets at fire sale prices.[416] Alternatively, a debt investor may purchase long and short positions in a company for the purpose of tanking the company (and the investor’s long position) to reap a windfall on the short position.[417] Savvy investors may expect, on the whole, to gain windfalls from these strategies even after accounting for the risk that the involuntary Chapter 11s get dismissed and courts impose fees and damages onto them. The intuition here is straightforward: If the company’s assets are sufficiently valuable, then the chance to own them at a deflated price will outweigh the costs associated with filing an involuntary Chapter 11 petition. The investor, then, would only internalize a fraction of the social costs that this strategy would generate. To deter this costly conduct, courts would impose punitive damages to deter this kind of misbehavior.

In short, identifying these two kinds of bad faith mitigates the risk of imposing costs, attorneys’ fees, and damages on false negative petitions while preserving courts’ second-mover advantage in curbing opportunism.[418]

4.   Chapter 11 Trustees

Under a well-calibrated Chapter 11 system, once an order for relief is entered, the court’s first task would be to resolve the company’s managerial distress. Otherwise, the company wouldn’t be able to put Chapter 11’s tools to good use. One potent tool that the court could use to do that is to appoint a Chapter 11 trustee over the company, since doing so is in the “interests of creditors, any equity holders, and other interests of the estate.”[419]

The court might nevertheless be tempted to do too much in this vein. It might, for instance, exile managers and replace them with a bankruptcy trustee. That would be a mistake in many instances. Managerial distress means that a company can’t operate properly if its management is left to its own devices, but managers may have core skills and institutional knowledge that the court would be wise not to waste. This is precisely why an involuntary Chapter 7 might be a bad idea for the company.[420] The same goes for a Chapter 11 trustee who fully supplants old management.[421]

Instead, it might make sense for the court to install a Chapter 11 trustee with a limited mandate as part of the debtor’s management team.[422] That mandate could vary depending on the circumstances at hand. A relatively hands-off intervention would be for the court to appoint the Chapter 11 trustee solely to break a deadlock.[423] The Chapter 11 trustee could also be more hands-on as needed. They might take control of the debtor’s finances and reporting obligations, for instance, while the rest of the management team continues to develop the debtor’s client base, products, and services.[424] This is among the more aggressive options, but this division of labor might allow the debtor to capture the comparative advantages that each member of its management, including the Chapter 11 trustee, can bring to the table.

While immediate interventions to defuse managerial distress are essential, so are long term solutions, such as plans of reorganization and asset sales, that alter the company’s capital and managerial structure. To help craft those solutions, the trustee could serve as something akin to a subchapter V trustee to broker a deal between the parties.[425] Among other tasks, the subchapter V trustee must “facilitate the development of a consensual plan of reorganization.”[426] This is a unique role among other kinds of trustees found in bankruptcy practice, one that requires the subchapter V trustee to “serve as a de facto mediator between the debtor and its creditors.”[427] Transplanted to the involuntary Chapter 11 context, the trustee could mediate disputes between conflicting investors or warring managers. The goal would be to move those parties toward a path that maximizes the company’s value, whether by reorganizing it or selling substantially all its assets.

***

Though the above discussion sketches what a sound involuntary Chapter 11 system would look like and how parties could use it, an involuntary Chapter 11 would be the nuclear option even under such a system. Because even a sound involuntary Chapter 11 system would be costly and drastic, it should only be used when all other efforts to ameliorate the company’s distress have been for naught. As a result, a sound involuntary Chapter 11 system could encourage warring managers to let cooler heads prevail and incentivize them to invest in best governance practices. Put differently, one can think of involuntary Chapter 11 as a kind of “overextraction” measure designed to induce parties to avoid managerial distress in the first place.[428] A sound involuntary Chapter 11 system, then, could incentivize parties to invest in good governance practices ex ante while allowing them to save companies with going-concern value when those practices fall short ex post.

Conclusion

Scholars and practitioners have all but ignored involuntary Chapter 11s. What make corporate governance and corporate reorganizations tick are managerial expertise and investor oversight. Involuntary Chapter 11s shirk both. So, what’s their use?

This Article has shown that there are good reasons to reappraise involuntary Chapter 11s. An involuntary Chapter 11 can be useful when a company faces financial and managerial distress at the same time. When that happens, the company must confront its significant financial challenges, but its managers and investors are in no position to help the company do so. Investors’ contract and corporate law tools misfire when both kinds of distress grind the company to a halt. Yet first straightening out the company’s managerial problems wastes time and resources that it doesn’t have. What the company needs, then, is for someone to force it to resolve both kinds of distress at the same time. This Article has shown that the involuntary Chapter 11 system makes that possible, but to do that work, it needs to be tweaked.

What this Article hasn’t shown is how many companies simultaneously face both kinds of distress. While this Article presented several case studies of companies that faced both financial and managerial distress and ended up in court, perhaps there are financially and managerially distressed companies that never surface on court dockets.[429] That’s an especially salient possibility because, for example, Delaware law allows investors to wind up companies by mutual consent[430] and voids entity charters if those entities fail to pay their franchise taxes.[431] Thus, some companies that face financial and managerial distress may suffer miserable existences only to be later dissolved without so much as a whimper. Future research can show the number and kinds of companies that simultaneously face financial and managerial distress.

Copyright © 2026 Jared I. Mayer, Assistant Professor of Law, Benjamin N. Cardozo School of Law. Many thanks to Ken Ayotte, Douglas Baird, Omri Ben-Shahar, William Birdthistle, Dolan Bortner, Vince Buccola, David Carlson, Tony Casey, Tony Derron, Hon. Michele M. Harner, Hajin Kim, Brian Leiter, Saul Levmore, Brian Lipshutz, Josh Macey, Drew McKinley, Randy Picker, Adriana Robertson, Joe Schottenfeld, David Skeel, students in my Business Divorce seminar at the University of Chicago Law School, and participants at the University of Chicago Faculty Work-in-Progress Workshop, the 2024 Harvard-Wharton Insolvency and Restructuring Conference, the University of Michigan Law School Legal Theory Workshop, the 7th Annual BYU Winter Deals Conference, the University of Miami Law School Law & Finance Workshop, and several faculty workshops for helpful comments and conversations on earlier drafts. Many thanks as well to the editors at the California Law Review for their excellent editorial work. All errors are my own.

[1]. See 11 U.S.C. § 301; In re Bd. of Dirs. of Hopewell Int’l Ins. Ltd., 238 B.R. 25, 53 (Bankr. S.D.N.Y. 1999) (“Under our insolvency system, it is the board of directors of a corporate debtor which must authorize the company by corporate resolution to file for chapter 11 relief.”).

[2]. See generally 11 U.S.C. § 303 (providing that involuntary bankruptcy may be commenced against persons who are a “moneyed, business, or commercial corporation”).

       [3]. For discussions of involuntary bankruptcy’s origins, see Marshall v. Marshall (In re Marshall), 721 F.3d 1032, 1059–63 (9th Cir. 2013); John C. McCoid II, The Occasion for Involuntary Bankruptcy, 61 Am. Bankr. L.J. 195, 196–212 (1987).

[4]. See Admin. Off. of the U.S. Cts., Table 7.2—U.S. Bankruptcy Courts—Voluntary and Involuntary Cases Filed, by Chapter of the Bankruptcy Code, During the 12-Month Periods Ending June 30, 1990, and September 30, 1995 Through 2023 tbl. 7.2 (2023), https://www.uscourts.gov/sites/default/files/data_tables/jff_7.2_0930.2023.pdf [https://perma.cc/95GA-Z5MY].

[5]. See, e.g., Richard M. Hynes & Steven D. Walt, Revitalizing Involuntary Bankruptcy, 105 Iowa L. Rev. 1127, 1129–31 (2020) (noting how involuntary bankruptcies can save valuable firms by forcing them into bankruptcy earlier); Jason Kilborn & Adrian Walters, Involuntary Bankruptcy as Debt Collection: Multi-Jurisdictional Lessons in Choosing the Right Tool for the Job, 87 Am. Bankr. L.J. 123, 150 (2013) (observing that involuntary bankruptcies can be used “to prevent the deterioration of the debtor’s assets due to continued mismanagement, waste, or intentional squandering of value by the debtor”); Brad R. Godshall & Peter M. Gilhuly, The Involuntary Bankruptcy Petition: The World’s Worst Debt Collection Device?, 53 Bus. Law. 1315, 1343 (1998) (discussing the rare circumstances in which an undersecured creditor may prefer to commence an involuntary action).

[6]. See Aronson v. Lewis, 473 A.2d 805, 812 (Del. 1984); see alsoIn re Fedders N. Am., Inc., 405 B.R. 527, 542 (Bankr. D. Del. 2009) (“[T]he decision whether to file for bankruptcy protection or not is generally a matter of directors’ business judgment.”); infra Part I.A.

[7]. See In re Walt Disney Co. Derivative Litig., 907 A.2d 693, 698 (Del. Ch. 2005).

[8]. See infra Part I.B.

[9]. See infra Part II.A.

     [10]. No. 2019-0407, 2021 WL 3575709 (Del. Ch. Aug. 13, 2021).

[11]. See id. at *1, 4.

[12]. See id. at *4.

[13]. See id. at *18.

[14]. See id. at *12, 20.

[15]. See id. at *19.

[16]. See id.

[17]. See id. at *20.

[18]. See id. at *24–25.

[19]. See id. at *59.

[20]. See id. at *58.

[21]. See id.

[22]. See infra Part II.A.1–3.

[23]. See infra Part II.B.

[24]. See 11 U.S.C. § 303(b).

[25]. See id. § 362(a).

[26]. See id. § 1104(a).

[27]. See id. § 364.

[28]. See id. § 548.

[29]. See id. § 365.

     [30]. Seeid. §§ 1121–1129 (discussing the elements of and requirements for a plan of reorganization).

[31]. See id. § 363(b), (f).

[32]. See infra Part II.B.1–2.

[33]. See infra Part III.A.

[34]. See 11 U.S.C. § 303(b), (h).

[35]. See infra Part III.B.1–2.

[36]. See infra Part III.B.3.

[37]. See infra Part III.B.4.

[38]. See 28 U.S.C. §§ 157(b)(1), 1408 (authorizing a bankruptcy filing in the district where the debtor, its principal place of business, or its principal assets have been located for 180 days prior to filing or longer period than any other place that might meet those criteria).

[39]. See Mason v. Integrity Ins. Co. (In re Mason), 709 F.2d 1313, 1316 (9th Cir. 1983).

[40]. See 11 U.S.C. § 301(b).

[41]. See id. § 1112(b) (enumerating grounds for dismissing a Chapter 11 case).

[42]. See Fraternal Composite Servs. v. Karczewski, 315 B.R. 253, 256 (N.D.N.Y. 2004) (“[A] debtor has filed its Chapter 11 petition in good faith when it finds itself in difficult financial situations with a need to financially reorganize and rehabilitate.”); In re Madison Hotel Assocs., 749 F.2d 410, 426 (7th Cir. 1984) (explaining that it was “Congress’ intent that a business organization experiencing cash flow problems be allowed to file a Chapter 11 petition for reorganization, extend the period of its debts, and return to the status of a viable entity while paying creditors in full”).

[43]. SeeIn re Pivar, No. 23-10938, 2024 WL 823035, at *6 (Bankr. S.D.N.Y. Feb. 27, 2024) (“[A]n involuntary petition filed under section 303 of the Bankruptcy Code is similar to a complaint initiating a lawsuit.”).

[44]. See 11 U.S.C. § 303(h); Fed. R. Bankr. P. 1011 (outlining requirements for response to involuntary Chapter 11 petition).

[45]. See Margaret A. Vesper, Considerations for Creditors During the Gap Period in Involuntary Cases, 41 Am. Bankr. Inst. J. 34, 34 (2022).

[46]. See 11 U.S.C. § 362(a).

[47]. See id. § 303(f). It’s hard to square the automatic stay with the permission to operate the company in the ordinary course of business. See Joseph Mullin, Comment, Bridging the Gap: Defining the Debtor’s Status During the Involuntary Gap Period, 61 U. Chi. L. Rev. 1091, 1101 (1994) (“The provisions of the Code that govern involuntary bankruptcies . . . produce considerable ambiguity concerning the debtor’s ability to conduct business during the gap period.”).

[48]. See 11 U.S.C. § 303(h). If the company fails to respond to the petition, the court “shall” enter an order for relief. See id.

[49]. See id. § 303(b)(1). This amount is automatically updated every three years and is current as of April 1, 2025. See id. § 104.

[50]. Seeid. § 303(b)(1). If the company has fewer than twelve creditors in total, only one creditor must support the involuntary Chapter 11 petition. See id. § 303(b)(2).

[51]. See id. § 303(h).

[52]. See Adam J. Levitin, Business Bankruptcy: Financial Restructuring and Modern Commercial Markets 234 (3d ed. 2023).

[53]. See Susan Block-Lieb, Why Creditors File So Few Involuntary Petitions and Why the Number is Not Too Small, 57 Brook. L. Rev. 803, 804 (1991).

[54]. In re Rent–A–Wreck of Am., Inc., 580 B.R. 364, 375–76 (Bankr. D. Del. 2018) (footnotes omitted).

[55]. See Gagliardi v. Trifoods Int’l, Inc., 683 A.2d 1049, 1051–53 (Del. Ch. 1996).

[56]. See Quadrant Structured Prods. Co., Ltd. v. Vertin, 102 A.3d 155, 185–86 (Del. Ch. 2014); Trenwick Am. Litig. Tr. v. Ernst & Young, L.L.P., 906 A.2d 168, 174–75 (Del. Ch. 2006).

[57]. See Steven M. Bainbridge, The Business Judgment Rule as Abstention Doctrine, 57 Vand. L. Rev. 83, 107, 119 (2004); Auerbach v. Bennett, 393 N.E.2d 994, 1000 (N.Y. 1979) (explaining that the business judgment rule “is grounded in the prudent recognition that courts are ill equipped and infrequently called on to evaluate what are and must be essentially business judgments”); Vincent S.J. Buccola, Efficacious Answers to the Non-Pro Rata Workout, 171 U. Pa. L. Rev. 1859, 1878 (2023) (“Judges are not professional investors, and, by design, they come to new cases without any specific information about the parties’ business prospects. They could not hope to distinguish commercially sensible from insensible transactions as accurately or as cheaply as investors.”).

[58]. See David A. Skeel, Jr., Debt’s Dominion: A History of Bankruptcy Law in America 177–78 (2001).

[59]. See 11 U.S.C. § 1107(a).

[60]. See id. §§ 1106(a), 1108.

[61]. See H.R. Rep. No. 95-595, at 232–33 (1977).

[62]. See In re Premier Gen. Holdings, Ltd., 427 B.R. 592, 601 (Bankr. W.D. Tex. 2010) (“The Code gives the debtor the ability to file voluntarily, and to choose under which chapter the debtor wishes to proceed, without court intervention.”).

[63]. See, e.g., Douglas G. Baird & Robert K. Rasmussen, Control Rights, Priority Rights, and the Conceptual Foundations of Corporate Reorganizations, 87 Va. L. Rev. 921, 922 n.4 (2001) (describing a case in which a retailer filed for Chapter 11 with $100 million in cash on hand only to fritter it and most of its assets away in less than a year).

[64]. See Nancy B. Rapoport, Rethinking Professional Fees in Chapter 11 Cases, 5 J. Bus. & Tech. 263, 264–65 (2010) (observing that “there’s no easy mechanism to ensure that . . . fees stay reasonable”).

[65]. See Kenneth A. Rosen, What Does Chapter 11 Really Cost?, Bloomberg L. (Apr. 20, 2016), https://news.bloomberglaw.com/bankruptcy-law/what-does-Chapter-11-really-cost [https://perma.cc/8RHM-GLTT].

[66]. SeeIn re Reid, 773 F.2d 945, 946 (7th Cir. 1985).

[67]. See Ben Browne, Randall Eisenberg & Clare Kennedy, Liability Management: Securing Stability with a Turnaround Mindset, AlixPartners (Oct. 17, 2024), https://www.alixpartners.com/insights/102jlq7/deep-dive-liability-management-exercises/ [https://perma.cc/MZ9V-4TXK].

[68]. See Elizabeth Pollman, Startup Failure, 73 Duke L.J. 327, 344–65 (2023).

[69]. See, e.g.,LTL Mgmt., LLC v. Off. Comm. of Talc Claimants (In re LTL Mgmt., LLC), 64 F.4th 84, 102 (3d Cir. 2023) (“Financial distress must not only be apparent, but it must be immediate enough to justify a filing.”); In re Schur Mgmt. Co., Ltd., 323 B.R. 123, 126–27 (Bankr. S.D.N.Y. 2005) (holding that debtors that wish to stay in Chapter 11 must have a “present need to file” for bankruptcy).

[70]. See Richard Squire, Shareholder Opportunism in a World of Risky Debt, 123 Harv. L. Rev. 1151, 1156–57 (2010).

[71]. See Douglas G. Baird & Thomas H. Jackson, Corporate Reorganizations and the Treatment of Diverse Ownership Interests: A Comment on Adequate Protection of Secured Creditors in Bankruptcy, 51 U. Chi. L. Rev. 97, 100–01 (1984); Thomas H. Jackson, The Logic and Limits of Bankruptcy Law 10–13, 210 (Beard Books 2001) (1986); Elizabeth Warren, Essay, Bankruptcy Policymaking in an Imperfect World, 92 Mich. L. Rev. 336, 350–52 (1993); Douglas G. Baird, The Uneasy Case for Corporate Reorganizations, 15 J. Legal Stud. 127, 133–35 (1986); Sarah Paterson & Adrian Walters, Chapter 11’s Inclusivity Problem, 55 Ariz. State L.J. 1227, 1239 (2023).

[72]. See Douglas G. Baird, Bankruptcy’s Quiet Revolution, 91 Am. Bankr. L.J. 593, 603–08 (2017).

[73]. See In re Genco Shipping & Trading Ltd., 509 B.R. 455, 461–62 (Bankr. S.D.N.Y. 2014) (“A successful prepack can cut down the duration of a bankruptcy case and, therefore, the incredible cost associated with a long, drawn out bankruptcy process.”).

[74]. See Edith Hotchkiss, Karin S. Thorburn & Wei Wang, The Changing Face of Chapter 11 Bankruptcy: Insights from Relevant Trends and Research, 15 Ann. Rev. Fin. Econ. 351, 354 fig. 3 (2023).

[75]. See generally Randal C. Picker, Voluntary Petitions and the Creditors’ Bargain, 61 U. Cin. L. Rev. 519, 523–24 (1992) (explaining that informational asymmetries and managerial indifference to creditor enforcement can misalign incentives and delay bankruptcy filings).

[76]. See Barry E. Adler, Vedran Capkun & Lawrence A. Weiss, Value Destruction in the New Era of Chapter 11, 29 J.L. Econ. & Org. 461, 479 (2012).

[77]. See 11 U.S.C. § 1129(b)(2); Mark J. Roe & Frederick Tung, Breaking Bankruptcy Priority: How Rent-Seeking Upends the Creditors’ Bargain, 99 Va. L. Rev. 1235, 1243–44 (2013) (describing the absolute priority rule).

[78]. See Jackson, The Logic and Limits of Bankruptcy Law, supra note 71, at 205 (“When the shareholders of a firm discover that it is likely that the firm is insolvent, they will realize that the advent of a bankruptcy proceeding will come as a ‘day of reckoning’ for them in which they are entitled to get nothing.”); Vincent S.J. Buccola, Sponsor Control: A New Paradigm for Corporate Reorganization, 90 U. Chi. L. Rev. 1, 26–27 (2023) [hereinafter Buccola, Sponsor Control] (applying this analysis to private equity sponsors); Barry E. Adler, A Re-Examination of Near-Bankruptcy Investment Incentives, 62 U. Chi. L. Rev. 575, 576–77 (1995) (noting how managers have an incentive to continue a firm’s operations, even if doing so would provide negative net present value).

[79]. See Jackson, The Logic and Limits of Bankruptcy Law, supra note 71, at 206–08.

[80]. See Picker, supra note 75, at 536; Lynn A. LoPucki, General Theory of the Dynamics of the State Remedies/Bankruptcy System, 1982 Wis. L. Rev. 311, 364–65 (1982).

[81]. See Robert K. Rasmussen, The Ex Ante Effects of Bankruptcy Reform on Investment Incentives, 72 Wash. U. L.Q. 1159, 1190 (1994); Douglas G. Baird, The Initiation Problem in Bankruptcy, 11 Int’l Rev. L. & Econ. 223, 224 (1991).

[82]. See Sheryl Giugliano & Michael Brandess, With Lenders Asleep at the Wheel, Unsecured Creditors Should Consider Involuntary Bankruptcy, 41 Am. Bankr. Inst. J. 56, 56 (2022); Godshall & Gilhuly, supra note 5, at 1342–43.

     [83]. Tally M. Wiener & Adrian J. Walters, Promise and Perils of Involuntary Insolvency Proceedings, 31 Am. Bankr. Inst. J. 46, 122 (2012).

     [84]. Godshall & Gilhuly, supra note 5, at 1316.

     [85]. 294 B.R. 71 (Bankr. D. Minn. 2003).

[86]. See id. at 75–76.

[87]. See id. at 76–77.

[88]. See id. at 73, 77.

[89]. See id. at 81–85, 88.

[90]. See Baird, The Initiation Problem in Bankruptcy, supra note 81, at 228.

[91]. See Warren, supra note 71, at 369.

[92]. See Zohar Goshen & Richard Squire, Principal Costs: A New Theory for Corporate Law and Governance, 117 Colum. L. Rev. 767, 771–72 (2017).

[93]. See Del. Code. Ann. tit. 6, § 15-401(f) (West 2000) (“Each partner has equal rights in the management and conduct of the partnership[’s] business.”); Del. Code Ann. tit. 6, § 18–402 (West 1995) [hereinafter DLLCA] (vesting control rights of an LLC in its members equally by default).

[94]. See Adolf A. Berle & Gardiner C. Means, The Modern Corporation & Private Property 78–84 (Routledge 2017); Michael C. Jensen & William H. Meckling, Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure, 3 J. Fin. Econ. 305, 312–13 (1976).

[95]. See generally Joseph A. McCahery, Zacharias Sautner & Laura T. Starks, Behind the Scenes: The Corporate Governance Preferences of Institutional Investors, 71 J. Fin. 2905 (2016) (exploring several ways in which institutional investors discipline underperforming companies).

[96]. See Buccola, Sponsor Control, supra note 78, at 11; Robert K. Rasmussen, The End of Bankruptcy Revisited, in Research Handbook on Corporate Bankruptcy Law 36, 42–43 (Barry E. Adler ed., 2020).

[97]. See Douglas G. Baird & Robert K. Rasmussen, Private Debt and the Missing Lever of Corporate Governance, 154 U. Pa. L. Rev. 1209, 1228 (2006) [hereinafter Baird & Rasmussen, Private Debt].

[98]. See George G. Triantis & Ronald J. Daniels, The Role of Debt in Interactive Corporate Governance, 83 Calif. L. Rev. 1073, 1103 (1995).

[99]. See Baird & Rasmussen, Private Debt, supra note 97, at 1229.

[100]. See Vincent S.J. Buccola, Bankruptcy’s Cathedral: Property Rules, Liability Rules, and Distress, 114 Nw. U. L. Rev. 705, 718–19 (2019) [hereinafter Buccola, Bankruptcy’s Cathedral].

[101]. See Greg Nini, David C. Smith & Amir Sufi, Creditor Control Rights, Corporate Governance, and Firm Value, 25 Rev. Fin. Stud. 1713, 1715–17 (2012); Sudheer Chava & Michael R. Roberts, How Does Financing Impact Investment? The Role of Debt Covenants, 63 J. Fin. 2085, 2087–88 (2008).

[102]. See Michael R. Roberts, The Role of Dynamic Renegotiation and Asymmetric Information in Financial Contracting, 116 J. Fin. Econ. 61, 75 (2015).

[103]. See Baird & Rasmussen, Private Debt, supra note 97, at 1233–35 (discussing chief restructuring officer appointment); Frederick Tung, Leverage in the Board Room: The Unsung Influence of Private Lenders in Corporate Governance, 57 UCLA L. Rev. 115, 156–59 (2009) (describing lenders’ role in forcing CEO turnover).

[104]. See Douglas G. Baird & Robert K. Rasmussen, The End of Bankruptcy, 55 Stan. L. Rev. 751, 786–88 (2002).

[105]. See David Griffiths & Alex Cohen, Pledged Equity Proxy Rights and the Rise of the Board Flip, Weil Restructuring Blog (May 14, 2024), https://restructuring.weil.com/corporate-governance/pledged-equity-proxy-rights-and-the-rise-of-the-board-flip/ [https://perma.cc/LZH5-K8N7]; In re CII Parent, Inc., No. 22-11345, 2023 WL 2926571, at *2–3 (Bankr. D. Del. Apr. 12, 2023) (outlining lender’s foreclosure on proxy rights upon debtor’s default).

[106]. SeeExercising Proxy Rights in a Distressed Company, King & Spalding LLP, https://www.kslaw.com/attachments/000/008/256/original/Exercising_Proxy_Rights_in_a_Distressed_Company.pdf [https://perma.cc/WP7A-36SM] (distinguishing between exercising proxy rights and foreclosing on equity pledged as collateral).

[107]. See Elizabeth Pollman, Startup Governance, 168 U. Pa. L. Rev. 155, 179–81 (2019).

[108]. See id. at 182–83.

[109]. See id. at 183.

[110]. See Brian Broughman & Jesse M. Fried, Carrots and Sticks: How VCs Induce Entrepreneurial Teams to Sell Startups, 98 Corn. L. Rev. 1319, 1348–51 (2013).

[111]. See Pollman, Startup Governance, supra note 107, at 184–85.

   [112]. See Ronald J. Gilson & Jeffrey N. Gordon, Board 3.0: An Introduction, 74 Bus. Law. 351, 361 (2019).

[113]. See id. at 359; Jared A. Ellias, Ehud Kamar & Kobi Kastiel, The Rise of Bankruptcy Directors, 95 S. Cal. L. Rev. 1083, 1098 (2022).

[114]. See Gilson & Gordon, supra note 112, at 359.

[115]. See id.

[116]. See Kobi Kastiel & Yaron Nili, The Corporate Governance Gap, 131 Yale L.J. 782, 803 (2022) (“Major shareholders have begun to leverage their increased voting power to demand greater involvement in business decision-making and governance arrangements through direct engagement with portfolio companies, both privately and publicly.”).

[117]. See Marcel Kahan & Edward B. Rock, Hedge Funds in Corporate Governance and Corporate Control, 155 U. Pa. L. Rev. 1021, 1029–34 (2007).

[118]. See Niraj Chokshi & Lauren Hirsch, Southwest Airlines Agreed to Board Changes After Pressure from Elliott, N.Y. Times (Sep. 10, 2024), https://www.nytimes.com/2024/09/10/business/southwest-airlines-board-elliott-management.html [https://perma.cc/R2WD-MT7Q ].

[119]. SeeSouthwest Airlines Announces Next Phase of Comprehensive Board Refreshment,Sw. Airlines(Sep. 10, 2024), https://www.southwestairlinesinvestorrelations.com/news-events/press-releases/detail/37/southwest-airlines-announces-next-phase-of-comprehensive-board-refreshment [https://perma.cc/SBH7-BJVF].

[120]. See Goshen & Squire, supra note 92, at 784, 791–95.

[121]. See Susanna M. Kim, The Provisional Director Remedy for Corporate Deadlock: A Proposed Model Statute, 60 Wash. & Lee L. Rev. 111, 120 (2003) (“[A] division among the directors themselves may render the board unable to take effective management action.”).

[122]. See Frank H. Easterbrook & Daniel R. Fischel, The Economic Structure of Corporate Law 233–34 (1991); Claudia M. Landeo & Kathryn E. Spier, Shotguns and Deadlocks, 31 Yale J. Regul. 143, 151–53 (2014) (discussing deadlocks that can occur in partnerships and LLCs).

[123]. See Int’l Fin. Corp., Conflicts in the Boardroom Survey 3 (2014).

   [124]. C.A. No. 9661, 2015 WL 4874733 (Del. Ch. Aug. 13, 2015).

[125]. See id. at *2.

[126]. See id. While Elting owned 50 percent, Shawe owned 49 percent, and Shawe’s mother owned the remaining 1 percent of the company. See id. Shawe and Elting were effectively equal owners of the company. See id.

[127]. See id. at *6–9.

[128]. See id. at *9.

[129]. See id. at *10–11.

[130]. See id. at *19–20.

[131]. See id. at *30.

[132]. See id. at *20.

   [133]. 86 So. 3d 910 (Miss. 2012).

[134]. See id. at 912.

[135]. See id. at 912–13.

[136]. See id. at 913.

[137]. See id. at 915.

[138]. See id. at 913, 915.

[139]. See supra notes 55–57 and accompanying text.

[140]. See Weinberger v. UOP, Inc., 457 A.2d 701, 715 (Del. 1983) (affirming “the broad discretion of the Chancellor to fashion such relief as the facts of a given case may dictate”).

[141]. SeeIn re Arrow Inv. Advisors, LLC, C.A. No. 4091, 2009 WL 1101682, at *1 (Del. Ch. Apr. 23, 2009) (“Dissolution is an extreme remedy to be applied only when it is not [sic] longer reasonably practicable for the company to operate in accordance with its founding documents, not as a response to fiduciary or contractual violations for which more appropriate and proportional relief is available.”).

[142]. Cf. Warshaw v. Calhoun, 221 A.2d 487, 491 (Del. 1966) (“It is plain, we think, that for a court to order a dissolution or liquidation of a solvent corporation, the proponents must show a failure of corporate purpose, a fraudulent disregard of the minority’s rights, or some other fact which indicates an imminent danger of great loss resulting from fraudulent or absolute mismanagement.”).

   [143]. 432 A.2d 814 (N.J. 1981).

[144]. See id. at 817–18.

[145]. See id. at 817.

[146]. See id. at 818.

[147]. See id.

[148]. See id.

[149]. See id. at 819.

[150]. See id.

[151]. See Del. Code Ann. tit. 8, § 226(a)(1)–(2) (West 2010) [hereinafter DGCL].

[152]. Seeid. § 291.

[153]. Seeid. § 279; In re Nat’l Heritage Life Ins. Co., 656 A.2d 252, 260 (Del. Ch. 1994).

[154]. See Ross Holding & Mgmt. Co. v. Advance Realty Grp., LLC, C.A. No. 4113, 2010 WL 3448227, at 6 (Del. Ch. Sep. 2, 2010); Mizel Roth IRA v. Laurus U.S. Fund, L.P., C.A. No. 5566, 2011 WL 808953, at 5 (Del. Ch. Feb. 25, 2011).

[155]. See DLLCA § 18–802; Del. Code. Ann. tit. 6, § 17–802 (West 1982) [hereinafter DLPA].

   [156]. David A. Skeel, Jr., An Evolutionary Theory of Corporate Law and Corporate Bankruptcy, 51 Vand. L. Rev. 1323, 1338 (1998).

[157]. See id. at 1337–46.

[158]. Cf. Melissa B. Jacoby & Edward J. Janger, Ice Cube Bonds: Allocating the Price of Process in Chapter 11 Bankruptcy, 123 Yale L.J. 862, 865 (2014) (“Financially distressed companies can melt like ice cubes: every day that a company burns through more cash than it earns, it loses value.”).

[159]. See Sartori v. S & S Trucking, Inc., 139 P.3d 806, 807 (Mont. 2006).

[160]. See Broccoli v. Broccoli, 710 A.2d 669, 670–72 (R.I. 1998).

[161]. See Anthony J. Casey & Eric A. Posner, A Framework for Bailout Regulation, 91 Notre Dame L. Rev. 479, 524–25 (2015); David A. Skeel, Jr. & George Triantis, Bankruptcy’s Uneasy Shift to a Contract Paradigm, 166 U. Pa. L. Rev. 1777, 1791–92 (2018).

[162]. See generally Norman Nadorff & Quinncy McNeal, Breaking Joint Venture Agreement Deadlocks: Before the Texas Shoot-Out, Try a Texas Shout-Out, 5 Oil & Gas, Nat. Res. & Energy J. 411 (2020) (outlining several deadlock-breaking mechanisms that parties can adopt).

   [163]. For an example of a state-contingent deadlock breaking mechanism like this, see Mehra v. Teller, C.A. No. 2019-0812, 2021 WL 300352, at *5–6 (Del. Ch. Jan. 29, 2021).

[164]. See supra notes 105–106 and accompanying text.

[165]. See Buccola, Bankruptcy’s Cathedral, supra note 100, at 742 (“The flexibility of contract to provide for and specify state-contingent rule-toggling suggests that bankruptcy law’s intervention is likely to be, at best, redundant.”).

[166]. See Anthony J. Casey, Chapter 11’s Renegotiation Framework and the Purpose of Corporate Bankruptcy, 120 Colum. L. Rev. 1709, 1734–38 (2020).

[167]. See R. H. Coase, The Problem of Social Cost, 3 J. L. & Econ. 1, 15 (1960) (“It is always possible to modify by transactions on the market the initial legal delimitation of rights. And, of course, if such market transactions are costless, such a rearrangement of rights will always take place if it would lead to an increase in the value of production.”).

[168]. See Ian Ayres & Robert Gertner, Strategic Contractual Inefficiency and the Optimal Choice of Legal Rules, 101 Yale L.J. 729, 737–42 (1992); Stanley D. Longhofer & Stephen R. Peters, Protection for Whom? Creditor Conflict and Bankruptcy, 6 Am. L. & Econ. Rev. 249, 276 (2004) (developing a model showing that creditor conflict would persist even in a transaction cost–free world).

[169]. See Casey, supra note 166, at 1737.

[170]. See id. at 1737–38.

[171]. See Jean-François Hennart & Ming Zeng, Structural Determinants of Joint Venture Performance, 2 Eur. Mgmt. Rev. 105, 109 (2005).

[172]. See Casey, supra note 166, at 1737–38.

   [173]. Kenneth Ayotte & Christina Scully, J. Crew, Nine West, and the Complexities of Financial Distress, 131 Yale L.J.F. 363, 367 (2021).

[174]. See Casey, supra note 166, at 1738; Ayres & Gertner, supra note 168, at 730 (observing that a “contract may be insufficiently state contingent in that the contractual obligations fail to fully realize the potential gains from trade in all states of the world”).

[175]. See Casey, supra note 166,at 1738.

[176]. See id. at 1738–39.

[177]. See Niklas Siebenmorgen & Martin Weber, The Influence of Different Investment Horizons on Risk Behavior, 5 J. Behav. Fin. 75, 78 (2004) (conducting a study finding that “[p]articipants given a long-term horizon tended to underestimate volatility to a greater degree than those with a short-term horizon”).

[178]. See, e.g., In re GR BURGR, LLC, C.A. No. 12825, 2017 WL 3669511, at 3–4, 6–8 (Del. Ch. Aug. 25, 2017) (holding that judicial dissolution was appropriate where a partner in a Las Vegas restaurant was convicted of hampering an IRS investigation, causing major partners to terminate their relationships with the restaurant).

[179]. See, e.g., Decco U.S. Post-Harvest, Inc. v. MirTech, Inc., C.A. No. 2018-0100, 2018 WL 6264574, at *5–8 (Del. Ch. Nov. 28, 2018) (dissolving a joint venture after patent litigation and settlement determined that the patent on which the joint venture relied belonged to a third party).

[180]. See Carlos L. Israels, The Sacred Cow of Corporate Existence: Problems of Deadlock and Dissolution, 19 U. Chi. L. Rev. 778, 778–79 (1952).

[181]. See supra note 157 and accompanying text.

[182]. See Benjamin Means, A Contractual Approach to Shareholder Oppression Law, 79 Fordham L. Rev. 1161, 1196 (2010); Jessica M. Erickson, Beyond Wall Street: Inside the Legal Battles of Private Companies, 50 J. Corp. L. 397, 415–24 (2025).

[183]. SeeIn re Dissolution of T & S Hardwoods KD, LLC, C.A. No. 2022-0782, 2023 WL 334674, at *6–9 (Del. Ch. Jan. 20, 2023) (finding that a buy-sell purchase option in an LLC operating agreement wasn’t mandatory and therefore refusing to dismiss a petition for judicial dissolution).

[184]. See Haley v. Talcott, 864 A.2d 86, 96–98 (Del. Ch. 2004) (refusing to enforce an exit provision that would inequitably leave one partner with a personal guarantee on the business’s loan).

[185]. See Ehlinger v. Hauser, 785 N.W.2d 328, 341 (Wis. 2010) (holding that a buyout agreement that was dependent on “book value” was unenforceable because the parties disagreed how to interpret it and didn’t keep company books and records). See generally Harris v. Ahtna, Inc., 107 P.3d 271 (Alaska 2005) (outlining a dispute concerning whether a buy-sell provision could be asymmetrical and whether the offeror could satisfy it with nonmonetary consideration).

[186]. See Karmely v. Wertheimer, 737 F.3d 197, 203–07 (2d Cir. 2013) (denying a lender’s motion to dismiss a borrower’s complaint alleging that the lender breached the agreements by foreclosing on pledged equity after an event of default because the loan documents were ambiguous); Segovia v. Equities First Holdings, LLC, C.A. No. 06C-09-149, 2008 WL 2251218, at *13–16 (Del. Super. Ct. May 30, 2008) (holding that loan documents merely allowed a lender to foreclose on pledged equity in the event of default and didn’t allow the lender to sell such equity prior to default as part of a “hedging” tactic); APS Sports Collectibles, Inc. v. Sports Time, Inc., 299 F.3d 624, 629 (7th Cir. 2002) (finding that a lender failed to perfect security interest in pledged stock, rendering it unenforceable).

[187]. See Henry E. Smith, Equity as Meta-Law, 130 Yale L.J. 1050, 1080 (2021) (defining “opportunism” as “undesirable behavior that cannot be cost-effectively defined, detected, and deterred by explicit ex ante rulemaking”).

[188]. See Jared A. Ellias & Robert J. Stark, Bankruptcy Hardball, 108 Calif. L. Rev. 745, 762–63 (2020) (arguing that “creditors cannot design perfect contractual language ex ante to cover all conceivable forms of opportunism” and “even when creditors expressly recognize a risk, designing a contractual solution is hard⎯⎯and may, in fact, be impossible”).

[189]. See Metro. Life Ins. Co. v. RJR Nabisco, Inc., 716 F. Supp. 1504, 1522 (S.D.N.Y. 1989) (“[C]ourts are properly reluctant to imply into an integrated agreement terms that have been and remain subject to specific, explicit provisions, where the parties are sophisticated investors, well versed in the market’s assumptions, and do not stand in a fiduciary relationship with one another.”).

[190]. See Jared A. Ellias & Elisabeth de Fontenay, Law and Courts in an Age of Debt, 171 U. Pa. L. Rev. 2025, 2049–53 (2023) (explaining the assumptions and limits of that judicial approach).

[191]. See Albert Choi & George Triantis, Market Conditions and Contract Design: Variations in Debt Contracting, 88 N.Y.U. L. Rev. 51, 60–61 (2013). The rise of private credit challenges this narrative because private credit lenders offer more streamlined and certain financing in exchange for tighter covenants. See Jared A. Ellias & Elisabeth de Fontenay, The Credit Markets Go Dark, 134 Yale L.J. 779, 823–31 (2025). Yet even private credit lenders are facing competition, raising the possibility that private credit lenders will drop the most onerous covenants to woo potential borrowers. See Faisal Ramzan & Alice Dawson-Loynes, How Banks Are Pivoting to Compete, Priv. Debt Inv. (May 9, 2024), https://www.privatedebtinvestor.com/how-banks-are-pivoting-to-compete/ [https://perma.cc/U2VE-LLSS].

[192]. See 11 U.S.C. § 303(h)(2) (authorizing unsecured creditors to support involuntary Chapter 11 cases by showing that the company had a custodian, receiver, or trustee appointed over it within 120 days before the involuntary Chapter 11 case commenced).

[193]. See Honorable J. Travis Laster, The Chancery Receivership: Alive and Well, 28 Del. Law. 12, 14 (2010) (“The power wielded by a federal bankruptcy judge greatly exceeds the reach of a state court judge.”).

[194]. See Paterson & Walters, supra note 71, at 1230–31 (“Even debtors who start their journey with an identifiable cash-draining issue and a sound underlying business are likely to descend into a condition of general default if they are unable to fix their problems earlier at a higher point on the demise curve.”).

   [195]. Even if the court eventually appoints a fiduciary over the company, it’s unclear whether that fiduciary will have the authority to file the company for Chapter 11. See, e.g., Jerald L. Ancel, Jeffrey J. Graham & Matthew S. Johns, Is a State Court Receiver-Initiated Chapter 11 Proceeding an End Run around § 303?, 30 Am. Bankr. Inst. J. (July/Aug. 2011) (discussing pitfalls associated with receiver-initiated voluntary Chapter 11s); In re Whittaker, Clark & Daniels, Inc., No. 23-13575, 2023 WL 4111338, at *3–5 (Bankr. D.N.J. June 20, 2023) (holding that the board of directors, not the receiver, had authority to file Chapter 11 for the company); Ullrich v. Welt (In re Nica Holdings, Inc.), 810 F.3d 781, 791 (11th Cir. 2015) (holding that the assignee under Florida assignment for the benefit of creditors didn’t have authority to file for bankruptcy on behalf of company).

   [196]. C.A. No. 12719, 2017 WL 568342 (Del. Ch. Feb. 13, 2017).

[197]. See id. at *1.

[198]. See id. at *1–2.

[199]. See id.

[200]. See id.

[201]. See id. at *2–3.

[202]. See id. at 3–6. Bioform claimed that Aharon alone insisted on the services agreement. See id. at 6.

[203]. See id. at *6.

[204]. See id. at *6–7.

[205]. See id. at *8.

[206]. See id. at *8–9.

[207]. See id. at *7.

[208]. See id.

[209]. See id. at *3.

[210]. See id. at *7–9.

[211]. See id. at *7.

[212]. See id. at *9.

[213]. See id. at *10.

[214]. See id.

[215]. See id. at *15.

[216]. See id. at *12–13.

[217]. Id. at *14.

[218]. See id.

[219]. See Chapter 7 Voluntary Petition, In re Applied CleanTech, Inc., No. 18-11759 (Bankr. D. Del. July 31, 2018), Dkt. No. 1.

[220]. See 11 U.S.C. §§ 701–02.

[221]. See id. § 704(a)(1).

[222]. See Trustee’s Motion for an Order Authorizing the Abandonment of Property at 4–5, In re Applied CleanTech, Inc., No. 18-11759 (Bankr. D. Del. May 1, 2019), Dkt. No. 14.

[223]. Id.

[224]. See id. at 2–3.

[225]. See id. at 7; Order Granting Chapter 7 Trustee’s Motion for an Order Authorizing Abandonment of Property, In re Applied CleanTech, Inc., No. 18-11759 (Bankr. D. Del. June 18, 2019), Dkt. No. 17.

[226]. See Kleinberg v. Cohen, C.A. No. 12719, 2017 WL 568342, at *15 (Del. Ch. Feb. 13, 2017).

   [227]. C.A. No. 2018-0558, 2019 WL 2158063 (Del. Ch. May 17, 2019).

[228]. See id. at *2.

[229]. See id. at *1.

[230]. See id. at *3–4.

[231]. See id. at *8.

[232]. See id. at 2, 5.

[233]. See id. at *5–6.

[234]. See id. at *6.

[235]. See id. at *7.

[236]. See id. at *9.

[237]. See id. at *10.

[238]. See id. at *10–12.

[239]. See id. at *10–11.

[240]. See id. at *11.

[241]. See id.

[242]. See id. at *15.

   [243]. See id.

[244]. See id.

[245]. See id. at 17, 35.

[246]. See id. at *25–28.

[247]. See id. at *26–27.

[248]. See id. at *34.

[249]. See id.

[250]. See id. at *35.

[251]. See Acela Invs. LLC v. DiFalco, C.A. No. 2018-0558, 2020 WL 1987093, at *2 (Del. Ch. Apr. 27, 2020).

[252]. See id. at *3.

[253]. See id. at 4. Cerovene likely terminated its contract to buy the company’s assets on the cheap. It submitted a last-minute bid within weeks of terminating its contract with the company. See id. at 5.

   [254]. C.A. No. 2020-0613, 2021 WL 1197593 (Del. Ch. Mar. 30, 2021).

[255]. See id. at *2–3.

[256]. See id. at *3.

[257]. See id. at *4.

[258]. See id.

[259]. See id. at *5–6.

[260]. See id. at *6–7.

[261]. See id. at 5, 7.

[262]. See id. at *7.

[263]. See id. at *8.

[264]. See id. at *15.

[265]. See id. at 8, 11–12.

[266]. See id. at *12–14.

[267]. See id. at *15.

[268]. See id.

[269]. See Barry E. Adler, The Creditors’ Bargain Revisited, 166 U. Pa. L. Rev. 1853, 1855–56 (2018); see also Baird & Jackson, supra note 71, at 100 n.15 (identifying bankruptcy as a hypothetical bargain among a firm’s investors, including its equity holders).

[270]. See 28 U.S.C. § 1334(e) (vesting court in which bankruptcy case was commenced with “exclusive jurisdiction . . . of all the property, wherever located, of the debtor as of the commencement of such case, and of property of the [bankruptcy] estate”); Elscint, Inc. v. First Wis. Fin. Corp. (In re Xonics, Inc.), 813 F.2d 127, 131 (7th Cir. 1987) (“The bankruptcy jurisdiction is designed to provide a single forum for dealing with all claims to the bankrupt’s assets.”).

[271]. See In re Arcapita Bank B.S.C.(c), 648 B.R. 489, 496 (Bankr. S.D.N.Y. 2023).

[272]. See 11 U.S.C. § 362(a).

[273]. Seeid. § 362(a)(3).

[274]. See Signature Apparel Grp. LLC v. Laurita (In re Signature Apparel Grp. LLC), 577 B.R. 54, 88 (Bankr. S.D.N.Y. 2017) (holding that actions that violate the automatic stay are void); All Trac Transp., Inc. v. Transp. All. Bank (In re All Trac Transp.), 306 B.R. 859, 874 (Bankr. N.D. Tex. 2004) (holding that actions that violate the automatic stay are voidable and subject to discretionary cure by the court).

[275]. See Off. Comm. of Unsecured Creditors of High Strength Steel, Inc. v. Lozinski (In re High Strength Steel, Inc.), 269 B.R. 560, 570 (Bankr. D. Del. 2001) (holding that section 362(k)(1) of the Bankruptcy Code applies to corporate debtors and entitles them to collect actual and punitive damages); Paloian v. Grupo Serla S.A. de C.V., 433 B.R. 19, 40–41 (N.D. Ill. 2010) (holding that while section 362(k)(1) doesn’t apply to corporate debtors, courts have inherent authority under section 105(a) to punish violations of automatic stay).

   [276]. Penn Terra Ltd. v. Dep’t of Env’t Res., 733 F.2d 267, 271 (3d Cir. 1984).

[277]. SeeIn re Valley Media, Inc., 279 B.R. 105, 137 (Bankr. D. Del. 2002).

[278]. See 11 U.S.C. § 362(a)(1)–(2).

[279]. Seeid. § 362(a)(4)–(5).

[280]. See ESL Invs., Inc. v. Sears Holdings Corp. (In re Sears Holdings Corp.), 51 F.4th 53, 58 (2d Cir. 2022).

[281]. See Gainesville Venture, Ltd. v. C & R Tr. (In re Gainesville Venture, Ltd.), 159 B.R. 810, 811–12 (Bankr. S.D. Ohio 1993).

[282]. SeeIn re SS Body Armor I, Inc., 527 B.R. 597, 606–07 (Bankr. D. Del. 2015).

[283]. See 11 U.S.C. § 364; Kenneth M. Ayotte & David A. Skeel, Jr., Bankruptcy Law as a Liquidity Provider, 80 U. Chi. L. Rev. 1557, 1567–72, 1590–92 (2013).

[284]. See 11 U.S.C. § 365; Spyglass Media Grp. v. Bruce Cohen Prods. (In re Weinstein Co. Holdings), 997 F.3d 497, 501 (3d Cir. 2021) (defining executory contracts as “contracts where the debtor and the nonbankrupt counterparty each has material obligations left to perform as of the bankruptcy filing”).

[285]. See generally 11 U.S.C. § 363(b), (f); Elliott v. Gen. Motors LLC (In re Motors Liquidation Co.), 829 F.3d 135, 152 (2d Cir. 2016) (“The Code permits a debtor to sell substantially all of its assets to a successor corporation through a § 363 sale, outside of the normal reorganization process.”).

[286]. See generally 11 U.S.C. § 548.

[287]. See, e.g., In re Pers. & Bus. Ins. Agency, 334 F.3d 239, 241 (3d Cir. 2003).

[288]. See 11 U.S.C. § 1104(a); In re Marvel Ent. Grp., Inc., 234 B.R. 21, 42 (D. Del. 1999) (identifying one of the trustee’s functions in the case as “oversee[ing] the management of the business”).

[289]. See 11 U.S.C. § 363(f).

[290]. See Czyzewski v. Jevic Holding Corp., 580 U.S. 451, 455 (2017).

[291]. See 11 U.S.C. §§ 1126(c)–(d), 1129(a)(8)–(10) (outlining voting thresholds needed to approve a plan of reorganization).

[292]. See id. § 1129(b) (outlining minimum treatment that dissenting stakeholders are entitled for the plan to be approved over their rejection);Anthony J. Casey & Joshua C. Macey, In Defense of Chapter 11 for Mass Torts, 90 U. Chi. L. Rev. 973, 996 (2023).

   [293]. This hypothetical is based on Vila v. BVWebTies LLC, C.A. No. 4308, 2010 WL 3866098, at *1–2 (Del. Ch. Oct. 1, 2010).

[294]. See 11 U.S.C. § 103(a) (providing that tools generally available in Chapter 11 cases are also available in Chapter 7 cases).

[295]. See supra notes 220–221 and accompanying text.

[296]. See Baird, The Uneasy Case for Corporate Reorganizations, supra note 71, at 139.

[297]. See Joshua M. Silverstein, A Revised Perspective on Non-Debtor Releases, 43 Bankr. L. Letter 1, 9 (2023).

[298]. See generally 11 U.S.C. § 364 (authorizing the debtor to obtain financing during the pendency of the chapter 11 case); Ayotte & Skeel, supra note 283 (discussing both problems).

[299]. See 11 U.S.C. § 363(f).

[300]. See id. § 1121(a).

[301]. See id. § 1129(a)(11). This is to say nothing of creditors’ ability to challenge a plan on the grounds that it doesn’t afford them what they are statutorily entitled to under the Bankruptcy Code. See id. § 1129(b).

[302]. In re Hou. Reg’l Sports Network, L.P., 505 B.R. 468, 471 (Bankr. S.D. Tex. 2014).

[303]. Id. The network had a similar broadcasting agreement with the Rockets. See id.

[304]. See id.

[305]. Id. Since several Comcast entities acted in concert in this story, I refer to the entities collectively as “Comcast.”

[306]. Id.

[307]. Id.

[308]. See id.

[309]. See id. at 473–76.

[310]. See id. at 471.

[311]. See id.

[312]. See Transcript of Hearing re: #60 – Motion to Appoint Trustee at 33:16–34:16, In re Hou. Reg’l Sports Network, L.P., 505 B.R. 468 (Bankr. S.D. Tex. 2014) (No. 13–35998), Dkt. No. 140.

[313]. SeeIn re Hou. Reg’l Sports Network, 505 B.R. at 473–74, 476.

[314]. See id. at 479.

[315]. Seeid.

[316]. See id. at 471.

[317]. Id. at 472.

[318]. See id. at 472, 479 (citing 11 U.S.C. § 1112(b)(4)(A) (mandating that the court convert or dismiss a Chapter 11 case for “cause,” including “the absence of a reasonable likelihood of rehabilitation”)).

[319]. See id. at 483.

[320]. See id. at 479–80.

[321]. See id.

[322]. See id. at 480–81.

[323]. See id. at 482.

[324]. See id. at 478.

[325]. See id. at 479–80. For a sense of the complexity in setting up broadcasting networks, see generally Gregory S. Crawford, The Economics of Television and Online Video Markets, in 1A Handbook of Media Economics 267 (Simon P. Anderson, Joel Waldfogel, David Strömberg eds. 2015).

[326]. See Order Confirming Plan, In re Hou. Reg’l Sports Network, L.P., No. 13-35998 (Bankr. S.D. Tex. Oct. 30, 2014), Dkt. No. 778.

[327]. See Third Amended Chapter 11 Plan of Reorganization Dated October 29, 2014 in Respect of Houston Regional Sports Network, L.P. Exhibit B at 16–17, In re Hou. Reg’l Sports Network, L.P., No. 13-35998 (Bankr. S.D. Tex. Oct. 29, 2014), Dkt. No. 772-2.

[328]. See Hannah Peery, Astros and Rockets Announce Acquisition of Regional Sports Network AT&T Sportsnet Southwest, Nat’l Basketball Ass’n (Sep. 29, 2023), https://www.nba.com/rockets/news/astros-and-rockets-announce-astros-and-rockets-announce-acquisition-of-regional-sports-network-att-sportsnet-southwest [https://perma.cc/8LMX-SRYZ].

[329]. See Declaration of Claudia Z. Springer in Support of First Day Motions at 3–4, In re Epic! Creations, Inc., No. 24-11161 (Bankr. D. Del. Oct. 10, 2024), Dkt. No. 193 [hereinafter Springer Declaration].

[330]. See id. at Exhibit A; Becky Yerak, Byju’s Lenders Seek to Put Three Children’s Businesses Into Bankruptcy, Wall St. J. (June 5, 2024), https://www.wsj.com/articles/byjus-lenders-seek-to-put-three-childrens-businesses-into-bankruptcy-78fa298b [https://perma.cc/68UH-LWQD].

[331]. See Motion of the Petitioning Creditors under 11 U.S.C. §§ 105(a) and 303(f) for Entry of an Order (A) Prohibiting the Alleged Debtors from Using Estate Assets for Non-Ordinary Course Purposes and (B) Requiring the Alleged Debtors to Provide Weekly Disclosures at 5, In re Epic! Creations, Inc., No. 24-11161 (Bankr. D. Del. June 5, 2024), Dkt. No. 8 [hereinafter “303(f) Motion”].

[332]. See id. at 5–7.

[333]. See id. at 6.

[334]. See id. at 6–7.

[335]. See id. at 4, 7–11.

[336]. See Springer Declaration, supra note 329, at 5–6.

[337]. See 303(f) Motion, supra note 331, at 11; see also Chapter 11 Involuntary Petition, In re Epic! Creations, Inc., No. 24-11161 (Bankr. D. Del. June 4, 2024), Dkt. No. 1.

[338]. See Consent Order Granting the Petitioning Creditors Emergency Motion Under 11 U.S.C. §§ 105(a) and 303(f) for Entry of an Order (A) Prohibiting the Alleged Debtors from Using Estate Assets for Non-Ordinary Course Purposes and (B) Requiring the Alleged Debtors to Provide Weekly Disclosures at 2, In re Epic! Creations, Inc., No. 24-11161 (Bankr. D. Del. June 28, 2024), Dkt. No. 69.

[339]. See Petitioning Creditors’ Motion to Appoint a Chapter 11 Trustee, In re Epic! Creations, Inc., No. 24-11161 (Bankr. D. Del. July 30, 2024), Dkt. No. 80.

[340]. See id. at 3–5.

[341]. See Petitioning Creditors’ Motion for Discovery Sanctions, In re Epic! Creations, Inc., No. 24-11161 (Bankr. D. Del. Aug. 19, 2024), Dkt. No. 105.

[342]. See id. at 7.

[343]. See id. at 9–10.

[344]. See Order for Relief in Involuntary Cases and Appointing Chapter 11 Trustee, In re Epic! Creations, Inc., No. 24-11161 (Bankr. D. Del. Sep. 16, 2024), Dkt. No. 147.

[345]. See generally Order (I) Authorizing Chapter 11 Trustee to Pay Certain Prepetition Claims of Critical Vendors; (II) Authorizing Financial Institutions to Honor and Process Related Checks and Transfers; and (III) Granting Related Relief, In re Epic! Creations, Inc., No. 24-11161 (Bankr. D. Del. Oct. 29, 2024), Dkt. No. 225; Order (I) Authorizing, But Not Directing, Chapter 11 Trustee to (A) Pay and Honor Certain Gap Period Employee Obligations and (B) Continue the Debtors’ Employee Compensation and Benefit Programs Postpetition; (II) Authorizing and Directing Financial Institutions to Honor All Related Checks and Electronic Payment Requests and (III) Granting Related Relief, In re Epic! Creations, Inc., No. 24-11161 (Bankr. D. Del. Oct. 29, 2024), Dkt. No. 227.

[346]. See generally Interim Order (I) Authorizing the Use of Cash Collateral, (II) Authorizing the Chapter 11 Trustee on Behalf of the Debtors’ Estates to Obtain Postpetition Financing, (III) Granting Senior Postpetition Security Interests, and According Superpriority Administrative Expense Status Pursuant to Sections 364(c) and 364(d) of the Bankruptcy Code, (IV) Granting Adequate Protection, (V) Modifying the Automatic Stay, and (VI) Granting Related Relief, In re Epic! Creations, Inc., No. 24-11161 (Bankr. D. Del. Oct. 31, 2024), Dkt. No. 236.

[347]. See generally Agreed Order Regarding Transfer of Account Holder Rights for Apple Developer Accounts, In re Epic! Creations, Inc., No. 24-11161 (Bankr. D. Del. Oct. 30, 2024) Dkt. No. 230 (outlining the debtors’ commercial relationship with Apple).

[348]. See Springer Declaration, supra note 329, at 2.

[349]. See First Amended Combined Disclosure Statement and Chapter 11 Plan for the Estate of Saga Formations, Inc., Pajeau, Inc., and Tangible Play, Inc. at 36–40, In re Saga Formations, Inc., No. 24-11161 (Bankr. D. Del. Aug. 4, 2025), Dkt. No. 871 [hereinafter “Chapter 11 Plan”].

[350]. See id.

[351]. See id. at 37–38.

[352]. See id. at 38.

[353]. See id. at 39.

[354]. See id. at 41–42.

[355]. See id. at 43.

[356]. See Supplement to Third Interim Fee Application of Jenner & Block LLP at Exhibit F, In re Saga Formations, Inc., No. 24-11161 (Bankr. D. Del. June 23, 2025), Dkt. No. 795.

[357]. See Charles M. Yablon, The Historical Race Competition for Corporate Charters and the Rise and Decline of New Jersey: 1880-1910, 32 J. Corp. L. 323, 331–35 (2007).

[358]. See, e.g., Elkins v. Camden & Atl. R.R. Co., 36 N.J. Eq. 5, 14–15 (Ch. 1882); Park v. Grant Locomotive Works, 3 A. 162, 165 (N.J. Ch. 1885); Ellerman v. Chi. Junction Rys. & Union Stock-Yards Co., 23 A. 287, 292 (N.J. Ch. 1891); Edison v. Edison United Phonograph Co., 29 A. 195, 196 (N.J. Ch. 1894).

[359]. See Comment, The Appointment of Receivers at the Instance of Creditors Upon the Mere Insolvency of a Corporation, 14 Yale L.J. 232, 232–34 (1905).

[360]. See, e.g., Oakley v. Paterson Bank, 2 N.J. Eq. 173, 178–79 (Ch. 1839); Brundred v. Paterson Mach. Co., 4 N.J. Eq. 294, 305 (Ch. 1843); Rawnsley v. Trenton Mut. Life & Fire Ins. Co., 9 N.J. Eq. 347, 350–51 (Ch. 1853); First Nat’l Bank v. Gage, 79 Ill. 207, 209 (1875); Baker v. La. Portable R.R. Co., 34 La. Ann. 754, 757–58 (La. 1882); Laurel Springs Land Co. v. Fougeray, 26 A. 886, 887 (N.J. 1893); Ft. Wayne Elec. Corp. v. Franklin Elec. Light Co., 41 A. 217, 220 (N.J. Ch. 1898); Murray v. Super. Ct. of L.A. Cnty., 62 P. 191, 192–93 (Cal. 1900).

[361]. See, e.g., French v. Gifford, 30 Iowa 148, 159–60 (1870); Haywood v. Lincoln Lumber Co., 26 N.W. 184, 185–86 (Wis. 1885); State J. Co. v. Commonwealth Co., 22 P. 982, 983 (Kan. 1890); Archer v. Am. Water Works Co., 24 A. 508, 515 (N.J. Ch. 1892); Supreme Sitting of the Ord. of Iron Hall v. Baker, 33 N.E. 1128, 1133–34 (Ind. 1893); Stevens v. S. Ogden Land, Bldg. & Improvement Co., 47 P. 81, 83 (Utah 1896); Cont’l Nat’l Bldg. & Loan Ass’n v. Miller, 33 So. 404, 407–08 (Fla. 1902); In re N.J. Refrigerating Co., 122 A. 832, 834 (N.J. 1923).

[362]. See 1 Ralph Ewing Clark, A Treatise on the law and practice of Receivers § 241 (1918); accord John W. Smith, Law of Receiverships as Established and Applied in the United States, Great Britain and Her Colonies with Procedure and Forms § 226 (1897).

[363]. See Pusey & Jones Co. v. Hanssen, 261 U.S. 491, 497 (1923).

[364]. See Clark, supra note 362, § 246 (noting that a receiver might not be appointed if the creditor couldn’t show “evidence of mismanagement or waste or carelessness or fraud, wantonness or collusion, or some ground to apprehend that the property will suffer deterioration or serious injury, [or] something to show that there is danger of probable loss or that some rights may be substantially impaired”).

[365]. SeeIn re Seneca Invs., LLC, 970 A.2d 259, 265 (Del. Ch. 2008).

[366]. See VTB Bank v. Navitron Projects Corp., C.A. No. 8514, 2014 WL 1691250, at *5 (Del. Ch. Apr. 28, 2014).

[367]. See Ross Holding & Mgmt. Co. v. Advance Realty Grp., LLC, C.A. No. 4113, 2010 WL 3448227, at *6 (Del. Ch. Sep. 2, 2010).

[368]. Id.

[369]. See Carlson v. Hallinan, 925 A.2d 506, 543 (Del. Ch. 2006) (quoting Chapman v. Fluorodynamics, Inc., 1970 WL 806, at *4 (Del. Ch. Mar. 20, 1970)).

[370]. See Hall v. John S. Isaacs & Sons Farms, Inc., 163 A.2d 288, 293 (Del. Ch. 1960) (“Mere dissension among corporate stockholders seldom, if ever, justifies the appointment of a receiver for a solvent corporation. The minority’s remedy is withdrawal from the corporate enterprise by the sale of its stock.”); Albert O. Hirschman, Exit, Voice, and Loyalty: Responses to Decline in Firms, Organizations, and States 33–34 (1970) (observing that voice can be less important if exit remains available).

[371]. See Bighorn Ventures Nev., LLC v. Solis, C.A. No. 2022-1116, 2022 WL 17948659, at *7 (Del. Ch. Dec. 23, 2022).

[372]. See Quadrant Structured Prods. Co. v. Vertin, 115 A.3d 535, 557–58 (Del. Ch. 2015).

[373].Prod. Res. Grp., L.L.C. v. NCT Grp., Inc., 863 A.2d 772, 786 (Del. Ch. 2004).

[374]. Id. at 784 (quoting Keystone Fuel Oil, Inc. v. Del–Way Petroleum, Co., No. 5263, 1977 WL 2572, at *2 (Del. Ch. June 16, 1977)).

[375]. Seeid. at 786; In re Geneius Biotechnology, Inc., C.A. No. 2017-0927, 2017 WL 6209593, at *10–11 (Del. Ch. Dec. 8, 2017).

[376]. See 11 U.S.C. § 303(a)–(b).

[377]. See id. § 303(h)(2).

[378]. See supra notes 77–78 and accompanying text.

   [379]. (.99 x $0) + (.01 x $9,000)= $90.

[380]. See Prod. Res. Grp., L.L.C. v. NCT Grp., Inc., 863 A.2d 772, 788 n.52 (Del. Ch. 2004) (doubting “that there is a magic dividing line that should signal the end to some, most, or all risk-taking on behalf of stockholders or even on behalf of creditors, who are not homogenous and whose interests may not be served by a board that refuses to undertake any further business activities that involve risk” and consequently holding that “the business judgment rule remains important and provides directors with the ability to make a range of good faith, prudent judgments about the risks they should undertake on behalf of troubled firms”); Quadrant Structured Prods. Co., Ltd. v. Vertin, 102 A.3d 155, 187–88 (Del. Ch. 2014) (“[W]hen directors make decisions that appear rationally designed to increase the value of the firm as a whole, Delaware courts do not speculate about whether those decisions might benefit some residual claimants more than others.”).

[381]. See Frank H. Easterbrook, Is Corporate Bankruptcy Efficient?, 27 J. Fin. Econ. 411, 416 (1990).

[382]. See Lucian Arye Bebchuk, A New Approach to Corporate Reorganizations, 101 Harv. L. Rev. 775, 793–94 (1988).

[383]. See Douglas G. Baird, Priority Matters: Absolute Priority, Relative Priority, and the Costs of Bankruptcy, 165 U. Pa. L. Rev. 785, 807 (2017).

[384]. See Kenneth Ayotte & Edward R. Morrison, Valuation Disputes in Corporate Bankruptcy, 166 U. Pa. L. Rev. 1819, 1841–45 (2018).

[385]. Cf. Trenwick Am. Litig. Tr. v. Ernst & Young, L.L.P., 906 A.2d 168, 174 (Del. Ch. 2006) (“The fact that the residual claimants of the firm at that time are creditors does not mean that the directors cannot choose to continue the firm’s operations in the hope that they can expand the inadequate pie such that the firm’s creditors get a greater recovery.”).

[386]. See H.R. Rep. No. 95-595 at 188 (1977); In re HH Tech. Corp., 649 B.R. 365, 371 (Bankr. D. Mass. 2023) (explaining that involuntary bankruptcy “is intended to benefit the entire creditor body, not simply serve as another collection tool for an individual creditor”); In re Tichy Elec. Co., 332 B.R. 364, 376 (Bankr. N.D. Iowa 2005) (“The power of an involuntary petition must be exercised for the good of the entire creditor body.”).

[387]. See H.R. Rep. No. 95-595, at 322 (1977).

[388]. See, e.g., In re Glob. Ship Sys., LLC, 391 B.R. 193, 203–04 (Bankr. S.D. Ga. 2007); In re Petro Fill, Inc., 144 B.R. 26, 31 (W.D. Pa. 1992).

[389]. See, e.g., In re WLB-RSK Venture, 296 B.R. 509, 514 (Bankr. C.D. Cal. 2003); In re Manhattan Indus., Inc., 224 B.R. 195, 201 (Bankr. M.D. Fla. 1997).

[390]. See 11 U.S.C. § 305(a)(1).

[391]. SeeIn re Allen-Main Assocs., Ltd. P’ship, 218 B.R. 278, 280–81 (Bankr. D. Conn. 1998).

[392]. See Nini, Smith & Sufi, supra note 101, at 1719 (describing “affirmative covenants,” which require borrowers to, among other things, provide information to lenders).

[393]. See DGCL § 220; see also Easterbrook & Fischel, supra note 122, at 229.

[394]. See Jared I. Mayer, Control Rights and Chapter 11’s Expanding Scope, 98 Am. Bankr. L.J. 340, 352–62 (2024) (discussing so-called “spillover control rights” that parties bargain for in order to protect themselves from misuse of a shared resource).

   [395]. Some receivership statutes have similar structures. See, e.g., N.J. Stat. Ann. § 14A:14-2 (West 1968) (allowing shareholders who aggregately own at least 10 percent of outstanding shares of any class of corporation’s stock to petition court to appoint receiver over corporation).

   [396]. Though the absolute priority rule usually makes equity holders squeamish about filing companies for bankruptcy, involuntary Chapter 11 presents an opportunity for equity holders to resolve the company’s several sources of distress and preserve the value of their equity. The Hertz Corporation, for instance, filed for bankruptcy in 2020 and issued a new equity offering that allowed it to weather the COVID-19 pandemic, reduce its corporate debt by 80 percent, and repay nearly $19 billion in funded debt. SeeHertz Celebrates Chapter 11 Exit, Looks Forward, Auto Rental News (July 1, 2021), https://www.autorentalnews.com/10146659/hertz-celebrates-chapter-11-exit-looks-forward [https://perma.cc/H56X-9YBD]; Anthony J. Casey & Joshua C. Macey, The Hertz Maneuver (and the Limits of Bankruptcy Law), 2020 U. Chi. L. Rev. Online 1, 5–8 (2020) (discussing the equity offering).

[397]. See Louis Kaplow, Rules Versus Standards: An Economic Analysis, 42 Duke L.J. 557, 573, 599–602 (1992); Smith, supra note 187, at 1139.

[398]. See Troy A. McKenzie, Judicial Independence, Autonomy, and the Bankruptcy Courts, 62 Stan. L. Rev. 747, 777–78 (2010); Adam J. Levitin, Toward a Federal Common Law of Bankruptcy: Judicial Lawmaking in a Statutory Regime, 80 Am. Bankr. L.J. 1, 81–87 (2006).

[399]. See 11 U.S.C. § 303(e).

[400]. See sources cited supra note 47 and accompanying text.

[401]. Cf. Fed. R. Bankr. P. 9013 (providing that request for an order shall be made by a written motion); id. 9006(d) (mandating at least seven-day notice period for all motions unless the court orders otherwise).

[402]. See, e.g., Goldberg Healthcare Partners, LLC v. MorrisAnderson & Assocs., Ltd. (In re SA Hosp. Acquisition Grp.), 660 B.R. 97, 110 (D. Del. 2024) (holding that the company’s purported answer to the involuntary petition was “unauthorized” since the state court–appointed receiver had sole authority to file answer on company’s behalf); In re CorrLine Int’l, LLC, 516 B.R. 106, 137–40 (Bankr. S.D. Tex. 2014) (holding that, under Texas law, an officer could not answer the involuntary petition on company’s behalf without the company board’s approval).

[403]. See Hynes & Walt, supra note 5, at 1179.

[404]. See id. at 1177–78.

   [405]. This proposal is similar to Lynn LoPucki’s proposal to give petitioning creditors priority over other creditors in an involuntary bankruptcy proceeding. See LoPucki, supra note 80, at 364–65. LoPucki’s proposal, however, runs the risk of creditors filing involuntary bankruptcies in hopes of recovering more than they could have outside of bankruptcy, which fuels concerns about forum shopping. See Douglas G. Baird, Loss Distribution, Forum Shopping, and Bankruptcy: A Reply to Warren, 54 U. Chi. L. Rev. 815, 825–28 (1987). Reimbursing attorneys’ fees avoids this distortion.

[406]. See 11 U.S.C. § 503(b)(4) (affording priority for petitioning creditors’ attorneys’ fees).

[407]. See Hynes & Walt, supra note 5, at 1162–65.

[408]. See 11 U.S.C. § 303(i)(2).

[409]. See Block-Lieb, supra note 53, at 826–29.

[410]. See 2 Collier on Bankruptcy ¶ 303.16 (Alan N. Resnick & Henry J. Sommer eds., 16th ed. 2024).

[411]. See, e.g., In re Luxeyard, Inc., 556 B.R. 627, 640–41 (Bankr. D. Del. 2016) (“[I]t is an improper use of the bankruptcy system to file an involuntary petition to obtain a disproportionate advantage for a petitioner’s own position.”); In re Better Care, Ltd., 97 B.R. 405, 411 (Bankr. N.D. Ill. 1989) (observing that bad faith includes “any time a creditor uses an involuntary bankruptcy to obtain a disproportionate advantage to that particular creditor’s position, rather than to protect against other creditors obtaining such a disproportionate advantage”).

[412]. See, e.g., In re Forever Green Athletic Fields, Inc., 804 F.3d 328, 334 (3d Cir. 2015); In re Bock Transp., Inc., 372 B.R. 378, 381 (B.A.P. 8th Cir. 2005).

[413]. See, e.g., In re Anmuth Holdings LLC, 600 B.R. 168, 198 (Bankr. E.D.N.Y. 2019) (finding that petitioning creditors who “admit[ted] that they made no effort of any kind to investigate whether” debtors were paying their debts as they became due filed involuntary petitions in bad faith); In re Cannon Express Corp., 280 B.R. 450, 456–57 (Bankr. W.D. Ark. 2002) (finding petitioning creditors filed involuntary petition in bad faith because, among other things, they “failed to conduct adequate inquiry prior to filing the petition”).

[414]. See, e.g., In re Express Car & Truck Rental, Inc., 440 B.R. 422, 434–35 (Bankr. E.D. Pa. 2010) (awarding attorneys’ fees to company after petitioning creditor “merely rel[ied] on a few snippets of information from two employees . . . and an email from the bank regarding the status of a single bank account” to support her assertion that the company was generally not paying its debts as they became due); In re Young Elec. Contractors, Inc., No. 14–26373, 2019 WL 2166653, at *5 (Bankr. D. Md. May 14, 2019) (finding that petitioning creditors who filed an involuntary bankruptcy petition after failing to investigate the “unsubstantiated rumors” that the debtor was liquidating did so in bad faith).

   [415]. Douglas Baird and Robert Rasmussen have shown how parties can similarly tank firms by using derivatives like credit default swaps. See Douglas G. Baird & Robert K. Rasmussen, Antibankruptcy, 119 Yale L.J. 648, 678–83 (2010).

   [416]. This concern has haunted receivership proceedings for over a century. See Jacob Trieber, The Abuses of Receiverships, 19 Yale L.J. 275, 276 (1910) (complaining that “it has become an established occupation for unscrupulous parties to buy a few shares of stock in a corporation for no other purpose than that of blackmailing by asking or threatening to ask for temporary injunctions or the appointment of a receiver”).

[417]. See Joshua A. Feltman, Emil A. Kleinhaus & John R. Sobolewski, The Rise of the Net-Short Debt Activist, Harv. L. Sch. F. on Corp. Governance (Aug. 7, 2018), https://corpgov.law.harvard.edu/2018/08/07/the-rise-of-the-net-short-debt-activist/ [https://perma.cc/5H8V-GJV7] (outlining the strategy’s possibility). But see generally Vincent S.J. Buccola, Jameson K. Mah & Tai Zhang, The Myth of Creditor Sabotage, 87 U. Chi. L. Rev. 2029 (2020) (doubting its lucrativeness).

[418]. See Smith, supra note 187, at 1139. This is to say nothing of the traditional tools that bankruptcy courts can use to combat opportunistic behavior, like equitable subordination, which allows the court to put a party’s claim against the debtor at the back of the line because it engaged in opportunistic behavior. See 11 U.S.C. § 510(c); In re Aéropostale, Inc., 555 B.R. 369, 396–99 (Bankr. S.D.N.Y. 2016) (describing equitable subordination).

[419]. See 11 U.S.C. § 1104(a)(2). The court even has authority to do so sua sponte. See id. § 105(a) (authorizing the court to act sua sponte).

[420]. See supra notes 294–297 and accompanying text.

[421]. See Off. Comm. of Unsecured Creditors of Cybergenics Corp. v. Chinery, 330 F.3d 548, 577 (3d Cir. 2003) (“The idea that existing management is best positioned to rescue a debtor from bankruptcy is precisely the reason why the appointment of a trustee is exceptional in Chapter 11 reorganizations.”).

[422]. See, e.g., In re Intercat, Inc., 247 B.R. 911, 924–25 (Bankr. S.D. Ga. 2000); In re Madison Mgmt. Grp., Inc., 137 B.R. 275, 282–83 (Bankr. N.D. Ill. 1992).

[423]. See, e.g., In re Tahkenitch Tree Farm P’ship, 156 B.R. 525, 528 (Bankr. E.D. La. 1993) (appointing trustee to break deadlock between warring partners who had competing visions for the debtor’s business); In re Petralex Stainless, Ltd., 78 B.R. 738, 744–45 (Bankr. E.D. Pa. 1987) (appointing Chapter 11 trustee to “work with the warring factions” in the debtor’s management).

[424]. See, e.g., In re Celeritas Techs., LLC, 446 B.R. 514, 521 (Bankr. D. Kan. 2011) (holding that debtors’ management could “remain in control of business operations” while the trustee would, among other things, “oversee financial management and disclosure requirements of” the debtors); In re Nartron Corp., 330 B.R. 573, 594 (Bankr. W.D. Mich. 2005) (vesting trustee with power to, among other things, “oversee the financial management of the” debtor, while allowing the debtor’s management to retain control over “product development, manufacture and sales”).

   [425]. Subchapter V is a subchapter of Chapter 11 designed to help rehabilitate small businesses. For a brief history and overview of subchapter V, see Christopher Hampson & Jeffrey A. Katz, The Small Business Prepack: How Subchapter V Paves the Way for Bankruptcy’s Fastest Cases, 92 Geo. Wash. L. Rev. 851, 857–75 (2024).

[426]. See 11 U.S.C. § 1183(b)(7).

[427]. SeeIn re Seven Stars on the Hudson Corp., 618 B.R. 333, 346 n.81 (Bankr. S.D. Fla. 2020).

[428]. See Saul Levmore, Gomorrah to Ybarra and More: Overextraction and the Puzzle of Immoderate Group Liability, 81 Va. L. Rev. 1561, 1575–78 (1995).

[429]. Cf. George L. Priest & Benjamin Klein, The Selection of Disputes for Litigation, 13 J. Legal Stud. 1, 16 (1984) (hypothesizing that parties will tend to settle disputes on issues where one party will clearly be victorious, since the difference in their expectations of prevailing at trial will be small and both parties will be inclined to save on litigation costs).

[430]. See DGCL §§ 273–275; DLLCA § 18-801; DLPA § 17-801.

[431]. See DGCL §§ 510–511; DLLCA § 18-1108; DLPA § 17-1110.