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 and managerial distress such. 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.