The Theory, Reality, and Pragmatism of Corporate Governance in Bankruptcy Reorganizations

Governing a corporation during a Chapter 11 reorganization presents a special case of the age-old problem of the separation of ownership and control. Critics of Chapter 11 have long pointed to the insulation provided by the automatic stay to managers of the business as one of the causes of bankruptcy inefficiency. Protected from the normal contractual and market forces that restrain the behavior of managers of healthy companies, managers of firms in bankruptcy, the harshest critics charge, use delay and other strategies to enrich themselves and the shareholders at the expense of the firm's creditors.

This Article addresses the financial economic theories of corporate governance and isolates some of the principles underlying the nonbankruptcy corporate governance structure that bear on the problem of corporate governance in Chapter 11. Having established those theories as a basis for discussion, the Article then examines the practical limitations on the bankruptcy process resulting from creditor indifference and a lack of consensus regarding the goals of Chapter 11. The Article next examines some of the ways courts have responded to the intractable problems of running a Chapter 11 debtor, focusing on courts' use of case management techniques, examiners, and control over attorneys' fees. The Article concludes with a discussion of the National Bankruptcy Review Commission's Report and Recommendations, discussing both the Commission's practical governance recommendations and the Report's evidence of a continued tension over the appropriate goals of Chapter 11.