Do you think the banks may have an unfair advantage in bankruptcies just because they can provide DIP financing?
Unfair is a very subjective word. [After all,] lenders, if they are going to put up new money, are entitled to certain protections in return for undertaking that risk.
What about the true-sale safe harbor? Should securitization be protected from review by bankruptcy judges through safe-harbor legislation?
I’m of two minds about that. There is certainly a history in the bankruptcy law of looking at the economic substance of transactions, being guided by the substance of those transactions rather than their label…. To declare that all securitizations are safe is to depart from this long history…. On the other hand, securitization is an important part of financial markets now, and some benefit can be gained from certainty in these transactions. So, to some extent, I guess there is a tension here.
If you had a clean slate to rewrite the bankruptcy code, where would you start?
The basic tenets of Chapter 11 work well. We have a “rescue” culture in this country, which is the best in the world. There are small areas in the bankruptcy [code that] might need fine-tuning. [For example,] the rules governing conflicts of interest are difficult to apply and difficult to work one's way through. Part of [the problem] is that, because so many people are involved in a bankruptcy case, it isn't always easy to know [when there are conflicts of interest among parties].
Obviously, you'd like the UNCITRAL model law added to the code. How important is it that the United States approve such legislation?
We already have, under Section 304 of the bankruptcy code, some provisions of the model law, and we have a body of judicial precedents for dealing with cooperation in cross-border cases. However, that doesn't mean we don't need the law; we do. We need it as a catalyst to induce our trading partners to adopt it, particularly in civil-law jurisdictions, where judges don't enjoy the same kind of discretion that common-law judges do. Civil-law judges need a statutory framework in order to implement some of what is necessary in the cross-border context. [In civil jurisdictions, judges often view liquidation, not rehabilitation, as the most appropriate method of dealing with bankruptcy.]
The model law actually had its genesis in a case you presided over — the mammoth bankruptcy of Maxwell Communications back in 1991. Why was that so groundbreaking?
The initial conditions surrounding the cases were such that I was faced with the choice of allowing the parties to engage in jurisdictional legislation [since Maxwell was headquartered in the UK but 80 percent of its assets were in the United States, creditors were poised to square off over which country had primary jurisdiction and possibly delay proceedings until all assets were gone], which would have been time-consuming, expensive, and disruptive to the rehabilitative process, or trying to do something different.