The Great Debate

The Great Debate was a famous debate in 1920 between two astronomers over whether the Milky Way is the only galaxy.

At last weekend’s American Bankruptcy Institute Annual Meeting, in accordance with established tradition, the kick-off session was the “Great Debate.”  This year, the Great Debate took on the most timely, popular and pervasive of controversial subjects: whether parties trading on non public information in a bankruptcy case should be subject to mandatory trading restrictions.  Two prominent lawyers, both past ABI presidents, debated the topic, each taking the opposite side.

The first speaker argued in favor of such restrictions. Interestingly, he presented no concrete argument other than bankruptcy policy. His opponent, however, advanced much more concrete arguments against the institution of such restrictions. He made the rational and persuasive argument that none of the parties in a chapter 11 case are directly injured by claims trading – only the other party to the trade. Thus, there is no justification for creating causes of action based on conduct that bears no causal relationship to the other creditors’ losses.

The audience then was asked to vote on the question posed in the debate. The results were astonishing: the audience overwhelmingly voted in favor of imposing trading restrictions, notwithstanding the clarity of the argument against them.

On the train ride back to New York today, I was haunted by this debate. The audience is a representative cross-section of the bankruptcy bar. Do their views on the question represent the consensus of the restructuring bar? What is the reason for the overwhelming support for trading restrictions?

Perhaps bankruptcy professionals don’t believe that “Wamu” type trading does no harm to parties in a case. They certainly don’t believe it does no harm to the bankruptcy system. Perhaps there is a belief that the harm reaches even beyond the bankruptcy system.

While I still don’t know all the reasons for the consensus of the ABI audience, of one thing I am sure: distressed debt trading influences every major chapter 11 case, in some way, shape or form, and will continue to do so for the foreseeable future.

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