Document Type
Article
Publication Date
2024
Disciplines
Law
Abstract
The proliferation of bankruptcy directors represents a controversial shift in the corporate governance landscape. Delegating corporate decision making to bankruptcy directors insulates conflicted transactions and claims from the elevated scrutiny provided by derivative standing and entire fairness. However, critics have questioned their independence and cleansing effect. Are bankruptcy directors really independent when their role includes negotiation with and/or investigation into the same parties who appoint them? Should their decisions be given deference when their appointment is associated with lower recoveries for creditors? Bankruptcy directors' salience is best illustrated by the numerous proposals for determining whether they have cleansing effect, including Professors Ellias, Kamar, and Kastiel's groundbreaking study. None of these suggestions, however, reflect the arc of bankruptcy case control, the development of safeguards covering conflicted corporate governance in bankruptcy, and the realities of bankruptcy case administration.
This Article applies those lessons to explain why bankruptcy courts should apply the entire fairness standard to evaluate whether bankruptcy directors have cleansing effect. The proposal operationalizes the fair process and fair selection required by entire fairness through (i) a standardized protocol for the disclosure of connections between bankruptcy directors and insiders who appoint them and (ii) a heightened burden for approval reflecting the structural bias endemic to bankruptcy directors' relationship with the insiders. Because the proposal is flexible, workable, and creditor-focused, it provides a better option than alternative frameworks.
Publication Title
Florida State University Business Review
Volume
23
First Page
61
Recommended Citation
Robert Miller, Everyone is Talking About Bankruptcy Directors, 23 Fla. St. U. Bus. Rev. 61 (2024)