CORPORATE BONDHOLDERS AND DEBTOR OPPORTUNISM - IN BAD TIMES AND GOOD

In this Article, Professor Brudney suggests that voluntary debt adjustments by enterprises in financial distress systematically disadvantage public bondholders and result in inappropriate sharing among debtors and bondholders of the gains of avoiding bankruptcy. Dispersed bondholders are subject to debtor strategic behavior, and are able to exercise little control in the voluntary debt adjustment process. He argues that the bargaining power of the sole lender should be the benchmark in determining whether or not dispersed bondholders' consent is adequately volitional, and that the strategic behavior of debtors and the structural tilt inherent in the debt readjustment process effectively deny dispersed bondholders the possibility of truly volitional consent. After exploring a variety of existing legal solutions to the bondholders' problem, Professor Brudney urges categorical prohibition of debtor strategic behavior, and in addition, he argues first, that individual bondholders should continue to be authorized to "hold out" from the voluntary adjustment, and second, that an-overriding cap of "fairness" should be placed on adjustment bargains. Professor Brudney also examines the problem of unilateral behavior by the debtor which may disadvantage dispersed bondholders, and suggests that courts should interpret bond contracts to place the risk of unusual or not reasonably foreseeable debtor behavior on the debtor rather than on public bondholders - at least, in the absence of adequate advance disclosure of that risk.