Over the past decade, there has been a sea change in the way large corporations handle financial distress.
UC Hastings Law Professor Jared Ellias took note of that change and, with co-author Robert Stark, examined the precipitating reasons in an article published in the June 2020 edition of California Legal Review. In April 2021, “Bankruptcy Hardball” was named one of the 10 best corporate and securities articles of the past year, selected from more than 320 finalists.
This designation, awarded by the Corporate Practice Commentator, is the highest honor an article on corporate law can receive. An added benefit, Ellias said, is that the paper has helped advance the careers of the UC Hastings students who assisted on the paper and has spurred ongoing research into changes in the way corporations deal with financial distress.
“This recognition of Professor Ellias’ scholarship is a reflection of the degree to which he is advancing our underlying mission as a center of higher learning — scholarship, teaching, and public service,” said Academic Dean Morris Ratner. “Professor Ellias writes about and teaches bankruptcy law, directs our Center for Business Law, and advises government officials on bankruptcy issues. So his research, teaching, and public service all intersect, making him a triple threat.”
In the article, Ellias and Stark note that large corporations facing financial hardship and difficulty repaying debt used to try to negotiate with their creditors to find a solution. But today, they say, those corporations instead often look for ways to get out of those commitments altogether, or “steal value” from their creditors.
While this phenomenon has been occurring over the past decade, this is the first time it has been noted in academic literature.
Ellias pointed out that the academic literature tends to notice changes only well after they happen. But in this case, his co-author, Stark, is a bankruptcy lawyer who “was living in the trenches of this change.”
Uniting Stark’s understanding of events on the ground with Ellias’ theoretical and empirical expertise yielded an article that was able to describe the new paradigm and the reasons behind it.
“We term the world we’re living in now ‘bankruptcy hardball,’” Ellias said. As the article explains, this new reality was accelerated by a series of rulings by Delaware judges that made it harder for creditors to sue corporate boards of directors for taking actions that harm them.
“We argue that these judges did so based on a faulty view of creditors’ abilities to protect themselves,” Ellias said, “using means such as contracts and bankruptcy law.” This left the creditors of large corporations, such as big banks, more vulnerable than expected. “Creditors at this moment have less protection from judges than probably at any point in recent history,” Ellias said.
At least as rewarding as receiving the award has been the fun of watching the article’s influence spread. Since its publication, Ellias said, “a number of great articles are following up on the work we did in this project, which is very gratifying.”
Ellias also noted that the project would not have been possible without the dedication of his student research assistants and who did the hard work of developing the case studies for the article. “Those law students who helped out,” he said, “are now on their way to their own brilliant careers in business law.”