Bankruptcy: Opportunism and Creditor Protection

On the eve of the financial crisis, a series of Delaware Court decisions made a radical change in law—creditors would no longer enjoy the protection from common law, which had protected their transactions from opportunism for two centuries. This change has caused companies in a dilemma to adopt strategies which harmed the interests of some creditors for the sake of the interests of some shareholders.

The fundamental problem is that the changes in Delaware’s laws were premised on wrong assumptions that creditors were fully capable of relying on contract laws and bankruptcy laws to protect their transactions. Through a series of case studies, we find that contrary to this assumption, creditors’ interests are easily infringed by opportunistic behavior. Delaware Court paved the way for scorched earth tactics. Fortunately, Judges can fix the problem with more rigorous applications of the existing laws.