The Myth of the Residual Owner is vintage Lynn LoPucki. Befitting the leading empirical scholar on the Chapter 11 proceedings of large, publicly held companies, the piece rigorously exposes under-appreciated aspects of modern Chapter 11 practice. Myth enriches our understanding of reorganization practice by replacing the standard characterization of a business’s capital structure as consisting of secured debt, unsecured debt, and equity with a pattern that reveals a more complex priority structure. Rather than a single class of unsecured creditors lodged firmly between secured creditors on the top and equity holders on the bottom, LoPucki finds a plethora of classes, with a median number above three and some businesses having as many as thirteen.
Academics fancy elegant solutions. Finding the one group that offers the best chance to address the problems of the financially embarrassed firm is an inviting target. Locate Hercules, be it in the residual claimant, the board of directors, the creditors or the bankruptcy judge, and let him do the rest. The world as we find it is always going to be more complex. This complexity, however, does not doom the enterprise. Those businesses that emerge from Chapter 11 have new capital structures and governance structures that are either the product of negotiations among sophisticated parties or imposed on the corporation by an entity that has bought the business. LoPucki has added to our understanding of the capital structures of corporate groups that enter Chapter 11. What he has failed to do, however, is to demonstrate that the law can improve on the way decisions are made today. Many questions, however, remain open, and we need to continue efforts to explore the exercise of control rights before, during, and after Chapter 11. I have no doubt that LoPucki will be one who continues to be a leader in our efforts to better understand the workings of corporate reorganization practice.