Lender Control Liability Functional Examination: The Firm and Heuristics

Lender control is criticized due to problems arising out of conflict of interests among different priority claimholders. Recently, it has been defended as a way to make the reorganization process more efficient. This paper builds on previous research on the theory of the firm to show that lender control generates inefficiencies even in situations where there is only one layer of legal claimants. Specifically, the paper demonstrates that departing from the nexus of explicit contracts paradigm, used by both previous critics and supporters of lender control, allows to understand other sources of lender control inefficiencies based on its inability to incorporate full firm value into her decision making. The paper suggests that, in contrast to the dwarfed role courts give lender control liability, its proper function should be to reestablish efficient incentives for a controlling lender. Lastly, drawing from the behavioral law and economics literature, the paper shows that hindsight bias is not the only cognitive error distorting adjudications of lender control liability and due attention should be given to anchoring in damage assessments