Where\u27s The Beef: A Few Words about Paying for Performance in Bankruptcy

This brief essay responds to Yair Listokin’s article, “Paying for Performance in Bankruptcy: Why CEOs Should Be Compensated with Debt,” 155 U. PA. L. REV. 777 (2007). Professor Listokin argues that we should give official creditors’ committees the power to pay management of reorganizing debtors with corporate debt. This, he argues, would properly align their incentives with those who are most likely affected, the “residual claimant” unsecured creditors. Although Professor Listokin’s proposal is a welcome addition to our literature on corporate reorganization, this essay points out several basic problems with it: • First, nothing currently prevents parties from doing this through a reorganization plan; it is thus not clear why there is a problem. • Second, the uncertain nature of bankruptcy recoveries would make the proposal implausible in the large and complex cases where it would presumably be needed most. • Third, by giving creditors’ committees the power to issue corporate debt, the proposal would empower them to reduce their constituents’ recoveries, thus creating new agency problems. The essay closes by observing that Professor Listokin’s proposal is nevertheless an important addition to a long line of thoughtful scholarship on corporate reorganization