July 10, 2006
Junior Scholars Workshop: Adam Levitin, Finding Nemo: Rediscovering the Virtues of Negotiability in the Wake of Enron
Posted by Christine Hurt

Good morning and welcome to the final paper in the Second Annual Conglomerate Junior Scholars Workshop.  The paper we have saved for last is Adam Levitin's Finding Nemo:  Rediscovering the Virtues of Negotiability in the Wake of Enron.  The expert commentary, provided by Bob Lawless and Todd Zywicki, will appear in separate posts under this one during the day.  We invite all readers to comment on Adam's paper in the comments section of this post.

The Glom views this workshop as an academic conference in cyberspace.  Therefore, any anonymous comments will be deleted.  As with a conference environment, if you have comments you wish to share with Adam privately, feel free to email him with those comments.  The abstract of the paper is here:

Creditors have long understood that any claims they submit for repayment in a bankruptcy might be valid, but subject to subordination in the order of payment of the bankruptcy estate's limited funds if the creditor behaved inequitably as the debtor failed. A groundbreaking opinion in Enron's on-going bankruptcy has expanded the practice of equitable subordination far beyond its traditional reach. According to the court, buyers of bankruptcy claims are now subject to subordination, not just for their own conduct, but also for conduct of previous owners of the claims, regardless of whether the conduct related to the claims. In a world of active bankruptcy claims trading, Enron raises powerful policy questions about the legal rules governing property transfers that affect the doctrinal development of bankruptcy law and the survival of a secondary market that provides important liquidity to other capital markets. This article shows how Enron was erroneous from both doctrinal and policy perspectives and examines the problems Enron has created for several distinct markets. Enron is a reminder of the continuing value of negotiability in commercial contexts, for if the claims involved had been negotiable, they could not have been subordinated. Thus, this article considers what factors have traditionally determined when the law adopts a negotiability regime for property transfers and whether these factors make sense in today's financial markets. The article argues that in the bankruptcy claims context, the liquidity benefits of negotiability outweigh its costs. Accordingly, the article proposes a federal law of negotiability for bankruptcy claims to protect the liquidity of this vital market.

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