Fallout: Emerging Issues of the Credit Crisis


FALLOUT: EMERGING ISSUES OF THE
CREDIT CRISIS

Each year in its Annual Survey, the Columbia Business
Law Review selects a major business law topic and presents
a group of articles exploring the relevant legal and economic
developments in the area. Not surprisingly, this year's
Survey topic focuses on the legal and commercial
implications of the 2008-2009 global financial crisis. Firms
such as Lehman Brothers, Bear Stearns, and American
International Group ("AIG") have become household names
for the roles they played in changing the makeup of Wall
Street. Home foreclosures and unemployment have reached
historic levels while credit and the private capital markets
remain frozen to individuals and businesses. Following Wall
Street's lead, it seems inevitable that the world of corporate
law will experience dramatic change. The articles included
in the Survey explore a variety of issues directly impacted by
the financial crisis. From the severe reduction in debtors'
ability to obtain financing in bankruptcy to recent efforts by
state attorneys general to curb executive compensation, the
authors of the 2009 Survey analyze the diverse implications
of a changing business law landscape.

In the first article, Chapter 18? Imagining Future Uses of
11 U.S.C. § 363 to Accomplish Chapter 7 Liquidation Goals
in Chapter 11 Reorganizations, Bryant P. Lee examines the
implications of the constricting credit markets for the
practice of avoiding the formal requirements of Chapter 11
through debtor-managed sales of all or substantially all of
the assets of a business in bankruptcy. The article argues
that the increasing scarcity of financing will
disproportionately impact firms in bankruptcy by necessarily
increasing the speed at which these transactions occur,
which may further depress sale prices and the resulting
recovery for creditors. In order to alleviate some of this
downward pressure, it is suggested that debtors and



COLUMBIA BUSINESS LAW REVIEW

creditors discover a renewed commitment to workouts and
other out-of-court solutions.

In the second article, Interpretation of Material Adverse
Change Clauses in an Adverse Economy, David Cheng
discusses the common features of Material Adverse Change
("MAC") clauses and the standard for materiality in two
recent cases. After comparing the purpose of MAC clauses
today to their role in the 2001 recession, the article concludes
that courts should continue to maintain a steep hurdle for
buyers seeking to prove a MAC.

In the third article, Credit Rating Agencies and the Credit
Crisis of 2007-2008: How the Issuer Pays Conflict
Contributed and What Regulators Might Do About It, Deryn
Darcy discusses how the issuer pays conflict inherent in the
business model of the major credit rating agencies ("CRAs")
may have been exacerbated when CRAs rated structured
finance products. The article examines why the current
disclosure-based regulatory regime may not adequately deter
agencies from issuing ratings tainted by the conflict and
evaluates two current proposals that would impose sanctions
on CRAs for low-quality ratings, ultimately advocating that
one proposal may provide a promising template for
regulatory reform.

In the fourth article, Overcompensating Much? The
Federalism Preemption Implications of State Regulation of
Executive Compensation Caps, Sarah H. Burghart explores
the mercurial regulatory efforts taken to curb executive
compensation in the wake of the Credit Crisis. The article
notes that that the involvement of state regulatory
authorities, most visibly New York State Attorney General
Andrew Cuomo, raises preemption implications that have
thus far gone unaddressed. She concludes that reactionary
regulation, such as that taken in response to the recent
economic downturn, must take into account the two relevant
disparate lines of preemption jurisprudence currently
espoused by the Supreme Court: a broadly preemptive
approach seen in the banking context and the statutory

(Vol. 2009



No. 2:517]

presumption against preemption seen in more traditional
preemption analysis.

In the final article, Finding the Right Balance For
Sovereign Wealth Fund Regulation: Open Investment vs.
National Security, Jennifer Cooke explores the changed legal
environment surrounding sovereign wealth funds ("SWFs")
as a result of the marked rise in SWF investment in Western
companies during the emergence of the Credit Crisis. The
United States amended its foreign investment statute and
issued new regulations under it while countries around the
globe entered into voluntary legal agreements governing the
behavior of both SWFs and countries receiving their funds.
The author considers the competing concerns of maintaining
an economic environment open to foreign investment and
protecting the United States against national security
threats. The article ultimately finds that the current legal
environment balances well these competing concerns but
also makes several suggestions for improving the balance.

Bryant P. Lee
David Cheng
Deryn Darcy
Sarah H. Burghart
Jennifer Cooke
Survey Authors

Kevin J. Coco
Survey Editor

SURVEY