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17 Drexel L. Rev. 1 (2024-2025)

handle is hein.journals/drexel17 and id is 1 raw text is: LOAN-TO-OWN 2.0 Robert W. Miller* ABSTRACT Convertible debtor-in-possession (DIP) financing is sympto- matic of a paradigm shift in the control of large bankruptcy cases. Dur- ing the prior era of lender control, distressed investors used DIP fi- nancing to shape the trajectory of bankruptcy cases and extract monopolistic rents at the expense of other constituencies. Enter the original loan-to-own: a common strategy commenced with a DIP loan, continued with a stalking-horse bid, and culminated in an acquisition of the debtor's assets. More recently, private equity sponsors (Spon- sors) and other sophisticated insiders are usurping control of bank- ruptcy cases. Convertible DIP financing (Loan-to-Own 2.0) is a by- product. This Article situates convertible DIP financing within the new era of Sponsor control, examines how it distorts valuation, and identifies why it violates the Supreme Court's teachings in Consoli- dated Rock Products Company v. Du Bois and its progeny. Loan-to-Own 2.0 reflects Sponsors' prowess. When Sponsors pro- pose DIP financing, they can exceed lenders' gains by leveraging their command over management, an influence unavailable to third-party lenders. Convertible DIP financing locks up a discounted stake in re- organized equity early in the case when the Sponsors' leverage as the proposed DIP lender is at its zenith. This precludes a subsequent fair and equitable allocation under a Chapter 11 plan. Meanwhile, * Assistant Professor, University of South Dakota Knudson School of Law. I owe special thanks to Kenneth Ayotte, Colleen Baker, Dustin Bernstein, Christopher Bradley, Ralph Bru- baker, Vincent Buccola, Michael Collins, Diane Lourdes Dick, Jared Ellias, Steven Kinsella, Da- vid Gaffey, Christopher Hampson, Michael Harmon, John Patrick Hunt, Daniel Kamensky, Ni- zan Packin, William Organek, Robert Rasmussen, Mark Roe, Michael Simkovic, Tomer Stein, and Daniel Waxman, as well as participants at the (1) 2023 National Business Law Scholars Conference, (2) 2023 Wharton-Harvard Insolvency and Restructuring Conference, and (3) the University of South Dakota Faculty Research Roundtable. Jenna Riedel provided excellent re- search assistance. Any errors are my own. 1

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