Big Boys and Chinese Walls

In most modern bankruptcy cases under Chapter 11, creditors and sophisticated investors trade in the claims against the debtor. Treating these claims like securities, various parties—including creditors serving on creditors’ committees—buy and sell bank debts, trade debts, tort claims, and other obligations the debtor incurred in the course of business. Amid an unstable judicial and academic consensus that the securities laws do not apply to trading in these claims, courts have developed a set of bankruptcy-specific remedies for abusive claims trading, including for situations that resemble insider trading. Courts generally allow creditors on committees to trade claims as long as they have in place a “Chinese Wall” separating their committee activity from their trading activity. But although Chinese Walls effectively prevent harms arising from violations of fiduciary duty, they are inappropriate guards against harms arising from insider trading itself. The crucial distinction between liability based on fiduciary duties and liability based on insider trading proper means that courts should accept the use of “big boy letters”—essentially nonreliance letters in which each party agrees to accept the possibility that the other has undisclosed inside information relevant to the trade—as an independent defense to insider trading liability. This Comment thus argues that, together, big boy letters and Chinese Walls respond to the harms that animate the bankruptcy remedies. Chinese Walls address the harms involved in fiduciary duty liability, though they have certain practical deficiencies. Big boy letters, for their part, guard against the harms associated with insider trading liability. This core insight—that Chinese Walls address one source of liability and big boy letters the other—suggests that bankruptcy courts should incorporate Chinese Walls and big boy letters into their claims trading regulations, and thereby realign the remedies for insider claims trading along the division between fiduciary duty liability and insider trading liability proper.