Fast, Cheap, and Creditor-Controlled: Is Corporate Reorganization Failing?

Abstract

Academic support for American-style corporate reorganization has been at an all-time high, or, at least, calls for the repeal of chapter 11 have been at an all-time low. Critics of chapter 11 now say, approvingly, that the process has become faster, cheaper, more creditor-controlled, and more integrated with market forces. World-renowned economists have looked to modern chapter 11 as the foundation of proposals to improve sovereign debt restructuring internationally. Endorsement of the modern chapter 11 is by no means universal, however. In Courting Failure: How The Competition for Big Cases is Corrupting the Bankruptcy Courts, Professor Lynn LoPucki, a well known academic with deep expertise in bankruptcy, portrays the bankruptcy system in a state of crisis. In this book, we learn that nearly half of the largest firms emerging from chapter 11 as publicly held companies are filing another bankruptcy petition in just a few years. LoPucki attributes the high repeat filing rate to the judges who compete for cases by appeasing case placers, the parties who guide a firm's decision regarding venue selection. A high repeat filing rate first afflicted two magnet venues, the District of Delaware and the Southern District of New York, then spread nationwide as other judges have tried to attract cases to their own courts. Courting Failure's policy prescription is to eliminate inter-venue competition by restricting firms' venue choice. Since the release of Courting Failure, LoPucki has convinced a prominent Senator to introduce legislation accomplishing exactly that. Courting Failure is rich with systematic empirical data, anecdotes, law, theories, allegations, and controversies, as would be expected from a researcher who has made critical contributions to our understanding of corporate reorganization for over two decades. Plenty of academics, lawyers, and judges are examining myriad aspects of Courting Failure, including whether LoPucki oversteps by characterizing the bankruptcy system as corrupted, whether a significant repeat filing is per se undesirable, whether LoPucki uses the ideal parameters to measure repeat filings and failure in bankruptcy, and how all of this affects the international market for judicial services. By contrast, I highlight other aspects of Courting Failure's ambitious thesis that ultimately cannot be sustained. First, Courting Failure cannot tell us enough about the pathways through which competition contributes to failed reorganizations for us to rely on the competition thesis to fuel policy change. Courting Failure's repeat filing data and his examples of competitive practices do not match up temporally or substantively, particularly with respect to the striking increase in repeat filings among firms emerging in 1997 and thereafter. Second, Courting Failure implicitly relies on an account of the drivers of court practices that does not square with the growing body of theoretical and empirical interdisciplinary research on the determinants of judicial politics and behavior. Others in the legal academy share LoPucki's assumption of judicial competition for large bankruptcy cases, although they have different views of its merits. Even if some judges do compete for large bankruptcy cases, however, the broader literature casts doubt that competition or the lack thereof is the dominant shaper of judicial practices in the way that Courting Failure suggests. In particular, Courting Failure takes insufficient account of the rise of the transactional model of chapter 11 and how the increasing recognition of this model might affect the evolution of judges' practices.