Select Advisory Committee on Business
Reorganization ("SABRE"): Annotated List of Resources
By SABRE,* Karen M. Gebbia-Pinetti, Reporter
A. DATA AND STUDIES CONCERNING BUSINESS BANKRUPTCY ......................... 246
1. DATABASES ........................................................................................................................... 246
2. REPORTED STUDIES BANKRUPTCY CODE BUSINESS CASES ....................... 248
a. National Sampling of Chapter 7, 11 and 13 Business
Bankruptcy Cases ...................................................................... 248
b. National Studies and Samplings of Chapter 11 Cases
by Bankruptcy Scholars ............................................................. 249
c. National Studies and Samplings of Business Failure,
Financial Distress, and Bankruptcy by Economics, Finance, Management, and Organizations Scholars ................................ 250
d. National Studies of Large, Public Companies in Chapter 11 .... 257
e. Single District Studies of Chapter 11 Cases .............................. 262
f. National Surveys Concerning Chapter 11 ....................... .......... 265
g. National Sampling of Small Business Chapter 7 Cases ............. 266
h. National and International Studies and Samplings Concerning Local Variation in Application of Bankruptcy Laws ................. 266
i. National and Local Studies, Samplings and Guidelines
Concerning Mediation In Bankruptcy ....................................... 266
3. REPORTED STUDIES HISTORICAL (pre-Bankruptcy Code) ............................ 268
a. Studies and Reports (chronological) .......................................... 268
b. Essays, Summaries, and Discussions Of Historical
Development of Business Bankruptcy Laws ............................. 270
4. COMMENTS ON THE USE OF EMPIRICAL DATA IN BANKRUPTCY
POLICY-MAKING ............................................................................................... 271
B. RECOMMENDATIONS CONCERNING BUSINESS BANKRUPTCY
(post-Bankruptcy Code) ..................................................................................... 272
1. GROUP REPORTS AND RECOMMENDATIONS
(reverse chronological) .......................................................................... 272
2. INDIVIDUAL PROPOSALS AND RECOMMENDATIONS
(alphabetical within each topic) ............................................................. 276
Topic a: Time Spent In Chapter 11 ........................................................ 277
Topic b: Cost Of Chapter 11 (and Business Bankruptcy,
Including Liquidation) ............................................................. 281
Topic c: Efficacy Of Chapter 11 ............................................................ 296
Topic d: Debtor Control, and Debtor/Creditor Respective
Leverage in the Plan Process (Includes Exclusivity
and Committees and Their Roles) ........................................... 310
Topic e: Judicial Resources and Case Management .............................. 321
Topic f: Size or Nature of the Business ................................................ 322
Topic g: Venue ...................................................................................... 323
Topic h: Special Consideration or Carve-Out for Unsecured
Creditors, Involuntary Creditors .............................................. 325
Topic I: Consideration of "Communities" ............................................ 327
C. STRUCTURE AND STRUCTURAL CHANGES IN BUSINESS BANKRUPTCY .......... 329
D. GOALS, PURPOSES AND POLICIES OF BUSINESS BANKRUPTCY LAW .............. 330
E. ALPHABETICAL LIST OF RESOURCES ................................................................ 333
ANNOTATED LIST OF RESOURCES
A. DATA AND STUDIES CONCERNING BUSINESS BANKRUPTCY
a. The Business Bankruptcy Project
Prof. Elizabeth Warren, Harvard Law School
Prof. Jay Lawrence Westbrook, University of Texas School of Law
Universe: Snapshot sample of more than 3000 business bankruptcy cases from 23 judicial districts, representing approximately 3.8% of all business Chapter 7 cases, 7.9% of all business Chapter 11 cases, and 10.7 % of all business Chapter 13 cases filed in the United States in 1994. Includes cases in Chapter 7, 11, and 13. Based upon court files and telephone interviews with debtors.
Status: Analysis of data is ongoing.
\b. Large, Publicly Traded Companies Bankruptcy Research Database
Prof. Lynn M. LoPucki, UCLA Law School
Universe: All Chapter 11 cases filed by or against a debtor group that has assets of $100 million or more at the time of filing (in 1980 dollars) and is required to file 10-Ks with the SEC.
Status: Continuing collection of plans and disclosure statements as new
cases are filed.
Format: Microsoft Access. Hard copy files at UCLA.
Access: Professor LoPucki hopes that others will use and contribute to the database.
c. Administrative Office of the United States Courts, Bankruptcy Division Statistical Information (AOUSC, PACER)
Ed Flynn (now at Executive Office of the United States Trustee, "EOUST")
Universe: Information is derived from clerks offices. Contains information on case opening and closing dates. Contains incomplete fee information based upon fees paid at closing.
Status: Updated on an ongoing basis.
Access: Difficult to obtain case-specific information. Difficult to obtain complete fee information.
d. U. S. Trustee Database
Joseph Guzinski, Ed Flynn
Executive Office of the United States Trustee ("EOUST")
Universe: Contains information concerning all pending Chapter 11 cases. Field itemization includes data such as case status, financial, disbursement, and event history. Includes case opening and closing dates. Information on direct costs includes filing and monthly fees, but information on attorneys fees is less complete. Case management system contains additional information, but is actually twenty-one separate systems. Archive contains information on closed cases. Status of archive is unclear. Does include key date and outcome information on all Chapter 11 cases since 1990, except those filed in Alabama and North Carolina, but not financial information. It may be possible to link with courts information on case size range to distinguish large cases from small cases, however, the data will still be unclear as a result of related case filings and the fact that the debtors report only asset ranges and debt ranges.
Reporter has a summary of case opening and closing data.
Status: Includes all pending cases. Unclear what cases are in the archives.
Access: Can obtain e-file that excludes disbursement information.
e. Annual Bankruptcy Yearbook & Almanac
New Generation Research
Contains data on larger cases.
f. Federal Judicial Center (FJC)
The FJC provides a mechanism for relatively prompt surveys on issues of relevance to judicial administration. The FJC responds to queries from Committees of the Judicial Conference.
2. REPORTED STUDIES BANKRUPTCY CODE BUSINESS CASES
Scholars, judges, and practitioners have conducted studies, samplings, and surveys of various aspects of business bankruptcy. "Studies" include data from every case, either nationally or in a particular district. There are no national studies of every business bankruptcy case under every Bankruptcy Code Chapter; however, the EOUST gathers national data concerning all Chapter 11 cases, and several scholars have conducted single-district Chapter 11 studies. "Samplings" examine data from select numbers of cases in a select number of districts. "Surveys" gather perceptions and opinions rather than actual case data.
This Resource List organizes these studies, samplings, and surveys into the following categories:
a. National Sampling of Chapter 7, 11 and 13 Business Bankruptcy Cases
b. National Studies and Samplings of Chapter 11 Cases by Bankruptcy Scholars
c. National Studies and Samplings of Business Failure, Financial Distress, and Bankruptcy by Economics, Finance, Management, and Organizations Scholars
d. National Studies of Large, Public Companies in Chapter 11
e. Single District Studies of Chapter 11 Cases
f. National Surveys Concerning Chapter 11
g. National Sampling of Small Business Chapter 7 Cases
h. National and International Studies and Samplings Concerning Local Variation in Application of Bankruptcy Laws
i. National and Local Studies, Samplings and Guidelines Concerning Mediation in Bankruptcy
These studies, samplings, and surveys are listed separately here and are incorporated into the Topics lists, infra. The Topics list includes both data and opinion pieces. In the Topics listing, empirical studies are distinguished from other resources by the presence of a "data" line that summarizes the scope of the study. Nota bene: The presence of a "Data: None" entry means simply that the resource did not generate new empirical data, it does not mean that the resource did not consider extant data in its analysis.
a. National Sampling of Chapter 7, 11 and 13 Business
Elizabeth Warren & Jay Lawrence Westbrook, Financial Characteristics of Businesses in Bankruptcy, 73 Am. Bankr. L.J. 499, 499-590 (1999).
This article embodies the preliminary report from the Business Bankruptcy Project. Describes the Project/Study and reports data, which includes demographics (size, nature of business, legal form of business, solvency, real estate cases, small business cases, employees), and the stated reasons for filing.
Data: Business Bankruptcy Project (see supra A.1.a).
b. National Studies and Samplings of Chapter 11 Cases by Bankruptcy Scholars
Gordon Bermant & Ed Flynn, Outcomes of Chapter 11 Cases: U.S. Trustee Database Sheds New Light on Old Questions, Am. Bankr. Inst. J., Feb. 17, 1998, at 8, 8, 32.
Summary of the Fee Information and Collection System (FICS) Chapter 11 database. For cases filed between 1989 and 1995, the FICS shows that 35.3% were dismissed and 35.4% were converted (total 70.7%). 26% were confirmed, 2% remained open as of the reporting date, and 1.4% were closed but without information on disposition. The confirmation rate is about twice the rate from the early 1980s (1982 13%, 1986 22%, 1979-1986 17%).
Time in Chapter 11 also decreased. The average time to confirmation varied from 478 to 860 among US Trustee regions and from 292 to 1092 days among judges who have confirmed more than 100 Chapter 11 cases.
The average time to dismissal or conversion also decreased significantly.
Stephen P. Ferris & Robert M. Lawless, The Expenses of Financial Distress: The Direct Costs of Chapter 11, 61 U. Pitt. L. Rev. 629 (2000).
National study of Chapter 11 cases (random sample drawn from six cities of cases confirmed at least fourteen months prior to the study) applied descriptive statistics and regression analyses to explain the relationship between costs and characteristics of the cases. The Study did not include cases from major metropolitan areas (New York, Chicago, Los Angeles) or Delaware. 65% of the cases were filed 1991 or 1992. 94% of the cases were filed between 1990 and 1993.
Data: National study of Chapter 11 cases in six cities.
Ed Flynn, Admin. Office Of The U. S. Courts, Statistical Analysis of Chapter 11 (1989).
Compiles information on Chapter 11 cases from the Statistical Analysis and Reports Division of the AOUSC and an Ernst & Young fifteen-district study. The report covers cases filed between 1979 and 1989.
Data: AOUSC and Ernst & Young (see supra A.1.c).
Joseph Guzinski & Lynn M. LoPucki, Study of Rates of Formation of Committees (unpublished data, on file with Reporter).
Study based upon questionnaire circulated to all US Trustees Offices seeking data for the period July 1996 to June 1997) and other EOUST data. Shows low committee formation rate.
Data: Study of formation of committees.
Robert Lawless & Stephen P. Ferris, Professional Fees and Other Direct Costs in Chapter 7 Business Liquidations, 75 Wash. U. L.Q. 1207 (1997).
Notes that reform proposals are based upon a perception that bankruptcy takes too long and costs too much, yet these assumptions are not supported empirically. Studies direct costs (attorneys fees, fining fees, professional fees) of ninty-eight business liquidation cases from five geographically dispersed judicial districts. Does not include indirect costs such as lost revenues, lost opportunities, lost goodwill. Reports direct costs as a percentage of assets at filing and of distributions. Finds direct costs are 13.5% of distributions and 6.1% of assets. Used PACER to identify cases. Also includes number of days spent in bankruptcy (minimum 91, maximum 1146, mean 392, median 335).
Data: Study of direct costs in a five-district sample of business liquidation cases.
Robert M. Lawless et al., Industry-Wide Effects of Corporate Bankruptcy Announce-ments, 12 Bankr. Dev. J. 293 (1996).
Did not find statistically significant competitive advantages to bankruptcy filing, particularly in highly leveraged industries.
Data: Study of how filing of bankruptcy affects the stock prices of companies in bankruptcy and their industry competitors to determine whether bankruptcy filing creates competitive advantages for the filer. There are 274 cases in the study.
c. National Studies and Samplings of Business Failure, Financial Distress, and Bankruptcy by Economics, Finance, Management, and Organizations Scholars
Edward I. Altman, A Further Empirical Investigation of the Bankruptcy Cost Question, 39 J. Fin. 1067 (1984).
Empirical study by NYU Professor of Finance examines the direct and indirect costs of bankruptcy to determine the impact of these costs on capital structure. Direct costs include legal, accounting, filing and other administrative costs. Indirect costs include lost profits, lost sales, higher cost of credit, and lost opportunity costs. Companies expected to fail as well as those that actually did fail, may incur indirect costs.
Study finds that the direct costs of bankruptcy averaged 6% of the firms value both five years prior to bankruptcy and just prior to bankruptcy. Id. at 1074, 1076-77. Indirect costs averaged 8.7% of firm value three years before filing and 12.2% just prior to filing for the retail firms, and 17.4% of firm value three years before filing and 23.7% just prior to filing for the industrial firms. The overall average of all firms was 12.1% of firm value three years before filing and 16.7% of firm value at filing. Id. at 1074, 1077-82. Concludes that bankruptcy costs and the expectation of bankruptcy costs could affect capital structure.
Data: Study reviews eleven retail and seven industrial firms that filed bankruptcy between 1970 and 1978.
Edward I. Altman, Corporate Bankruptcy In America (1971)
Places bankruptcy in perspective by reviewing the evolution of bankruptcy in the United States, including equity receiverships, the Bankruptcy Act, and Chandler Act. Compares Chapter X, XI, liquidation, and the early 1970s reform proposals. Provides statistics on business failures (Dun & Bradstreet). Analyzes influences on business failures. Provides means for predicting business failure and discusses the implications of such predictions. Considers bankruptcy and mergers, including tax issues. Discusses investor implications of corporate bankruptcy. Uses railroad failures, particularly the Penn Central case, as a sample and provides a model for predicting railroad failures.
Data: Railroad cases study. Business failure statistics.
Edward I. Altman, Corporate Financial Distress AND BANKRUPTCY: A COMPLETE GUIDE TO PREDICTING & AVOIDING DISTRESS AND PROFITING FROM BANKRUPTCY (2d ed. 1993).
Places bankruptcy in perspective by discussing the evolution of bankruptcy processes and the Bankruptcy Code. Discusses influences on business failure rates. Analyzes various models and continues earlier development of models to predict business failure. Discusses accounting implications and legal implications of business failure prediction models. Discusses investor implications of bankruptcy and of bankruptcy prediction models. Extends analysis to non-industrial sectors, such as railroads, savings & loans. Concludes with an international survey of business failure models.
Data: Failure models.
Edward I. Altman, Evaluating the Chapter 11 Bankruptcy-Reorganization Process, 1993 Colum. Bus. L. Rev. 1 (1993).
Argues for revision rather than scuttling of Chapter 11. One purpose of the Bankruptcy Code was to reduce the time in reorganization. Study finds that time has decreased under the Bankruptcy Code, but is still too long. Finds that, under the Bankruptcy Act, the average time in reorganization was twenty-seven months and the median was twentty months. Under the Bankruptcy Code, the average time was twenty-one months and the median was seventeen months. 54.2% of the Code cases took less than eighteen months, 21.8% took more than 2.5 years (5% took longer than four years). Compares similar results in studies by Hotchkiss (average eighteen months, median 16.2 months). Notes that Professor LoPuckis studies show that the time difference lies in the size of the case and that Chapter 11 had little impact on the time large companies spent in reorganization but that it more than doubled the time small companies spend in reorganization. Recommends reasonable exclusivity that cannot be extended unless the debtor shows that the firm is worth more as a going concern than liquidated. Identifies the objective of reorganization as maximizing the value of the estate and argues that this should be the directors fiduciary goal.
Argues that the Bradley & Rosenzweig study (infra) is biased, incomplete, and otherwise problematic.
Data: Study of time in reorganization under former Bankruptcy Act for 90 non-railroad cases and under Bankruptcy Code for 284 non-railroad cases. Also considers other studies.
James S. Ang et al., The Administrative Costs of Corporate Bankruptcy: A Note, 37 J. Fin. 219 (1982).
Empirical study of direct administrative bankruptcy costs. Like other finance and management commentators, the authors concern is how the costs of bankruptcy affect capital structure decisions. Identifies three types of bankruptcy costs: direct costs, indirect costs when a firm is reorganized (or the shortfall in value when assets are liquidated), and loss of tax credits.
Over 80% of cases were completed in less than two years. The longest lasted just over 4.5 years. The average time in bankruptcy was fourteen months. Each firm was liquidated. Id. at 220-21. Found 31% had no assets for distribution Id. at 222. (Notes that Stanley & Girth also found 31%, see infra Part A.3.a).
Finds that the average administrative costs equal 7.5% of liquidated value, the median is 1.7% of liquidated value. This is substantially lower than Stanley & Girths finding of 20% but higher than Warners finding of 5.3%. Id. at 223, 224.
Finds a scale effect in which administrative costs decline as firm size increases. Extrapolating these data, estimates that costs would be less then 2% of liquidating value in firms valued at over $1 million. Id. at 224.
Data: Study of eighty-six randomly selected closed cases filed in the Western District of Oklahoma between 1963 and 1978.
Nancy Rhein Baldiga, Is This Plan Feasible? An Empirical Legal Analysis of Plan Feasibility, 101 Com. L.J. 115 (1996).
Economics/accounting professor conducted a study of the consummation rates of plans that had been subjected to feasibility challenges and compared these results to the results of Jensen-Conklins Poughkeepsie Study (see infra Part A.2.e). The Baldiga Study included every case (141 cases) over a fourteen-year period in which there was a feasibility challenge (as determined using Westlaw key system searches). She found that, of these cases: 25.6% resulted in confirmed, consummated reorganization plans, 11.6% resulted in confirmed, consummated liquidating plans, 18.6% resulted in on-going plans likely to consummate, 7% resulted in plans modified post-confirmation, and 37.2% resulted in failed plans. When liquidating plans are excluded, 50% of the cases resulted in successful plans, 42% resulted in failed plans, 8% resulted in modified plans.
Data: Study of 141 cases in which feasibility was challenged.
Jagdeep S. Bandari & Lawrence A. Weiss, The Untenable Case for Chapter 11: A Review of the Evidence, 67 Am. Bankr. L.J. 131 (1993).
Responds to Bradley & Rosenzweig by reviewing their econometric evidence. Argues that Bradley & Rosenzweigs evidence is "vacuous" and that their conclusions are not compelled by their empirical analysis.
Data: Evaluation of Bradley & Rosenzweig study (see infra).
Brian L. Betker, An Empirical Examination Of Prepackaged Bankruptcy, FIN. MGMT., Spring 1995, at 3-18.
Finding that the direct costs of prepackaged bankruptcy cases are comparable to those of traditional Chapter 11 cases, but that the indirect costs of prepacks are significantly lower because entities that file prepacks spend less time in financial distress.
Suggesting that the relatively high direct cost of prepacks may result from the payment of pre-petition fees to committees formed in response to reorganization attempts. Finding that indirect costs were dependent on time in financial distress and the degree of disruption to ordinary business operations. Reviewing the effects of debt restructuring on taxes, discussing differences between workouts and prepacks, and arguing that prepacks provide significant tax savings over workouts.
Data: Forty-nine prepackaged bankruptcies filed between 1986 and 1993. Sources of information: The Bankruptcy Yearbook and Almanac (1993), The Bankruptcy DataSource, and the Nexis database.
Michael Bradley & Michael Rosenzweig, The Untenable Case For Chapter 11, 101 Yale L.J. 1043 (1992).
Professors Bradley and Rosenzweig argue that Chapter 11 reduces social welfare, that stockholders and bondholders lose more under the Bankruptcy Code than under the Bankruptcy Act, and that the primary beneficiaries are managers. Proposes repeal of Chapter 11.
Data: Empirical study comparing pre-1979 and post-1979 filings.
Note: Other scholars, including Professors Altman, Bhandari, LoPucki, Warren, and Weiss have criticized the studys methodology and conclusions.
Stuart C. Gilson, Bankruptcy, Boards, Banks, and Blockholders: Evidence on Changes in Corporate Ownership and Control When Firms Default, 27 J. Fin. Econ. 355 (1990).
Concludes that corporate default leads to significant changes in the ownership of firms residual claims and in the allocation of rights to manage corporate resources. Findings include: only 46% of incumbent directors remain when bankruptcy or restructuring is over; directors who resign hold significantly fewer seats on other boards following their departure; common stock becomes more concentrated in the hands of large blockholders and less in the hands of corporate insiders.
Data: Study of 111 publicly traded firms that either filed bankruptcy or restructured debts out of bankruptcy between 1979 and 1985.
Stuart C. Gilson, Management Turnover and Financial Distress, 25 J. Fin. Econ. 241 (1989).
Study of senior management turnover in financially distressed firms. Finds that, in any given year, 52% of sampled firms that are in default, bankruptcy, or private restructuring experience senior management turnover. None of these managers were employed by another exchange-listed firm for at least 3 years (although their average age was only 52). Lenders initiate 21% of the management changes. In non-distressed firms, the turnover rate is only 19%. Considers what types of policy decisions managers will make to avoid the cost of job loss.
Data: Analyzes 381 exchange-listed firms that experienced severe extreme common stock decline between 1979 and 1984.
Stuart C. Gilson et al., Troubled Debt Restructurings: An Empirical Study of Private Reorganizations of Firms in Default, 27 J. Fin. Econ. 315 (1990).
Study of incentives for financially distressed firms to restructure outside of Chapter 11. Finds that, in approximately half of the cases, the firms restructured out of bankruptcy. Out-of-court restructuring is more likely to be successful if the firms assets are intangible, and the firm owes relatively more debt to banks, and owes fewer lenders. Out-of-court restructuring is less likely to succeed if the firm has multiple, distinct classes of outstanding debt.
Stockholders fare better under out-of-court restructurings. The study also provides detail regarding the manner in which debt is restructured out of bankruptcy.
Data: Analyzes 169 publicly traded companies that experienced severe financial distress during 1978-1987.
Kose John, Managing Financial Distress and Valuing Distressed Securities: A survey and a Research Agenda, FIN. MGMT., Autumn 1993, at 60-78.
Analyzes data from nine studies of financial distress, asset and debt restructuring, bankruptcy and valuation of distressed securities. Defines and discusses different types of contracts, assets and debt restructuring schemes. Finds that asset sales are used often in conjunction with debt restructuring. Finds that holdouts, informational asymmetries and conflicts between creditor groups are the primary impediments to private debt restructuring. Discusses the benefits of Chapter 11 bankruptcy and suggests that the evidence does not indicate that Chapter 11 reorganization is particularly effective in rehabilitating distressed firms. Argues that the probability of default figures prominently in the evaluation of distressed securities. Proposes investigating the role of financial contracting in resolving the costs and difficulties of default; suggests further studies of workouts, the role of banks in facilitating workouts, the role of management and the board of directors, financing strategies; proposes comparative studies of bankruptcy procedures used by different countries.
Data: Examines data from prior studies.
Philip B. Nelson, Corporations In Crisis: Behavioral Observations For Bankruptcy Policy (1981).
Views bankruptcy from the perspective of behavioral theory of the firm. He applies this to consider current bankruptcy law and proposed reforms. His focus is on whether firms that should file do file, and file at the right time, and whether firms that should not file, do not file.
Argues that the Bankruptcy Codes changes in administrative processes do not go far enough. Id. at 138. Proposes, among other things, means of improving managements decision to file bankruptcy when it is needed while the entity can still be saved. These include adjusting management perceptions, encouraging creditor action by providing more penalties to institutional creditors who fail to monitor the debtor, increasing creditor leverage in involuntary filings, improving information flow, strengthening the board of directors vis-à-vis management, and introducing a public representative as mediator between the firm and its creditors Id. at 147-48.
The mediator would act pre-bankruptcy (or as an alternative to bankruptcy) to ensure that creditors receive information and would serve as a catalyst for change with in the firm. S/he would have clout through the power to alert other public representatives if the firm is not making progress.
Data: Behavioral, not empirical.
Elizabeth Tashjian et al., Pre-Packs: An Empirical Analysis of Prepackaged Bankruptcies, 40 J. Fin. Econ. 135 (1996).
Reports results of a study of pre-packaged bankruptcy. Compares results to studies of out-of-court and Chapter 11 restructurings. Finds that pre-packaged filings fall between out-of-court and Chapter 11 restructurings in terms of time, direct costs, recovery rates, and violations of absolute priority.
Data: Study of forty-nine firms that restructured through pre-packaged bankruptcy; compares to Chapter 11 and out-of-court restructuring studies.
Jerold B. Warner, Bankruptcy Costs: Some Evidence, 32 J. Fin. 337 (1977)
Finds a scale effect in which the ratio of direct cost to firm value falls as the firm size increases. The costs, on average, are about 1% of firms market value seven years prior to bankruptcy. Notes that the Stanley & Girth finding of higher cost/value ratio may be due in part to the fact that they studied smaller firms.
Direct administrative costs as a percentage of market value at filing ranged from 1.7% to 9.1% with an average of 5.3%. Direct administrative costs as a percentage of market value five years prior to filing ranged from 0.4% to 3.2% with an average of 1.4%. Direct administrative costs as a percentage of market value seven years prior to filing ranged from .6% to 1.6% with an average of 1.0%. Id. at 343.
Time in bankruptcy ranged from four years to twenty-three years and averaged 12.5 years. The median was thirteen years. Id. at 340.
Data: Narrow study of the direct bankruptcy costs of eleven railroad cases filed between 1933 and 1955.
Lawrence A. Weiss, Bankruptcy Resolution: Direct Costs and Violation of Priority of Claims, 27 J. Fin. Econ. 285 (1990).
Finds that direct costs average 3.1% of the book value of debt plus the market value of equity. Finds that absolute priority was violated in twenty-nine cases these violations occurred among unsecured classes and between unsecured creditors and equity holders. Secured creditors contracts were generally upheld.
Such small costs have virtually no impact on the pricing of claims and capital structure before bankruptcy (consistent with Warner 1977 study conclusions).
Notes that this is the first study to examine costs under the new Bankruptcy Code and that prior studies showed costs of 4% to 25%. Id. at 286.
Data: Study of a sample of thirty-seven New York and American Stock Exchange firms that filed for bankruptcy between November 1979 and December 1986.
Karen Hopper Wruck, Financial Distress, Reorganization, and Organizational Efficiency, 27 J. Fin. Econ. 419 (1990).
Argues that financial distress has benefits as well as costs. Benefits include change in management, governance and structure. These changes can enhance value by improving the use of resources.
51% of the firms studied defaulted or restructured their debt. Of these, 47% resolved the default in an out-of-court restructuring; 53% filed Chapter 11. Of those that filed Chapter 11, one study of thirty-seven entities filing between 1980 and 1986 showed that 95% emerged under a plan, 5% liquidated. Of those that filed Chapter 11, another study of 162 entities filing between 1973 and 1982 showed that 60% emerged under a plan, 7% merged with other companies, 15% liquidated, 17% n/a.
Consolidation of data from four studies of Chapter 11 costs shows direct costs ranging from 3.1% of market value (Weiss 1990 study of thirty-one cases filed between 1980 and 1986 in seven districts), 4% of market value (Warner 1977 study of eleven railroad cases filed between 1933 and 1955), 4.3% of market value (Altman 1984 study of eighteen cases, eleven retail and seven industrial, filed between 1970 and 1978), to 7.5% of liquidated value at the end of the process (Ang 1982 study of fifty-five Oklahoma cases filed between 1963 and 1978, all of which liquidated). Id. at 437.
Data: Consolidation of data from five prior studies shows outcomes for 381 financially distressed publicly traded firms based upon stock performance.
d. National Studies of Large, Public Companies in Chapter 11
Gordon Bermant ET AL., Chapter 11 Venue Choice by Large Public Companies, (Fed. Judicial Ctr., 1997).
This is a Report to the Judicial Conference Committee on the Administration of the Bankruptcy System.
The report responds to a request by the Judicial Conference Committee on the Administration of the Bankruptcy System to provide empirical information and analysis concerning whether the bankruptcy venue statutes and procedural rules should be amended. The information is relevant to the National bankruptcy Review Commission (see infra Part B.1) proposal to modify 28 U.S.C. section 1408 to prohibit corporate debtors from filing in a district based solely on the debtors state of incorporation or the earlier filing in that district by a subsidiary. The study is based upon (i) an August 1996 survey to which 221 of 339 (65%) bankruptcy judges responded, and (ii) an analysis of administrative and demographic characteristics of large, public companies that emerged from Chapter 11 during 1994 and 1995. The report concludes that (i) cases moved through Delaware faster, (ii) Delaware and the U.S. District Court for the Southern District of New York were the primary magnet districts, (iii) the inconvenience to creditors, as measured by a "distance index," was not extraordinary.
Data: Survey and study.
Theodore Eisenberg & Lynn M. LoPucki, Shopping For Judges: An Empirical Analysis of Venue Choice in Large Chapter 11 Reorganizations, 84 Cornell L. Rev. 967 (1999).
Article reports forum-shopping data from 1980 through 1997 for large, publicly held companies in Chapter 11. Significant data reported in tables and graphs includes: number of large cases filed each year, number of large cases "shopped," rate of forum shopping, mean time to termination of large Chapter 11 cases, use of pre-packaged plans in Delaware, rate of forum shopping in pre-packaged plan cases. For example, Figure 3 shows that the mean time to termination in large, publicly traded companies in Chapter 11 fell from approximately 1400 days in 1981 to approximately 300 days in 1996 and 1997.
Data: Forum-shopping data from 1980 through 1997 for large, publicly held companies in Chapter 11 using the Bankruptcy Research Database. Earlier reports range from 1990 to 1993; this report is 1999.
Julian R. Franks & Walter N. Touros, An Empirical Investigation of U.S. Firms in Reorganization, 44 J. Fin 747 (1989).
Study of thirty large, publicly traded firms that filed reorganization between 1970 and 1983. Finds framework of Chapter 11 is complex, lengthy, and costly, and frequently results in violations of absolute priority in favor of stockholders. Cases took from thirty-seven days to more than thirteen years to emerge. The mean was 3.67 years, the standard deviation was 2.88 years. Railroads took the longest.
Data: Study of thirty Bankruptcy Act and early Bankruptcy Code cases.
Edith S. Hotchkiss, Post-Bankruptcy Performance and Management Turnover, 50 J. Fin. 3 (1995).
Study of the performance of 197 publicly traded firms that filed for Chapter 11 between October 1979 and September 1988 and emerged as public companies. Finds that over 40 % experienced operating losses following bankruptcy, and that 32 % restructured their debts through another bankruptcy or an out-of-court restructuring after the original bankruptcy case.
Data: Study of publicly traded firms.
Declaration of Lynn M. LoPucki, in In re Dow Corning Corporation No. 95-20512 (Bankr. E. D. .Mich. filed May 15, 1998).
Declaration filed on behalf of the Tort Claimants Committee in connection with the Committees Motion to Modify Exclusivity dated March 10, 1998.
Based upon his experience, prior research, and two studies conducted for the case, concludes that modifying exclusivity in large Chapter 11 cases fosters consensual resolution of cases by focusing the parties on realistic settlement values. Id. at 1.
In one study conducted for the case, he examined the large, public company filings in which exclusivity was lifted. In these forty-one cases, all but four resulted in a confirmed plan (95%). Of the four remaining cases, two are pending, one resulted in a 363 sale, the other was converted for unrelated reasons. Of the thirty-seven confirmed, twenty-two were consensual, nine were largely consensual (together 79%), one was unclear, and five were cramdowns. Each was confirmed within seven to fourteen months of the lifting of exclusivity.
In another study conducted for the case, he examined each of the eight mass tort bankruptcy cases in his large, public companies database. In the three cases in which exclusivity was lifted, a plan was confirmed within seven to nineteen months after exclusivity was lifted.
In a third study conducted for the case, he examined distributions to unsecured creditors and equity holders in cases in which exclusivity had been lifted and not lifted in large, public company cases filed and concluded between October 1979 and March 1988. In the eight cases in which exclusivity was lifted, distributions conformed closely to absolute priority. In the thirty-two cases in which exclusivity was not lifted, deviations from absolute priority were more than four times greater than in the lift cases.
Data: Covers forty-three large cases filed between 1979 and 1988.
Lynn M. LoPucki & Sara D. Kalin, The Failure of Public Company Bankruptcies in Delaware and New York: Empirical Evidence of a "Race to the Bottom", 54 Vand. L. Rev. 231 (2001).
Examines re-filing rates for large public companies. Concludes that companies reorganized in Delaware and New York exhibit far higher rates of re-filing than companies reorganized elsewhere.
To provide a standard basis for comparison, compares the re-filing rate for each year to the "background filing rate" for all public companies (i.e., the rate at which all public companies filed Chapter 11). The background rate ranged from 0.54% to 1.34% between 1983 and 1999, and averaged 0.84%; the weighted average was 0.77%. The re-filing rate for all companies in the study was 3.1%, which is more than four times the weighted background filing rate.
Finds that the re-filing rate rose steadily for three years, then fell, but rose again in year seven. The rates were 1.6% re-filed one year after emerging, 2.8% re-filed two years after emerging, 4.4% re-filed three years after emerging, 4.2% re-filed four years after emerging, 3.9% re-filed five years after emerging, 2.4% re-filed six years after emerging, 4.7% re-filed seven years after emerging, and 2.1% re-filed more than seven years after emerging (up to seventeen years after re-emerging). The low number of re-filings in year seven may represent a random fluctuation. The re-filing rate through the entire period exceeded the weighted background filing rate of 0.77%.
Of the 188 re-filed cases in the study, thirty-one emerged in Delaware (16%), thirty-six emerged in New York City (19%), and 121 emerged in other courts (64%). The next most active court was Los Angeles with twelve (6%). Thirty-two percent of Delaware cases have re-filed, 28% of New York cases have re-filed, 10% of all other cases have re-filed. Delaware has a re-filing rate of 8.6% per year, New York has a rate of 5.2% per year, and all others have a combined rate of 1.7% per year. The re-filing rate for large, public companies in Delaware and the New York City is nearly 30%, and is six to seven times as high as the re-filing rate for companies emerging in other districts. The combined rate for all courts is 3.1%. If the study examines only those cases that emerged after 1990, the re-filing rate for Delaware is 7.9% per year, New York City is 4.8% per year, all other courts is 1.1% per year, and aggregate is 3.1% per year.
Pre-packaged cases that emerged after 1990 re-filed more frequently than other cases, but the difference is not statistically significant. The re-filing rate for all companies during this period was 14% while the rate for pre-packaged cases was 22%. For all cases from 1983 to 1997, the re-filing rate for pre-packaged cases confirmed in Delaware and New York was 33%, for all other courts it was 7%. The per year re-filing rate for Delaware pre-packaged cases was 9.2%, for new York was 6.4%, for all other courts was 1.4%. Considering only those cases that emerged after 1990, the rates are Delaware 9.2%, New York 6.4%, all others 0%.
Overall, Delaware confirmed 79% of its large public company cases, all other courts confirmed 85% of such cases.
Concludes that competition for cases leads to lower success rates.
Data: Study of 188 large, public companies that filed Chapter 11 after October 1979 and emerged by December 31, 1996. Examines re-filing rates.
Lynn M. LoPucki & William C. Whitford, Bargaining Over Equitys Share in the Bankruptcy Reorganization of Large, Publicly Held Companies, 139 U. Pa. L. Rev. 125 (1990).
Presents data from a study of forty-three large, public companies that filed Chapter 11 between 1979 and 1988 concerning "the central issue of reorganization theory how the value of the reorganizing enterprise should be divided among the various claims and interests." Id. at 126. Contains information about exclusivity, committees, voting, and distribution in these cases. Concludes that (i) bargaining rather than adjudication (i.e. contested cramdown) determined outcomes, (ii) shareholders nearly always participate in distributions, (iii) the lawyers culture of preferring a consensual plan is at least part of the reason shareholders received distributions in the cases of insolvent debtors, (iv) where the debtor was marginally solvent, there were substantial deviations from absolute priority, (v) where the debtor was clearly solvent, the issue of post-petition interest was particularly important in determining whether creditors were paid in full.
Argues that participation by junior claims and interests in violation of absolute priority may increase expense, complexity, and obstruction. Proposes "preemptive cramdown" (i.e., an early valuation showing that equity has no entitlement to a share and therefore is not a party in interest) to obviate these problems.
Data: Study of large, public companies in Chapter 11.
Lynn M. LoPucki & William C. Whitford, Corporate Governance in the Bankruptcy Reorganization of Large, Publicly Held Companies, 141 U. Pa. L. Rev. 669 (1993)
Presents data from a study of forty-three large, public companies that filed Chapter 11 between 1979 and 1988 concerning two questions: who the managers of a reorganizing company is normatively supposed to represent and who these managers in fact represent, shareholders or creditors.
Contains useful information concerning the historical development of systems to control management, based in part on SEC empirical studies conducted under William O. Douglas in the 1930s and other empirical studies of reorganizing companies.
Focuses on three issues that tend to dominate conflicts among managers, creditors and shareholders: what level of investment risk; should assets be liquidated or reorganized; and what mix of cash, debt, and equity should be distributed and to whom. Discusses the nature of management power, creditors and shareholders power, and judicial power to influence these issues. Presents empirical evidence concerning management turnover; cover-ups and grabs; managements orientation (pro-creditors, pro-shareholders, maximize value, preserve business); and corporate expansion.
Notes a high rate of turnover in management in troubled companies. Concludes that managers do not consistently represent the interests of either shareholders or creditors; that control over management decisions is complex, haphazard, and varies from case to case; and that creditor and shareholder influence over management frequently prevents companies from maximizing value. Argues that Chapter 11 fosters an inappropriate separation of risk and consequences. Recommends shortening proceedings, implementing risk compensation, and shifting from a prudent investment model to a maximization of value model of investment.
Data: Study covers forty-three large cases filed between 1979 and 1988.
Lynn M. LoPucki & William C. Whitford, Patterns in the Bankruptcy Reorganization of Large, Publicly Held Companies, 78 Cornell L. Rev. 597 (1993).
Presents data from a study of large, public companies concerning the outcomes of Chapter 11 cases, i.e., what happened to the businesses in Chapter 11 and after Chapter 11. Variables include plan confirmation rates, whether the business survived (either as the same entity or as an enterprise through a going concern sale), financial performance (measured by whether the emerging entity filed a bankruptcy case and whether the emerging entity had less debt or improved profits), asset size before and after Chapter 11, and control persons before and after Chapter 11. The report cautions that not all of these variables should be viewed as normative measures of success.
Finds that 32% has filed another bankruptcy case by 1993.
Data: Study of forty-three large cases filed between 1979 and 1988.
Lynn M. LoPucki & William C. Whitford, Venue Choice and Forum Shopping in the Bankruptcy Reorganization of Large, Publicly Held Companies, 1991 Wis. L. Rev. 11.
Presents data from a study of large, public companies concerning forum shopping, i.e., choosing a venue in which the company has little or no physical presence. Concludes that debtors forum shopped in a substantial number of these cases, and that their motivation seemed to be to avoid courts with reputations for limiting extensions of exclusivity or limiting attorneys fees. Recommends policy changes that would allow forum shopping. They would accomplish this by limiting the reasons for forum shopping by tightening statutory standards and narrowing judicial discretion. This would increase competition among different districts for the large bankruptcy cases.
Data: Study of forty-three large cases filed between 1979 and 1988.
Note: At the time of this study, the primary choice of venue was New York. Subsequently, it shifted to Delaware. See Bermant et al., supra; NATIONAL BANKRUPTCY REVIEW COMMISSION Report, infra Part A.2.i.]
Note: A Conference planned for Fall 2001 will present additional studies using Professor LoPuckis Large Public Companies in Chapter 11 Database.
e. Single District Studies of Chapter 11 Cases
Samuel L. Bufford, Chapter 11 Case Management and Delay Reduction: An Empirical Study, 4 Am. Bankr. Inst. J. 85 (1996).
Argues that modest judicial case management can reduce delay in Chapter 11 cases. The case management program in the study, when applied to 81.2% of cases, shortened by 24.1% the time to confirmation in a typical case, reduced by 44.1% the time to conversion, and shortened by 53.5% the time to dismissal in a typical non-viable case. Discusses who benefits from shortening the time in Chapter 11. Concludes the primary beneficiary is the secured creditor. Benefits to unsecured creditors depend upon circumstances, benefits to debtors are less clear, benefits to courts are clear.
Data: Study of Judge Munds caseload. Also cites other studies of cost and delay.
Samuel L. Bufford, What is Right About Bankruptcy Law and Wrong About its Critics, 72 Wash. U. L.Q. 829 (1994).
Judge Bufford is highly critical of several economics-based proposals for bankruptcy reform. He argues that the persons making these proposals have little knowledge of bankruptcy law and that the proposals lack empirical support. He acknowledges a 10% rate of plan confirmation and consummation, but argues that success should be measured more broadly. He estimates a "success" rate of 40% based upon his own cases.
Data: Rough calculations of number of filings and "success" rates in Chapter 11 in Judge Buffords cases.
Lisa Hill Fenning & Craig A. Hart, Measuring Chapter 11: The Real World of 500 Cases, 4 Am. Bankr. Inst. L. Rev. 119 (1996).
Reports on a study of more than 500 Chapter 11 cases from Judge Fennings district in Los Angeles during the early 1990s. The study finds that the cases are mostly real estate related, 85% are mid-sized (65% are $500,000 10,000,000 in assets; 15% are $100,000 500,000 in assets). The study did not have an adequate number of cases to draw clear correlations based upon size or type and length of case, kind of plan confirmed, or economic outcome.
Data: More than 500 Los Angeles Chapter 11 cases.
Lisa Hill Fenning & Brian Tucker, Profile of Single Asset Real Estate Cases, Comm. L. & Bankr. Sec. Newsletter (L.A. County Bar Assn, Los Angeles, Cal.), Summer 1994.
Article reports on a study of 256 Chapter 11 cases filed in the Central District of California between January 1992 and December 1993. Of these, 64% were identified as real estate cases. Judge Fenning found four types of real estate cases: single asset real estate (SARE), multi-asset real estate (MARE) cases, small real estate (SRE) cases and house (HRE) cases. SARE cases constituted 33% of all Chapter 11 filings during the period studied and 51% of all real estate cases during the period studied. MARE cases constituted 15% of all Chapter 11 filings during the period studied and 23% of all real estate cases during the period studied. SRE cases constituted 4% of all Chapter 11 filings during the period studied and 8% of all real estate cases during the period studied. HRE cases constituted 12% of all Chapter 11 filings during the period studied and 18% of all real estate cases during the period studied. Of the forty-two cases in the latter two categories, thirty-five scheduled debt less than $1 million. These cases would fall into Chapter 13 if the debt limits were raised to $1 million (the debt limits were raised in 1994).
Data: Study of 256 Chapter 11 petitions filed in the U.S. District Court for the Central District of California between January 1992 and December 1993.
Susan Jensen-Conklin, Do Confirmed Chapter 11 Plans Consummate? The Results of a Study and Analysis of the Law, 97 Com. L.J. 297 (1992).
Reports on a study of a sample of Chapter 11 cases from the Southern District of New York (SDNY) in which plans were confirmed (the Poughkeepsie Study). Jensen-Conklin found a 17.31% confirmation rate, 26% of which were liquidating plans. Her findings, she argues, are consistent with the Flynn Study (which found a 17% confirmation rate in a national 15 district sample, 25% of which were liquidating plans) (see supra Part A.2.b). During the first five years of the study, the average time for confirmation was 22.09 months; over the second five years it was 19.36 months; overall it was 22.04 months. The Flynn Study showed an average time of 22 months. She found that 58% of the plans in her sample were consummated (38% were reorganizing plans, 20% were liquidating plans). The plans most likely to consummate were those of larger debtors with creditors committees, and plans with payment periods of less than one year.
Data: Study of 260 Chapter 11 cases filed in the SDNY during the period of 1980-1989 (Poughkeepsie study).
Jerome R. Kerkman, The Debtor in Full Control: A Case For Adoption of the Trustee System, 70 Marq. L. Rev. 159 (1987).
Study finds that creditors were unable to close nonviable businesses, creditors were generally unable to change management, debtors were successful in dictating the terms of plans, debtors were successful in obtaining delays, creditors committees failed to operate, secured creditors protected their own interests, opposition was used to bargain in cases destined for success rather than to close marginal businesses, non-debtor plans provided no realistic control, trustees and examiners were seldom used, and preferences were not challenged. The study concludes that debtors exercise excessive control, and recommends (i) greater use of examiners and trustees, (ii) amendment to Chapter 13 with respect to business filings, and (ii) adoption of the United States Trustee system nationwide.
Data: Empirical study of Chapter 11 cases filed in the U.S. District Court for the Eastern District of Wisconsin during 1982. Also draws upon Professor LoPuckis study of the U.S. District Court for the Western District of Missouri filings during a one-year period of 1979-80 (see infra), the 1971 Brookings Institute Study (See Stanley & Girth, infra Part A.3.a), and the 1983 Study of the U.S. Trustee Pilot Program (see Ames, infra Part B.1.g).
Robert M. Lawless et al., A Glimpse at Professional Fees and Other Direct Costs in Small Firm Bankruptcies, 1994 U. Ill. L. Rev. 847.
Study of fifty-seven small firm bankruptcy cases filed in Memphis and closed in 1991 or 1992. Finds average Chapter 7 costs of 69% of distributions to unsecured creditors and 59.68% of unencumbered assets at filing, and average Chapter 11 costs of 26.19% of distributions and 36.65% of assets. Professional fees account for 60% of distributions in Chapter 7 and 18.87% of unencumbered assets at filing, and 20.3% of distributions and 17.45% of assets in Chapter 11. In contrast, studies of large cases show direct costs of only 2 % to 6 % of distributions. Discusses factors that increase professional fees in bankruptcy cases.
Data: Memphis small firm bankruptcy filings closed in 1991 and 1992.
Lynn M. LoPucki, The Debtor in Full Control: Systems Failure Under Chapter 11 of the Bankruptcy Code? (pts. 1 & 2), 57 Am. Bankr. L.J. 99 (1983); 57 Am. Bankr. L.J. 247 (1983).
Findings include: an overall "success" rate of 26%; debtors were primarily large manufacturers with a high rate of success (86%) and small manufacturers and all others with a low rate of success (15%); 73% of cases were filed in response to creditor action; compositions and arrangements played no role; committees were appointed in only 40% of the cases, fewer than half of the committees employed counsel, and the committees in general were ineffective; there was no evidence that giving creditors a right to file plans had any affect on debtor-creditor leverage; debtors were able to continue operating as long as they wished; creditors were unable to force management change; plans fit a well-defined pattern under which the debtor remained in control, paid creditors over 2.5 to 5.5 years, half paid unsecured creditors in full, half paid unsecured creditors from 10 to 50 cents on the dollar; debtors usually successfully dictated the terms of the plan; the cases took longer than cases under Chapter XI of the Bankruptcy Act.
Data: Reports results of an empirical study of all Chapter 11 cases filed in the Bankruptcy Court for the Western District of Missouri during the first year after the Bankruptcy Code became effective.
f. National Surveys Concerning Chapter 11
Timothy J. Curtin et al., Debtors Out-of-Control: A Look at Chapter 11s Check and Balance System, 1988 Ann. Surv. Bankr. L. 87 (1988).
Picks up from Professor LoPuckis "debtor in full control" articles. Suggests that the "ideal" Chapter 11 envisioned by the drafters "was an expeditious proceeding in which relatively evenly-matched parties, the debtor and its creditors, strove to reorganize an ailing business in a manner that would fairly recognize the competing interests of all." Id. at 87. The U.S. Trustee was to handle administrative matters and the judge was to resolve disputes.
In smaller cases, that creditor portion of the checks and balances is non-existent or not working. Id. at 88. Some argue that Chapter 11 serves the interests of managers, who pick the table clean, then liquidate. Id. at 88-89. The bifurcation of administrative and judicial functions had led to gaps in monitoring. Id. at 89.
The authors report the results of a survey that considers how effective different monitoring devices are in facilitating reorganization and preventing dissipation of assets.
Data: Based upon a 1986 study/questionnaire sent by the ABA Task Force on Chapter 11. 168 of 850 recipients responded. Of these sixty-two were bankruptcy judges (28% of sitting judges), forty-four were estate administrators (47% of acting administrators), eight were U.S. Trustees (44% of U.S. Trustees), and fifty-four were bankruptcy attorneys.
Karen Gross & Patricia Redmond, In Defense of Debtor Exclusivity: Assessing Four of the 1994 Amendments to the Bankruptcy Code, 69 Am. Bankr. L.J. 287 (1995).
Notes that debtor exclusivity is often cited as one primary reason that Chapter 11 takes too long and costs too much. The 1994 Acts legislative history identifies time and cost as reasons for amendments. The authors examine the four provisions of the 1994 law that affect exclusivity (direct appeal of exclusivity orders, status conferences including to discuss exclusivity deadlines, small business exclusivity provisions, and single asset relief from stay provisions). Argues that exclusivity is rarely a true cause for delay in Chapter 11 cases. Reports the results of a preliminary empirical study to determine whether the options permitted by these amendments are being implemented. Concludes that, although these amendments are being used, delay and increased cost will continue to be a problem as long as lack of creditor participation remains the norm. Also notes that increasing creditor participation will be difficult.
Data: Survey of bankruptcy judges who attended a Federal Judicial Center seminar in Texas in 1995. Of the 100 judges attending, seventy-one returned the survey.
g. National Sample of Small Business Chapter 7 Cases
Mariana A. McNeill & Richard F. Fullenbaum, U.S. DEP'T OF COMMERCE NAT. TECHNICAL INFO. PROGRAM, Function OF Failure (1994).
Reports a pilot study (not nationally statistically representative) of 101 individual small business owners whose businesses failed and who filed Chapter 7 in Maryland between 1987 and 1993. Concludes that failure is not associated with individuals who have no prior experience (37% had been entrepreneurs before). Failure is not a career-ending event (entrepreneurs move quickly back into the mainstream usually in the same industry).
Data: Pilot study of small businesses.
h. National and International Studies Concerning Local Variation in Application of Bankruptcy Laws
Jean Braucher, Lawyers and Consumer Bankruptcy: One Code, Many Cultures, 67 Am. Bankr. L.J. 501 (1993).
Finds that local legal culture can affect consumer debtors choice of Chapter.
Data: Based upon interviews with fifty-seven persons (forty-five of whom were debtors counsel in consumer bankruptcy cases) in four cities in two states.
Teresa A. Sullivan et al., The Persistence of Local Legal Culture: Twenty Years of Evidence from the Federal Bankruptcy Courts, 17 Harv. J. L. & Pub. Poly 801 (1994).
Considers how local legal culture affects legal reform and formal rules. Concludes that local legal culture systematically and predictably affects the choices consumers make in their bankruptcy cases, including whether to file, choice of Chapter, and how much to pay creditors after bankruptcy.
Data: Study of consumer bankruptcy cases.
Jay Lawrence Westbrook, Local Legal Culture and the Fear of Abuse, 6 Am. Bankr. Inst. L. Rev. 25 (1998).
Concludes that "local legal culture" accounts for coherent and persistent variation in the application of the consumer bankruptcy laws. This arises from broad discretion intentionally built into the bankruptcy laws to prevent abuse of the discharge and can be traced to the historical development of the discharge.
Data: Embodies the results of empirical research on consumer bankruptcy in the United States and Europe.
i. National and Local Studies and Guidelines Concerning Mediation in Bankruptcy
Jacob Aaron Esher, Mediation manual: A guide for Implementing Dispute Resolution Procedures in Bankruptcy Matters (1996).
Steven Hartwell & Gordon Bermant, Fed. Judicial Ctr., Alternative Dispute Resolution in a Bankruptcy Court: The Mediation Program in the Southern District of California (1988).
Ralph R. Mabey et al., Expanding the Reach of Alternative Dispute Resolution in Bankruptcy: The Legal and Practical Bases for the Use of Mediation and the Other Forms of ADR, 46 S.C. L. Rev. 1259 (1995).
Reviews the use of arbitration, mediation, settlement, and other forms of ADR (AMS) in bankruptcy in both court-annexed and non-court-annexed mediation settings, and discusses the legal authority for using AMS in bankruptcy cases. Considers the use of ADR pre-confirmation to mediate reorganization plans (paid mediator, settlement judge, examiner), resolve multiple claims of the same nature, and resolve single creditor claims. Considers the use of ADR post-confirmation to resolve claims. Examines the characteristics of court-annexed mediation/ADR programs and the use of such programs in large Chapter 11 cases.
Makes recommendations for improvement in the use of ADR in bankruptcy cases, including amendments to the bankruptcy rules. Appendix contains information on bankruptcy court-annexed mediation programs.
NAT'L BANKR. REVIEW COMM'N, BANKRUPTCY: THE NEXT TWENTY YEARS (Elizabeth Warren, Reporter 1997) [hereinafter NBRC REPORT].
NBRC recommends that Congress authorize courts to enact local rules to establish non-binding, confidential mediation programs that allow mediation on a partys request or sua sponte. Id. at 489-92; see infra Part B.1.a.
Robert J. Niemic, Fed. Judicial Ctr., Mediation In Bankruptcy: The Federal Judicial Center Survey Of Mediation Participants (1998).
This is a Report to the Advisory Committee of Bankruptcy Rules of the Judicial Conference of the United States.
The report responds to a request by the Alternative Dispute Resolution Subcommittee of the Judicial Conferences Advisory Committee of Bankruptcy Rules for empirical data to assist the committee in determining whether to consider rule changes that would govern mediation in bankruptcy. The report is based upon a July 1997 survey of 1,992 persons who had participated in mediation in bankruptcy by judicial referral during the three year prior to May 1997. (The survey had a 64% response rate.) The report found a low percentage of identified problems with mediation, but noted that certain problems occurred more frequently than others.
Robert J. Niemic, Fed. Judicial Ctr., Mediation & Conference Programs in the Federal Courts of Appeal: A Sourcebook for Judges and Lawyers (1997).
Elizabeth Plapinger CPR INST. FOR DISPUTE RESOLUTION, & Donna Stienstra, Fed. Judicial Ctr., ADR and Settlement in the Federal District Courts: A Sourcebook for Judges and Lawyers (1996).
Hugh M. Ray, Jr., Mediators, Egos and Common Courtesy, Tex. Law., March 14, 1994 at 22.
William J. Woodward, Jr., Report on Court Sponsored Mediation, U.S. Bankruptcy Court, Eastern Division of Pennsylvania (January 6, 1998).
ABA Business Bankruptcy Committee, Ad Hoc Committee on Bankruptcy Court Structure and Insolvency Processes, Draft Local Mediation Rules (Nathan B. Feinstein, Chair) (1997).
MODEL LOCAL RULE, (ADR Subcomm., Am, Bankr. Inst. 1997)
The Judicial Arbitration and Mediation Center.
3. REPORTED STUDIES HISTORICAL (pre-Bankruptcy Code)
a. Studies And Reports (chronological)
House Judiciary Comm., 71ST CONG. (1929) (Comm. Print 1931) (Donovan Report).
Instigated by Judge Thomas Thacher. Investigates abuses in the New York bankruptcy bar.
Sabath Committee Report, H.R. Rep. No. 3012 (1935 to 1936).
U.S. Sec. & Exch. Commn, Report On The Study AND Investigation OF THE Work, Activities, Personnel And Functions Of Protective And Reorganization Committees (1937 TO 1940) (The Douglas Report).
Admin. Of The Bankr. Act, Report Of The U. S. Attorney Generals Committee On Bankruptcy Administration (1940) (The Shea Report).
Recommends changes to bankruptcy administration, principally including reducing the number of referees, creating a full-time corps of salaried referees, and changing the salary and reimbursement structure.
David T. Stanley & Marjorie Girth, The Brookings Inst., Bankruptcy: Problems, Process, And Reform (1971).
Study of bankruptcy demographics. This report was widely cited as a foundation for the 1978 Bankruptcy Codes reforms. Those reforms did not, however, adopt all of the authors recommendations.
Studies cases closed in 1964 in eight judicial districts.
Estimates direct administrative costs to be 20% of total distributions in liquidating cases.
Select findings include:
"Little rehabilitation takes place under the special provisions of the rehabilitative Chapters of the Bankruptcy Act. A majority of these cases end in failure, and are either dismissed or converted into straight bankruptcy proceedings. . . . Creditors get so little out of bankruptcy proceedings that they have almost no incentive to be interested. They do not bother to prove their claims or to exercise theirs rights to creditor control of the proceedings. In any event, their losses are passed along to other customers in the form of higher prices or to the taxpayer . . . Administratively, the bankruptcy system as it is managed through the courts violates most principles of wound organization and management. The system provides inadequate supervision, audit, and investigation, leading to opportunities for error and fraud. Procedures are slow and archaic; records are incomplete and sloppy. . . . Over 70 percent of all bankruptcy cases have no assets left after exempt property is set aside and pay neither administrative costs nor creditors. In just over half the rest, administrative costs consume the excess assets. Thus creditors receive payment in approximately 15 percent of the cases. In this last group, administrative costs consume an average of one-quarter of the assets.
Id. at 3-4. Recommends that all new cases be handled by an administrative agency, except that reorganizations remain in the district courts. Id. at 4.
As for business bankruptcies, finds that 93.4% were liquidation, 0.6 % were Chapter X (corporate reorganization), 5.6% were Chapter XI (arrangements to extend or reduce unsecured debt), 0.4% were Chapter XII (modification of real estate secured debt by unincorporated debtors). Id. at 107-08.
Nine of ten creditors were unsecured; one-third of the debt was secured. Id. at 113.
Fewer than 1% had been in bankruptcy before. Id. at 114.
Only one-third of Chapter XI debtors were still operating their business two years later. Id. at 115. Another 6% were still in business but under new management or merger. Id.
Feasibility is construed to mean whether the debtor will meet the plan requirements rather than whether the debtor will remain in business. Id.
Administrative expenses for different Chapter are listed. Id. at 130, 142.
For liquidation cases, the average time in bankruptcy was twenty-three months. Of the nominal-asset cases, 56% were closed within two years, the slowest 15% took more than three years. Of the asset cases, 54% were closed within two years; but the rest took substantially longer and 10% took more than four years. Id. at 131-32.
For Chapter XI cases, the typical case took about eighteen months. Id. at 143.
The sole successful Chapter X case in the study was not closed until more than five years after the plan was confirmed. Id. at 145.
Costs paid by the estate:
Nominal-asset cases in which the cost of liquidation uses all the available funds run 10% to 15% of cases. Most of these costs went to the trustees. Id. at 175.
In asset cases, which total 11% to 13% of straight bankruptcies, administrative costs run about 25% to 30% of amounts brought into the estate. The largest share went to the attorneys for the trustees. Id. at 176.
In Chapter XI cases, costs were lower than in liquidation cases. In these cases, debtors attorneys fees were about 10.2% of the estate, creditors committees attorneys fees were about 3%. Id. at 177-78, table C-27 at 263.
In Chapter XII and Chapter X cases, administrative costs ran about 12% of the estate. Id. at 178-79.
Report Of The Commission On The Bankruptcy Laws Of The United States, H.R. Doc. No.93-137. (1973).
Report embodies the Commissions comprehensive reform proposals, which became a basis for the Bankruptcy Code of 1978. The Bankruptcy Code did not, however, adopt all of the Commissions recommendations. For example, it declined to create a comprehensive Bankruptcy Administration.
Carroll Seron, Judicial Reorganization: The Politics Of Reform In The Federal Bankruptcy Court (1978).
Gathers empirical data in a study designed to focus on issues of bankruptcy court reform. Includes discussion of structural constraints, increasing demand, backlog, right to representation, bureaucratization, professionalism, computerization, and political and social meaning of court reform.
b. Essays, Summaries, and Discussions of Historical Development of Business Bankruptcy Laws
Frank R. Kennedy, The Origins And Growth Of Bankruptcy And Reorganization Laws In The 20th Century: An Oral History Perspective (1994) (Bankruptcy Law in the Second Circuit, An Historical Perspective; Second Circuit Committee on Historical and Commemorative Events and the Federal Bar Council).
Harvey Miller interviews Professor Kennedy. Discusses the evolution of the Chandler Act, including the role of the Donovan Report, the Douglas Report, the National Bankruptcy Conference, the SEC (Chapter X). Discusses the unique role of bankruptcy in the United States, particularly in terms of debtor relief, the concept of the debtor in possession, and the constitutional status of bankruptcy law. Discusses the historical roots and development of prominent aspects of US bankruptcy law, the early bankruptcy laws and the reasons they did not last. Discusses the Rules Committee and the bankruptcy bar. Discusses that evolution of bankruptcy laws since 1939, including hot issues, the Brookings Institute Report, the National Bankruptcy Commission, Northern Pipeline Constr. v. Marathon Pipeline, 458 U.S. 50 (1982) and criticisms of the current system.
F. Regis Noel, A History Of The Bankruptcy Law (1919).
Surveys the history of the Bankruptcy Act of 1898 and its predecessors. Covers topics such as foreign bankruptcy laws before the Constitutional Convention, bankruptcy laws in the colonies before the Constitutional Convention, the Constitutional Convention, the bankruptcy establishment clause, the laws of 1800, 1841, 1867 and 1898 and amendments. Discusses legal, moral and socio-economic aspects of the bankruptcy laws.
David A Skeel, The Genius of the Bankruptcy Act of 1898, 15 Bankr. Dev. J. 321 (1999).
Considers why the 1898 Bankruptcy Act was the first bankruptcy law to survive for a significant period of time and why the Bankruptcy Act was so different from English bankruptcy laws emerging at the same time. Attributes the success of the Act to the emergence of business organizations representing creditors interests, and the long period of republican control that allowed the development of a bankruptcy bar.
Charles Jordan Tabb, A Century of Regress or Progress? A Political History of Bankruptcy Legislation in 1898 and 1998, 15 Bankr. Dev. J. 343 (1999).
Focus is the politics of the 1898 act, with a brief discussion of the politics of the 1998 reform efforts.
Charles Jordan Tabb, The History of the Bankruptcy Laws in the United States, 3 Am. Bankr. Inst. L. Rev. 5 (1995).
Reviews bankruptcy laws prior to 1978 (beginning in 1542 in England), the 1978 Bankruptcy Code, the 1994 amendments, and the appointment of the NBRC. His objective is to inform the Commission (NBRC) with a historic basis.
Julie A. Veach, Note, On Considering the Public Interest In Bankruptcy: Looking to the Railroads for Answers, 72 Ind. L.J. 1211 (1997).
Argues for consideration of the public interest in all business reorganizations.
Data: Uses data showing results in railroad reorganization cases.
Charles Warren, Bankruptcy In United States History (1935).
Historical context of United States bankruptcy laws.
4. COMMENTS ON THE USE OF EMPIRICAL DATA IN BANKRUPTCY POLICY-MAKING
Jennifer Frasier, Caught in a Cycle of Neglect: The Accuracy of Bankruptcy Statistics, 101 Comm. L. J. 307 (1996).
Analyzes the Administrative Office of the United States Trustee (AOUST or AO) database by comparing the bankruptcy statistics gathered by the AO to the actual case file data. Finds that, despite efforts by the AO to ensure accurate data, the data is severely flawed due to inaccurate face sheets and erroneous entries by bankruptcy clerks and persons gathering the information for the database. Concludes that: "The AO demographic bankruptcy statistics are fraught with errors, meaning that they are not reliable as empirical data." Id. at 340. Data on assets, liabilities and number of creditors are inaccurate on the face sheets 20% to 25% of the time. Data on the nature of the case are inaccurate in 14% to 20% of cases. She suggests short and long term solutions.
Teresa A. Sullivan et al., The Use of Empirical Data in Formulating Bankruptcy Policy, Law & Contemp. Probs., Spring 1987, at 195.
Argues that empirical research is essential to the formulation of bankruptcy policy and that it is possible to develop data. Argues for collection and dissemination of data by the AOUSC to provide broad, general data on a regular basis.
Teresa A. Sullivan, Methodological Realities: Social Science Methods and Business Reorganizations, 72 Wash. U. L.Q. 1291 (1994).
Discusses and defends the social survey tradition methodology of the Business Bankruptcy Study, which the author also used in the Consumer Bankruptcy Study.
B. RECOMMENDATIONS CONCERNING BUSINESS BANKRUPTCY (post-Bankruptcy Code)
1. GROUP REPORTS AND RECOMMENDATIONS (reverse chronological)
a. NBRC Report (supra Part A.2.i).
Commissioners: Brady C. Williamson (Chair), Hon. Robert E. Ginsburg (Vice Chair), Jay Alix, Caldwell Butler, Babette Ceccotti, John Gose, Jeffrey Hartley, Hon. Edith Jones, James Shepard
Reporter: Prof. Elizabeth Warren
Chapter 2, Business Bankruptcy:
"Two principles guided the Commission in developing its business bankruptcy recommendations: reducing cost and inefficiency in business reorganizations and liquidations, and enhancing the effectiveness of the Bankruptcy Code to deal with business failures." Id. at 313 (emphasis added). For references to cost, delay, and inefficiency in the context of business bankruptcy, see id. at 304, 310, 311, 313.
"The Commissions recommendations reflect a conclusion that the business bankruptcy system works well, at times very well, but that it can be improved." Id. at 303. "In general, . . . most of those who use the system or comment on it agree that the basic structure of business bankruptcy is sound and needs only fine tuning to clarify ambiguities and reduce cost and delay." Id. at 304. "Notwithstanding the diversity of perspectives represented, there was widespread (although not unanimous) agreement that the Chapter 11 system was generally functioning well and that adjustments to the system, which could have widely-felt implications throughout the economy, should be modest in scope." Id. at 310. "Collectively, the business bankruptcy proposals are designed to improve a system that generally works well and to create and sharpen the tools needed to deal with business failures for the next 20 years." Id. at 314.
The votes on the business bankruptcy proposals were often split. See, e.g., id. at 307, 1030-1313.
The Report, particularly the Chapter 11analysis, was hampered by inadequate supporting empirical data. Id. at 308, 309.
In the business context, the Commission made separate proposals concerning: Mass Torts and Future Claims; Transnational Bankruptcy; Small Business, Partnership, and Single Asset Bankruptcy; and Chapter 11. In the Chapter 11 working group "[t]he debates were lively and wide-ranging, but there was widespread agreement about the general goals served by a Chapter 11 system:
Maximize enterprise value
Rehabilitate viable businesses
Encourage out of court restructuring
Resolve distributive decisions
Benefit other parties affected by business failure."
Id. at 309.
Chapter 4, Other Recommendations and Issues:
Recommends procedures for improved data collection and dissemination (primarily through the Administrative Office of the United States Courts).
Select commentary concerning the NBRC Report Business Bankruptcy proposals:
Series of articles on various NBRC proposals concerning: consumer bankruptcy, mass torts, partnerships, preferences, conflicts of interest, tax provisions, bankruptcy contracts, new value, executory contracts, single asset real estate.
Consumer Bankruptcy in the Balance: The National Bankruptcy Review Commission's Recommendations Tilt Toward Creditors, 5 Am. Bankr. Inst. L. Rev. 293, 293-557 (1997).
Suggestions for the National Bankruptcy Review Commission and Congress, 4 Am. Bankr. Inst. L. Rev. 487, 487 - 556 (1996).
Collection of thirty-eight short essays, each of which suggests one change to the Bankruptcy Code. Includes the following suggestions:
- a Chapter 11 "monitor" to eliminate the current one-sided or adversarial system (Flaschen)
- an expert panel rather than competing professionals for each party (Gross)
- standardized cash collateral and debtor in possession financing orders (McGuire)
- small business Chapter (Small).
b. National Bankruptcy Conference, Reforming the Bankruptcy Code: Final Report (1994) [hereinafter, NBC 1994 Report].
This report supersedes the 1993 preliminary report (National Bankruptcy Conference, Bankruptcy Reform Circa 1993 (ALI-ABA 1993)) and is the culmination of the work commenced at the Williamsburg Conference (infra Part B.1.d).. Reflects the consensus of the participants, although not every participant agrees with each conclusion.
"[T]he Conference and its auxiliary group have concluded that the Code has generally worked well, is fundamentally sound, and is not in need of a general overhauling, with the exception that Section 365 (executory contracts) should be rewritten." NBC 1994 Report at Forward ii. "The Conference believes that the basic structure of Chapter 11 is sound, but that the experience of the past decade reveals a number of areas which require modification to improve the balance of interests of debtors and creditors, to reduce the costs and increase the speed of reorganization, and to clarify conflicting interpretations of the current provisions." Id. at Overview i.
"The Report suffers from inadequate empirical data." Id. at Overview iii-iv.
"The changes offered in this report center on:
- Adjusting the balance of the interests of debtors and creditors to assure baseline protection for all parties, while encouraging consensual and speedy rehabilitations and restructurings.
- Reducing the costs of the reorganization effort for all participants.
- Increasing the speed, when appropriate, of the reorganization process.
- Clarifying legal rules and eliminating significant conflicts among jurisdictions."
Id. at Overview iv (emphasis added).
The recommendations contain some overlap with the NBRC Commission. See, e.g., NBC 1994 Report Overview iv-vi (summarizing recommendations).
Nat'l Bankruptcy Conference, Reforming The Bankruptcy Code: Final Report, Revised Edition (1997) [hereinafter, NBC 1997 Revised Final Report].
This report supersedes the NBC 1994 Report. The revision was spurred by the 1994 amendments to the Bankruptcy Code, which adopted certain of the proposals of the NBC 1994 Report, and the creation of the NBRC. Id. at Forward i.
Notable recommendations include:
- limits on the role of the U,S, Trustee Id. at 11-17.
- affirmation of the new value corollary, but termination of exclusivity if a new value plan is proposed; elimination of the one impaired class acceptance requirement Id. at 19-27.
- affirmation of the expanded role of bankruptcy judges in case administration under section 105, but caution to limit this to case administration Id. at 29.
- only one official committee should be appointed at estate expense; all creditors including secured, unsecured, senior, subordinated, should be eligible to serve; others may be compensated for substantial contribution Id. at 30.
- recommendations for faster pre-packaged reorganizations Id. at 44)
- no adoption of a separate section for small business reorganization Id. at 61.
- no procedures for earlier termination of reorganization cases Id. at 63.
- no additional procedures to oust management Id. at 64.
- bankruptcy judges be given article III status Id. at 66.
c. American Bankruptcy Institute Bankruptcy Reform Study Project (1995 to 1996).
Articles reported in Volumes 3 and 4 of the ABI Law Review (Volume 4 covers Chapter 11). Intended audience is the NBRC and Congress.
d. The Williamsburg Conference On Bankruptcy: Critique of the First Decade under the Bankruptcy Reform Act and Agenda For Reform (ALI-ABA Oct. 17 to 19, 1988).
The Conference was organized by the National Bankruptcy Conference and sponsored by the ALI-ABA. It became the first step toward the NBC 1994 Report.
The Conference Proceedings comprise seven Chapters that summarize developments and, in some cases, recommend reforms concerning the following general topics: Supreme Court and Bankruptcy Code (Frank R. Kennedy), Executory Contracts (David G. Epstein), Practice and Procedure (Richard F. Broude, Michael L. Cook, Richard B. Levin), Trustee Powers (Thomas H. Jackson), Avoiding Powers (Douglas G. Baird), Chapter 11 Administration (Lawrence P. King, Stephen H. Case, Bernard Shapiro), Plan topics (Harvey R. Miller). Other faculty included Vern Countryman, Ronald DeKoven, Leon S. Forman, John J. Jerome, Kenneth N. Klee, Herbert Minkel, Patrick A. Murphy, George M. Treister, J. Ronald Trost.
The purpose was to "create an agenda for legislative reform, if any is necessary."
Id. at 33.
e. United States General Accounting Office, Bankruptcy Reform Act Of 1978 A Before And After Look (1983).
Comptroller Generals Report to the Chairman, Committee on the Judiciary House or Representatives of the United States (July 20, 1983).
Responds to the Committees request for a study of personal bankruptcy and various social and economic variables and compare personal bankruptcy debtors before and after the Bankruptcy Code was implemented.
Data: Statistical analysis of social and economic variables and their impact on personal bankruptcy filings. Compares personal bankruptcy filings under Chapter 7 and 13 before and after the Bankruptcy Code in five districts.
Note: There was no comparable study of business cases, but some of the personal filings were business related.
f. J. Ronald Trost et al., The Proposed Federal Bankruptcy Reform Act (ALI-ABA 1978).
Reviews the proposed Bankruptcy Code. Topics include need for reform, status of reform, changes in bankruptcy administration, substantive changes of general application, business reorganizations, consumer debtors, and taxes.
g. Nancy L. Ames, Executive Office U.S. Trustees, U.S. Dep't of Justice, An Evaluation of the U.S. Trustee Pilot Program for Bankruptcy Administration: Findings and Recommendations (Apr. 1983 & Aug. 1985).
Reports discuss the role of the U.S. Trustees in bankruptcy administration, study the impact of the U.S. Trustee system on bankruptcy case administration, and make recommendations concerning the nationwide expansion of the U.S. Trustee program. Reports conclude that the U.S. Trustee program has increased efficiency, reduced costs, an