Patterns in a Complex System: An Empirical Study of Valuation in Business Bankruptcy Cases

Abstract

This Article applies complex systems research methods to explore the characteristics of the bankruptcy legal system. It presents the results of an empirical study of twenty years of bankruptcy court valuation doctrine in business cramdown cases. The data provide solid descriptions of how courts exercise their discretion in valuing firms and assets. This Article has two objectives: First, using scientific methodology, it explains the content of bankruptcy valuation doctrine. Second, the Article uses doctrine as a variable to explore the system dynamics that govern the processes of change over time. Significant findings include: (1) Courts tend to split the difference in valuations much less frequently than expected; (2) while early data show debtors' and creditors' valuation positions were close together, later data show the parties' valuations moved further apart; (3) bankruptcy courts' valuation approach is substantially influenced by whether the valuation includes a calculation for the time value of money; (4) there seems to be some geographic distribution of courts' acceptance of valuation models, with courts in southern circuits more likely to accept soft valuation models, and nonsouthern circuit courts more likely to accept hard valuation models; and (5) the evidence offers preliminary support for the hypothesis that bankruptcy system content may self-organize according to some complex deterministic dynamics.

Keywords: bankruptcy, valuation, empirical, chaos, complexity science, self-organization