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Abstract:
Credit derivatives transfer the default risk of an underlying debt instrument, without transferring legal title. These transactions have several benefits outside of bankruptcy. But once a corporate debtor enters bankruptcy - in particular, chapter 11 - it enters a bargaining process that was bottomed on a model of creditor behavior that may no longer hold because of credit derivatives. A creditor may not act like a traditional creditor if they no longer face the risk of non-payment because that risk has been hedged. In this essay I argue that credit derivatives will substantially alter chapter 11, at least with respect to large corporate debtors.

Swaps, Derivatives, Chapter 11, Reorganization, CDS, credit default swaps

Abstract:
The concerns that animated the Delaware supreme court's decision in Smith v. Van Gorkom - inattentive directors failing the shareholders at a critical juncture in a firm's life - could have lead, even after the legislature enacted Section 102(b)(7), to the development of a duty of care jurisprudence based on non-monetary remedies. Instead, the Delaware supreme court developed a new law of transactions, built around banner cases such as Unocal and Revlon.

Now, two decades latter, we ask two key questions: First, is there any duty of care left in Delaware? And, if the answer to the first question is no, is that a bad thing?

We answer the first question by tracing the waning of the duty of care: a rule that now requires little more of a director than a ritualistic consideration of relevant data. Today, after the director engages in this ritual, her decision will not violate the duty. In short, the classic duty of care no longer exists in Delaware.

But the Delaware courts clearly are not about to countenance every business decision, no matter how incoherent or ill-advised. So, they struggle to fit cases into either the loyalty or transactional model, even when these tools are ill suited to the task. No better example of this trend exists than the Delaware supreme court's decision in Omnicare, Inc. v. NCS Healthcare, Inc., where the court struggled to apply Unocal's entrenchment-based structure to deal protection devices in a friendly stock for stock merger.

Because we argue that Omnicare could have been better addressed under a classic duty of care analysis - no reasonable director would have agreed to totally lock up the deal - we answer our second question in the affirmative. There is a role, albeit a limited, narrow role, for the courts to review and question some decisions, even in the absence of loyalty or transactional concerns.

Thus, we use this paper to highlight a subtle, and even unintended consequence of Delaware's increasing reliance on the loyalty and transactional duties. While the result may be the same regardless of which tool the courts use, attempts to fit classic duty of care cases under other headings - perhaps in a misguided attempt to avoid Section 102(b)(7) - only muddle the development of a coherent analytical framework. In this paper, we argue for a reinvigoration of the classic duty of care analysis to preserve the distinct roles played by the director's fiduciary duties.

Delaware, duty of care, corporate law, directors, Smith v. Van Gorkom, Omnicare

Abstract:
The concerns that animated the Delaware supreme court's decision in Smith v. Van Gorkom - inattentive directors failing the shareholders at a critical juncture in a firm's life - could have lead, even after the legislature enacted Section 102(b)(7), to the development of a duty of care jurisprudence based on non-monetary remedies. Instead, the Delaware supreme court developed a new law of transactions, built around banner cases such as Unocal and Revlon.

Now, two decades latter, we ask two key questions: First, is there any duty of care left in Delaware? And, if the answer to the first question is no, is that a bad thing?

We answer the first question by tracing the waning of the duty of care: a rule that now requires little more of a director than a ritualistic consideration of relevant data. Today, after the director engages in this ritual, her decision will not violate the duty. In short, the classic duty of care no longer exists in Delaware.

But the Delaware courts clearly are not about to countenance every business decision, no matter how incoherent or ill-advised. So, they struggle to fit cases into either the loyalty or transactional model, even when these tools are ill suited to the task. No better example of this trend exists than the Delaware supreme court's decision in Omnicare, Inc. v. NCS Healthcare, Inc., where the court struggled to apply Unocal's entrenchment-based structure to deal protection devices in a friendly stock for stock merger.

Because we argue that Omnicare could have been better addressed under a classic duty of care analysis - no reasonable director would have agreed to totally lock up the deal - we answer our second question in the affirmative. There is a role, albeit a limited, narrow role, for the courts to review and question some decisions, even in the absence of loyalty or transactional concerns.

Thus, we use this paper to highlight a subtle, and even unintended consequence of Delaware's increasing reliance on the loyalty and transactional duties. While the result may be the same regardless of which tool the courts use, attempts to fit classic duty of care cases under other headings - perhaps in a misguided attempt to avoid Section 102(b)(7) - only muddle the development of a coherent analytical framework. In this paper, we argue for a reinvigoration of the classic duty of care analysis to preserve the distinct roles played by the director's fiduciary duties.

Delaware, duty of care, corporate law, directors, Smith v. Van Gorkom, Omnicare

Abstract:
In this paper I mediate between the reality that securitizations serve useful, efficient purposes and the goal of preventing unnecessary corporate liquidations. Starting from the premise that the decision to include any party in a chapter 11 reorganization involves line drawing, I explain a principled reason for excluding some securitizations from the scope of chapter 11, while including other transactions - such as many of those at issue in Enron. Specifically, by considering the reasons why we ignore formalities in other related situations - under veil piercing, equitable subordination, and fraudulent transfer law - I explain why a line can be drawn that excludes typical securitizations from the chapter 11 estate. In the process, I suggest a functional analysis that would be more useful in making these types of determinations than the present reliance on whether or not there has been a true sale of assets as part of the securitization.

Securitization, Structured Finance, Chapter 11, Bankruptcy, Corporate Finance

Abstract:
In early 2005, the American Bankruptcy Institute awarded me a $345,000 grant to conduct the most comprehensive, independent empirical study of professional fees in chapter 11 cases to date. This report represents the results of that study.

Chapter 11, bankruptcy, insolvency, reorganization, professional fees, direct costs

Abstract:
Some of the most important - and most interesting - recent work in the area of corporate and sovereign bankruptcy is rooted in the late 1800s and early 1900s, the golden age of the railroad receivership. Yet we know very little about railroad or equity receiverships beyond how they worked in theory.

This paper remedies the existing gap in the literature by looking at a sample comprised of the largest railroads in the United States at the turn of the twentieth century, approximately half of which went through a receivership between 1890 and this country's entry into World War I. By examining the fate of these two groups of railroads after the World War, I am able to shed some light on the long-term effectiveness of receiverships. The results are striking.

The data shows that having undergone a receivership before World War I made a railroad more than two and a half times (i.e., 150%) more likely to undergo another receivership or bankruptcy after the War. The average railroad that reorganized under a receivership subsequently failed at a rate more than twice as high as railroads that had never gone through a receivership and almost three times as high as modern chapter 11 debtors. And the data shows that Morgan's involvement with a road had little effect on the road's ability to avoid financial distress.

Chapter 11, bankruptcy, sovereign debt restructuring, railroad receivership, equity receivership, reorganization, legal history, business history

Abstract:
The putative scourge of "cherry picking" provides the foundation for the Bankruptcy Code's special treatment of derivative contracts, which are not subject to the automatic stay or the Code's normal rules prohibiting termination solely as a result of one party's bankruptcy filing. Alternatively, some argue that the special treatment of derivatives is justified because "derivatives contracts are generally not firm-specific assets and therefore giving them special treatment will increase economic efficiency." In this paper I argue that neither argument is very convincing, and that derivative contracts should be subject to the general rules of bankruptcy in most cases.

Chapter 11, derivatives, safe harbor, CDS, Lehman, bankruptcy

Abstract:
Chapter 11 has healed itself. According to some of its leading critics, chapter 11 is no longer the long, expensive process that it was in the 1980s - when storied companies like Pan Am slowly wasted away their remaining value in a vainglorious attempt to survive in a changed marketplace. Today's chapter 11 is a swift, market driven process that quickly moves troubled companies into more capable hands. And the credit for this change goes to control rights. In particular, advances in financial contracting are said to allow the parties to agree about who should exercise control over the firm's assets in any particular state of the world. Chapter 11 has then become a system of corporate reorganization that is dominated by a single creditor, or at least a small group of sophisticated creditors.

In this paper I examine this putative new chapter 11. Unlike Baird, Rasmussen, and Skeel before me, I express some skepticism about the new state of affairs.

I begin by addressing two basic questions: should chapter 11 be dominated by a parochial group and who might suffer under such a regime? In particular, I look at whether chapter 11 is appropriately deployed to address a firm's financial distress when that firm has already allocated its control rights to a single actor or a concentrated group of actors, like a DIP lender. I conclude that if the control rights description of the new chapter 11 is accurate, chapter 11 will only be used when it benefits the controlling creditor, and we should expect these sorts of creditors to capture most or all of these benefits. Moreover, we should expect that in some number of cases, the use of chapter 11 under a control rights regime will not be overall efficient, in that any gains come with corresponding losses to non-consenting parties.

I then consider whether the empirical story told by these authors is plausible. Again in contrast to the leading scholars, I argue that control in a large modern firm is often inherently ambiguous and that control rights are always relative and state-dependant. Formal control may have little relation to actual, functional control. In this context, chapter 11 provides a forum for an organized resolution of these competing claims.

Chapter 11, bankruptcy, control rights, reorganization, Baird, Rasmussen, Skeel, Lubben

Abstract:
Chapter 11 has healed itself. According to some of its leading critics, chapter 11 is no longer the long, expensive process that it was in the 1980s - when storied companies like Pan Am slowly wasted away their remaining value in a vainglorious attempt to survive in a changed marketplace. Today's chapter 11 is a swift, market driven process that quickly moves troubled companies into more capable hands. And the credit for this change goes to control rights. In particular, advances in financial contracting are said to allow the parties to agree about who should exercise control over the firm's assets in any particular state of the world. Chapter 11 has then become a system of corporate reorganization that is dominated by a single creditor, or at least a small group of sophisticated creditors.

In this paper I examine this putative new chapter 11. Unlike Baird, Rasmussen, and Skeel before me, I express some skepticism about the new state of affairs.

I begin by addressing two basic questions: should chapter 11 be dominated by a parochial group and who might suffer under such a regime? In particular, I look at whether chapter 11 is appropriately deployed to address a firm's financial distress when that firm has already allocated its control rights to a single actor or a concentrated group of actors, like a DIP lender. I conclude that if the control rights description of the new chapter 11 is accurate, chapter 11 will only be used when it benefits the controlling creditor, and we should expect these sorts of creditors to capture most or all of these benefits. Moreover, we should expect that in some number of cases, the use of chapter 11 under a control rights regime will not be overall efficient, in that any gains come with corresponding losses to non-consenting parties.

I then consider whether the empirical story told by these authors is plausible. Again in contrast to the leading scholars, I argue that control in a large modern firm is often inherently ambiguous and that control rights are always relative and state-dependant. Formal control may have little relation to actual, functional control. In this context, chapter 11 provides a forum for an organized resolution of these competing claims.

Chapter 11, bankruptcy, control rights, reorganization, Baird, Rasmussen, Skeel, Lubben

Abstract:
In this short paper we examine how the sale of Lehman Brothers may have serious implications for asset backed financing.

Lehman, securitization, Lubben, bankruptcy, chapter 11, substantive consolidation

Abstract:
In this short paper I examine the growth of credit derivatives and the implications for corporate reorganization systems both in the United States and in other jurisdictions seeking to adopt chapter 11 like systems.

Chapter 11, corporate reorganization, CDS, credit derivatives, bankruptcy

Abstract:
In recent years critics have lambasted a corporate bankruptcy system that they see as nothing more than competing bankruptcy courts offer[ing] high fees to bribe the lawyers to bring them cases. Of course, big firm corporate attorneys earn lofty hourly rates in or out of bankruptcy court. And too often critics of chapter 11 make the mistake of assuming that the general agency problems inherent in all corporations can be solved by the bankruptcy system.

Exactly how much it should cost to reorganize a corporate entity is a matter of surprising elusiveness.

This paper provides the most extensive study to date of the professional fees and expenses awarded by U.S. bankruptcy courts in the reorganizations of American businesses. This study's database includes approximately 1,050 chapter 11 cases filed in 2004 - almost more than 1,000 more cases than the next largest American study.

Among the key findings of this study are:

- Most of the regulation of professional fees provided by the Bankruptcy Code is valuable primarily for its deterrence effects. Retention applications are rarely denied and requested fees are rarely reduced. This, of course, does not mean that the regulatory system is broken, but rather that much of the system is not easily viewed by outsiders.

- Unlike prior studies, I find that time spent in chapter 11 seems to have very little independent effect on the costs of the case. Factors like the size of the debtor corporation, the number of professionals retained, and whether a committee is appointed play much bigger roles.

- Professional fees in chapter 11 are subject to economies of scale. In particular, with every 1 percent increase in the size of a debtor, professional fees only grow by less than half a percent - holding other key factors constant.

- Lost in the sound and fury about large professional expenses in large cases is the fact that almost 35 percent of the chapter 11 cases result in no payment whatsoever to the professionals. These are typically smaller cases that are often converted to chapter 7 or dismissed outright.

chapter 11, direct costs, professional fees, bankruptcy, reorganization

Abstract:
We are in the midst of the most significant financial crisis since the New Deal, yet chapter 11 is notable mostly for its absence. Chapter 11 is thing that wrecked Lehman Brothers, and perhaps the credit markets. And the thing that the Federal Reserve and Treasury worked so hard to keep AIG and Bear Stearns away from. The thing that General Motors and Chrysler were working so hard to avoid.

In this short paper I examine the role of chapter 11 in a time of widespread financial distress. I argue that Lehman’s chapter 11 filing did not cause the current credit crisis, but rather Lehman’s failure caused the crisis. That failure was likely to occur with or without chapter 11, unless the government prevented it or mitigated its consequences, as in the case of AIG.

Chapter 11 has a role to play in a systemic crisis, by providing a framework for government intervention that avoids the need for the kind of intervention we have recently been seeing on an ad hoc basis. But I also argue that the growth of exceptions to chapter 11 -- like the safe harbor provisions for derivatives -- have reduced chapter 11's efficacy. It is time to reconsider the piecemeal erosion of chapter 11, and return to the more inclusive bankruptcy process that Congress enacted in 1978.

Chapter 11, systemic risk, TARP, safe harbors, dervivatives, bankruptcy, AIG, Lehman, GM

Abstract:
While several articles in the last decade have illuminated the basic costs that these professionals add to the chapter 11 process, little else is understood about the role of professionals in chapter 11. Even in the rarified world of public-company bankruptcies, the basic question of how debtors choose bankruptcy counsel has never been the subject of any empirical inquiry. But the choice of counsel has important implications - most notably, because some have argued that debtor's counsel may steer cases to jurisdictions like Delaware and New York, with possible detrimental effects on the debtor's reorganization. This short paper investigates several questions related to the choice of debtor's counsel by examining a new sample of 275 large chapter 11 cases commenced in 2001 through early 2005. Among other things, I find that this market has many more participants than might have been expected. And debtor size only explains a small part of the decision to hire one of the leading law firms as bankruptcy counsel. In short, the market for corporate bankruptcy counsel defies easy, anecdotal explanation.

Chapter 11, bankruptcy, counsel, direct costs

Abstract:
While several articles in the last decade have illuminated the basic costs that these professionals add to the chapter 11 process, little else is understood about the role of professionals in chapter 11. Even in the rarified world of public-company bankruptcies, the basic question of how debtors choose bankruptcy counsel has never been the subject of any empirical inquiry. But the choice of counsel has important implications - most notably, because some have argued that debtor's counsel may steer cases to jurisdictions like Delaware and New York, with possible detrimental effects on the debtor's reorganization. This short paper investigates several questions related to the choice of debtor's counsel by examining a new sample of 275 large chapter 11 cases commenced in 2001 through early 2005. Among other things, I find that this market has many more participants than might have been expected. And debtor size only explains a small part of the decision to hire one of the leading law firms as bankruptcy counsel. In short, the market for corporate bankruptcy counsel defies easy, anecdotal explanation.

Chapter 11, bankruptcy, counsel, direct costs

Abstract:
In this paper I revisit the data used in The Other Liquidation Decision to further examine the important question of liquidation of American businesses under chapters 7 and 11 of the Bankruptcy Code. In particular, I utilize a propensity score matching technique to address the differences between the chapter 7 and 11 cases in the sample. I also examine the use of weighted data to address the original study's selection protocols.

Some results are predictable: for example, unsecured creditors sometimes fare much better in chapter 11 liquidations. But other results are likely to surprise academics and chapter 11 practitioners alike. For example, even under a chapter 11 liquidation plan the median recovery to unsecured creditors is zero. At least half of the unsecured creditors will suffer a complete loss, regardless of the procedure the debtor uses to liquidate. And very few creditors ultimately receive the benefits of a chapter 11 liquidation - most chapter 11 cases convert to chapter 7 and very few liquidating plans are ultimately confirmed. Only 81 of 202 chapter 11 debtors in the sample filed plans, and only 43 of those plans were actually confirmed. Chapter 7 is thus the prevailing method of business liquidation, although a sizable number of firms first attempt either a reorganization or liquidation under chapter 11.

bankruptcy, liquidation, business, chapter 11, chapter 7, insolvency

Abstract:
Several recent studies have put the level of professional fees in large chapter 11 cases at about 2.5 percent of assets or less. This compares favorably with other significant corporate transactions. But little attention has been given to the issue of how professional fees are allocated within chapter 11 cases. Examining this issue is important because a significant strain of bankruptcy scholarship is premised on the notion that chapter 11 is excessively expensive, notwithstanding the existing evidence that suggests otherwise. In particular, these theorists employ the long-recognized principle that lenders will recoup anticipated losses through higher ex ante interest rates to support the argument that altering or even replacing chapter 11 will reduce the costs of debt financing and thus promote efficiency. But if most of the supposed costs of chapter 11 are in fact exogenous to the Bankruptcy Code, reductions in the cost of chapter 11 may have only a modest correlation with reductions in the cost of financial distress.

This paper thus offers the first look at the intra-debtor distribution of professional fees. I analyze a new sample of almost 4,000 attorney time entries, from more than 30 law firms, in 27 very large chapter 11 cases filed between 2001 and 2003 to look at several basic questions regarding the allocation of attorney's fees within chapter 11 cases. I find that up to 60% of the professionals fees in a bankruptcy case may be exogenous to chapter 11. I then develop the broader argument that ex ante costs are virtually irrelevant to current discussions of chapter 11.

Chapter 11, debt costs, professional fees, Lubben, bankruptcy, financial distress

Abstract:
Almost every leading corporate bankruptcy academic has spoken against the automotive bankruptcy cases. And the Chrysler and GM chapter 11 cases have been vilified in every major finance-focused media outlet - by everyone from Ralph Nader to Richard Epstein. In this short paper, originally written for the TARP Congressional Oversight Panel, I address the key academic arguments against the automotive chapter 11 cases and contextualize what happened in these two cases. Stripped of their speculation and 'what ifs,' I show that these arguments are no more persuasive than the loose, unsupported arguments thrown about in the popular press. But first, I show how these cases, and particularly their structure - a quick lender-controlled §363 sale - are entirely within the mainstream of chapter 11 practice for the last decade.

Chapter 11, financial distress, GM, Chrysler, bankruptcy, 363 sales

Abstract:
The core of business bankruptcy turns on a set of questions about the deployment of a distressed firm's assets. Among these questions, the decision to shut down - the liquidation decision - is central. The liquidation decision actually involves two decisions: the initial decision to shut down the firm and the second question of how? The first decision is widely discussed, the second is rarely acknowledged.

To examine the second part of the liquidation decision, this paper adopts two novel approaches to the problem at hand. First, I present the results of a new empirical examination of 473 firms that liquidated under chapters 7 or 11. This study is unique in that it is the first multi-district study to examine business liquidation in all its forms since the enactment of the current Bankruptcy Code in 1978.

Next, I use these empirical results to begin a discussion of the secondary liquidation decision in real option terms. In particular, the choice of liquidation tools itself offers claimants a valuable option, albeit one with a value limited by the short time in which this initial choice must be made. The subsequent ability to alter the initial choice as new information is revealed and uncertainties resolve themselves during the course of the bankruptcy case may be viewed as an option that can be exercised when a different liquidation tool will increase overall value. For example, the debtor's ability to convert from chapter 11 to chapter 7 can be seen as a put option which allows management to abandon the firm to a trustee when it becomes apparent that chapter 11 will not produce more value.

Bankruptcy, chapter 11, liquidation, real options

Abstract:
Nearly thirty years of chapter 11 scholarship offers little insight into the reasons why certain firms are unable to confirm a reorganization plan. This paper offers the first empirical model of why firms fail in chapter 11. Using a database of 945 chapter 11 cases filed in 2004, and a simple definition of chapter 11 failure as any case that is converted to chapter 7 or dismissed, I show that some of the most significant predictors of "failure" are observable on the first day of a chapter 11 case.

Chapter 11, bankruptcy, reorganization, financial distress, Lubben

Abstract:
In this short paper I develop an argument that chapter 11 does not give the large corporate debtor enough power, or, rather, gives too many other parties too much power. By framing chapter 11 as an open, consensual, equitable process in which all will be heard - including the federal government in the form of the United States Trustee - Congress created a system that allows parties with small or nonexistent stakes to delay the process while pursuing their own agendas. I therefore propose a new form of corporate reorganization that would allow a debtor to cancel or strip-down its unsecured debt, refinance it secured debt, and sell new equity, all without any voting by creditors or the chance for creditors to litigate most objections to the debtor's restructuring. I envision my plan as a new chapter to the current Bankruptcy Code, rather than a replacement for the current chapter 11. Debtors would then have a choice between restructuring tools. Further, the presence of this new chapter might have the additional benefit of improving the debtor's bargaining position in chapter 11. In short, corporate reorganization would improve even if no debtor ever used my proposed new chapter.

chapter 11, bankruptcy, financial distress

Abstract:
According to its critics, most prominently Lynn LoPucki, Delaware has become so desperate for large corporate bankruptcy cases that it has diluted its oversight of these cases, resulting in a dramatic increase in repeated chapter 11 filings. This, Professor LoPucki argues, is evidence of corruption in the corporate bankruptcy system. The defenders of Delaware acknowledge the higher refiling rate in Delaware but argue that surely Delaware must offer some advantage, given the sophisticated parties that continually decide to file there.

But all of this assumes that whether or not a case filed in Delaware is the proper criterion. Using a sample of 337 chapter 11 cases from Lynn LoPucki's Bankruptcy Research Database, I present a new regression model that predicts whether a large chapter 11 case will reenter bankruptcy within five years. Among the factors in the model are variables that capture debtor characteristics like asset size, variables that capture underlying economic conditions at the start and conclusion of the debtor's chapter 11 case, and variables that indicate whether or not the debtor was engaged in one of several key industries.

None of the variables in the equation relate to whether or not the case filed in Delaware. In fact, the model's performance substantially declines upon the inclusion of Delaware. The model also performs much better than a simple model that tries to predict refiling solely based upon whether or not a case is filed in Delaware.

My model does not conclusively prove Delaware's irrelevance to the issue of whether or not a case will enter bankruptcy again, but it challenges the faith that Delaware plays a key role in the problem of refiling and raises several additional important questions. Most notably, has the whole of bankruptcy scholarship been focused in the wrong place?

chapter 11, Delaware, bankruptcy, corporate

Abstract:
The United States' adoption of chapter 11 in the late 1970s began a process of world-wide reevaluation of the mechanisms for resolving financial distress. Especially following a series of financial shocks in the 1990s, corporate reorganization procedures have become vital parts of the new commercial laws of developing economies. At the same time, the United States and other developed economies have recently enacted procedures that suggest an increased willingness to respect and support reorganization in emerging markets. As signs of convergence, albeit at the most general of levels, begin to emerge with regard to the resolution of private-sector financial distress, the reality of global financial integration has greatly complicated the resolution of sovereign financial distress. In short, the general financial distress framework in emerging markets is still a work in progress, leaving gaps for regulators to address and investors to exploit.

Chapter 11, bankruptcy, insolvency, emerging markets, Lubben

Abstract:
Long before the enactment of the first corporate reorganization statutes in the 1930s, the federal courts developed a method of reorganizing financially distressed corporations, especially railroads, within the existing architecture of the equity receivership. From 1850 to 1932 these receiverships were the only form of relief available to financially distressed railroads, as they were prohibited from liquidating or filing under the Bankruptcy Act.

Several leading scholars have begun to ask if railroad receiverships might hold important insights into the issue of sovereign debt restructuring, or at least inform the analysis. This paper takes a closer look at the analogy between railroads and countries to see if it holds beyond its superficial appeal. In particular, I examine how railroad receiverships addressed the problems of holdouts and individual creditor action, the key stumbling blocks for most of today's approaches to sovereign debt restructuring. I conclude that receiverships overcame these problems in ways that could be useful with respect to today's sovereign borrowers, although the utility of receiverships should not be overstated. Plainly there are historical lessons awaiting application, but I argue that only selective and considered reference to the early days of corporate bankruptcy will translate into meaningful improvement of sovereign debt restructuring.

Sovereign Debt, Bankruptcy, Chapter 11, Railroad Receivership, Equity Receivership, Reorganization, Business History

Abstract:
This paper, written while I was a practicing lawyer, examines several leading theoretical alternatives to chapter 11 and explains why these theories never gained traction outside the academy.

Chapter 11, bankruptcy, insolvency, reorganization, Bebchuk, Adler, Schwartz

Abstract:
Bankruptcy scholars like to divide chapter 11 cases into piles. Big cases compared with small cases. Public company debtors compared with private companies. Cases greater than or less than a specified asset size. But much of this dividing happens with little more than hunch to support it, and sometimes the division is never discussed but only implied. In this short paper I look at a new dataset of almost one thousand chapter 11 cases that were filed in 2004. I find three distinct kinds of chapter 11 cases, but also find that the very biggest cases are not as different in result as their extra cost might suggest. I ultimately argue that very large cases would benefit from codification of many of the administrative procedures that are now routinely implemented by way of pleading, as doing so would reduce the direct costs of these cases.

Substantial revision posted on April 27, 2009.

Chapter 11, bankruptcy, insolvency, reorganization, direct costs

Abstract:
A firm's liquidation decision actually involves two decisions: the initial decision to shut down the firm and the second question of how?. In the federal bankruptcy system this second question involves a choice between chapter 11 and chapter 7. Conventional wisdom instructs that the debtor's management will always favor chapter 11 because the Bankruptcy Code mandates a trustee in every chapter 7 case, while in chapter 11 the norm is that the debtor and its management remain in possession, with the powers and obligations of a trustee. What has been little examined is how creditors fare in the choice between chapters.

To further examine the second part of the liquidation decision, I present the results of a new empirical examination of 449 firms that liquidated under chapters 7 or 11. This study is unique in that it is the first multi-district study to examine business liquidation in all its forms since the enactment of the current Bankruptcy Code in 1978.

Bankruptcy, Liquidation, Chapter 11, Chapter 7, Financial Distress

Abstract:
The "safe harbors" excuse derivatives from much of the normal operation of the Bankruptcy Code. This exception to the normal rules is justified by fears that involvement of derivatives in the bankruptcy process will increase systemic risk. But as I and others have argued, the safe harbors themselves are likely to increase systemic risk by encouraging a "run on the bank." As Congress considers a variety of responses to the financial crisis, I argue that it is time to repeal the safe harbors. I do not advocate pulling out sections of the Bankruptcy Code and leaving the Code otherwise the same. Derivative contracts are somewhat unique. The volatility, interconnectedness and sheer magnitude of the sums of money involved make financial firms unique. As part of the repeal that I suggest, the Code would have to adapt to these realities. But the safe harbors should be repealed.

Derivatives, chapter 11, safe harbors, ISDA, bankrupty, Lehman, AIG, systemic risk, close-out netting

Abstract:
In this paper we adopt a new approach to the issue and contextualize the cost of chapter 11 by comparison to the costs of business bankruptcy in the Netherlands. Using unique data-sets that each author has developed in connection with other projects, we match a group of comparable cases from each jurisdiction. The results not only contextualize chapter 11 by reference to a comparable international economy, but also provide important comparative insights.

Most importantly, we find that "law matters." In particular, because the two jurisdictions consider the cost of corporate reorganization in different ways - chapter 11 includes almost all professional costs incurred during the case to be chapter 11 costs, whereas the Netherlands considers a narrower range of professionals - the difference in jurisdictions is initially the most important factor in explaining the cost of reorganization. We then account for these legal distinctions, and find that economic factors like the size of the debtor and the degree to which the firm's debts are secured explain most of the cost of corporate bankruptcy - irrespective of jurisdiction.

chapter 11, bankruptcy costs, direct costs, financial distress, Netherlands

Abstract:
The 2005 changes to the U.S. Bankruptcy Code represent the first significant step away from a long-term inclination toward corporate rescue. In doing so, Congress, however unwittingly, partially reunited American corporate bankruptcy practice with its long forgotten, much smaller twin, Switzerland. Why would Congress want to move the American system in this direction? To address this key question, I offer a comparison of corporate reorganization systems in these two leading commercial, federal systems. In particular, I examine the Swiss system for rescuing failed companies and compare it with the post-BACPA version of chapter 11. While the American system clearly remains more “debtor friendly,” the space between the two systems has significantly narrowed. More generally, through this short paper I demonstrate how Congress’ ill-conceived amendments to chapter 11 may have damaged a corporate reorganization system that is increasingly the subject of imitation worldwide.

Chapter 11, corporate reorganization, bankruptcy, Switzerland, BACPA, financial distress

Abstract:
In this paper I look at a sample of firms that filed for chapter 11 protection in 1994. Unlike most other studies of the direct costs of chapter 11, this sample includes both public and private firms. The direct costs of chapter 11 - defined as professional fees and expenses for purposes of this paper - are found to represent 2.5% of pre-bankruptcy assets, when prepackaged cases are excluded from the sample. The paper then finds that this figure is comparable to the costs of other significant corporate transactions.

chapter 11, direct costs, financial distress