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Abstract:
The Business Bankruptcy Project is a five-year empirical study of about 3,200 business cases originally filed in Chapter 7, Chapter 11 and Chapter 13 in 23 judicial districts during 1994. This first report focuses on financial and demographic data, creating a statistical profile of the businesses in bankruptcy. The data reported in this paper include assets, debts, solvency, corporate or individual debtor type, classification of industries, number of employees, and reasons for filing; the data are reported in the aggregate, by chapter of filing, and by district. These data are used to test a number of hypotheses about the operation of the business bankruptcy system. The report also reveals anomalies in the system, such as certain large debtor companies that file no bankruptcy schedules at all.

The sample is marked by its diversity, which includes a large number of small businesses and a small number of large businesses. Among the business debtors are a surprising number of natural persons in Chapter 11, a procedure designed around a corporate template. Across all three chapters there is substantial overlap of consumer and business debt, with many business debtors reporting a combination of business and personal reasons as triggers for their bankruptcy filings. Financially, the sample as a whole is solvent, with more than 25% of Chapter 11 business debtors claiming balance-sheet solvency. The social impact of bankruptcy is emphasized by its effect on employees. Although many of businesses are small by most measures, extrapolation from the reported data suggest that as many as 2 million employees a year find their employers going into bankruptcy. Real estate companies are prominent in Chapter 11, and more than half of them claim to be solvent.

Abstract:
The corporation's core objective is to further the interests of shareholders. But one judicially crafted exception has long existed. In many jurisdictions around the world, financial distress mandates a shift to a duty to creditors. In May 2007, the Delaware Supreme Court announced a modern law of duty shifting.

This Article's prescription and reasoning break with existing law and critiques. We urge abolition of the doctrines. The result would be a duty to creditors arising upon a formal bankruptcy filing. This legal step, not "insolvency" or another financial metric, would be determinative.

Our reasoning is structural. First, the doctrines conflict with the corporate governance structure, one consisting of two alternative systems: the corporate governance system rooted in state law and the bankruptcy corporate governance system rooted in federal law. The mechanisms of the normal system promote the largely unitary interests of shareholders while those of the bankruptcy system primarily protect the disparate interests of creditors. By imposing creditor-oriented goals on corporations subject to the shareholder-oriented governance system, duty shifting mismatches ends and means.

Second, the doctrines misconceive the structure of shareholder ownership rights. Using a myopic residual claimant analysis, they ignore call option-like economic rights as well as voting and other "embedded rights" inherent in the concept of shareholder. Moreover, duty shifting imposes a unique duty on corporate debtors, depriving shareholders of property without justification, disclosure, or legal process.

Following the abolition of duty shifting, the task at hand will be to determine the optimal transition between the two governance systems.

bankruptcy & reorganization, corporate governance, corporate investment, corporate objective, Credit Lyonnais, creditor rights, diversification, fiduciary duty, financial distress, hedging, ownership, risk-taking, shareholder rights, shareholder wealth maximization, troubled companies, voting rights

Abstract:
Universalism-administration of multinational insolvencies by a leading court applying a single bankruptcy law-is the correct long-term solution to the problem presented by the general default of a multinational company. Bankruptcy is one of those laws that cannot perform its function unless it is symmetrical to the market in which it operates. Virtually all theorists share this view and it is reflected in the nearly unanimous practice of nations, including the United States. The only substantive objection is that universalism would too greatly submerge national policies, but experience in the United States and elsewhere demonstrates that a national, market-symmetrical law can largely accommodate local policies. In the same way, an international system could permit considerable play to varying national policies and could enforce them more effectively against multinationals. Although it is argued that universalism is unlikely to be achieved in the foreseeable future, globalization is producing enormous pressures for legal convergence and those pressures are most likely to prevail as to laws that require market-symmetry to be successful. Many of the obstacles to universalism are also obstacles to coordination and harmonization in anti-trust, securities laws, and other business laws. Solutions in each area will feed solutions in the others, if globalization continues. Contractualism as an alternative to universalism is not workable domestically or internationally unless based on a system of dominant security interests. The theoretical benefits of such a system remain highly controversial and its prospects for international adoption are bleak. "Modified universalism" as proposed in the American Law Institute Transnational Insolvency Project is the best interim solution pending movement to true universalism, because its pragmatic flexibility provides the best fit with the current patchwork of laws in the global market and because it will foster the smoothest and fastest transition to true universalism.

International Bankruptcy, universalism, transnational, territorialism

Abstract:
Nearly every country in the world has a legal regime devoted to the process of recovery and distribution of value following a general default by a debtor in business. In the United States, we have both a public and a private regime that may govern the recovery process. The public regime is bankruptcy and the private regime is secured credit. Any regime governing the recovery process must include two components: (1) control of the process that maximizes value and allocates that value to chosen beneficiaries; and (2) rules of priority that specify the beneficiaries and their shares of the value. The greater sophistication of the modern recovery process means that control of that process crucially influences outcomes, but the theoretical literature discussing bankruptcy and secured credit has been devoted to questions of priority rather than control. Control is the central subject of this Article. New models of secured credit and bankruptcy are proposed, incorporating the concept of control as fundamental to both regimes. The struggle for control is the essential linkage between them. A number of consequences follow from these new models. Development of these consequences is the author's larger project, but only one of them is fully explored in this Article.

"Contractualism" is a term describing a variety of proposals for privatizing the recovery process through contracts between a debtor and its creditors. This Article argues that these proposals cannot be legitimate or efficient unless linked to a dominant security interest encumbering substantially all of the debtor's assets, even though none of the scholars proposing contractual regimes has acknowledged that the contractual schemes require security to be plausible. Because secured-credit law in the United States is in place and highly functional, it represents the only method for resolving the otherwise intractable difficulties presented by these privatization proposals. That conclusion is confirmed by the United Kingdom's experience with a contractualist system based upon a dominant security interest, a system that has served as the core structure of commercial finance in that country for over a century.

Recognition that secured credit is the sina qua non for contractualism presents some serious difficulties for its proponents, including underdeveloped claims of efficiency and substantial conflicts of interest in secured-party management of the recovery process. The abolition of the British system in 2003 demonstrates empirically the serious weaknesses of secured contractualism. This Article concludes that the case for secured contractualism cannot be made. The control models give rise to a number of consequences mentioned here but left for subsequent development, including: (1) the need to introduce valuation of control rights, pre- and post-default, to the long-standing debate about the efficiency of secured credit - a point closely tied to the specific debate about securitization of assets; and (2) the relationship between the control models offered by other recent articles and the models presented here.

Bankruptcy, reorganization, control, secured credit, administrative receivership, veto, priority

Abstract:
A central concern in domestic economic policy has been the great increase in consumer bankruptcy filings since 1980. That concern was a major cause of the adoption of the 2005 amendments to the Bankruptcy Code. We analyze the data from three studies of consumer bankruptcy over twenty years to learn more about the causes of that increase. One consistent claim has been that a decline in reputational loss (stigma) has made filing for bankruptcy easier, thus explaining the rise in filings. The principal competing claim has been that increased filings arise from increased financial distress. We find that the declining-stigma hypothesis is implausible because the data show that consumer bankrupts are even more indebted now than their counterparts were in 1981 and 1991 and that there is no identifiable group of less-indebted bankrupts that were tempted into bankruptcy by reduced reputational costs. Those data and other factors support an inference that the stigma of bankruptcy may have increased over the past twenty years.

bankruptcy, consumer

Abstract:
Chapter 11 has greatly influenced bankruptcy reforms all over the world, but has been attacked as imposing great costs and delay with relatively meager rates of success as measured by confirmation of plans. Although some recent data have hinted at a less negative picture of the efficiency of Chapter 11, it is now also claimed it has become a mere liquidation device controlled for the benefit of creditors, with equity owners dismissed at the door. This paper reports data from two large multi-district studies of business bankruptcy for cases filed in 1994 and 2002. It finds a confirmation rate up to 70% among cases with a realistic change of success and an overall system that disposes of losers quite early in the process. The paper confirms that there was a sharp increase in the use of Chapter 11 for liquidation between 1994 and 2002, but reports that equity owners still retain an interest going forward in a majority of cases.

Bankruptcy, Chapter 11, Reorganization, Corporate, Coprorate Finance, Empirical

Abstract:
In this essay we offer brief reflections on the best process for critiquing empirical work in law and sustaining an engagement between theoretical and empirical approaches. We emphasize the importance of theoretical work in helping to shape the scholarly agenda, but we urge that theory should be more closely tied to fact. We illustrate our argument by responding to a recent critique of our own empirical work by Professor Rasmussen. His principal claim is that our work should be discounted because we reported on all business bankruptcies, both those of entrepreneurs and those in corporate form. In response, we reanalyze our data, separating the individuals from the corporations; in every case the re-analyzed data support the conclusions of our original paper to the same extent or more strongly. Similarly, his other claims about our work are shown to be incorrect.

theoretical, empirical, scholar

Abstract:
This article draws upon data from a large empirical study of business bankruptcy cases to cast serious doubt upon two of the fundamental premises required to support claims that bankruptcy law should be replaced by default procedures established by contract. A number of proposals have been made to privatize the bankruptcy process by contract. The proponents of these contractualist approaches assume that default structures bargained in the marketplace will reduce transaction costs and improve post-default outcomes. Although these proposals necessarily affect materially the interests of third parties, their proponents suggest devices that are claimed to make that process efficient and non-redistributive.

One premise underlying a contractual approach is that third parties can adjust their prices and terms to account for the effects of the proposed bankruptcy contracts. Prior scholarship has cast doubt on this premise by identifying categories of involuntary and maladjusting creditors who could not make such adjustments. This article for the first time quantifies that critique, showing that in most business bankruptcies there are many such involuntary or maladjusting creditors. Second, contractual theories necessarily assume that many or most business bankruptcies involve relatively few claims, because numerous claims, especially small ones, would impose transaction costs that are substantial enough to make individual negotiation or even unilateral adjustment by each creditor impossible. In fact, the data reveal that the typical business bankruptcy case presents many claims that are too small to be adjusting. These data demonstrate that a contractualist system will likely produce substantial inefficiencies, including a redistribution of wealth to the parties to the proposed bankruptcy contracts. The data support the superiority of a model of bankruptcy law that provides a non-waivable, collective infrastructure for the resolution of a multiparty economic problem.

bankruptcy, business, contractualism

Abstract:
From the perspective of planning commercial transactions, the application of the avoiding powers may be the single most important aspect of multinational insolvency/bankruptcy cases. The French case is a Court of Appeals case that applies United States law to avoid a pre-bankruptcy transfer of real estate in Bermuda. Being reluctant to litigate the question of the debtor's status as a trader, the trustee wanted to use Cayman avoidance law which applied whether the debtor was a trader or not. Thus in Al Sabah, if the Cayman Islands settlement-avoidance law was not part of its bankruptcy law, and if the Cayman courts had interpreted their law to permit its use by a trustee in bankruptcy, a United States trustee could avoid the settlement under Cayman law and distribute the proceeds in the United States proceeding without the policy anomalies I have asserted above. The analysis is different from the earlier one because the Cayman nonbankruptcy avoidance law would be intended to benefit any creditor, not to protect the creditors specified in a bankruptcy distribution scheme. As things stand, a creditor or other transferee of a cross-border transfer faces a risk of action under a law with seemingly little contact with the transaction or the debtor.

Bankruptcy, International Law, Choice of Law, Conflict of Law

Abstract:
Although Chapter 11 has served as a model for bankruptcy reform around the world, the conventional wisdom has been that it is characterized by a relatively low success rate and endless delay. The data from large samples of Chapter 11 cases filed in 1994 and 2002 demonstrate that this characterization is wrong. Nearly all troubled companies choose Chapter 11 over Chapter 7 liquidation, which means that the system serves a critical screening function to eliminate hopeless cases relatively quickly. Almost half the unsuccessful cases were jettisoned within six months and almost eighty percent were gone within a year. The cases that survive the early screening result in confirmed plans of reorganization around seventy percent of the time. The mistaken conventional view has not only skewed the academic debate, but also prompted changes to the statute in 2005 regarding small business reorganizations, changes that may have produced little benefit in reducing delay at the price of blocking many small business reorganizations of a sort that were succeeding prior to the amendments.