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Abstract:
This paper builds on the theory of human identification proposed by Professor Roger Clarke and uses the product as the basis for a proposed solution to the identity theft problem. The expanded theory holds that all human identification fits a single model. The identifior matches the characteristics of a person observed in a first observation with the characteristics of a person observed in a second observation to determine whether they are the same person. From the theory it follows that a characteristic used for identification in the credit reporting system, such as social security number, mother's maiden name and date of birth, must be known to all entities participating in that system. Because those characteristics - and any substitute for them - must be distributed so widely, it is unrealistic to think they can at the same time remain secret. Hence the current efforts to curb identity theft by keeping personal information secret are doomed to failure.

As an alternative solution to the identity theft problem, this paper proposes a system by which persons concerned about identity theft can register their identities through a government agency that will make their names, social security numbers, and non-sensitive contact information publicly available on an open-access website. Credit grantors and credit reporting agencies would have the option to contact the registrant to verify that he or she is in fact the credit applicant. Creditors who opted to use the system to identify a borrower would retain their current exemption from legal liability for misidentification. Those who did not would be liable for misidentification under common law principles, including theories of defamation, invasion of privacy, and negligence. In cases in which credit grantors and credit reporting agencies used the system, the effect would be to give the individual person control over the process of his or her own identification in credit transactions, with no meaningful loss of privacy.

identity theft, human identification, privacy, information privacy, social security numbers, identification, fair credit reporting act, credit reporting system, consumer credit, consumer credit reporting

Abstract:
This article presents the findings of an empirical study of professional fee and expense awards by United States Bankruptcy Courts in 48 large public company bankruptcy cases concluded from 1998 through the first half of 2002. Data was gathered from fee applications and orders in the courts files. Using that data together with case and company data from the Bankruptcy Research Database, the authors constructed regression models of the determinants of (1) the amounts of professional fees and expenses awarded by case and (2) the amounts of debtor-in-possession bankruptcy attorneys fees awarded by case. Two determinants dominate both models: the value of the reorganizing firm's assets and the length of time the case remains pending. Two additional factors contribute to determining the amount of professional fees and expenses, but not debtor in possession bankruptcy attorneys fees: the number of professional firms working in the bankruptcy case and whether the case was in the Delaware bankruptcy court.

The ratio of fees and expenses to firm size was subject to a scale effect. As the size of the case increased, the ratio of fees to expenses declined. For the 48 cases studied, total fees and expenses were 1.4% of assets reported on the bankruptcy petition. The average ratio of fees and expenses to assets was 2.2%, but removal of a single outlier reduced it to 1.9%. Controlling for firm size, case duration, and the number of professional firms working, fees were 32% higher in Delaware cases. But controlling only for firm size, the significance of this finding disappeared. Fee cuts were generally small - exceeding 4% of the amounts applied for in only 11% of the cases. The mean fee cut varied significantly by court. Delaware cuts averaged 0.7%, New York 4.5%, and Other Courts 2.3%. The differences in fee cuts among courts was significant, but fees were not significantly lower in cases with larger fee cuts.

Based on a comparison of the data gathered in this study with the data gathered by Weiss, inflation-adjusted professional fees and expenses awarded in large, public company reorganizations have fallen by about 57% since the 1980s. Controlling only for firm size, the difference is statistically significant. The decline in fees appears to be associated with the decline in case duration that occurred during the period.

Abstract:
This paper extends Professor Margaret Blair and Lynn Stout's pathbreaking Team Production Theory of Corporate Law to the bankruptcy reorganization of public companies. The paper begins by describing the prevailing contractarian theory of bankruptcy reorganization, the Creditors' Bargain theory propounded by Professor Thomas Jackson in 1982. The paper briefly describes the Team Production Theory of Corporate Law and then projects the consequences of that theory for the firm in bankruptcy. The final part of the paper compares the Team Production Theory of Bankruptcy Reorganization with the Creditors' Bargain theory, reaching two conclusions. First, the Team Production Theory of Bankruptcy Reorganization describes the bankruptcy system more accurately than does the Creditors' Bargain theory. Second, if the empirical assumptions underlying the Team Production Theory of Corporate Law theory are accurate, the ex ante maximization recommended by the Team Production Theory of Bankruptcy Reorganization will better serve the goal of economic efficiency than the ex post maximization recommended by the Creditors' Bargain theory.

bankruptcy, bankruptcy reorganization, reorganization, creditors' bargain, team production, public companies, public corporations, externalization, board of directors, shareholder primacy, director primacy

Abstract:
In an article recently published in the Stanford Law Review Professors Douglas G. Baird and Robert K. Rasmussen assert that big-case bankruptcy reorganizations have "all but disappeared" and give three theoretical explanations. This reply provides empirical evidence that the assertion is wrong; reorganizations not only survive but are booming. It then explains how their theoretical explanations led Baird and Rasmussen to the wrong conclusion.

In their first explanation, Baird and Rasmussen note that modern firms have few firm-specific or dedicated assets. From that observation, they argue that the firms have no going concern value. This reply argues that the going concern value of bankrupt firms exists independently of the firm's assets and does not depend on their nature. Instead, going concern value inheres in the relationships among people and assets. Modern firms continue to generate those relationships and so continue to have substantial going concern value.

Baird and Rasmussen's second explanation relies on asserted recent advances in bankruptcy contracting. They claim those advances made it possible to deliver control rights dynamically to investors whose incentives match the interests of the firm. Through these contracts, creditors who are the residual owners of the firm are put in control of the firm, rendering reorganization superfluous. This reply notes that Baird and Rasmussen supply no description of the contracts involved. It also provides empirical evidence that the pattern of contracting claimed is impossible because no single class of residual owners exists in most bankrupt firms.

In their third explanation, Baird and Rasmussen argue that improvements in the market for firms have made sale as a going concern an effective substitute for reorganization. This reply explains why reorganizations would continue even if firms could be sold for their full going concern values.

bankruptcy, reorganization, bankruptcy reorganization, corporate reorganization, bankruptcy contracting, residual owner, asset specificity, nature of the firm, liquidation

Abstract:
This essay argues that the decline of public identities over the past three decades, combined with increasing secrecy in the process of identification, is the root cause of the burgeoning problem of identity theft. Identity theft is easy because impersonation increasingly takes place in private transactions that are invisible to the victim. The essay compares two proposed solutions: Professor Daniel Soloves' architectural approach and the author's Public Identity System. Both would make the identification process transparent to the person identified, put imposters at risk by requiring personal appearances, and ban the use of social security numbers as passwords. But the two writers take opposing positions with respect to continued secrecy of the information used to identify consumers. Solove would maintain the link between identification information (name and social security number) and personal information (information descriptive of the consumer or the consumer's circumstances) and seek to impose better security to keep all of it from thieves. The author would sever the link between the two kinds of information, make identification information - which is harmless - public, and allow consumers to use it to create public, thief-proof identities. The essay explains the operation of the Public Identity System the author proposed in Human Identification Theory and the Identity Theft Problem, 80 Texas Law Review 89 (2001) and addresses Solove's objections related to the public display of social security numbers, consumer profiling, stalking, marketing abuse, and other aspects of the proposed System.

identity theft, privacy, human identification, Solove, Public Identity System, social security numbers, public identity, Fair Credit Reporting Act, credit reporting system, credit reporting agencies, identification, password, stalking, credit files

Abstract:
By the conventional view, case outcomes are largely the product of courts' application of law to facts. Even when courts do not generate outcomes in this manner, prevailing legal theory casts them as the arbiters of those outcomes. In a competing strategic view, lawyers and parties construct legal outcomes in what amounts to a contest of skill. Though the latter view better explains the process, no theory has yet been propounded as to how lawyers can replace judges as arbiters. This article propounds such a theory. It classifies legal strategies into three types: those that require willing acceptance by judges, those that constrain the actions of judges, and those that entirely deprive judges of control. Strategies that depend upon the persuasion of judges are explained through a conception of law in which cases and statutes are almost wholly indeterminate and strategists infuse meaning into these empty rules in the process of argumentation. That meaning derives from social norms, patterns of outcomes, local practices and understandings, informal rules of factual inference, systems imperatives, community expectations, and so-called public policies. Constraint strategies operate through case selection, record making, legal planning, or media pressure. Strategists deprive judges of control by forum shopping, by preventing cases from reaching decision, or by causing them to be decided on issues other than the merits. The theory presented explains how superior lawyering can determine outcomes, why local legal cultures exist, how resources confer advantage in litigation, and one of the means by which law evolves.

Abstract:
For more than two decades, scholars working from an economic perspective have criticized the bankruptcy reorganization process and sought to replace it with market mechanisms. In 2002, Professors Douglas G. Baird and Robert K. Rasmussen asserted in The End of Bankruptcy, an article published in the Stanford Law Review, that improvements in the market for large, public companies had rendered reorganization obsolete. Going concern value could be captured through sale.

This article reports the results of an empirical study comparing the recoveries in bankruptcy sales of large public companies in the period 2000-2004 with the recoveries in bankruptcy reorganizations during the same period. We find that, controlling for company values reported at case commencement, pre-filing operating profits, and post-filing operating profits, the recoveries in reorganization cases are more than double the recoveries from going concern sales. We attribute the low recoveries in sale cases to continuing market illiquidity and the corruption of the bankruptcy process by competition among bankruptcy courts for large, public company cases.

We also find that bankruptcy recoveries are higher in years when merger and acquisition activity is higher for reasons other than high stock prices. Lastly, we find that bankruptcy recoveries are higher when debt capacity in the debtor's industry is lower - the opposite effect predicted by Professors Andrei Shleifer & Robert W. Vishny in their landmark article in 1992.

bankruptcy, sales, reorganizations, recoveries, market, merger and acquisition, corruption

Abstract:
In economic theory, the residual owner is the perfect person to control the bankrupt firm. The residual owner risks its own money and has incentives identical to those of the firm. But in more than fifteen years of trying, scholars have not been able to specify a mechanism that would identify the residual owner of a bankrupt firm and put that residual owner in control. Despite this lack of success, scholars continue to frame their theories in terms of residual owners and continue to propose mechanisms. The most recent was proposed by Baird and Rasmussen in 2002.

This article recounts the theoretical debate and presents the findings of an empirical study. The principal finding was that no single residual owner class existed in the large majority of reorganizing firms studied. Instead, investors from more than one priority level shared the marginal dollar of gains or losses. The article concludes that no mechanism can identify and empower the single residual owner class because, in the large majority of cases, no single residual owner class exists.

The study included data on 78 to 86 of the 98 large, public companies that emerged from bankruptcy reorganization from 1991 to 1996. Tables present class-by-class data on percentage recoveries by unsecured and shareholder classes in each of the cases. Creditor investors were considered residual owners if they recovered at least 10% and less than 90% of their claims. Shareholders were considered residual owners if they received at least 10% of the stock of the emerging firm and that stock had a value of at least $5 million.

The data show that investors at different levels of priority shared residual owner status in more than 62% of the cases. The average number of investor priority levels in the reorganizing firms was 4.3; the median was 4. Subordinated debt existed in 70 of 86 cases (81%).

residual owner, residual claimant, bankruptcy, bankruptcy reorganization, subordinated debt, priority, control rights, plan of reorganization, investor priority levels, corporate groups, bankruptcy judges

Abstract:
In the early 1990s, Delaware replaced New York as the jurisdiction of choice for the bankruptcy reorganization of large, public companies. In an empirical study of 188 companies emerging from bankruptcy reorganization from 1983 through 1996, the authors found that the refiling rates for public companies reorganized in Delaware and New York were about five to seven times the refiling rates for companies reorganized in other courts. Nine of the thirty large, public companies emerging in Delaware from 1991 to 1996 (30%) have already refiled. New York rates were higher during the period of New York's dominance than during the period of Delaware's dominance and higher for the judge who attracted cases to New York in the 1980s than for other judges on the New York court. Delaware and New York rates were highest for prepackaged bankruptcies; the opposite was true for other courts' rates.

The authors argue that Delaware refiling rates are probably higher than efficient. They conclude that New York, and later Delaware, each won its dominance of bankruptcy reorganization at least in part by confirming plans likely to lead to the necessity for further reorganization. Based on their conclusion that companies probably are seeking inefficient reorganizations in Delaware, the authors speculate that companies may also be seeking inefficient incorporations there.

The authors also found that public companies emerging from bankruptcy are more than four times as likely to file for bankruptcy reorganization as are public companies generally. The refiling rate for emerging companies is double the background rate for the first year after confirmation. It climbs to more than four times the background rate by the third year after confirmation and then declines to about three times the background rate by the eighth year after confirmation.

Delaware, refiling, Chapter 11, bankruptcy, reorganization, race to the bottom, race to the top, New York

Abstract:
In the early 1990s, Delaware replaced New York as the jurisdiction of choice for the bankruptcy reorganization of large, public companies. In an empirical study of 188 companies emerging from bankruptcy reorganization from 1983 through 1996, the authors found that the refiling rates for public companies reorganized in Delaware and New York were about five to seven times the refiling rates for companies reorganized in other courts. Nine of the thirty large, public companies emerging in Delaware from 1991 to 1996 (30%) have already refiled. New York rates were higher during the period of New York's dominance than during the period of Delaware's dominance and higher for the judge who attracted cases to New York in the 1980s than for other judges on the New York court. Delaware and New York rates were highest for prepackaged bankruptcies; the opposite was true for other courts' rates.

The authors argue that Delaware refiling rates are probably higher than efficient. They conclude that New York, and later Delaware, each won its dominance of bankruptcy reorganization at least in part by confirming plans likely to lead to the necessity for further reorganization. Based on their conclusion that companies probably are seeking inefficient reorganizations in Delaware, the authors speculate that companies may also be seeking inefficient incorporations there.

The authors also found that public companies emerging from bankruptcy are more than four times as likely to file for bankruptcy reorganization as are public companies generally. The refiling rate for emerging companies is double the background rate for the first year after confirmation. It climbs to more than four times the background rate by the third year after confirmation and then declines to about three times the background rate by the eighth year after confirmation.

Delaware, refiling, Chapter 11, bankruptcy, reorganization, race to the bottom, race to the top, New York

Abstract:
In a study of the division of professional fees in 74 large, public company bankruptcy cases concluded from 1998 through 2003, we find that 79% of court-awarded fees are awarded for services rendered directly to the debtor in possession. Only 20% are awarded for services rendered to creditors committees, only one half of one percent are awarded for services rendered to equity committees, and less than one percent are awarded for services rendered by court appointed professionals.

Fifty-three percent of the fees were awarded to attorneys, 42% to financial advisors, 5% to accountants, and a fraction of 1% to all other professions combined. Of the 53% that went to attorneys, more than two thirds went to bankruptcy attorneys and less than one third went to "special" or "ordinary course" counsel performing nonbankruptcy work.

We estimated regression models for the fees of each of five types of professionals: (1) attorneys, (2) DIP bankruptcy attorneys, (3) DIP special attorneys, (4) financial advisors, and (5) DIP financial advisors. Debtor size, case duration, and the number of attorney firms working were the principal determinants of attorneys fees. But those factors were only weak determinants of financial advisors' fees. The strongest determinants of financial advisors' fees were court (the Delaware and New York courts awarded more to financial advisors) and the trend over time. Over the period of our study, the fees of financial advisors increased at the rate of 25% per year. Courts did not award higher fees to financial advisors in cases where the debtor sold its business or a controlling interest in its business.

By comparing the results of our study with the results of LoPucki and Whitford's study of reorganizations in early 1980s, we find a sharp increase in the employment of financial advisors by creditors' committees and a sharp decline in the employment of professionals by equity committees.

We found that several factors thought to cause DIP bankruptcy attorneys fees to be higher in fact did not. They include whether the DIP lead attorneys were a New York firm, whether the DIP lead attorneys were from a city distant from the courts, and the hourly rates charged by the attorneys.

bankruptcy, reorganization, professional fees, attorneys fees, financial advisors, investment bankers, direct costs, special counsel

Abstract:
Based on systems/strategic analysis, this paper predicts the complete failure of legal liability system. Liability is the system by which injured persons recover money damages from those who injure them. The system operates through the entry and enforcement of judgments by the courts. The paper argues that the system is vulnerable to defeat by a variety of judgment proofing techniques which can be categorized as secured debt strategies, ownership strategies, exemption strategies, and foreign haven strategies. Computerization has recently brought about dramatic reductions in the costs of pursuing these strategies, making them cost effective for more potential defendants. As use spreads, the cultural and political barriers to judgment proofing will decline, leading to wider use of the techniques and ultimately to system failure. The paper examines a variety of strategies by which the system might respond, including shareholder unlimited liability, involuntary creditor priority, asset provider liability, enterprise liability, mandatory insurance, and financial responsibility laws. The paper concludes that judgment- proofing strategists will be able to overcome all of them.

Abstract:
In recent years, about 70% of the large, public firms that file for reorganization choose the bankruptcy courts of Delaware (about 55%) or New York (about 15%). In an earlier study, LoPucki and Kalin found that firms emerging from those courts refiled bankruptcy at rates four to seven times the rate for firms emerging from other U.S. bankruptcy courts.

The study reported in this paper examines all 98 firms emerging as public firms from the bankruptcies of large, public firms in U.S. bankruptcy courts from 1991 to 1996, the period of Delaware's ascendency. Using four measures of failure, refiling, business discontinuation, post-bankruptcy earnings, and plan failure, this study finds rates of Delaware failure ranging from two to ten times the rates of Other Court failure in the five years after emergence. New York's failure rates were between those of Delaware and Other Courts. The study concludes that firms emerging from Delaware and New York reorganizations fail more often.

Prefiling characteristics of the firms, including measures of their sizes and levels of financial distress, were not related to failure. Nor were there important measurable differences in the firms choosing Delaware or New York and those choosing Other Courts. The study concludes that characteristics of the filing firms do not cause Delaware and New York's high failure rates.

The study discovered five characteristics of the reorganization process that may contribute to Delaware's higher failure rates. Delaware reorganization appears not to fix the business; firms emerge from Delaware reorganization with higher leverage; prepackaged cases fail heavily in Delaware but not in Other Courts; Delaware reorganization is faster; and Delaware plans are simpler. The paper concludes that the causes of Delaware's high failure rates are endogenous to Delaware's reorganization process. Large public firms in financial distress are flocking to the bankruptcy courts least likely to reorganize them successfully.

bankruptcy, reorganization, Delaware, New York, failure, refiling, Chapter 22

Abstract:
In an empirical study of professional fees and expenses in 74 large public company bankruptcies concluded 1998-2003, we found that (1) controlling for the trend over time and the geographical location of the cases, company size (measured by assets), case duration (measured in days), and the number parties (measured by the numbers of professional firms working) explain nearly 87% of the case-to-case variation in professional fees, (2) fees and expenses increased about 9% per year over the six year period covered by our study, (3) five of six predictors of fees and expenses exhibited a strong scale effect, (4) the scale effect for company size is so severe that reporting fees as a simple percentage of assets is misleading, (5) using the same model we used with court file data our variables explain 86% of the case-to-case variance in the amounts of professional fees and expenses reported in SEC filing data, and (6) fees and expenses reported in SEC filing data are highly correlated with those reported in court file data, but are 59% higher.

The principal determinants of fees and expenses assets, days in bankruptcy, and the number of professional firms working appear to us to measure not only the need for professional services, but also the opportunity for professionals to bill. In an attempt to statistically isolate this billing opportunity component of fees and expenses, we compiled a second set of variables employees, docket length, and reorganization plan classes that we believe measures case complexity without measuring billing opportunity. When those variables are substituted for the principal determinants, the regression explains substantially the same percentage of variance in fees and expenses. This second, complexity-only model predicts fees that, controlling for scale, are significantly lower for companies with assets greater than about $1 billion. We theorize that this systematic difference in the two models' predictions measures the billing opportunity component of fees and expenses in large public company bankruptcies.

professional fees, attorneys fees, bankruptcy, fees

Abstract:
No general rule of law renders trademark owners liable for products sold or business conducted under the trademark. This essay proposes the adoption of such a rule. The rationale for the change is that businesses are known by their trademarks, not their entity names, in the marketplace. The vast majority of customers - both businesses and consumers - select the persons with whom they will deal, and contract with those persons, on the basis of trademarks. The entity structures of businesses (corporate groups, franchises, joint ventures, etc.) are generally invisible to customers. Yet under current law the businesses' liabilities to customers are calculated from those entity structures. The result is a failure in the market for liability: Customers lack the information they need to contract for the level of supplier financial responsibility they prefer.

The proposed rule would create no new liability, it would merely extend existing liability to trademark owners. The rule would extend liability to trademark owners for (1) defective products sold under the mark and (2) the wrongful acts of licensees that conduct businesses identified to customers by the mark. The initial assignment of liability to the trademark owner will prevent businesses from externalizing their liabilities. Trademark owners will remain free, however, to pass the liability on to their licensees by contracts requiring indemnification or insurance.

Abstract:
Multinational bankruptcy cases have tremendous potential for forum shopping because changing forum country also changes the law that will determine the debtor's remedies and the creditors' priorities. That potential has been held in check by the multinational companies' need that the courts of other countries recognize the decree of the forum court. Thus, the need for recognition is the lynchpin that holds forum shopping largely in check.

Many of the world's leading bankruptcy professionals are now seeking to eliminate the recognition requirement by adopting universalist laws and regulations. This paper briefly describes three such efforts. First, the European Union has adopted a regulation, effective in 2002, requiring EU countries to recognize multinational bankruptcies filed in the debtor's home country (provided that country is in the EU). Second, UNCITRAL has promulgated, and the U.S. is about to adopt, a Model Law that encourages recognition of multinational bankruptcies filed in the debtor's home country. Third, the American Law Institute has promulgated Principles of Cooperation in Transnational Insolvency Cases that, when combined with the Model Law, make recognition of home country multinational bankruptcies effectively mandatory.

This paper was initially published as Chapter 8 of Courting Failure: How Competition for Big Cases Is Corrupting the Bankruptcy Courts (2005). Other chapters of the book describe forum shopping and court competition in and to the U.S. This paper describes rampant forum shopping and court competition in European Union cases since the adoption of the regulation. It predicts that worldwide rampant forum shopping and court competition will result from the adoption of the Model Law, and explains how that will occur.

Universalist bankruptcy laws lead to forum shopping because multinational companies do not have home countries in any meaningful sense and, to the extent that they do, they can easily change them to gain legal advantage over their creditors. The paper speculates that some universalists are deliberately seeking to throw the international bankruptcy system into chaos in order to force countries to rapidly harmonize their laws (which will reduce the incentives for forum shopping). What the Universalists have not anticipated, however, is the potential for a race to the bottom as courts and countries compete for the multibillion dollar business of multinational bankruptcy.

bankruptcy, forum shopping, court competition, competition, universalism, European Union, UNCITRAL, insolvency

Abstract:
Universalism is the term used to describe an international bankruptcy system in which a court of a multinational debtor's home country would apply home country law to control the company's bankruptcy worldwide. For decades, prominent bankruptcy scholars, judges, and practitioners have pressed for the adoption of treaties, conventions, and laws that would make the universalist concept the foundation of the international bankruptcy system. They won major victories with the promulgation of the UNCITRAL Model Law in 1997, the adoption of the European Insolvency Regulation in 2002 and the adoption of the UNCITRAL Model Law by the United States in April 2005.

This essay argues that universalism is an unworkable concept because multinational debtors do not have home countries in any meaningful sense. To the extent the universalist concept is adopted, it will lead to rampant forum shopping and competition among nations and courts for large multinational cases. That competition will shift power from the nations and courts to the multinationals' managers and professionals, render the international bankruptcy system unpredictable, and threaten the world's economic progress.

The essay will be published in the American Bankruptcy Law Journal, as part of a commentary on the author's recently published book, Courting Failure: How Competition for Big Cases Is Corrupting the Bankruptcy Courts. The essay will be published with, and comments on, proposals by United States Bankruptcy Judge Samuel L. Bufford intended to repair defects in the universalist concept identified in Courting Failure.

bankruptcy, universalism, territoriality, international bankruptcy, UNCITRAL Model Law, insolvency, European Union, DaisyTek, Eurofoods, forum shopping, venue, court competition

Abstract:
In 1990, the United States Bankruptcy Court for the District of Delaware - then a one-judge backwater - began competing for big bankruptcy cases. In six years, that court achieved a near monopoly. In 2000, LoPucki and Kalin discovered that 42% of the companies filing in Delaware during that six year period of ascendency refiled bankruptcy within five years of their emergence, as compared with only 6% of those filing in courts other than Delaware and New York. In a later study, we found the (1) the failure of the companies reorganized in Delaware during the period of ascendency was robust across several measures of failure and (2) the Delaware filers were not different from the other court filers in any way that might account for the higher refailure rates.

In a review of LoPucki's book Courting Failure (University of Michigan Press 2005), An Efficiency-Based Explanation for Current Corporate Reorganization Practice, 73 University of Chicago Law Review 425 (2006), Professors Kenneth Ayotte and David A. Skeel, Jr. came to Delaware's defense with an economic model and new empirical evidence. They argued, in essence, that companies with worse prospects for reorganization chose Delaware reorganization because it was cheaper. Because this group of companies was weaker, creditors put them "on a short[er] leash," by saddling them with high debt levels. The higher rate of refiling that resulted was nevertheless efficient because refiling costs were low.

In this essay we respond that the Ayotte-Skeel model is based on the assumption of a selection effect for which there is neither a shred of empirical evidence nor even a variable proposed for measurement. We demonstrate that it is mathematically impossible for the cost savings from Delaware's shorter bankruptcies to offset the cost of so many second bankruptcies. We also note that the Ayotte-Skeel model leads to several predictions in conflict with the empirical evidence.

We argue that refailure is costly and propose an empirical approach to quantify those costs. We praise Ayotte and Skeel's discovery that the EBITDA of firms emerging from Delaware bankruptcy was not significantly different from the EBITDA of firms emerging from bankruptcy in other courts during the period of ascendency. We agree that their findings suggest leverage played a greater role in the failure of the Delaware companies than we had previously thought.

Lastly, we respond to Ayotte and Skeel's argument that DIP lenders, other creditors, and bankruptcy courts can prevent the case placers from using their leverage over the bankruptcy courts to externalize costs. The DIP lenders will not prevent the externalization because they are themselves case placers. Other creditors cannot prevent the externalization because no procedural means exist by which they could do so. The bankruptcy courts cannot prevent the externalization because the case placers avoid courts that attempt to place limits on them.

Delaware, bankruptcy, reorganization, leverage, refailure, refiling, Chapter 22, DIP lenders

Abstract:
By historical accident, the bankruptcy venue statute gives large public companies their choice of bankruptcy courts. Over three decades a competition for those cases has developed among some United States Bankruptcy Courts. The most successful courts - Delaware and New York - today attract more than two thirds of the billion-dollar-and-over cases. The courts compete principally because the cases represent a multi-billion dollar a year industry in professional fees alone, because local lawyers pressure judges to compete, and because judges who lose the competition are stigmatized and may not be reappointed.

In February 2005, the University of Michigan Press published my book, Courting Failure: How Competition for Big Cases Is Corrupting the Bankruptcy Courts. In September 2005, Professor William C. Whitford convened a conference of leading bankruptcy scholars at the University of Wisconsin Law School to provide a critique. The papers from that conference, written by Douglas G. Baird, Mechele Dickerson, Melissa B. Jacoby, Judge Robert D. Martin, Robert K. Rasmussen, David A. Skeel, Jr. and Charles J. Tabb, will be published along with this response in a symposium issue of the Buffalo Law Review.

This essay summarizes the critiques and responds. Part I reviews the four-step argument that corruption is the right word for what is happening to the bankruptcy courts. Bankruptcy judges are under pressure to attract big cases. Courts have changed substantive rules and rulings to attract them, affecting such matters as professional fee awards, trustee appointments, deference to consensus, critical vendor orders, conflicts of interest, executive retention bonuses, insider releases and many others. That every significant trend in big cases bankruptcy has been in favor of the professionals, executives, and DIP lenders who are capable of bringing the courts additional cases demonstrates that at least some of the judges are acting in bad faith. That is, at least some of the changes are driven by the desire to get cases, not a good faith belief that the changes are legal or desirable.

Courting Failure argues that court competition caused high reorganization failure rates in Delaware and New York during the period from 1991-96 and then high reorganization failure rates nationally when the competition spread to the rest of the country in 1997. Part II responds to a variety of objections to this argument.

Melissa Jacoby argues that high reorganization failure rates spread too quickly to be the result of competition. I respond that despite the problems with that thesis, it remains the best explanation of the evidence. Baird and Rasmussen argue that the failure of Delaware's prepackaged cases should not count because judges don't compete for prepackaged cases. I respond with evidence they do. David Skeel argues that Delaware's high failure rate may be the result of a selection effect in which the weakest companies chose the Delaware court and were put on a short leash by saddling them with heavy debt. I respond by noting the complete lack of any evidence of a selection effect despite substantial efforts to find one.

Abstract:
No general rule of law renders trademark owners liable for products sold or business conducted under the trademark. This essay proposes the adoption of such a rule. The rationale for the change is that businesses are known by their trademarks, not their entity names, in the marketplace. The vast majority of customers - both businesses and consumers - select the persons with whom they will deal, and contract with those persons, on the basis of trademarks. The entity structures of businesses (corporate groups, franchises, joint ventures, etc.) are generally invisible to customers. Yet under current law the businesses' liabilities to customers are calculated from those entity structures. The result is a failure in the market for liability: Customers lack the information they need to contract for the level of supplier financial responsibility they prefer.

The proposed rule would create no new liability, it would merely extend existing liability to trademark owners. The rule would extend liability to trademark owners for (1) defective products sold under the mark and (2) the wrongful acts of licensees that conduct businesses identified to customers by the mark. The initial assignment of liability to the trademark owner will prevent businesses from externalizing their liabilities. Trademark owners will remain free, however, to pass the liability on to their licensees by contracts requiring indemnification or insurance.

Abstract:
This article reports on an empirical study of forum shopping in all bankruptcy reorganization of large, public companies from 1980 through 1997 (273 cases). Principal findings include: (1) forum shopping increased from about 20% to between 50% and 86% over the period studied, (2) the principal destination for shopping changed abruptly from New York to Delaware about 1990, (3) Delaware achieved a virtual national monopoly on these kinds of case by 1996, before the Chief Judge in Delaware took the large cases from the Bankruptcy judges, (4) Delaware processes cases a little faster than other districts but the difference is not statistically significant, (5) shopping rates differ significantly for firms in different cities, suggesting that shopping is in significant part a rejection of particular courts. The study is based on data from Lynn M. LoPucki's Bankruptcy Research Database.

Abstract:
This article examines the several competing systems proposed for international cooperation in the bankruptcy cases of multinational companies and concludes that a cooperative form of territoriality would work best. Universalism, the system that currently dominates the scholarship, diplomacy, and jurisprudence of international bankruptcy, holds that the courts of the multinational company's "home country" should have worldwide jurisdiction and apply its own law to the core issues of the case. Universalism is unworkable because it would require that countries permit foreign law and courts to govern wholly domestic relationships and because the of "home countries" of multinational companies are so ephemeral and manipulable that the resulting system would be unpredictable. Modified universalism, secondary bankruptcy, and Rasmussen's corporate charter contractualism are similarly flawed. Territoriality, a system in which each country has jurisdiction over that portion of the multinational company that is within its borders, provides what is potentially the best foundation for international cooperation. Though a system of cooperative territoriality potentially requires multiple filing and prosecution of claims, cooperation among courts and administrators with respect to particular reorganizations and liquidations, and international agreements to control fleeing assets, it offers the best hope for a workable, worldwide system.

Abstract:
This article examines the several competing systems proposed for international cooperation in the bankruptcy cases of multinational companies and concludes that a cooperative form of territoriality would work best. Universalism, the system that currently dominates the scholarship, diplomacy, and jurisprudence of international bankruptcy, holds that the courts of the multinational company's home country should have worldwide jurisdiction and apply its own law to the core issues of the case. Universalism is unworkable because it would require that countries permit foreign law and courts to govern wholly domestic relationships and because the of home countries of multinational companies are so ephemeral and manipulable that the resulting system would be unpredictable. Modified universalism, secondary bankruptcy, and Rasmussen's corporate charter contractualism are similarly flawed. Territoriality, a system in which each country has jurisdiction over that portion of the multinational company that is within its borders, provides what is potentially the best foundation for international cooperation. Though a system of cooperative territoriality potentially requires multiple filing and prosecution of claims, cooperation among courts and administrators with respect to particular reorganizations and liquidations, and international agreements to control fleeing assets, it offers the best hope for a workable, worldwide system.

Abstract:
This article applies systems analysis to two ends. First, it identifies simple changes that would make the court system transparent. Second, it projects transparency's consequences. Transparency means that both the patterns across, and details of, case files are revealed to policymakers, litigants, and the public in easily understood forms.

Government must make two changes to achieve court system transparency. The first is to remove the existing restrictions on the electronic release of court documents, including the requirements for registration, separate requests for each document, and monetary payment. The second - already being implemented in the federal courts - is to require the use of data-enabled forms. Once these changes are in place, institutions and private parties will process the available data at the parties' own expense. That processing will generate millions of real-time views of court system operation using automatically-updated regression analyses and both textual and graphical data displays.

The effect would be a renaissance. Corruption, incompetence, inefficiency, prejudice and favoritism would be exposed and wither. Litigation would be cheap and easy because parties could see all court files in the system and copy the work of others. Policy makers could see the human consequences of the laws they enact and adjust accordingly. Lawyers could predict the outcomes of their cases, making litigation less necessary. Citizens would for the first time be able to derive and see the real rules by which they are governed.

Transparency would have a minimal effect on privacy. The data processed are already public record and adequate privacy protections are already provided through sealing orders and redaction requirements. Transparency would generate pressures on judges and court administrators, but the effects of those pressures would be generally positive. Limitations on the public enforcement of private arbitration awards might be necessary to prevent parties from opting out of the transparent system.

transparency, courts, privacy, regression, electronic, bankruptcy, prediction, legal documents, pdf, data-enabled forms, federal courts, pacer, relational data

Abstract:
This 11-page paper argues that the problems of empirical researchers in accessing federal court data are principally political, not technological or economic. The technological advances of the past twenty years - computerization of court records and internet access through PACER - have been offset almost entirely by political restrictions on data access. Additional restrictions, ostensibly to protect privacy, now threaten to reduce access further. The data access problem discourages research that might produce results critical of the judges or the functioning of the legal process. The problem thus restricts public access to critical evidence of the courts' failures and limits public understanding of how the courts actually function.

Abstract:
In his 1998 article, A Contract Theory Approach to Business Bankruptcy, 107 Yale Law Journal 1807, Alan Schwartz presented a model and proof purporting to show that contractual bankruptcy was superior to the state-supplied mandatory regime. This reply shows the proof to be incorrect on its assumptions in several respects. The reply also presents empirical evidence on the pattern of actual bankruptcy contracting. That evidence suggests that bankruptcy contracting is motivated principally by redistributional rather than efficiency concerns.

Abstract:
In Bankruptcy Fire Sales, 106 Michigan Law Review 1 (2007), we compared the recoveries from the going-concern bankruptcy sales of 25 large, public companies with the recoveries from the bankruptcy reorganizations of 30 large, public companies in the same period. We found that, controlling for the asset size of the company and its pre-sale or pre-reorganization earnings (EBITDA), reorganization recoveries were more than double sale recoveries.

In Bankruptcy Noir, a reply forthcoming in the Michigan Law Review, Professor James J. White values the same set of companies differently to reach the finding that the sale recoveries are not statistically significantly different form the reorganization recoveries.

In this response to White's reply, we demonstrate that the difference in White's findings results entirely from four errors in White's method. First, White values grossly insolvent companies based on their debts rather than their assets, thus creating phantom assets at filing even the companies themselves did not claim. Second, in comparing the sale and reorganization recoveries, White deducts current liabilities from the reorganized company recoveries without making the corresponding deduction from the sold company recoveries. Third, after deducting those current liabilities B which are a proxy for cash and other current assets B White deducts the cash a second time. Here too, he makes the deduction from the reorganization recoveries, but not from the sale recoveries. White's fourth error was to drop from his study the seven sale cases with the lowest recoveries. He attempts to justify their removal on the ground that they were unreorganizable telecoms. But he acknowledges that two were not telecoms, he retains seven higher-recovery telecoms in the study, and he provides no evidence that the companies dropped could not have been reorganized.

bankruptcy, 363 sales, James J. White, liquidation, total enterprise value, enterprise value, reorganization, recoveries, telecommunications, CLECs, mergers and acquisitions

Abstract:
Over the past decade, technology has transformed the federal courts. The federal courts moved from paper to electronic filing, resolved daunting privacy problems, and made their files available on PACER - thereby becoming the world's most transparent court system. Now they have already embarked on what may be a second, equally important transformation - the use of relational forms from which court data can be extracted automatically. This Article describes the technology and seeks to project and evaluate the effects of that second transformation.

If it occurs, the second transformation would create millions of windows into the courts at virtually no cost to the government. All relevant aspects of the courts' decision making would be revealed to policymakers, litigants, and the public, in forms they could readily comprehend. All would be able to see who wins what and how often. That would give policy makers the feedback necessary to fine tune the system, lawyers the ability to predict the outcomes of their cases, and the public the ability to see what courts actually do. Members of the public could also see whether the precautions they take for supposed legal reasons are the right ones.

Opponents argue that court record transparency (1) will expose parties and witnesses to the risk of identify theft and other harms, (2) will invade privacy by making previously difficult-to-obtain public record information about individuals readily available, and (3) will pressure judges in ways that deprive them of judicial independence. The Article argues that none of those objections is well-founded.

transparency, courts, privacy, regression, electronic, bankruptcy, prediction, legal documents, pdf, data-enabled forms, federal courts, pacer, relational data

Abstract:
This manuscript is part of an ongoing debate over the fundamental principles that govern the bankruptcies of multinational companies. Essentially three positions have emerged. Universalists assert that the bankruptcy of a multinational company should take place in the courts of the company's "home country" and the law of the home country should govern the distribution. Contractualist Robert K. Rasmussen asserts that the bankruptcy of each constituent entity of the company should take place in the courts of the country selected by that entity in its articles of incorporation and the law of the selected country should govern the distribution. This manuscript argues for a separate bankruptcy proceeding in each country where the multinational has assets. International cooperation should be achieved by agreement among the representatives of the bankruptcy estates, in the shadow of a default rule under which the law of the country where the asset is located would govern the distribution of that asset.

Universalism must be rejected because it is not in fact a workable system. Universalist theory depends upon the assumption that each multinational company has an easily recognizable "home country." But universalists are unable to specify a rule or standard for identification of that home country when the debtor's place of incorporation, headquarters, principal operations, and principal assets are located in different countries, or to specify whether, in the case of a corporate group the home country would be that of the group, or of particular entities within the group. Absent such specification, forum shopping for favorable law would destabilize and destroy the system. Contractualism would be inefficient because (1) the costs of contracting would be huge, (2) debtors would externalize much of their costs by shopping for fora that would deny recovery to tort and other insufficiently adjusting creditors, and (3) the complexity of the system would make it vulnerable to fraud and mistake.

Abstract:
Debtor name errors have been a substantial and persistent problem for filers and searchers in the Uniform Commercial Code Article 9 filing system. Filers make errors in spelling, punctuation, and spacing, use trade names, and include extraneous words. The law prior to 2001 excused such errors if they were minor and not seriously misleading. That put the burden on searchers to conduct reasonable diligent searches to find erroneous filings. The effect was to render all searches problematic and costly.

The drafters of revised Article 9 conceived a brilliant solution to the problem with respect to corporate debtors (registered entities). First, they required filers to file in the exact, correct names of their debtors, forgiving only errors that would be caught by the filing office's official search logic. That meant a searcher could conduct a single search in the exact, correct name of a debtor and be assured of finding every effective filing. To make exact, correct names easily available to filers and searchers, the drafters changed the place for filing against a corporate debtor to its state of incorporation. Because the same office would have both the Article 9 and corporate record for a debtor, filing officers could set up point and shoot systems in which filers and searchers selected their debtors from the list of all entities incorporated in the state rather than attempting to name them. Had point and shoot been implemented, filing or searching against the wrong debtor would have remained possible, but debtor name errors would have been eliminated completely.

The Sixth Circuit's decision in Spearing Tool nullified the drafters' efforts. The court held federal tax lien filings valid despite the Internal Revenue Service's failure to comply with the exact, correct name requirement. Because nearly every searcher is concerned with tax lien filings and those filings are in the Article 9 filing system in nearly all states, the practical effect of the decision was to reinstate the reasonable diligent search requirement for Article 9 searching.

This essay applies systems analysis to demonstrate that the Spearing Tool decision imposes six kinds of costs on lenders while providing no significant benefit to the Internal Revenue Service: the costs of (1) name variation searches, (2) receiving and acting on notices of name variation, (3) purchasing insurance against search failures, (4) subordination of loans as a result of search failure, (5) litigating the reasonableness of search methods, and (6) professional advice on how to respond to Spearing Tool in specific circumstances.

Despite the increase in total system cost resulting from Spearing Tool, reversal of the decision is highly unlikely. The IRS can prevent relitigation of the issue until the operation of the system has adjusted to the point where the cost of reversal would be prohibitive. Reform requires coordinated state and federal legislation.

Uniform Commercial Code, Article 9, filing system, tax liens, UCC search, Article 9 search

Abstract:
This article argues that substantially all judgment proofing can be described through a single model: a symbiotic relationship between two or more entities, in which one of the entities generates disproportionately high risks of liability while the other owns a disproportionately high level of assets. The two entities typically are joined by a contract that allocates the profits gained from externalization of the tort liability. Proof that the model is workable even in large businesses is made by demonstrating that a single business can be divided into two such entities without altering its components or its function. The courts cannot collapse the two entities into one because no principle exists for distinguishing them from each other or from their environment.

Abstract:
This Article reports the results of an empirical study showing that the United States bankruptcy courts routinely authorize and tolerate professional fee practices that violate the Bankruptcy Code and Rules. The study documents the existence of three such illegal practices. The Ordinary-Course-Professionals Practice excuses some or all professionals serving in the ordinary course of the debtor’s business from the requirement that they obtain court approval for the payment of their fees. The Prior-Payment-Disclosure Practice ignores the requirement that a final fee application disclose the prepetition payments the professional received in connection with the bankruptcy case. The Disburse-First Practice allows debtors to pay 80% or more of the fees sought by professionals before the court has even seen the fee requests. The Article speculates that these practices, which apparently occur only in large, public company cases, result at least in part from competition among the bankruptcy courts for those cases.

bankruptcy, professional fees, attorneys fees, court competition

Abstract:
This is a rejoinder by the author of The Death of Liability, 106 Yale L.J. 1 (1996). The rejoinder is to a reply by Professor James J. White to the original article. Corporate Judgment Proofing: A Response to Lynn LoPucki's The Death of Liability, 107 Yale L.J. 1363 (1998). In response to specific points made by White, LoPucki argues that the judgment proofing of large companies would not be visible in Compustat data because it is not accomplished through secured debt or leasing and because Compustat data is aggregated by corporate group. Contracting parties will permit debtors to judgment proof themselves because by doing so the contracting parties and debtors can externalize liability and split the profits between them. LoPucki also responds to arguments that corporate veil piercing, fraudulent conveyance law, government and consumer reaction, and mandatory insurance will prevent judgment proofing by large companies. The rejoinder concludes that computerization will lead to the proliferation of virtual companies that are born judgment proof.

Abstract:
In an article published in 1992, Professors Twerski and Cohen suggested that basic principles of the law of informed consent require medical providers to tell their patients about competing providers could perform the same procedures better or more safely. In its 1996 decision in Johnson v. Kokemoor, the Supreme Court of Wisconsin cited Twerski and Cohen's article in holding a neurosurgeon liable for not telling a patient of such a competitor. As a result, Twerski and Cohen now argue, the law of informed consent now stands on the brink of a second revolution. This comment sets forth a systems/strategic analysis of Twerski and Cohen's proposal. That is, using the delivery system for coronary bypass graft surgery as an example, it describes the current system's operation, projects how the system would operate with Twerski and Cohen's proposal in place (by exploring the strategies that patients and providers would be likely to pursue), and then evaluates the two comparatively. The comment concludes that even if the proposal were adopted immediately, the resulting change would proceed at a moderate pace. Over the long run, the proposal would tend to align the interests of providers with those of their patients and work a substantial net improvement in system operation.