Delaware Bankruptcy: Failure in the Ascendancy

34 Pages Posted: 26 Sep 2006

See all articles by Lynn M. LoPucki

Lynn M. LoPucki

University of Florida Levin College of Law

Joseph W. Doherty

University of California, Los Angeles - School of Law


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.

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

JEL Classification: G33, K19, K22, K29

Suggested Citation

LoPucki, Lynn M. and Doherty, Joseph W., Delaware Bankruptcy: Failure in the Ascendancy. University of Chicago Law Review, 2006, UCLA School of Law, Law-Econ Research Paper No. 06-15, Available at SSRN:

Lynn M. LoPucki (Contact Author)

University of Florida Levin College of Law ( email )

P.O. Box 117625
Gainesville, FL 32611-7625
United States

Joseph W. Doherty

University of California, Los Angeles - School of Law ( email )

385 Charles E. Young Dr. East
Room 1242
Los Angeles, CA 90095-1476
United States

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