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Live-Blogging the Big-Bankruptcy Empirical Research Agenda: Nothing Succeeds Like Success

posted by Jonathan Lipson

UCLA Law Professor Lynn LoPucki has graciously agreed to permit me to live-blog the Big-Bankruptcy Empirical Research Agenda conference he has organized today at UCLA.

For those few who don't know, the Bankruptcy Research Database is one of the most important tools available to scholars and practitioners interested in understanding patterns in  chapter 11 cases.  It captures a great deal of information about essentially every large public company that has commenced a chapter 11 case under the current Bankruptcy Code.

The holy grail of all bankruptcy scholarship is figuring out whether a case was successful.  Conventional wisdom might say that confirming a chapter 11 plan—and paying the professionals in full—is good enough. 

But, we know that many companies file again, despite having confirmed a plan, and that may not necessarily be evidence that the plan was a failure:  circumstances change, etc.  Conversely, the confirmed plan may, in hindsight, prove much worse than other possible deals: Perhaps a 363 sale would have produced greater recoveries for creditors.  

As Ken Klee observed, yet another issue involves what we can think of as “soft” indicia of success:  Has the reorganization preserved jobs and going concern values?  Although we often forget this, this was at least one of Congress’ basic policy goals in developing Chapter 11 in the first place.

LoPucki has proposed a model that would help researchers make their own decisions:  

We believe scholars can answer all these questions empirically, using a model composed of three variable sets. The first set consists of several alternative measures of success (Success). They include plan confirmation, business survival, job survival, post- bankruptcy profitability, the recurrence or non-recurrence of financial distress, and creditor and shareholder recoveries. The Success variables are the dependent variables in the model. The second set consists of several measures of case difficulty (the Problem). They include debt, revenue, and income ratios, measures of the nature of the debtor’s business, and measures of the economic climate. The third set consists of measures of the procedures employed (the Procedures). They include such things as examiners, trustees, 363 sales, DIP lending, prenegotiation, claims trading, etc.

The virtue of this approach is that it does not force researchers to quibble with an ex ante claim of what constitutes success.  Rather, it seems, the goal is to create a menu of possible definitions of success and to permit researchers to decide what factors make that more or less likely.

As with all empirical research, of course, this is not perfect.  As I hope to observe in a subsequent post, choices about what data to collect to make this possible must still be made, and those choices are difficult.  Defining success, in short, is about more than identifying failure.


"Conventional wisdom might say that confirming a chapter 11 plan—and paying the professionals in full—is good enough."

My, what a Delawarian concept of success.

It's striking that the list of criteria omits duration of the case. I would think that would be a top 5 concern, right after presrving jobs and value.

I don't think short case duration is a goal in an of itself. If it reduces the direct or indirect costs of bankruptcy (which it seems to) or increases the likelihood of firm survival (it seems to do the opposite) those would be the indicia of success.

In personal and small business chapter 11s, monthly reports and quarterly fees are disproportionately burdensome and often the straws that break the camel's back. Consequently, time from filing to final decree has been a pretty good indicator of success. Since Congress in its infinite wisdom decided to turn personal Chapter 11s into bastardized Chapter 13s, final decrees are getting harder to come by, and individual debtors are throwing their hands in the air and saying, "Take it, I'm heading for Belize."

The one area I see short duration decreasing the rate of success is small business Chapter 11s, where the combination of the shortened presumptive plan period and cross-collateralization agreements that are something out of Kafka turn every case into a slug-fest between the bank and the tax agencies until time and hope run out and the case is converted. Then the Chapter 7 trustee strings the skeleton out into something resembling Jarndyce and Jarndyce.

I don't mean to smear muck all over your ivory tower by injecting actual practice problems, especially from down here in small world, especially since we all know Chapter 11 is a two-class system and courts and US Trustees treat large cases wholly differently from how they treat small cases (Does anyone honestly believe SCO would still be in Chapter 11, with no reorganization plan beyond its litigation "strategy," if the case were In re Joe's Computer Repair Shops, Inc.), but please remember that the laws and policies you create up there are often wielded as nasty broad axes on debtors down here, however inapposite they may be.

Professor Lopucki's perspective in the third comment does demonstrate a regrettable ivory towerness as the above commenter politely suggests. I cannot recall a chapter 11 where the real people running the company felt duration was irrelevant to successful reorganization and value maximization. Conversely, many such people have felt the shorter the stay in chapter 11, the better for the business's long term health. Uncertainty is a very significant business issue. This is an example of a topic where researchers should interview the people confronting the real problems of running a business in chapter 11.

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