Why Are Delaware and New York Bankruptcy Reorganizations Failing

Abstract

I. INTRODUCTION Before 1990, the United States Bankruptcy Court for the District of Delaware was a sleepy backwater. During the entire decade of the 1980s, Phoenix Steel-whose only plant was located in Delaware-was the only large, public company to file there.1 In 1990, two large, public companies-Continental Airlines and United Merchants and Manufacturers-filed in Delaware. They constituted 7% of the twenty-nine large, public companies filing in the United States that year.2 From 1990 to 1996, Delaware's market share steadily increased to 87% (thirteen of fifteen cases).3 In just seven years, Delaware had become the bankruptcy reorganization capital of the United States.4 Lynn LoPucki and Sara Kalin recently suggested that the Delaware bankruptcy court's spectacular success in winning market share may have been accompanied by an equally spectacular failure in the reorganizations that the court processed during those years.5 Their suggestion was based principally on an empirical finding that by February 2000, nine of the thirty companies (30%) emerging from bankruptcy reorganization in Delaware from 1991 to 1996 had filed bankruptcy a second time.6 Excluding New York-which had a refiling rate almost as high as Delaware's (23%)-only four of the seventy-five large, public companies (5%) emerging from bankruptcy in other courts during the same period filed a second time.7 LoPucki and Kalin's study made only a preliminary attempt to discover the reasons for Delaware's higher refiling rate. But, as their findings on the disparity of refiling rates gained wide publicity,8 bankruptcy scholars, lawyers, and judges offered a variety of possible explanations. Most of those explanations sought to exonerate the courts. Some argued that refiling is an inadequate measure of success, IMAGE FORMULA9 because it ignores distressed debtors that fail without refiling.9 Some argued that the firms filing in Delaware might have been more difficult to reorganize because they had more complex capital structures10 or more serious business problems.11 Others argued that Delaware's high refiling rate was economically efficient,12 implying that other courts should ease their standards and accept higher refiling rates. Still others argued that it was impossible to know whether Delaware was doing a worse job without knowing the individual reasons that each reorganization failed.13 This Article reports the results of a study designed to confirm that Delaware's and New York's higher refiling rates indicate higher failure rates and to begin the inquiry into the reasons for those higher failure rates. Part II describes the universe of cases studied, the sources of data, and the method by which the data were gathered. IMAGE FORMULA11 Part III describes four criteria for evaluating the success of reorganized firms and applies them to determine whether Delaware and New York reorganizations are less successful than reorganizations in other courts. Part III concludes that in the five years after emerging, Delaware- and New York-reorganized firms refiled more often, failed to perform their plans more often, suffered greater losses, and even went out of business due to financial distress more often. Part IV compares, on several criteria, the firms entering reorganization in Delaware and New York with those entering reorganization elsewhere but finds no reason to believe that the Delaware- or New York-reorganized firms differed in ways that made them more difficult to reorganize. Part V considers and rejects the claim that the two courts' high failure rates might be efficient. Part VI examines several differences in the bankruptcy process as it operates in Delaware, New York, and other courts, concluding that certain differences in Delaware's reorganization process appear to contribute to Delaware's high failure rates. Part VII offers some additional conclusions and speculations on other, as-yet-untested features of Delaware reorganization that might also contribute to Delaware's high failure rates. …