Chapter 11 Duration, Pre-Planned Cases, and Refiling Rates: An Empirical Analysis in the Post-BAPCPA Era

By Foteini Teloni, Fordham University School of Law

The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (“BAPCPA”) enacted and amended several business bankruptcy provisions that triggered a heated debate over their effects on the chapter 11 landscape and the debtor’s reorganization chances.

In this article, I use multivariate regression models to examine empirically and quantify, for the first time, BAPCPA’s effect on three distinct aspects of the chapter 11 process: (a) the duration of traditional chapter 11 cases; (b) the use of preplanned bankruptcies; and (c) debtor refiling rates.

My study indicates that BAPCPA fulfilled, on the one hand, a long-standing desire of having shorter business reorganization cases. Indeed, the average duration of chapter 11 dropped from 480 days to 261 days in the post-2005 era, while the proportion of companies undergoing preplanned bankruptcies rose 23% in that same period. Even after controlling for various factors, including the companies’ pre-filing financial profile, BAPCPA remained correlated at a statistically significant level with shorter chapter 11 duration and more preplanned cases.

On the other hand, however, the proportion of debtors that had to refile for bankruptcy soon after exiting their previous filing increased 30% in the post-2005 era. BAPCPA’s effect on recidivism remained statistically significant even after controlling for a number of factors, including the companies’ post-emergence profitability and leverage.

It seems that the 2005 amendments force the debtor to emerge hastily from its chapter 11 proceedings, ignoring operational and structural problems and, therefore, not achieving true rehabilitation. And if one measure for successful bankruptcies is refiling rates, then BAPCPA seems to have failed in this respect.

The full article is published in 23 Am. Bankr. Inst. L. Rev. 571 (2015), and is available here.

Curbing the Exploitation of Passive Creditors in Chapter 11 Reorganization by Leveraging the Oversight Role of the United States Trustee

By Addison F. Pierce, American University – Washington College of Law

The Bankruptcy Reform Act of 1978 is beginning to show its age in ways similar to the forty-year-old code it replaced. In addition to being ill-suited to address changes in the underlying credit market, the current code is confronting the development of an entirely new marketplace — a market in claims trading. While some praise the enhanced liquidity, others take issue with the strains placed on the efficacy of bankruptcy.

Rather than engaging in the normative debate, this Comment seeks to redress a clear drawback to the current system: the harm endured by passive creditors. Unlike those economically empowered to participate in the reorganization process, the passive creditor lacks the economic ability and incentive to play an active role. This position leaves the passive creditor’s ability to collect on its claim solely in the hands of another: the creditors’ committee. While this committee may have provided adequate protection in 1978, the credit market and its participants are very different today. Some argue that this issue is systemic and can only be addressed by replacing the current code; however, this Comment argues that something can be done short of this massive task. The challenge is as follows: if too little is done, passive creditors will continue to be exploited and if too much is done the whole market could be damaged. Recognizing this challenge, this Comment proposes that passive creditors can be afforded adequate protection by leveraging the oversight power of the US Trustee to ensure the proper functioning of creditors’ committees. Moreover, the recommendation of this Comment would enhance protection for passive creditor while remaining market neutral.

For the full article, see 4 Am. U. Bus. L. Rev. 95 (2015), available here.

 

Testimony before House Judiciary Committee on Financial Institution Bankruptcy Act

By Stephen E. Hessler, Kirkland & Ellis LLP

hesslerCongress is again advancing legislation to amend the Bankruptcy Code to add specific provisions for administering the case of a major financial institution.  The belief that the Chapter 11 filing of Lehman Brothers was a key cause of the Great Recession led Congress to enact in 2010, as part of the Dodd-Frank Act, Title II, which provided “orderly liquidation authority” to the federal government to wind down insolvent financial companies whose failure would have “serious adverse effects on financial stability in the United States,” in proceedings administered by the FDIC.  Although there has never been a Title II proceeding, Dodd-Frank has been significantly criticized for creating a new resolution framework that imbues politically-sensitive regulators with broad and untested discretion to liquidate a major bank.

In further response, the House of Representatives last year passed the Financial Institution Bankruptcy Act of 2014, but the Congressional session expired without consideration of the bill by the Senate.  In July 2015, the House Judiciary Committee held another hearing on H.R. 2947, the reintroduced Financial Institution Bankruptcy Act of 2015.  This bill, which is substantively identical to last year’s iteration, proposes to amend the Bankruptcy Code by adding a new Subchapter V within current Chapter 11.  The central feature of Subchapter V is referred to as the “single point of entry” approach that allows a debtor to separate quickly upon filing “good” from “bad” assets through a near-immediate postpetition transfer of “good” assets to a nondebtor bridge company whose equity is held by a trust that is managed by a special trustee for the benefit of creditors of the chapter 11 estate.  The “bad” assets would then be liquidated within the chapter 11 case.  Critically, both the proposed transfer and liquidation transactions are subject to Bankruptcy Court approval.

For a further exploration of the legislation and these issues, my testimony before the House Judiciary Committee in 2015 is available here and my testimony before the House Judiciary Committee in 2014 is available here. Please note the views expressed in my testimony are solely my own, and are not offered on behalf my firm, any client, or other organization.

For a previous Roundtable post on the Financial Institution Bankruptcy Act see here.

New AIRA Standards on Distressed Business Valuation

posted in: Valuation | 0

By Michael D. Pakter, Gould & Pakter Associates, LLC

Michael_D._PakterGiven the increasing number of professionals who are performing business valuation engagements, the Association of Insolvency & Restructuring Advisors approved Standards for Distressed Business Valuation (“AIRA Standards”), effective March 1, 2014, to improve the consistency and quality of practice among its members.

In Part 1 of a 2 part article, the author submits that the selection of applicable valuation standards is impacted by the valuation analyst’s professional certifications, his or her association memberships and credentialing, the asset, business, or interest being valued and the applicable forum. The author provides an overview of the AIRA Standards on distressed business valuations and shares views on what standards business valuation professionals should consider in a distressed business valuation engagement.

In Part 2 of the 2 part article, the author discusses some of the unique issues regarding valuations of distressed businesses relating to engagement development, procedural steps in the business valuation engagement, and generally accepted valuation approaches. The AIRA Standards note that traditional valuation methods may require significant adjustments to reflect the unique financial or operating issues associated with a firm in distress, the legal context of the valuation and the intended purpose of the valuation.

The author concludes that despite the widespread use by business valuation analysts of a specific company risk premium in a “build­up” or “capital asset pricing model” there remains limited academic research on quantification of specific company risk premiums, which generally remains in the realm of the financial analyst’s judgment.

To read the full article see Part 1 and Part 2.