Practice Makes Perfect: Judge Experience and Bankruptcy Outcomes
by | posted in: Bankruptcy Administration and Jurisdiction, Bankruptcy Reform | 0

By Benjamin Charles Iverson (Brigham Young University), Joshua Madsen (University of Minnesota, Twin Cities, Carlson School of Management), Wei Wang (Queen’s School of Business), and Qiping Xu (University of Notre Dame, Department of Finance).

Prior studies document the influence of bankruptcy judges’ discretion on restructuring outcomes, yet we know little about how judicial experience affects the bankruptcy process. We study how the accumulation of job-specific human capital influences judges’ efficiency in handling large corporate bankruptcy filings, using 1,310 Chapter 11 filings by large U.S. public firms overseen by 309 unique bankruptcy judges in 75 bankruptcy courts between 1980 and 2012.

Using random assignment of judges to cases for empirical identification, we show that cases assigned to a judge with twice as much time on the bench realize a 5.5% decrease in time spent in reorganization. This reduced time in court translates into savings of approximately $2 million in legal fees alone for a typical case in our sample. Judges’ time on the bench is associated with higher probability of emergence but not higher recidivism. The combined evidence suggests that more experienced judges are overall more efficient. We also find that it takes up to four years for a new judge to become efficient and that judges who see a higher volume of business filings and a greater diversity of cases by size and industry early in their tenure become efficient faster than those who don’t. We find little evidence that judges’ general experience and personal attributes consistently affect case outcomes.

Our analyses highlight a potential benefit of allowing firms to file in courts with more experienced judges. Restricting this flexibility (e.g., through the proposed Bankruptcy Venue Reform Act of 2017) may impose a cost on firms by forcing them to file in courts with less experienced judges.

The full article is available here.

The Roundtable has previously posted on potential Bankruptcy venue reforms, including a summary of the Bankruptcy Venue Reform Act of 2018 introduced by Senators John Cornyn, R-TX, and Elizabeth Warren, D-MA. For a critique of current venue rules—and a possible solution—see Prof. Lynn LoPucki, “Venue Reform Can Save Companies.” For a defense of the current system, see the Roundtable’s summary of the Wall Street Journal’s “Examiners” Panel on venue reform.

Fraudulent Transfer Avoidance Recovery Not Limited to Total Amount of Creditor Claims
by | posted in: Avoidance, fraudulent transfer | 0

By Jane Rue Wittstein and Mark G. Douglas (Jones Day)

Courts disagree as to whether the amount that a bankruptcy trustee or chapter 11 debtor-in-possession can recover in fraudulent transfer avoidance litigation should be capped at the total amount of unsecured claims against the estate. The U.S. Bankruptcy Court for the District of Delaware recently weighed in on this issue in PAH Litigation Trust v. Water Street Healthcare Partners, L.P. (In re Physiotherapy Holdings, Inc.), 2017 WL 5054308 (Bankr. D. Del. Nov. 1, 2017). Noting the absence of any guidance on the question from the U.S. Court of Appeals for the Third Circuit, the bankruptcy court ruled that, unlike most state fraudulent transfer laws, which limit a creditor’s recovery to the amount of its unpaid claim against the transferor, section 550 of the Bankruptcy Code imposes no such limitation on the estate’s recovery. The ruling reinforces the idea that federal and state fraudulent transfer avoidance laws are intended to be remedial rather than punitive. Under state law, this understandably means that an avoidance recovery is limited to the amount necessary to make an injured creditor whole. Under federal bankruptcy law, recoveries must benefit the bankruptcy estate, which includes the interests of creditors and other stakeholders.

The article is available here.

Delaware District Court Affirms Order Approving Gifting In Chapter 11 Case
by | posted in: Avoidance | 0

Author: Mindy Mora of Billzin Sumberg Baena Price & Axelrod, LLP

In an unusual but practical decision, the U.S. District Court for the District of Delaware affirmed a bankruptcy court order which approved both a sale of the debtors’ assets and the establishment of an escrow account to provide a “gift” to fund a distribution to the debtors’ unsecured creditors.  What is significant about this decision is that it approved the use of gifting in a chapter 11 bankruptcy case.  LCI Holding Company, Inc., civ. no. 13-924 (D. Del. March 10, 2014).

The concept of gifting in a bankruptcy case allows a secured creditor or purchaser to overcome objections to a sale of assets interposed by the debtor’s unsecured creditors.  Often, the gift consists of a pool of funds for distribution to the debtors’ unsecured creditors, and bypasses the claims of priority creditors with more senior claims.  See In re SPM Mfg. Corp., 984 F.2d 1305 (1st Cir. 1993).

A distribution that bypasses priority claims raises the issue of whether gifting is permissible in a chapter 11 case, based upon the requirement that distributions under a plan of reorganization must comply with the Bankruptcy Code, including the priority scheme for distributions to creditors and the absolute priority rule set forth in Bankruptcy Code § 1129(b)(2)(B).  This type of compliance is not mandated in chapter 7 cases, in which bankruptcy courts have authorized gifting more regularly.  See id.  Apparently in Delaware, gifting is permitted in a chapter 11 case, so long as the sale of assets is followed by a dismissal of the case without the confirmation of a plan.

Link to full article: http://www.financeandrestructuringblog.com/2014/06/delaware-district-court-affirms-order-approving-gifting-in-chapter-11-case/