Venue Reform Can Save Companies

By Lynn LoPucki, Security Pacific Bank Distinguished Professor of  Law at UCLA Law School
LoPucki imgOne side in litigation should not pick the court. That is exactly what happens, however, in big bankruptcies. A debtor, perhaps working together with its largest lender, can choose virtually any court in the country. The thousands of other stakeholders have no say.

The current system’s defenders argue that venue transfers will protect the stakeholders in appropriate cases. But in big case bankruptcy, venue transfer is illusory. Over the past ten years, 209 of the 317 large, public company Chapter 11s filed in the United States (66%) were filed in Wilmington, Delaware or New York City. One hundred eighty-six of the 209 (89%) were headquartered in some other district or division, but the Delaware and New York courts retained 206 of the 209 (99%).

Because cases have flowed to Delaware and New York since the 1990s, those courts’ judges now have high levels of big-case experience. In a recently completed study, Joseph Doherty and I found that significantly more companies survive under judges with greater big-case experience.

That doesn’t justify or necessitate letting corporate managers and DIP lenders pick their courts. The venue rules should require a big bankrupt to file with a big-case panel designated for its headquarters region. Within each of three or four regions, a chief judge could assign cases to maximize the development and utilization of big-case experience. That could eliminate forum shopping, level the playing field for stakeholders, reduce the pressure on judges to attract cases, and save more companies and jobs.

Bankruptcy Survival

By Lynn M. LoPucki and Joseph W. Doherty, UCLA School of Law

lopuckidoherty Of the large, public companies that seek to remain in business through bankruptcy reorganization, only 70% succeed.  The assets of the other 30% are absorbed into other businesses.  Survival is important both because it is efficient and because it preserves jobs, communities, supplier and customer relationships, and tax revenues.  This Article reports the findings of the first comprehensive study of who survives.  Eleven conditions best predict survival.  All are concurrently statistically significant in our best regression model. 1. A company that even hints in the press release announcing its bankruptcy that it intends to sell its business is much more likely to fail. 2. Companies whose cases are assigned to more experienced judges are more likely to survive. 3. Companies headquartered in isolated geographical areas are more likely to fail. 4. Companies that file with higher leverage are more likely to survive. 5. If a creditor’s committee is routinely appointed, the company is more likely to fail. 6. Companies with DIP loans are more likely to survive. 7. Companies that prepackage or prenegotiate their plans are more likely to survive. 8. Companies are more likely to survive if pre-filing interest rates are low. 9. Larger companies are more likely to succeed if they are larger. 10. Manufacturers are more likely to survive. 11. Companies with positive pre-filing operating income are more likely to survive. System participants can improve survival rates by shifting cases to more experienced judges and perhaps also by greater attention to the decisions to appoint committees, prenegotiate plans, obtain DIP loans, and publicly seek alliances. The article is forthcoming in the UCLA Law Review, May, 2015. Click here to read further.