Lawyer Networks and Corporate Bankruptcies

By Vidhan K. Goyal (Hong Kong University of Science and Technology), Joshua Madsen (Carlson School of Management, University of Minnesota), and Wei Wang (Smith School of Business, Queen’s University)

Vidhan Goyal
Joshua Madsen
Wei Wang

Does having a lawyer who has previously interacted with the judge matter for bankruptcy outcomes? While knowledge obtained through past interactions about the judge’s views and preferences could improve the efficiency of court process, lawyer familiarity with the judge could also result in a capture of economic rents, leading to delays due to the difficulties in measuring lawyer efforts. Furthermore, connected lawyers could also exploit their connections to obtain biased outcomes in favor of their clients.

We examine these questions in the context of corporate bankruptcies by assembling a comprehensive dataset that contains detailed biographical information, professional experiences, and past in-court interactions of 162 bankruptcy judges overseeing 650 large Chapter 11 cases from 1996–2013, and 2,426 unique lawyers from 775 law firms representing those cases as debtor’s counsel. Our results show that cases with a lead counsel lawyer connected to the judge spend 16–21% less time in bankruptcy, a 2.6–3.5-month reduction in bankruptcy duration, translating into aggregated savings of $3.2–4.5 billion in professional fees for our sample firms.

Our empirical strategy exploits a setting where lead counsel lawyers are selected by the firm before the bankruptcy is filed and thus the assignment of a judge, minimizing concerns that connected lawyers are endogenously hired. The results are robust to the inclusion of controls for case complexity, industry effects, lawyer’s expertise, law firm quality, and judges’ fixed characteristics. Our specifications therefore ensure that any effect from having a connected lawyer is not due to unobserved heterogeneity that is specific to courts, judges, or lawyers.

We further document that the most effective lead counsel connections arise through previous clerkships and in-court interactions with the judge assigned to the case. The effects concentrate in cases with smaller legal teams where connected lawyers presumably have more influence. Having a connected non-lead counsel lawyers’ or connected lawyer representing the unsecured creditors committee only weakly affects case duration.

Lastly, we investigate other bankruptcy outcomes, including the probability of emergence, the bankruptcy refiling rate, operating performance post emergence, the likelihood of a Chapter 7 conversion, and the likelihood of loss of exclusivity extension. We find no evidence that the faster restructurings come at a cost of higher refiling rates or poorer operating performance after emergence. More importantly, there is no evidence that connections lead to judge favoritism or pro-debtor biases.

How do connected lawyers accelerate the bankruptcy process? The most likely explanation is connected lawyers’ knowledge of a judge’s preferences. Judges are extremely busy, and must devote enormous effort to keep straight all the facts and legal nuance under consideration. Connected lawyers are plausibly more familiar with the assigned judge’s preferences and expectations as well as the cases, legal precedents, and statutes that the judge will rely on. They can exploit this knowledge to help the “light shine through.” Idiosyncrasies across judges and their preferences imply that lawyers’ experience with other judges may not be as useful as a connection to the assigned judge and that there is likely no one “magic bullet” used by all connected lawyers. That is, lawyers’ knowledge of judges’ preferences are largely non-transferrable. These findings have implications for the design of bankruptcy institutions, where institutions that lead to lawyers’ increased awareness of a judge’s preferences could produce efficiency gains.

The full article is available here.

Practice Makes Perfect: Judge Experience and Bankruptcy Outcomes

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.