Whither the Race? A Comment on the Effects of the Delawarization of Corporate Reorganizations

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1. INTRODUCTION ........................283 II. THE RACE TO DELAWARE ............... 286 III. WHY REFILINGS? ...................293 IV. THE DIVERGENCE BETWEEN DATA AND CONCLUSIONS ........299 A. What is the Relationship Between Bankruptcy Filings in Delaware and the Refiling Rate? ..........300 B. How Should We Test a Theory Suggesting That Increases in Bankruptcy Filings in Delaware Lead to Increases in the Refiling Rate? .................. 303 V. CONCLUSION ................................................................307

I. INTRODUCTION

The war is over and Delaware has won. The "Delawarization" of bankruptcy law appears complete. The reorganization of a large, publicly held corporation under Chapter 11 of the Bankruptcy Code today will more likely take place in the Delaware Bankruptcy Court than in any other jurisdiction.' The bankruptcy judges and lawyers in Delaware are no doubt pleased with this state of affairs, while many of their counterparts in other jurisdictions look to Delaware with envy.2 While few question that Delaware is the preferred forum for public corporations seeking to reorganize, it remains hotly contested whether that is a good thing. In other words, the race is to Delaware; but is it to the top, the bottom, or somewhere in between?

To answer this normative question, one needs a theory explaining why the managers of a firm, advised by their lawyers, decide to file in one jurisdiction as opposed to another. Some have argued that firms prefer to file in Delaware because the Delaware Bankruptcy Court is the fastest and most efficient processor of Chapter 11 cases.3 Others see a nefarious attempt on the part of managers of firms to shop for a forum that will promote their interests at the expense of shareholders and creditors.4 Still others view the matter as more complex, suggesting that some of the reasons for going to Delaware are beneficial from the perspective of social welfare, while maintaining that other reasons are suspect.5 The normative desirability of the stampede to Delaware remains a contested issue.

Lynn LoPucki and Sara Kahn purport to provide the answer in their article in this issue of the Vanderbilt Law Review.6 According to them, Delaware's victory has been something of a mistake. Supposedly, those who took firms to Delaware to reorganize simply did not know what they were getting themselves into. A firm that reorganizes in Delaware, it turns out, is four times as likely to file a second bankruptcy petition as is a firm that reorganizes in another jurisdiction. "[T]he parties who stood to lose in a failed Delaware reorganization simply underestimated the likelihood of failure."7 The conclusion that the players in the reorganization game did not understand the risk inherent in choosing the Delaware bankruptcy court leads directly to LoPucki and Kahn's policy prescription-give the market more information. They endorse the proposition that competition among bankruptcy courts can lead to desirable results,8 and seek to promote competition by providing the relevant actors with more information.

LoPucki and Kalin have increased our understanding of bankruptcy practice in Delaware. Firms that reorganize there often need a subsequent reorganization. We have no quarrel with their factual findings. Naked facts, of course, do not generate conclusions. What one needs is a theory that explains the facts. We maintain that LoPucki and Kahn's facts do not necessarily lead to the conclusions that they draw, especially the conclusion that market players are unable to assess legal regimes.9 This assertion, if true, would have impact well beyond bankruptcy law and even corporate law. The data that they generate, however, does not justify their sweeping conclusions.

In this Reply, we proceed as follows. First, we set forth our theory of venue choice in bankruptcy law, suggesting why competition among bankruptcy courts is likely to be efficient as to prepackaged bankruptcies, but may not be efficient as to traditional Chapter 11 cases. …