Why Are Delaware and New York Bankruptcy Reorganizations Failing?
LoPucki, Lynn M., Doherty, Joseph W., Vanderbilt Law Review
Before 1990, the United States Bankruptcy Court for the District of Delaware was a sleepy backwater. During the entire decade of the 1980s, Phoenix Steel-whose only plant was located in Delaware-was the only large, public company to file there.1 In 1990, two large, public companies-Continental Airlines and United Merchants and Manufacturers-filed in Delaware. They constituted 7% of the twenty-nine large, public companies filing in the United States that year.2 From 1990 to 1996, Delaware's market share steadily increased to 87% (thirteen of fifteen cases).3 In just seven years, Delaware had become the bankruptcy reorganization capital of the United States.4
Lynn LoPucki and Sara Kalin recently suggested that the Delaware bankruptcy court's spectacular success in winning market share may have been accompanied by an equally spectacular failure in the reorganizations that the court processed during those years.5 Their suggestion was based principally on an empirical finding that by February 2000, nine of the thirty companies (30%) emerging from bankruptcy reorganization in Delaware from 1991 to 1996 had filed bankruptcy a second time.6 Excluding New York-which had a refiling rate almost as high as Delaware's (23%)-only four of the seventy-five large, public companies (5%) emerging from bankruptcy in other courts during the same period filed a second time.7
LoPucki and Kalin's study made only a preliminary attempt to discover the reasons for Delaware's higher refiling rate. But, as their findings on the disparity of refiling rates gained wide publicity,8 bankruptcy scholars, lawyers, and judges offered a variety of possible explanations. Most of those explanations sought to exonerate the courts. Some argued that refiling is an inadequate measure of success,
because it ignores distressed debtors that fail without refiling.9 Some argued that the firms filing in Delaware might have been more difficult to reorganize because they had more complex capital structures10 or more serious business problems.11 Others argued that Delaware's high refiling rate was economically efficient,12 implying that other courts should ease their standards and accept higher refiling rates. Still others argued that it was impossible to know whether Delaware was doing a worse job without knowing the individual reasons that each reorganization failed.13
This Article reports the results of a study designed to confirm that Delaware's and New York's higher refiling rates indicate higher failure rates and to begin the inquiry into the reasons for those higher failure rates. Part II describes the universe of cases studied, the sources of data, and the method by which the data were gathered.
Part III describes four criteria for evaluating the success of reorganized firms and applies them to determine whether Delaware and New York reorganizations are less successful than reorganizations in other courts. Part III concludes that in the five years after emerging, Delaware- and New York-reorganized firms refiled more often, failed to perform their plans more often, suffered greater losses, and even went out of business due to financial distress more often. Part IV compares, on several criteria, the firms entering reorganization in Delaware and New York with those entering reorganization elsewhere but finds no reason to believe that the Delaware- or New York-reorganized firms differed in ways that made them more difficult to reorganize. Part V considers and rejects the claim that the two courts' high failure rates might be efficient. Part VI examines several differences in the bankruptcy process as it operates in Delaware, New York, and other courts, concluding that certain differences in Delaware's reorganization process appear to contribute to Delaware's high failure rates. Part VII offers some additional conclusions and speculations on other, as-yet-untested features of Delaware reorganization that might also contribute to Delaware's high failure rates.
Because the phenomena we examine appear more distinctly in the Delaware data than in the New York data, we focus our discussion on Delaware. Some of the conclusions that we draw solely with respect to Delaware, however, might also be drawn with respect to New York.
This study analyzed the reorganizations of all companies that (1) were large, public companies at the time they filed for reorganization in a United States bankruptcy court and (2) emerged from reorganization as operating public companies during the period from January 1, 1991 to December 31, 1996. We chose this period because the Delaware bankruptcy court began the period with no market share, built to an 87% market share, and ended the period "locked-in" as the preeminent reorganization court in the United States.14 Measured by the standard of the marketplace, it was a period of astonishing success for the Delaware bankruptcy court.
The universe of eligible firms was identified from Lynn M. LoPucki's Bankruptcy Research Database ("BRD").15 The application
of the above criteria identified twenty-six Delaware reorganizations, sixteen New York reorganizations, and fifty-six reorganizations in other courts, for a total of ninety-eight reorganizations.
We obtained most of the financial data for the five years prior to filing and the five years after the effective date of the plane16 from Compustat, a service that extracts that data from the firms' filings with the Securities and Exchange Commission. For several firms, Compustat had no data. For many, Compustat's data did not cover all of the relevant years. For both groups of firms, we obtained some or all of the data directly from the firms' SEC filings. We obtained nonfinancial data principally from the BRD. The BRD data ultimately came from a variety of published and unpublished sources, including court files, SEC filings, newspapers, newsletters, and bankruptcy data services.
We report data for three categories of courts. "Delaware" indicates the United States Bankruptcy Court for the District of Delaware, which sits only in Wilmington. "New York" indicates the Manhattan division of the United States Bankruptcy Court for the Southern District of New York.17 "Other Courts" indicates all United States Bankruptcy Courts other than those sitting in Wilmington and New York City. The methodologies employed with respect to particular issues are explained in the relevant sections below.
III. DO DELAWARE AND NEW YORK REORGANIZATIONS FAIL MORE OFTEN?
The data show that during their first five years, firms emerging from Delaware bankruptcy court reorganizations refile more often than firms emerging from Other Court reoganizations. Specifically, firms emerging from Delaware reorganization were more than ten times as likely to refile (42%) during this period than were firms emerging from reorganization in Other Courts (4%) and more than twice as likely to refile as firms emerging from New York reorganization (19%) (Table 1). This difference in refiling rates is statistically significant at the .001 level.
B. Measured by Business Failure
The plans for each of the ninety-eight firms studied contemplated that the reorganized firms would remain in business indefinitely.18 In fact, only seventy (71%) remained in business for even five years after confirmation (Table 2).19
Although the proportion of Delaware firms surviving for five years was lower than those for New York and Other Courts, the differences among them were not statistically significant. Delaware's lower survival rate may have occurred by chance.
Business continuation is, however, an imperfect measure of success. Mergers and liquidations, even when they occur within a few years after a plan that does not contemplate them, are not necessarily business failures. Even a successful firm might merge into a larger business, either because the deal is attractive or because a hostile takeover eliminated its options. In theory, at least, even a piecemeal liquidation might be a success from the standpoint of the firm's investors if the pieces sell for a sufficiently high price.
The particular firms we classified as "liquidated" after emerging were clearly failures of their earlier reorganizations. All were liquidated through bankruptcy refiling, and all had negative total earnings from the time they emerged from the first bankruptcy until they filed the second bankruptcy. But many of the firms that were discontinued through mergers had postreorganization earnings exceeding those of firms continuing in business. On the whole, the postreorganization earnings of firms discontinued by merger were lower than the postreorganization earnings of continuing firms, but the difference was not even significant.20 We concluded that some of the mergers were distress mergers tantamount to the failure of the emerging firm's business, but that others were successes or something in between.
To take account of this difference, we divided the merger cases into two groups, classifying those with positive postbankruptcy earnings prior to the date of merger as business "successes" (along with all firms continuing in business for five years after confirmation) and those with negative postbankruptcy earnings to the date of merger as "failures" (along with all firms liquidating during the five years after confirmation).21 Using these classifications, Table 4 shows the distribution of business success and failure by reorganization court.
Our three-way categorization of the courts does a poor job of explaining business failure. When we compare subsets, however, the differences are somewhat significant.23 The business failure rate between Delaware and Other Courts is significant at the .10 level.24 Moreover, when the Delaware cases are combined with the New York cases into a single category, the difference between that combination and Other Courts is significant at the .07 level.25 Businesses reorganized in Delaware and New York appear more likely to fail than businesses reorganized in Other Courts.
C. Measured by Business Performance
The purpose of a business is to earn profits; a business that does not do so can fairly be said to have failed. Profits reported on a firm's income statement are admittedly an imperfect measure of success,26 but they are nevertheless a useful one.
We collected two measures of profits for the first five full fiscal years after the firm emerged from bankruptcy: profit (loss)27 and operating profit (loss) after depreciation.28 The figure used for each firm was the average for as many of the five years as were available.29 To control for the sometimes widely differing sizes of the emerging firms, the profits were expressed as percentages of the firms' sizes. The size of a firm for this purpose was the average of its total assets30 and sales.31
We calculated the averages and medians of the annual average postbankruptcy earnings for the cases in each of the three jurisdictions. The average earnings for Delaware-reorganizing firms in the period after bankruptcy were negative in an amount equal to 9% of the firm's entire size-an astonishingly poor performance (Table 5). By contrast, firms reorganized in Other Courts on average had positive earnings in amounts equal to 1% of their size. The median earnings for Delaware firms were negative in an amount equal to 4% of firm size each year, while the median Other Court firm had positive earnings of 1% of firm size. The differences in earnings between courts is highly significant.32 Firms emerging from Delaware reorganization have consistently lower postbankruptcy earnings than firms emerging from reorganization in New York or in Other Courts.
D. Measured by Plan Failure
The criteria of refiling and business failure are separate measures of reorganization failure in that a firm's business can completely fail without the firm refiling, and a firm can refile even though its business has not completely failed. Thus, each of these measures recognizes some failures not recognized by the other.
"Plan failure" is a criterion that recognizes both kinds of failure simultaneously.33 That is, it treats a reorganization as a failure if the firm refiles, liquidates, or distress-merges34 within five years of emerging.35 By this criterion of failure, Delaware also fares poorly.
Fifty-four percent of the Delaware reorganization plans failed (Table 6).36 That figure compares with only 31% of New York plans and 14% of Other Court plans. The difference between Delaware's plan failure rate and the plan failure rate in New York or Other Courts is statistically significant.31 The failure rate in Delaware was three times the overall failure rate of New York and Other Courts combined (18%).
Aside from its relevance as a direct measure of failure, plan failure also serves an important methodological purpose in this study. Because it identifies more failures than either the refiling or the business failure measures from which it is composed, it yields statistically significant results in tests where neither of those measures do.
Delaware-reorganized firms were significantly more likely to refile, significantly more likely to go out of business as a result of their financial distress, and significantly less likely to perform successfully under their plans of reorganization. They also had significantly lower postbankruptcy earnings. These findings warrant the conclusion that Delaware-reorganized firms emerging in the period from 1991 to 1996 failed more often than firms emerging from reorganization in Other Courts.
IV. POSSIBLE FAILURE CAUSES EXOGENOUS TO DELAWARE
The data presented in Part III demonstrate that Delaware reorganizations fail more often. But that fact alone does not prove that Delaware's process is faulty. Two other possibilities remain. First, Delaware's higher failure rate may reflect some differences among Delaware-reorganizing firms that make them more difficult to reorganize successfully. That is, characteristics of the firms choosing Delaware, rather than characteristics of Delaware's reorganization process, could be causing Delaware's high failure rates. Second, even if the firms filing in Delaware and Other Courts were equally difficult to reorganize, Delaware's higher failure rate might still be "efficient" if it resulted from the taking of risks that were justified by the potential returns.
Two propositions must hold for the difficulty of Delaware's cases to cause Delaware's higher failure rates. First, some category of cases must be more difficult to reorganize than others. Second, Delaware must have more cases from that category.38
A. What Firm Characteristics Make Reorganization Difficult?
Under one theory, a variety of characteristics might make a firm more difficult to reorganize successfully. The firm's financial distress may be more severe, its decline into distress more precipitous, or its managers less skilled. The firm may be in a depressed industry, a more competitive industry, or an industry with no future prospects. It may be disadvantaged by the location of its plants, its poor relations with regulators, or the patent holdings of its competitors. The firm's lenders and suppliers may be unwilling to continue to deal with it. The firm's creditors and shareholders may be hostile or unreasonable. The firm may have alienated its customers.
Under a different theory, such factors might be expected to have no significant effect on the rate at which reorganizations fail. If the reorganization process functions well, participants can discover the debtor's problems and resolve them. Managers can be replaced, plants closed, and the objections of creditors, shareholders, and customers met. If the firm's leverage is excessive, the firm can reduce it. If the bargaining parties insist on unrealistic recoveries, the court can force them back to the bargaining table by refusing to confirm an
unfeasible plan. If operating problems might prevent the firm from making substantial payments under the plan, the payments can be reduced or eliminated almost entirely through an all-equity plan. In the worst case-a firm incapable of paying even its operating expenses-the solution is to liquidate the firm in the initial bankruptcy case. Because the firm was not reorganized, there could be no "failure" of reorganization as that term is defined in this study.39
To determine which of these competing theories best fit the data, we examined eleven factors that we suspected, or others suggested, might make firms more difficult to reorganize. For each factor, we tested for a relationship to each of three measures of failure: refiling, plan failure, and postbankruptcy earnings. Only one of the suspected factors appears related to success and failure-complexity of capital structure. That relationship is not strong and runs in apparently the wrong direction to explain Delaware's high failure rates. It appears that none of the other ten factors makes firms prone to failure, and hence none of the eleven factors can explain or excuse Delaware's high failure rates. For presentation here, we have grouped the eleven factors examined under three headings.
1. Degree of Financial Distress Prior to Filing
Eight of the eleven factors tested were measures of the reorganizing firms' levels of financial distress prior to the firms' initial bankruptcy filings. Those measures are leverage before bankruptcy, abnormal leverage before bankruptcy, four measures of prebankruptcy earnings, and two measures of decline in earnings in the year prior to bankruptcy.
a. Prefiling Leverage
"Leverage" is the ratio of a firm's liabilities to its assets. High leverage generally results in high interest expenses and the need to apply high amounts of cash to repayment of debt. If leverage is sufficiently high, the business cannot operate at a profit and cannot meet its obligations as they become due.
We calculated the prefiling leverage of each firm at the last fiscal year-end prior to filing by dividing the firm's liabilities by its assets as shown on the firm's balance sheet.40
b. Abnormal Prefiling Leverage
Normal leverage ratios differ from industry to industry. To illustrate, in 1996 the average leverage for grocery stores41 was 80%, while the average ratio for crude petroleum and natural gas businesses was 48%.(42) These differences probably reflect differing debt carrying capacities. Consequently, a leverage ratio of 80% might indicate deep financial distress for a crude petroleum business but no financial distress for a grocery store chain.
To control for these differences, we constructed a variable that indicates the leverage of each of the firms studied in relation to what is normal for the firm's industry. We first calculated the average leverage for all firms in each debtor's industry.43 We then subtracted that average from the debtor's actual leverage to determine the "abnormal prefiling leverage" for each of the firms studied. "Abnormal prefiling leverage" for a firm is the excess of the firm's leverage over the level normal in the industry.
c. Prefiling Losses
One might suppose that an unprofitable firm would be harder to reorganize.44 Firms cannot continue to lose money indefinitely. The
more money a firm is losing before bankruptcy, the greater the changes the firm must make to emerge successfully.
To test this seemingly obvious proposition, we examined four measures of the firms' profitability in the period prior to the filing of the bankruptcy case. They are (1) profits in the last full fiscal year prior to filing (profits in the year before filing); (2) operating profits in the last full fiscal year prior to filing (operating profits in the year before filing); (3) average annual profits for the last five full fiscal years prior to filing (profits in the five years before filing); and (4) average annual operating profits for the last five full fiscal years prior to filing (operating profits in the five years before filing).45
Although all of the firms studied were large, some were much larger than others. Profits or losses in a particular dollar amount might have far greater consequences for a small firm than for a large one. To control for the size of the firm, we expressed the amounts of profits and losses as percentages of the sizes of the firms in which they were incurred. The size of a firm for this purpose is the average of its assets and sales in the last full fiscal year prior to filing.46
d. Recency of Decline in Prefiling Profits
A firm whose earnings declined immediately before bankruptcy may be more difficult to reorganize than a firm whose earnings declined earlier and then stabilized. We calculated recency of decline in two variables: profits and operating profits. We defined recency of decline as the difference between average annual profits in the five years prior to bankruptcy and average annual profits in the year before bankruptcy, expressed as a percentage of firm size.
We tested each of these eight factors against each of three measures of success and failure: refiling, plan failure, and average annual profits.47 For none of the three measures of success was the
difference between the successful cases and the unsuccessful cases in any of the eight factors statistically significant. The data provide no reason to believe that the financial condition of a firm prior to bankruptcy has any effect on its likelihood of reorganizing successfully.48
To illustrate the manner of this testing, we found no important differences in prefiling leverage, statistical or otherwise, between firms that refiled and those that did not. The mean and median prefiling leverages for refiling firms were only slightly below those of firms that did not refile for bankruptcy within five years (Table 7).
Adjustment for differences in leverage from industry to industry did not change the result. The mean and median values of the abnormal prefiling leverage49 follow the same pattern as reported for the unadjusted leverage before filing. There are no significant differences in the industry-adjusted leverage of firms that refiled for bankruptcy within five years and those that did not refile (Table 8).
2. Size and Complexity of Capital Structure
Prior research has shown a strong relationship between size of the firm and success of the reorganization when success is measured by confirmation or consummation of the plan. Larger firms are more often successful than smaller firms.50 One reason may be that a large firm has the option of closing unprofitable plants, divisions, or product lines while continuing the remainder of its business, while small firms may have only a single plant, division, or product line. None of those studies, however, deals directly with the issue addressed here: the success after confirmation of a business emerging from the reorganization of a large, public firm.
To address that issue, we tested each of six measures of size: (1) assets before bankruptcy;51 (2) assets after bankruptcy;52 (3) sales before bankruptcy;53 (4) sales after bankruptcy;54 (5) employees before
bankruptcy;55 and (6) employees after bankruptcy,56 against each of three measures of success and failure. For none of the three measures of success-refiling, plan failure, and postbankruptcy earnings-was the difference between the successful cases and the unsuccessful cases for any of the six measures of size statistically significant.57 The data provide no reason to believe that within the population of relatively large cases studied, smaller or larger firms were more difficult to reorganize successfully.
b. Complexity of Capital Structure
In response to LoPucki and Kalin's findings, Professor David Skeel suggested that Delaware's higher refiling rates may result from Delaware-reorganizing firms having more complex capital structures.58 To further explore the relationship between capital structure complexity and success, we gathered data on the number of separate classes of claims and interests in the reorganizing firms' confirmed plans of reorganization.59 The number of separate classes might be a measure of capital structure complexity because it indicates the number of types of claims or interests that differed in ways that required different treatment. The differences that result in separate classification and treatment are usually differences in the
holders' rights against the reorganizing firm. Separate classes typically exist for unsecured debts of differing priority, stock with different preferences, claims against different members of a corporate group, and secured creditors with different priorities or different collateral.
We tested the hypothesis that successful reorganizations are related to complexity by examining our data on plan classes in light of three measures of success. Under our two binary measures of success (refiling and plan failure) the mean number of plan classes is larger among firms that had successful reorganizations (Table 9). Of particular interest is the relationship between plan failure and the number of plan classes. Among firms whose reorganizations were successful there were, on average, 16.8 separate classes in their plans; while among firms whose reorganizations failed there were only 13.3 separate classes. The difference is statistically significant.60 Even under a more conservative definition of failure (refiling) the differences among companies tend in the same direction; failed reorganizations are less complex (12.8 plan classes) than the successful ones (16.5 plan classes). This relationship is significant by conventional standards.61 Finally, the relationship between the number of classes and postbankruptcy earnings (size-adjusted) is also significant.62
Measured by plan classes, capital structure complexity appears to be related to success and failure. The direction of the relationship-- complex structures are associated with lower failure rates-is opposite the direction that Skeel predicted: complex structures would be associated with higher failure rates. If we adhere to Skeel's premise that simple structures make reorganization easier, we must conclude that Delaware has higher failure rates despite having an easier caseload. Alternatively, we could abandon his premise and conclude that complex capital structures make firms easier to reorganize successfully. We are not comfortable with either alternative and so return to the issue in Part IV.C.
In their study of large, public firms reorganizing from 1980 to 1996, LoPucki and Kalin found that manufacturing and retail trade firms were significantly more likely to refile than firms in other industries.64 Because the universe of cases we studied is a subset of the universe studied by LoPucki and Kalin, we expected to find the same relationship. We did not. None of the most likely groups-- manufacturers, retailers, or manufacturers and retailers combined-- was significantly more likely than other firms to fail.65
4. Multiple Regression Analysis
Table 10 shows the results of a multivariate analysis of the key factors tested in the section above, with the addition of court location. This analysis is motivated by the following proposition: Delaware's record of plan failure is an artifact of difficult reorganizations. No single measure of difficulty adequately captures this phenomenon, but together these measures comprise an index of difficulty. To test this proposition, we constructed a model that estimates Delaware's exceptionalism while controlling for several exogenous factors that we considered most likely to influence significantly the success or failure of a reorganization plan: prefiling leverage, prefiling profits, industry (here represented by membership in either the manufacturing or retail industries),66 firm size before filing (here represented by the
If the proposition stated above is true, then we should find a diminished or even insignificant relationship between court location and plan failure after controlling for the difficulty of the reorganization. Our analysis suggests that the proposition is false. Delaware reorganizations fail significantly more often than New York or Other Court reorganizations, controlling for exogenous factors.67 None of the other variables has an individually significant
relationship to plan failure or refiling.68 The lack of relationship suggests that plan failure cannot be predicted from firm-specific conditions that existed before the petition arrived at the courthouse.
B. Are Delaware-Reorganizing Firms Different?
We identified only one prefiling characteristic that made a significant difference in firms' abilities to reorganize successfully: capital structure complexity. That relationship was weak and appears to run in the direction opposite that needed to explain Delaware's high failure rates. The ten other characteristics we investigated appeared unrelated to failure. Thus, no difference in those characteristics between Delaware-reorganizing firms and Other Court-reorganizing firms could explain Delaware's higher refiling rates.
Out of an abundance of caution, however, we tested to determine if the population of firms choosing Delaware (or Delaware and New York) was significantly different from the population choosing Other Courts in any of the eleven characteristics examined. Only two additional differences were statistically significant. Firms reorganizing in Delaware and New York (combined) had significantly higher average prefiling sales ($805 million) and prefiling numbers of employees (5,792) than firms reorganizing in Other Courts ($488 million and 2,839 employees).69 We found no other significant differences between the firms that chose Delaware for their reorganizations and the firms that chose Other Courts.
Eight of the eleven prefiling firm characteristics we examined were measures of the firms' financial distress. None appears to be related to the success or failure of the firms' reorganizations. To put it another way, the likelihood of a successful reorganization does not appear to depend upon the depth or suddenness of the reorganizing firm's prefiling financial distress.
Nor did we find any relationship between the sizes of firms or their industries and the firms' likelihood of successful reorganization. Earlier studies found such relationships in other contexts.70 That, together with the relatively small size of the universe of cases we studied, causes us to be cautious in concluding that no such relationship exists among firms generally. But if such a relationship does exist, it is sufficiently subtle that it alone could not explain Delaware's high failure rates.
We did find a weak relationship between "complexity of capital structure," as measured by the number of classes of claims and interests distinguished under the firms' plans. We are, however, skeptical. First, the relationship runs in the direction opposite that expected: firms with more complex capital structures appear easier to reorganize successfully.71 Second, as we explain below, the number of classes in plans may be more a product of the reorganization process than of capital structure complexity.
Taken together, these data suggest that prefiling characteristics of the firms filing in Delaware cannot explain Delaware's high failure rates. Prefiling firm characteristics appear unrelated to the success or failure of reorganizations, and firms choosing to reorganize in Delaware do not differ grossly from firms choosing to reorganize in Other Courts.
V. IS DELAWARE'S FAILURE RATE EFFICIENT?
A. Framing the Issues
LoPucki and Kalin presented data showing that firms emerging from Delaware reorganization refiled more frequently than firms emerging from reorganization in Other Courts. They acknowledged that "[r]elatively high refiling rates are theoretically defensible," because the refiling losses might be more than offset by gains from a higher rate of reorganization or a greater magnitude of a jurisdiction's successes.72 LoPucki and Kalin did not think this defense saved Delaware, however, because Delaware did not have a higher rate of reorganization than other courts or obvious, dramatic successes.73
In separate replies to LoPucki and Kalin, Rasmussen and Thomas and Skeel pressed the efficiency issue. Rasmussen and Thomas argued that measurement of success and failure should take both reorganizations and liquidations into account. They also argued that lower direct costs of reorganization might more than offset the cost of additional reorganizations in Delaware. Both Skeel and a wellknown, but unidentified New York bankruptcy lawyer concurred in the latter argument. As the lawyer put it:
Very often the right solution is to do a fix that lasts for a period of time and, if it doesn't work, do it again. That's how the workout world works. When you're talking about big companies, it's just a workout under court protection. Why is that such a bad outcome? [Some] will say it's a bad outcome because that's not what the statute provides for. But a good outcome may be different than what the statute really requires. [The statute] doesn't contemplate incremental restructurings. A judge has to make a determination about plan feasibility, but if no one opposes [the plan] and it turns out not to work, what's wrong with using the same mechanism a second time?74
The data show dramatically what is wrong with using the same mechanism a second time. Between the first and second bankruptcies, the refiling firms suffered huge losses. Our data fix those losses at 18% of firm size per year during the five years after emergence.75 By comparison, firms that did not refile averaged profits of 1% of firm size per year. In a related study, LoPucki found that the nine Delaware-- reorganized firms that refiled averaged operating losses alone of 18%
of the firms' prefiling assets.76 The losses associated with a failed reorganization are huge. The fact that Other Court-reorganized firms refiled at one-tenth the rate for Delaware-reorganized firms suggests that the bulk of those losses were avoidable.
The mere fact of these avoidable losses does not prove Delaware reorganization is ineff