Bankruptcy in the Blogs

It’s always gratifying to learn that bankruptcy legends read this blog.  Lynn LoPucki is one of those people. 

Last night I opened an email I received from Professor LoPucki letting me know that he and my (not-so-old) old law school professor, Doug Baird, would be duking it out at the University of Chicago Faculty Law Blog over issues raised in Professor LoPucki’s recent paper (written with empiricist Joseph W. Doherty) entitled Bankruptcy Fire Sales, 106 Mich. L.R. 1 (2007).  The article was posted on SSRN last April, accompanied by the following abstract:

For more than two decades, scholars working from an economic perspective have criticized the bankruptcy reorganization process and sought to replace it with market mechanisms. In 2002, Professors Douglas G. Baird and Robert K. Rasmussen asserted in The End of Bankruptcy (pdf), an article published in the Stanford Law Review, that improvements in the market for large, public companies had rendered reorganization obsolete.  Going concern value could be captured through sale.

This article reports the results of an empirical study comparing the recoveries in bankruptcy sales of large public companies in the period 2000-2004 with the recoveries in bankruptcy reorganizations during the same period.  We find that, controlling for company values reported at case commencement, pre-filing operating profits, and post-filing operating profits, the recoveries in reorganization cases are more than double the recoveries from going concern sales.  We attribute the low recoveries in sale cases to continuing market illiquidity and the corruption of the bankruptcy process by competition among bankruptcy courts for large, public company cases.

We also find that bankruptcy recoveries are higher in years when merger and acquisition activity is higher for reasons other than high stock prices.  Lastly, we find that bankruptcy recoveries are higher when debt capacity in the debtor’s industry is lower – the opposite effect predicted by Professors Andrei Shleifer & Robert W. Vishny in their landmark article in 1992 [entitled Liquidation Values and Debt Capacity: A Market Equilibrium Approach, 47 J. Fin. 1343 (1992)].

This "H2H"–as the U of C Law Blog calls the "head to head" grudge match–is sure to be a classic, as Professors LoPucki and Baird have been sparring over bankruptcy’s most fundamental questions since 1990, when Professor LoPucki first challenged Professor Baird’s "faith" in the free market’s ability to properly value a company’s worth in chapter 11.  See LoPucki, Bargaining Over Equity’s Share in the Bankruptcy Reorganization of Large, Publicly Held Companies, 139 U. Penn. L. Rev. 125 (1990).  Their ongoing debate remains central to bankruptcy jurisprudence, as noted in this last post, with recent opinions by the Seventh Circuit’s Judge Cudahy (while sitting by designation as a Third Circuit judge in VFB LLC v. Campbell Soup Co.) and Judge James M. Peck (in the Iridium bankruptcy) suggesting that judges, by placing a heavy burden of proving market folly on the party challenging the market’s indication of value, are beginning to share Professor Baird’s faith in free market valuations.

Professor LoPucki also took issue early on with the idea that chapter 11 should be eliminated and companies forced instead to liquidate expeditiously in chapter 7, an idea he attributes first to a 1986 article by Professor Baird (and Professor Baird’s former writing partner, Thomas H. Jackson).  See LoPucki, Strange Visions in a Strange World:  A Reply to Professor Bradley and Rosenzweig, 91 Mich L. Rev. 79 n.2 (1992); and LoPucki & Whitford, Corporate Governance in the Bankruptcy Reorganization of Large, Publicly Held Companies, 141 Univ. Pa. L. Rev. 669 (1993).

Professor LoPucki stepped up the rhetoric in the debate in 1994, paying Professor Baird this back-handed compliment at an interdisciplinary conference at Wash. U. Law School:  "Without the unrealistic work done by Baird and Jackson during the 1980s, bankruptcy scholarship might not have gone beyond the relatively shallow analysis produced by doctrinalism in the 1970s."  See LoPucki, Reorganization Realities, Methodological Realities, and the Paradigm Dominance Game, 72 Wash. U. L. Q. 1307, 1312 (1994).
Continue Reading LoPucki v. Baird Redux: Bankruptcy Titans Blog “Head to Head” Over Chapter 11’s Utility or Futility

Be sure to read Bob Eisenbach’s excellent up-to-the-minute summaries (here and here) on his In the (Red) Business Bankruptcy Blog of Judge Gropper’s rulings in the Northwest Airlines bankruptcy case (recently filed plan and disclosure statement are here). 

As reported by Bob, Judge Gropper in this first opinion dated 2-26-07 required hedge

Below are some notable blog posts for the week ended 12/2/05 on the following topical bankruptcy issues of interest to the bankruptcy litigator and practitioner:
Calpine’s Distress
Delphi’s Bankruptcy
Hedge Funds under Scrutiny
More Professional Feasting in Bankruptcy
Substantive Consolidation
The Workout Business Today
***Continue Reading Weekly Blog Roundup on Bankruptcy-Related Topics for the Week Ended 12/2/05

Below are notable blog posts on the following topical bankruptcy issues of interest to the bankruptcy litigator and practitioner for the week ending 11/25/05.
Judge Alito’s Bankruptcy Jurisprudence
The Portland Archdiocese Disclosure Statement Filing
The Problem of Legal Valuation Uncertainty
Asbestos Trust Fund Talk
The UK Housing Bubble and Its Lessons
Management-Labor Disputes Spilling Into Bankruptcy Courts
Professional Feasting in Bankruptcy
Derivative Risks
Entergy’s Failure, Katrina, and a Dark New Orleans
Delphi and GM’s Woes, from a Union Perspective (with lots of good news stories from the Detroit Free Press, Automotive News, and other great newspapers)
Delta Bankruptcy Judge Beatty’s “Live-Wire” Comments
***Continue Reading Weekly Blog Roundup on Bankruptcy-Related Topics for the Week Ended 11/25/05