Vanderbilt Law Review

First Page



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. 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. From 1990 to 1996, Delaware's market share steadily increased to 87% (thirteen of fifteen cases).' In just seven years, Delaware had become the bankruptcy reorganization capital of the United States.

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. 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. 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.

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, bankruptcy scholars, lawyers, and judges offered a variety of possible explanations. Most of those explanations sought to exonerate the because it ignores distressed debtors that fail without refiling. Some argued that the firms filing in Delaware might have been more difficult to reorganize because they had more complex capital structures or more serious business problems. Others argued that Delaware's high refiling rate was economically efficient, 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.