Research Brief: The Value of Time-Tested Bankruptcy Judges

Firms seeking Chapter 11 protection may want to shop for a judge with plenty of on-the-job experience
toys r us bankruptcy

What Did The Study Look At?

Given that elite corporate law firms charge upwards of US$1,500 an hour for their services, beleaguered companies going through bankruptcy are eager to move through the proceedings as quickly as possible, at the very least to keep legal bills down. Presiding judges have a lot to say in this matter. In the U.S, bankruptcy judges are appointed to 14-year terms and are randomly assigned to cases within their district. Previous research has looked into how a judge’s discretion with regards to restructuring can affect a bankruptcy’s outcome. This study is among the first to examine the effects of judges’ on-the-bench experience on large public Chapter 11 outcomes.

How Was The Study Designed?

The study used a sample of all major Chapter 11 filings made in the U.S. by public firms with assets of more than $50 million between 1980 and 2012. In total, 1,310 filings were used. The bankruptcies analyzed were managed by 309 judges in 75 different bankruptcy courts. Using a variety of publicly available sources, information was then compiled on each judge in the study, including any prior judicial experience, their work history, education, and known character traits. The primary measure of job-specific experience was the amount of time a judge had served as of the filing date of a given Chapter 11 case.

What Did The Study Find?

  • Bankruptcy cases in the U.S. that had been assigned to more experienced judges spent less time in court and were far more likely to emerge from bankruptcy intact rather than be liquidated.
  • Cases which were undertaken by experienced judges were adjourned almost one month earlier relative to the average duration of bankruptcies within the study.
  • For cases within the study, less time in bankruptcy court translated on average to a savings of approximately $2 million in legal fees.
  • It can take up to four years for new judges to attain the level of efficiency seen in more experienced judges.

What Do I Need To Know?

Experienced judges are able to discharge bankruptcies more efficiently in terms of both time in actual court and cost savings. While previous judicial experience is useful in instances where judges manage large caseloads, this research overwhelmingly points to a judge’s bench skills, developed while serving as a bankruptcy judge, as contributing more to successful outcomes than any of the skills he or she mastered prior to taking a seat on the judiciary.

A judge’s experience and efficiency are not just matters of idle curiosity. In the U.S., large firms declaring bankruptcy have some flexibility in where they file for Chapter 11 protection, a process known as “forum shopping.” They can file in their place of incorporation, principal place of business, location of principal assets, or any district where a bankruptcy case is pending against one of their affiliates. This gives them the opportunity to “shop” for a favourable court.

This flexibility may be restricted if a Senate bill is enacted. The proposed Bankruptcy Venue Reform Act of 2018 would require corporations to file for bankruptcy protection only in the district in which their principal assets or principal place of business is located. As the researchers note, “Our results suggest that greater restriction of this flexibility could impose a cost on firms and their creditors by forcing them to file in courts with potentially less experienced and less efficient judges.”

 

Title: “Practice Makes Perfect: Judge Experience and Bankruptcy Outcomes

Authors: Benjamin Iverson (Brigham Young University), Joshua Madsen (University of Minnesota), Wei Wang (Smith School of Business, Queen’s University), Qiping Xu (University of Notre Dame)

Published: Paper available for download

James Bennett

Smith School of Business

Goodes Hall, Queen's University
Kingston, Ontario
Canada K7L 3N6

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