Is Chapter 11 Too Favorable to Debtors? Evidence from Abroad

Chapter 11 is widely believed to be among the industrialized world\u27s most debtor-oriented reorganization laws. Critics assert that Chapter 11 is too easily available and that it allows debtors too much control by, inter alia, not requiring appointment of a trustee. One criticism of Chapter 11, low returns to unsecured creditors, resonates with an important theme of this Symposium, the Bebchuk-Fried proposal to reduce secured creditor priority in insolvency proceedings. The Chapter 11 criticisms and the Bebchuk-Fried proposal raise the question whether less easy access to Chapter 11, reduced debtor control, diminished secured creditor priority, or other changes could reduce filings and delays, improve performance, and reduce costs. Directly exploring such issues without repealing or changing Chapter 11 is not possible. Social experiments could help supply an answer. Given political and practical reality, however, such experiments are unlikely to be conducted. Second-best empirical evaluation methods will have to suffice. One method is to compare Chapter 11\u27s performance with that of a reorganization system similar to Chapter 11, but differing in some crucial respects, such as whether a trustee or other official must be appointed. Comparing Chapter 11\u27s results with those of the second system should yield insights into Chapter 11\u27s efficacy. This Article presents the results of such an empirical study. It compares data from prior Chapter 11 studies with new data on Finnish reorganizations. Finnish reorganization law is in many important respects similar to Chapter 11. But it contains two central features that are less favorable to debtors. The first feature is its early detection and termination of cases inappropriate for reorganization. A second noteworthy difference is the U.S. debtors\u27 greater influence over the reorganization plan and the information communicated to creditors. The United States is probably the only developed nation that leaves the debtor in unsupervised possession of the estate during a reorganization. This Article examines whether differences in the countries\u27 reorganization laws affect their reorganization systems\u27 performance. In particular, one expects Finnish reorganization proceedings to be more selectively employed, to be quicker, to be less likely to devote time and energy to hopeless firms, and to generate results more favorable to creditors. Our comparative analysis indicates that a greater portion of insolvent firms reorganize in the United States than in Finland. These findings are consistent with the hypothesis that Chapter 11\u27s prodebtor features attract more filings and induce debtors to file at an earlier stage of financial difficulty. Surprisingly, we find no evidence that the U.S. system leads to reorganization plans that are more favorable to debtors. While Finnish reorganization mechanics are more procreditor, a substantive rule requiring full payment to creditors for owners to retain ownership may generate U.S. plans that are more favorable to creditors. We confirm the favorable treatment of U.S. unsecured creditors by briefly examining results from Canada, Japan, and Australia