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Copyright (c) 2011 National Conference of Bankruptcy Judges
The American Bankruptcy Law Journal

ARTICLE: The Decline of Unsecured Creditor and Shareholder Recoveries in Large Public Company Bankruptcies

Fall, 2011

American Bankruptcy Law Journal

85 Am. Bankr. L.J. 429


by Andrew A. Wood*


The legislative history of the United States Bankruptcy Code states:

The purpose of a business reorganization case, unlike a liquidation case, is to restructure a business's financings so that it may continue to operate, provide its employees with jobs, pay it creditors, and produce a return for its stockholders... It is more economically efficient to reorganize than to liquidate, because it preserves jobs and assets. 1

Eight years later, bankruptcy scholar Thomas H. Jackson proposed the Creditor's Bargain Theory of bankruptcy reorganization almost diametrically opposed to that history. In Jackson's theory, the purpose was no longer to save companies and jobs, but solely to serve the interests of the firm's "owners" - by which he essentially meant its creditors. 2 Jackson proposed that "bankruptcy law ... should focus primarily on values, not rights." 3 In the years that followed, courts and scholars increasingly saw maximization of the distributions to creditors as the "goal of reorganization." 4

Despite the central theoretical role that distributions to creditors and shareholders now play in the evaluation of bankruptcy reorganization, there has been little empirical study of the amounts creditors and equity interests actually recover. In 2004, Professor Lynn LoPucki analyzed creditor recoveries as to companies with plans of reorganization confirmed from 1991 to 1996 ("the LoPucki study"). 5 On average, general unsecured creditors in the 1991-96 cases recovered 60 cents on the dollar. Senior subordinated creditors recovered 56 cents on the dollar. 6 Equity made more than a ...
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