What drives forum-shopping? Is it that sophisticated litigants seek jurisdictions that offer judicial expertise and predictable application of the law, or is it that sophisticated litigants seek to game the system by seeking out judges more likely to be biased in their favor? In “What Drives Bankruptcy Forum Shopping? Evidence from Market Data,” Professor Jared Ellias empirically tackles these important and perennial questions in the bankruptcy context.
Bankruptcy provides a rich context for exploring these questions. Over the past thirty years, the majority of large firms that filed for bankruptcy did so in the Bankruptcy Courts of the Southern District of New York and in Delaware. The explanation for this preference has been the subject of heated debate. Some argue the Bankruptcy Courts in these districts are highly experienced and this attracts sophisticated firms because their expertise makes bankruptcy outcomes more predictable. Critics dispute this explanation, arguing instead that “predictability” is a cloak for the actual motivation of the managers, lawyers and senior creditors that influence the debtor’s venue decision: to select a venue where judges are hospitable to the interests of senior creditors.
These arguments ultimately rest on empirical claims that have been largely untested until now. Professor Ellias tests them using a novel, hand-collected data set of 285 firms that filed for bankruptcy between 2001 and 2012, representing all large-firm filers during this time period with debt traded in public or private markets. He finds strong evidence for the “predictability” hypothesis but no evidence supporting the “bias” hypothesis. Specifically, he shows that large bankruptcies filed in the Southern District of New York and in Delaware are more accurately priced by the market, as reflected by lower deviations between the price paid for pre-bankruptcy claims and the discounted present value of the ultimate bankruptcy payoff, controlling for several other variables that might account for the size of deviation. Ellias also tests the “bias” hypothesis by investigating whether bankruptcy judges in the destination jurisdictions disproportionately approve reorganization plans that transfer value to senior creditors from junior claimants. He finds no evidence to support this claim.
While Ellias is careful to qualify his claims as preliminary steps toward answering the broader questions, they are important steps. Questions about forum shopping and forum preference arise in a range of disciplines, from civil procedure to corporate law. Ellias interjects valuable empirical insight into these ongoing debates.