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In The Lexus and the Olive Tree, Thomas L. Friedman described the new international system that is transforming the global economy. He discussed the tension between the globalization system and the forces of culture and tradition. This tension has surfaced in the insolvency arena, as several industrialized nations wrestle with the idea of embracing the United States model of corporate reorganization. For both cultural and economic reasons, that model has not been embraced historically by other industrialized nations (even those with legal systems founded, as ours is, on the English common law tradition). Ironically, the move to adopt the American-style model is taking place at the same time that many critics here are questioning whether our model is succeeding in its critical mission of salvaging financially distressed corporations. Although the American corporate reorganization model is not without shortcomings, the adoption of a legal system that recognizes the concept of a corporation’s ability to reorganize is a concept that other nations should embrace. In recent years, a great deal of international attention has been directed toward the necessity of a well-developed and functioning corporate reorganization process to prevent and resolve corporate-insolvency issues. Our system has been characterized as debtor oriented, with a primary focus on the reorganization of a corporation so as to preserve its going-concern value. Inherent is the presumption that all corporations should be given the opportunity to reorganize. In contrast, the bankruptcy systems of most other industrialized nations have tended historically to be more creditor oriented, with a focus on the liquidation of a corporate debtor’s assets to pay off creditors according to the system’s priorities. Many of these countries have long rejected the notion that every corporation should be given the opportunity to reorganize and allow a corporation’s creditors to challenge immediately a reorganization attempt. In the United States, the debtor-in-possession has greater control. In the vast majority of Chapter 11 cases, the debtor’s management remains in place during the case and often will make the ultimate decision as to whether to liquidate or reorganize. In other systems, a court-appointed third party (a trustee or administrator) typically controls the reorganization process. Does our system work so well? Lawmakers in several countries have recently begun to re-examine the historical policies and principles, and the consequent goals, of their bankruptcy systems. Due in large part to the perceived success of the American bankruptcy system, many industrialized nations, such as France, the United Kingdom, Germany, South Korea and Japan, recently have enacted bankruptcy legislation intended to embrace, to varying degrees, the American corporate reorganization model. Although the globalization of our style of reorganization is starting to gain widespread international acceptance, there is increasing sentiment among many U.S. legal scholars and insolvency practitioners that our model often fails in its mission of rehabilitating financially distressed corporations. Critics typically cite the so-called “survival rates” of companies that emerge from Chapter 11-focusing almost exclusively on large public companies. In a study of such bankruptcies in Delaware and New York, professors Lynn LoPucki and Sara Kalin found that the overwhelming majority of large public companies that filed for Chapter 11 in those states eventually emerge from bankruptcy, yet a significant number of these corporations eventually end up seeking Chapter 11 protection again. In fact, in Delaware, which has been described as the bankruptcy capital of the United States, the study indicated that 30% of the corporations emerging from Chapter 11 ended up filing again. Critics have seized upon these findings as evidence that the American corporate reorganization model is seriously flawed. Although several theories have been proffered to explain the high failure rate of business reorganizations in Delaware, the results of these types of studies are largely irrelevant because a “survival rate” analysis is an improper yardstick to measure success in the context of a business reorganization. Also, the studies typically address the survival rate of large public companies; that gives the studies limited applicability to the smaller, private corporations that constitute the great majority of yearly Chapter 11 cases. The American model is successful because it not only provides a mechanism for reorganization, but it also permits a financially distressed business to maintain its going-concern value while attempting to conduct an orderly sale of its assets. It is the preservation of value, not the survival rate, which should be the yardstick when considering whether a business reorganization was successful. Even if we were to accept the notion that an American-style reorganization is often nothing more than an economically efficient auction block, the stakeholders in Chapter 11 cases typically receive a greater benefit than they would under a model that mandates an immediate cessation of business operations and often causes piecemeal liquidation. Despite its imperfections, the American model rightly is gaining more global acceptance and is worth replicating. Kevin Lamb is a partner at Boston’s Testa, Hurwitz & Thibeault.

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