Recently the U.S. bankruptcy courts have been inundated by new bankruptcy filings. For example, during the year ending September 30, 1997, the number of new bankruptcy filings reached 1,367,364, a record high. In addition, between the years of 1994 and 1997, bankruptcy filings grew 63 percent. Because of the huge increases, issues concerning bankruptcies have received a lot of attention from all three branches of government, the private sector and the media. One issue that has not received a lot of attention is the appellate process. Attention has been given to particular appeals or to legislative efforts to reform the bankruptcy appellate process,¹ but little or no attention has been given to the overall trend of bankruptcy appeals or to the relationship between bankruptcy appeals and bankruptcy filings.

The three dominant modes of relieving financially troubled consumers or businesses within the bankruptcy system are chapters 7, 11 and 13. The bankruptcy system offers two options for appeal. Litigants can file bankruptcy appeals in the district courts or in bankruptcy appellate panels (BAPs). BAPs, established pursuant to the Bankruptcy Reform Act of 1994, consist of three bankruptcy judges.² More than one-third of the 94 districts are using BAPs,³ and preliminary reports indicate that BAPs can help to expedite the appeals process.⁴ The bankruptcy system also offers litigants the opportunity to sue during the course of a bankruptcy proceeding. An appeal can be taken after any judgment, order or decree entered during the course of a bankruptcy case.

AOUSC Study

The Administrative Office of the U.S. Courts (AOUSC) recently undertook a study⁵ to deduce the fundamental relationship between bankruptcy appeals and bankruptcy filings, as well as adversary terminations. Understanding these relationships may provide the judiciary with a better understanding of how much work can be expected in the district courts and BAPs, given the recent increases in bankruptcy filings.

Presently, the Appellate Court and Circuit Administration Division (ACCAD) uses the current number of bankruptcy appeals to predict the future number of bankruptcy appeals, and these predictions are used to determine how often BAPs might be used. The Statistics Division (SD) provides annual forecasts of total bankruptcy filings, chapter 7, 11 and 13 filings, as well as adversary terminations. The purpose of this study was to determine if bankruptcy appeals responded to the growth or decline in total bankruptcy filings or in any component, such as chapter 11.

Data and Methodology

The SD is responsible for the collection and maintenance of many statistics related to the judiciary. These statistics include the number of bankruptcy filings by type of chapter and court. The SD also collects and maintains statistics on civil (district court) matters, including statistics on bankruptcy appeals. The information available on particular bankruptcy appeals filed in district courts is limited and does not include the type of filing being appealed.⁶ Essentially, only the number of bankruptcy appeals filed is available. Short of conducting a sample survey, determining what relationship exists between bankruptcy filings and bankruptcy appeals can best be achieved by conducting a regression analysis and a time series analysis.

This study was conducted in two parts. First, to determine what type of statistical relationship exists between filings and appeals, we conducted a regression analysis on bankruptcy appeals and bankruptcy filings. This part of the study used district court and bankruptcy court data for the years ending September 1991 through 1996. We examined the number of bankruptcy appeals filed in each of the district courts, as well as the number of bankruptcies filed in each of the bankruptcy courts. The filing data included the number of individual chapter filings (chapter 7, 11 and 13) filed in each of the bankruptcy courts. We also examined adversary terminations. The years 1991 through 1996 were chosen because these years reflect the most recent available data at the time this study was conducted. While this part of the study offers insights into what factors affect the number of bankruptcy appeals in the long run, it is not useful in predicting future appeals because it cannot adequately take into account the year-to-year time dependence of bankruptcy filings. In other words, the number of bankruptcies filed in one year influences, to a degree, the number filed the next.

The second part of the study addressed issues relating to predicting future bankruptcy appeals. We used information obtained from the first part and conducted a time series analysis. This part of the study can account for important time considerations. We examined monthly bankruptcy appeals data for the years 1981 through 1996 and monthly bankruptcy data for the years 1980 through 1995.

Results

The results of the regression analysis indicate that a relationship does exist between bankruptcy appeals and filings. However, this relationship varied from year to year and depended on the type of filing being appealed. The models that involved the number of chapter 7 filings, chapter 11 filings and adversary terminations showed the best predictive ability. Sometimes they together proved to be the best predictors of bankruptcy appeals; sometimes chapter 7 filings, combined with chapter 11 filings only, proved to be the best predictors of bankruptcy appeals; sometimes chapter 11 filings, combined with adversary terminations only, proved to be the best predictors of bankruptcy appeals; and sometimes, chapter 11 filings by themselves proved to be the best predictors of bankruptcy appeals.

While often not as good as when combined with other chapters or adversary terminations, chapter 11 filings by themselves proved to be excellent predictors of bankruptcy appeals. Again, this relationship was not consistent from year to year. For example, sometimes chapter 11 filings from the same year had the best relationship with bankruptcy appeals, sometimes chapter 11 filings that were a year old had the best relationship, and sometimes chapter 11 filings that were two years old had the best relationship. However, all the models that involved chapter 11 filings by themselves demonstrated a strong relationship with bankruptcy appeals and, moreover, all the models proved to be superior to the models that involved the other chapters or adversary terminations individually.

The next best model involved adversary terminations. Adversary terminations by themselves proved to be somewhat good predictors of bankruptcy appeals. Close behind, in terms of model fit, were those models that involved chapter 7 filings by themselves, but again, the relationship was only somewhat good. The models that involved total bankruptcy filings were next in terms of how well they formed a relationship with bankruptcy appeals, and these were similar to adversary terminations and chapter 7 filings in that they demonstrated a somewhat good predictive ability. Finally, the models that involved chapter 13 filings consistently showed a poor relationship with bankruptcy appeals. In other words, regardless of what year a lagged interval was being examined, chapter 13 filings were uncorrelated with bankruptcy appeals.

The time series analysis examined bankruptcy appeals in terms of its own past behavior, as well as its historical relationship with chapter 11 filings.⁷ This analysis showed that the best forecasting models of bankruptcy appeals generally involved using bankruptcy appeals in conjunction with chapter 11 filings (lagged one, two, or three years). The graph below superimposes bankruptcy appeals onto a graph of chapter 11 filings. Note the overall pattern of appeals filed over time is similar to that of chapter 11 filings. Using these models, we were able to accurately predict bankruptcy appeals one year into the future with a one percent error rate. The best model, in terms of overall forecast error, involved appeals and chapter 11 filings (lagging over three years). In addition, all of the time series models developed were superior in terms of forecast error to the model which is currently used. That is, while the number of past appeals filed is a major factor in predicting future appeals, it should not be considered the sole determinant.

Conclusions

The relationship between bankruptcy appeals and total bankruptcy filings is weaker than that between bankruptcy appeals and chapter 11 filings. Moreover, chapter 11 filings are an especially good predictor of bankruptcy appeals when combined with chapter 7 filings and adversary terminations. However, the degree to which chapter 7 filings, chapter 11 filings, and adversary terminations help determine bankruptcy appeals varies from year to year. This is likely the result of how and when an appeal can be taken. For example, a typical chapter 11 case will take approximately three years to close. Any decree, order or judgment made throughout the life of the case can be appealed, and therefore, an appeal could be made within one, two, or three years of the filing of a typical chapter 11 case.

Finally, the best predictors of future bankruptcy appeals in a given year appear to be chapter 11 filings and bankruptcy appeals themselves. Over time, the pattern of chapter 11 filings (in the aggregate) resembles that of bankruptcy appeals. In addition, we can more accurately predict future bankruptcy appeals using sophisticated statistical models than models currently used.

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Footnotes

¹ See, e.g., Chicago DailyLaw Bulletin, Vol. 144, No. 28, and congressional testimony on bankruptcy revision, 3/10/98. Return to article

² While the Bankruptcy Reform Act of 1978 authorized the establishment of BAPs for all circuits, only the First and Ninth Circuit courts subsequently established BAPs. Return to article

³ BAPs are currently being used to varying degrees in the First, Second, Sixth, Eighth, Ninth and Tenth Circuits. Return to article

⁴ See, e.g., Massachusetts Lawyers Weekly, Vol. 25, No. 35. Return to article

⁵ A more technical analysis of this report is available from the author. Return to article

⁶ Information, such as the type of bankruptcy filing being appealed, is available for cases moving through BAPs. However, BAPs have only been in use since 1996 (excluding the First and Ninth Circuits), and, moreover, there is no evidence that district courts and BAPs handle the same type of bankruptcy appeal. Return to article

⁷ A time series analysis that included chapter 7 filings and adversary terminations was also conducted, but the results were not significantly different from when chapter 11 filings were used exclusively. Return to article

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Journal Date:  Tuesday, December 1, 1998 © American Bankruptcy Institute. All rights reserved. ABI is a (501)(c)(3) non-profit business (52-1295453)