Last month, Jared Ellias and co-authors Ehud Kamar and Kobi Kastiel published a new paper, “The Rise of Bankruptcy Directors,” quantifying a trend in Chapter 11 that has been getting more and more notice: the role of independent directors in bankruptcy cases.

The UC Hastings Law professor and his co-authors found a stunning spike in the appointment of independent directors with bankruptcy experience, termed bankruptcy directors in the paper. The number of Chapter 11 cases with these directors has risen from 3.7% in 2004 to 48.3% in 2019. Those cases that have bankruptcy directors are associated with a 21% lower recovery for unsecured creditors.

Many practitioners have speculated or pointed to the most egregious examples of the consequences of these director appointments, but the research is the first attempt to quantify the effect of this latest trend on unsecured creditors.

Ellias discussed these findings during the inaugural episode of The Deal’s latest podcast, Fresh Start.

“In the current era of Chapter 11 — as opposed to say where things were during the financial crisis,” Ellias said, “when unsecured creditors are doing relatively worse on average, you see an independent director or a bankruptcy director on the board. That’s a different look for Chapter 11.”

Ellias’s research found that the so-called independence of these directors may be affected by the insular nature of a bankruptcy world that includes just a handful of debtor counsel firms and private equity sponsors.

Because the world is so small, he said, “It’s very easy to imagine that one might approach their engagement as an opportunity to audition for future work.”

Listen to the podcast below, in which Ellias also discussed how those directors interact with creditors on investigations.

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