Professor LoPucki Blasts “Corrupting” Competition for Big Cases by Bankruptcy Courts: Dedate to Follow
Robert J. Keach
rkeach@bssn.com

If you have not read the transcript of Prof. Lynn LoPucki’s recent remarks before Congress, you may wish to secure a copy, as the remarks are likely to be the stuff of heated debate in the very near future. In recent testimony before the Congress, on July 21, 2004, briefly reported in some of the mainstream and financial press, the law professor stated that “The Bankruptcy Courts of the United States have inadvertently been thrown into competition for big bankruptcy cases. That competition is changing bankruptcy law and practice in ways not contemplated by Congress and corrupting those courts. By ‘corrupting’ I mean that a substantial number of bankruptcy judges are deciding particular matters not as they believe they should, but as they believe they must to maintain the flow of cases to their courts.” The professor, later in his remarks, was equally harsh: “…the pressures of competition have resulted in major changes in the operation of the bankruptcy system…They evolved because the case placers [the professor’s term for the lawyers and bankers who choose venue] wanted the changes and the bankruptcy courts stretched or broke the law to accommodate them.” The professor cites his prior study on recidivism among chapter 11 filers in Delaware and the Southern District of New York in support of his argument that the move to attract cases to those courts has been adverse to the interests of debtor companies.

The professor, at least to a minor degree, achieved the media and congressional reaction he perhaps coveted, with statements of disgust emanating from the capitol’s halls and quoted in the press. E.g., Shannon Murray, “Bankruptcy Process: ‘This stinks!’”, The Deal, July 23, 2004 (quoting Congressman Cannon).

Undoubtedly, some of the professor’s factual contentions have some merit, such as the argument that the economic benefit to Delaware of being the “national bankruptcy court” drives its bar and politicians to fight vigorously any change to the venue statutes. The argument that some large cases are filed in Delaware or New York because those venues are perceived as large-case friendly, or even debtor-friendly, is also true as far as it goes.

However, perhaps because it is being saved for the book the professor advertises at the end of his written remarks to Congress, the testimony was long on controversy but short on empirical evidence in support of the criticism of the courts and the process. While a detailed response must be left for other writings and other days, a review of the professor’s rationale will leave some thinking the arguments will not hold water. For example, the contentions that judges chase big cases because (1) the achievement of such cases makes the judge a “celebrity”; (2) most fees in such mega-cases are paid to local counsel and thus benefit the community in which the judge lives; and (3) judges are “humiliated” by the loss of any case that could have been filed in their district that files elsewhere, are a stretch. Moreover, the arguments that the prevalence of Section 363 sales of businesses and critical vendor orders is a product of the unseemly competition seem simply wrong, as a matter of historical fact. Both have occurred in small and middle-market cases for years, in districts far removed from alleged “taint” of the big-case competition.

The remarks, as noted, are sure to result in detailed and scholarly responses and much debate. The debate is likely worthwhile, if nothing else because others in the bar and, to some degree, the public may share these perceptions. However, one wishes that the debate had first occurred in scholarly journals, and among learned panelists at future seminars, where the arguments and counterarguments could have been presented simultaneously and the audience had been left to judge the merits of the arguments following an adequate exchange of views. Unfortunately, the professor’s one-sided presentation to Congress—to the extent it draws a less-than-measured legislative reaction—could cause unwarranted damage to the image of the bankruptcy process, and its dedicated judges and practitioners, before an adequate and fair debate is held.

• LoPucki Testimony
• Professor LoPucki on the Great Debate (PDF)
• Professor LoPucki on the Great Debate (PowerPoint)
• Thomas J. Salerno on the Great Debate (PDF)
• Thomas J. Salerno on the Great Debate (Microsoft Word)

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