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Bar News - August 12, 2005 Book Review: Courting Failure By: Attorney Pamela E. Phelan
The corruption, according to LoPucki, arises from the competition that has developed among bankruptcy courts for the “big bankruptcy” cases - the reorganization cases filed by large public companies. LoPucki believes this competition is an effort by certain courts to attract big bankruptcy cases to their forum by handling and deciding cases in a way that will make those courts more attractive to the persons who decide in which forum to file the next big case, the so-called “case placers.” These case placers include the decision makers at the companies contemplating bankruptcy and the professionals who advise them. Because the bankruptcy code has what LoPucki describes as “a highly permissive venue statute,” these case placers have a great deal of discretion in deciding in which forum to file bankruptcy and, according to LoPucki they use that discretion to select the most beneficial forum they can find. LoPucki’s book begins with a brief overview of the development of corporate law in the United States and, as a prelude to the rest of his book, the competition that quickly grew among states for this business by offering certain protections to companies that incorporated in those states. Delaware eventually emerged as the leader in attracting large public companies to incorporate, and it later became the leader in attracting the big bankruptcy cases. According to LoPucki’s research, by the middle to late 1990s, however, other courts began actively chipping away at Delaware’s position. As to why this competition has developed, LoPucki suggests it is for the power and recognition that comes with handling high profile cases, which bring millions of dollars into the forum court’s local economy, as well as to the sense of loyalty to past and current colleagues in the local bar. The balance of the book is devoted to exploring how the courts compete for these cases and the consequences of that competition. Here the book becomes more interesting as it reflects LoPucki’s opinion and offers his critique of key decisions in most of the big bankruptcy cases of the last decade – Enron, Worldcom, Adelphia, Kmart and Polaroid, to name a few — the motivations behind the decisions, and his view on how those decisions have affected the number of new filings in those courts.
LoPucki is not shy about criticizing the apparent decisions and motivations of the courts involved in these big cases. As an example, early on in the book, LoPucki takes on Enron and the New York bankruptcy court. LoPucki surmises that the case placers in Enron carefully vetted the choice of the forum in which to file bankruptcy. As I am sure most will recall, the Enron case was riddled with allegations of fraud at the highest level of the company’s management. LoPucki suggests that the Enron case placers decided not to file in Delaware because of a concern that there was a greater risk that the Delaware court might be more inclined than another court to appoint an independent trustee once bankruptcy was filed. LoPucki asserts that this concern arose from a decision that had just been issued by the Delaware court in another case that, according to LoPucki’s theory, had a chilling effect on the Enron case placers. An independent trustee would take control of the company from the case placers, which would, presumably, lead to a swift discovery and remedy of the fraud. The Enron case placers eventually filed in the New York bankruptcy court and, according to LoPucki, they benefited from doing so. LoPucki goes on to take the New York bankruptcy judge to task for, among other things, not appointing a trustee, one of several decisions in that case that, LoPucki concludes, contributed to crippling the efforts to hold the alleged corrupt executives responsible for wrongdoing. LoPucki states that the “market reacted swiftly” following the initial decisions in the Enron case when the case placers in several other imminent big bankruptcy cases, including Global Crossing and Adelphia, which were facing their own fraud problems, later decided to file for bankruptcy in New York. LoPucki’s research indicates that with the filings in New York that followed Enron, in 2002, New York surpassed Delaware in the competition for big bankruptcy cases. LoPucki’s assessment of the numerous other big bankruptcy cases of the last decade follows a similar framework. He examines the decisions made by the various courts on issues that affect the interests of the case placers: retention of and payments to key management personnel; payments to critical vendors; §363 sale practices; swift approvals on plans of reorganization and, in particular, “pre-packaged” plans of reorganization; and employment of professionals. Toward the end of the book, LoPucki ventures into the international landscape of insolvency, discussing his views on how competition among countries for these cases is building and ways in which it might continue to grow, absent reform. A reader’s unfamiliarity with the details of the cases LoPucki focuses on limits one’s ability to assess his analysis of the decisions rendered in these cases and the accuracy of his premise that corruption, whether intentional or not, led to those decisions. LoPucki offers a detailed account of how extra-judicial considerations strongly influence the world of big bankruptcy. As one might expect, given his sharp criticism of the bankruptcy practice and the judiciary, the book is very detailed both on the empirical research LoPucki spent decades compiling, and on the details of the big cases with which he takes issue. The depth of LoPucki’s research or the rationale for his conclusions cannot be explored completely in this review. One has to read the book to truly appreciate the breadth of his analysis and the impact that his conclusions – if accurate – have on the bankruptcy practice. Although it is definitely not a “light” read, I recommend the book, as it offers an interesting hypothesis that inappropriate influences may have invaded the legal profession and judiciary.
Pamela E. Phelan |
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