Why Bad Things Happen in Large Chapter 11 Cases: Some Thoughts about Courting Failure
Michael St. James
St. James Law - San Francisco Office
Tennessee Journal of Business Law, Forthcoming
The enactment of the Bankruptcy Code in 1979 made forum shopping possible: A company might choose among several different courts in which to file its Chapter 11 case. In COURTING FAILURE, Professor LoPucki argues that forum shopping has corrupted the bankruptcy courts, leading them to compete with each other for the largest bankruptcy cases, effectively by offering to rule in manners contrary to established law but favorable to the company or its major interest groups. LoPucki further argues that a statistical analysis of recidivism - companies that file for a second bankruptcy case within five years of successfully emerging from the first case - proves that the most competitive courts are doing the poorest jobs of reorganizing companies.
Allegations of judicial corruption prove a lightening rod for LoPucki's critics. Salerno argues that, while there is forum shopping, it is an appropriate and legitimate aspect of the practice of bankruptcy law. Salerno is outraged by the allegations of corruption which he contends are factually wholly unsupported and unsupportable, and argues that LoPucki's statistical methodology fails to address the important underlying issues because they are, by their nature, issues about which statistics are not available. Zywicki presents examples of good and bad forum shopping, and finds himself unable to determine how to characterize bankruptcy forum shopping. He challenges LoPucki's contention that the judges are directly engaged in competition, noting that many of the cases attracted by the competitive courts would be unappealing to most judges, but agrees that a court's expressed position on attorney's fees has a significant affect on forum shopping.
The article concurs with the critics to the effect that evidence of corruption is weak and concludes that the characterization is unhelpful. Rather, the author argues that the source of the problem, as suggested by Professor Kuney, are the bankruptcy professionals. With floods of money running through the largest bankruptcy cases, Darwinism took hold: if professionals could identify courts that would adopt minority viewpoints favorable to critical constituencies and could forum-shop to those courts, the professionals would prosper and multiply. Conversely, if they were unable to deliver rulings on key issues that differed substantially from mainstream bankruptcy law by correctly selecting the best forum for the case, they would lose market share, replaced by professionals who could deliver the right rulings.
The author argues that, while some minority rulings have important policy consequences (i.e., willingness to issue critical vendor orders and third party releases), the most critical characteristic of a favored forum is a mindset: a willingness to treat bankruptcy proceedings as primarily multi-party private actions and to permit the parties to work out matters primarily privately and through private negotiation, encouraging and approving consensual resolutions among the litigants. The author argues that this deference is wrong-headed as a matter of bankruptcy policy: Virtually every order issued by a bankruptcy court affects the rights of third parties not before the court, and collectively dissidents and non-voting creditors often constitute one of the largest classes in any case. The legitimacy of the bankruptcy process - which binds dissidents and non-consenting parties to a forced adjustment of their legal rights - depends on the presence of a bankruptcy judge who is willing to exercise an independent adjudicative function. Independent adjudication renders a court less predictable and hence less desirable to forum shoppers, but without it the ability to bind the multitudes of creditors who do not affirmatively consent to the bankruptcy reorganization loses its legitimacy.
The author concludes that forum shopping has effectively ensured that the largest bankruptcy cases will be administered on the basis of minority views about bankruptcy law. There is a serious policy problem when mainstream bankruptcy law does not govern most of the large bankruptcy cases. Unfortunately, legislative repeal of the ability to forum shop seems unlikely, and no other mechanism seems available to correct this policy problem.
Number of Pages in PDF File: 19
Keywords: bankruptcy, forum shopping, Courting Failure, LoPucki,Accepted Paper Series
Date posted: November 2, 2005
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