Ellen Podgor lets us know that Michael J. Wing, an attorney who lives in Tyler but whose practice is apparently mostly in Houston, has been indicted in the Eastern District of Texas for allegedly running a Ponzi scheme promoting investments in phony companies.
Wing faces up to 20 years in prison and a fine of up to $250,000 for each of the eighteen counts alleged in the indictment, and the government is also seeking the forfeiture of $3.575 million traceable to the offenses alleged in the indictment.

Don’t miss this entertaining featured discussion over at PointofLaw.com in which PofL’s Jim Copland and Alex Tabarrok of Marginal Revolution fame debate contingent legal fees. Jim is the director of the Center for Legal Policy at the Manhattan Institute and is a leading advocate for reform of Americaís civil justice system, while Alex is a member of George Mason University’s up-and-coming libertarian-oriented economics department. An earlier post on Alex’s research into contingent fees is here.
Although Jim does not advocate a prohibition on all contingency fee arrangements, he makes the following case for regulation:

[U]nder a contingency fee arrangement, plaintiffs’ lawyers accept not only cases that are likely to succeed but long-shot cases with high potential damage payouts. A risk-neutral plaintiffs’ lawyer with a diversified portfolio of cases is just as happy to take a case with a 1 percent chance of paying out $20 million as a case with an 80 percent chance of paying out $250,000.
But as a society, do we really want to be flooded with high-dollar, low-probability claims? The contingency fee creates a very real incentive to play the “lawsuit lottery”óa lottery with positive expected returns for the plaintiff and client, but substantial social costs. At a very basic level, the contingency cap, while a crude mechanism, ameliorates this problem. If a lawyer’s take in a case goes downó-especially for high-dollar cases-óthe incentive to take shoot-the-moon cases falls proportionately.

To which Alex replies:

If a lawyer and her client want to contract in Lira what business is it of the state to interfere? If the lawyer and client agree on an incentive plan, why should that be regulated? Do we want to regulate contingent fees in other areas? A money-back guarantee, for example, is a contingent fee – you pay only if the product is a winner. A tip is a contingent fee – you pay only if the service was good.
True, not all contracts should be respected – we don’t enforce contracts against the public interest – nevertheless, my spider-sense starts to tingle whenever reformers of any stripe try to abrogate private contracting.

Walter Olson also has more.

As noted in these previous posts, I think that the Bankruptcy Reform Act of 2005 (nicknamed “BAPCPA”) is a misguided piece of legislation, a thought that Bankruptcy Judge Frank Monroe of Austin shares. Now, as the decisions on BAPCPA start rolling in, it appears that the legislation has significantly altered one of the cornerstones of American bankruptcy law — the automatic stay.
As most everyone knows, the automatic stay is the powerful injunction that goes into effect immediately upon the filing of a bankruptcy case. The stay enjoins most creditor actions against the debtor and the debtor’s assets to give the debtor some breathing room before a reorganization or liquidation ensues. In so going, the stay stops the “grab law” syndrome of creditors dismembering a debtor’s assets pursuant to state law collection remedies, and facilitates the dual policies of equitably distributing a debtor’s assets to all creditors while attempting to generate the highest value for such assets through either an orderly liquidation or reorganization.
Houston Bankruptcy Judge Marvin Isgur — who is at the forefront of early interpretation of the new bankruptcy legislation — points out in this new decision that the force of the automatic stay has been significantly altered under BAPCPA. In this particular case, Judge Isgur had previously dismissed the debtor’s bankruptcy case because the debtor had failed to obtain credit counseling in advance of the filing of the petition (another new BAPCPA-imposed requirement). Then, Judge Isgur took up the question of whether the automatic stay even went into effect at all during the period between the time of the filing of the defective bankruptcy case and the time that he declared the debtor ineligible to be a debtor under section 109(h) of BAPCPA. Judge Isgur makes a persuasive case that it does not:

[I]t is implausible to believe that Congress specifically identified people to exclude from the bankruptcy process, yet permitted those same people to benefit from bankruptcy’s most powerful protection: the automatic stay. Both logic and the statute dictate that no automatic stay arises on the filing of a petition by an ineligible person . . . [T]he relevant statutory language leaves no room for discretion.

Steve Jakubowski of the excellent Bankruptcy Litigation Blog provides more thorough analysis of the decision, which Judge Isgur certified for an immediate appeal to the Fifth Circuit Court of Appeals because of the policy implications of the decision. However, Judge Isgur’s interpretation of the language of the relevant BAPCPA-modified Code sections is straightforward and logical, so a reversal appears to be a longshot.
The bottom line — particularly in consumer bankruptcy cases, the automatic stay is simply not what it used to be.

Larry Ribstein, who was prescient in predicting the outcome of the corporate case of the decade, thinks in this post that the Delaware Supreme Court may be preparing to reverse Chancellor Chandler’s decision in the Disney-Ovitz case:

The supreme court might say [that Ovitz’s healthy Eisner-arranged severance from Disney] was important enough to require the same level of attention [as the board in Van Gorkum should have given to the transaction in that key case].
This would fit in with all the public agitation on executive compensation and the performance of executives and the need for active board supervision of these matters. But such a holding would be problematic because it seems to deny the need for perspective and judgment ñ just what the feds have lost with the obsession with trivia in the SOX internal controls rule.
Another possible basis for reversal is that the chancellor held that Eisner had the power to terminate Ovitz on his own, and therefore that the board had no duty to act. The supreme court might hold that this was wrong — the ceo’s technical power does not limit the board’s duty. This holding would satisfy the need to tell the board to do more, yet on a sufficiently narrow ground that the court can distinguish it in the future. So by taking this tack, the court will have satisfied its need to preserve VG without too great an expansion of the board’s duties. [ . . .]
The above analysis leads to the seemingly weird result that Eisner gets off while the board members go down for not controlling him. Of course good faith would ultimately fix that by letting everybody off. Apart from that, I’m not sure how Eisner goes down without questioning his substantive business judgment or finding a breach of a duty of loyalty, and both are stretches here.

Professor Bainbridge doesn’t think so because he doesn’t “see any basis in [Chancellor] Chandler’s decision for the requisite finding of ‘a genuine question about a directorís independence or personal interest in the outcome.'” Besides, Professor Bainbridge notes, all this talk about disclosure of executive compensation really misses the point, anyway.
Before the blawgosphere, discussion and analysis of such corporate governance issues — which are key factors in the success or failure of virtually all businesses — were buried in law reviews and an occasional op-ed on the editorial pages. As a result, these key issues were largely unappreciated by the public, many businesspersons and a large segment of the legal profession. Now, through the leadership of corporate law blawg pioneers Bainbridge and Ribstein, analysis of these important and interesting issues are instantly available for the world to review as a virtual cornucopia of corporate law blawgers has emerged to provide commentary and insight. That’s a wonderful legacy for these two fine educators, and one for which we should all be appreciative.

The WSJ’s Kimberly Strassel pens this devastating op-ed in today’s edition in which she chronicles one of the chapter 11 cases prompted by contingent liability for asbestos claims that has resulted in the Third Circuit Court of Appeals issuing a series of decisions over the past several years highly critical of the asbestos plaintiffs bar’s conduct in connection with those reorganization cases. Previous posts on a several of those cases are here.
The particular case that Strassel addresses is the In re: Congoleum Corp case, a New Jersey reorganization in which the Third Circuit concluded that the Bankruptcy Court had improperly approved the debtor company’s retention of one of the asbestos claimants’ law firms (Gilbert, Heintz & Randolph or “GHR”) as special counsel for the debtor:

Under the Congoleum plan, the lawyers would shift their asbestos claims into a special trust that had first dibs on any money. Congoleum and its parent, ABI, would contribute $250,000 in cash and a $2.7 million promissory note — payable 10 years down the line. Congoleum would then breeze in and out of bankruptcy in record time, its shareholders emerging with all of their equity and the company with a clean bill of health.
As for who’d pay for the trust, that was the beauty of the deal: The lawyers would arrange it so that the trust bill would land with insurers. And elegantly, the size of the trust they engineered was almost precisely what insurers owed under Congoleum’s maximum policy limits: a staggering $1 billion. Much of this booty would go instantly to the lawyers (via contingency fees) and their plaintiffs. Anyone who really did get sick from a Congoleum product down the line would be ushered into a second, unsecured trust that could pay pennies on the dollar.

Continue reading →

UCLA law professor Lynn LoPucki‘s book last year — Courting Failure : How Competition for Big Cases Is Corrupting the Bankruptcy Courts (UM Press 2005) — is still reverberating through corporate reorganization and bankruptcy legal circles. As noted in this earlier post, Professor LoPucki has been studying for many years the issue that he characterizes as the “race to the bottom” — i.e., bankruptcy courts in certain jurisdictions (primarily Delaware and New York City) bending federal bankruptcy law to market themselves to debtors’ lawyers who often are instrumental in choosing the venue of big business reorganization cases. Professor LoPucki argues that court competition caused high reorganization failure rates in Delaware and New York during the period from 1991-96 and then high reorganization failure rates nationally when the competition spread to the rest of the country in 1997.
In September 2005, the University of Wisconsin Law School convened a conference of leading bankruptcy scholars to provide a critique of Professor LoPucki’s book, and an upcoming symposium issue of the Buffalo Law Review will include the papers presented at that conference along with this response from Professor LoPucki, the abstract of which provides in part as follows:

By historical accident, the bankruptcy venue statute gives large public companies their choice of bankruptcy courts. Over three decades a competition for those cases has developed among some United States Bankruptcy Courts. The most successful courts – Delaware and New York – today attract more than two thirds of the billion-dollar-and-over cases. The courts compete principally because the cases represent a multi-billion dollar a year industry in professional fees alone, because local lawyers pressure judges to compete, and because judges who lose the competition are stigmatized and may not be reappointed. […]

Continue reading →

Clear Thinkers favorite Peter Henning provides this cogent analysis of the important case of Richard Convertino, the former Assistant U.S. Attorney who was indicted yesterday on conspiracy, obstruction of justice, and perjury charges for his part as lead counsel in the extraordinary “Detroit Terrorism Trial,” the case in which two defendants were convicted on terrorism charges only to have the prosecution request that the verdicts be thrown out because of prosecutorial misconduct. A copy of the indictment is here, the WaPo article on the indictment is here and the NY Times article is here.
As Professor Henning reports, this may be the first indictment based on a prosecutor’s alleged failure to comply with the government’s Brady obligation and the prosecution’s duty to turnover to the defense potentially exculpatory evidence that the prosecution obtained in the course of its investigation. Given the Enron Task Force’s use of similarly questionable tactics in connection with various Enron-related prosecutions — including this recent alleged failure to comply with the Task Force’s Brady obligation in the Lay-Skilling case — you can bet that the defense attorneys involved in the Enron-related criminal cases will be following the Convertino case closely.
11/01/07 Update: Convertino was acquitted.

Most of us lawyers have had difficult clients from time to time, but this WaPo article reports that would-be 9/11 bomber Zacarias Moussaoui redefines the concept of the difficult client.
As we all know, Moussaoui pled guilty to six counts arising from the 9/11 suicide bombing of the World Trade Center and now federal prosecutors are seeking the death penalty because Moussaoui could have supplied information that would have prevented the attacks. Moussaoui’s defense contended that the defendant was a merely a fringe figure in al Qaeda. That led to the following testimony:

[Zacarias Moussaoui] had planned to fly a hijacked airliner into the White House, but he got arrested before the attack and had to sit it out. Yesterday, fighting the death penalty in an Alexandria courtroom, he took the stand — over his lawyers’ strenuous objections — and pretty much destroyed the defense his team had built.
He readily agreed that he was part of the 9/11 plot. “I was supposed to pilot a plane to hit the White House,” he said, and he knew of the World Trade Center attacks but lied to prevent authorities from stopping them.
“You rejoiced in the fact that Americans were killed?” the prosecutor asked.
“That is correct,” Moussaoui said, matter-of-factly.
You called the collapse of the twin towers “gorgeous”?
“Indeed.”
You asserted that “3,000 miscreant disbelievers” burned in a “hellfire”?
“That is correct.”

Moussaoui’s defense team proceeded to contend that he is insane and, thus, his testimony should be disregarded, while the prosecution contended that it would be unfair to deny Moussaoui the opportunity to testify. Moussaoui agreed with the prosecution. In fact, Moussaoui was more cooperative with prosecutors and became restless on the stand only when questioned by his own lawyers.
Tough client, indeed. Hat tip to Carolyn Elefant for the link to the WaPo article.

Stephen Cooper, the fellow who oversaw Enron’s liquidation for a couple of years, has backed off his request for a $25 million “success” fee (earlier post here) — on top of his $1.3 million annual salary and tens of millions already paid to his company for its services in the Enron case — after the U.S. Trustee examining his request pointed out some “billing issues” to the Bankruptcy Judge overseeing the Enron chapter 11 case. Mr. Cooper now is requesting “only” a $12.5 million success fee in the Enron case, where creditors holding unsecured claims will probably receive somewhere between a 15% – 25% dividend on their claims.
Something tells me that Lynn LoPucki is not pleased.