This may seem a bit odd coming on the heels of the previous post, but UCLA law professor Lynn LoPucki‘s long-awaited new book — Courting Failure : How Competition for Big Cases Is Corrupting the Bankruptcy Courts (UM Press 2005) — is finally available.
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 bending federal bankruptcy law to market themselves to debtors’ lawyers who often are instrumental in choosing the venue of big business reorganization cases.
The cost attributable to this “race to the bottom” is considerable because the two main bankruptcy venues — Delaware and the New York City — commonly approve professional fees in big reorganization cases that are at the highest level of the profession. In comparison, the high hourly rates being charged and routinely approved in the Enron reorganization case in New York would likely not have been approved if the case had been filed in Houston where Enron is based and which is a far more convenient venue for the vast majority of Enron creditors. In addition, Professor LoPucki argues in his new book that the “race to the bottom” has also caused a decline in the quality of bankruptcy reorganizations and a parallel rise in chapter 22’s (i.e., repeat reorganizations).
By the way, the bankruptcy reform legislation referred to in the previous post fails to address this “race to the bottom” issue. So it goes.

The long legislative fight over bankruptcy reform legislation appears to be coming to a close, as this Washington Post article reports.
If you want to understand why this is poorly-conceived legislation that is a perfect example of Republican legislators indulging the narrow self-interest of certain business interests, then read this.
Although not perfect, America’s Bankruptcy Code and system is the best in the world, which is one of the reasons that it is often emulated. Making that system more expensive and difficult for individuals is contrary to the public policy of the fresh start and the promotion of risk taking that are the foundation of our insolvency laws.

Brian Lavielle, one of three former Duke Energy Corp. natural gas traders who were indicted last April for booking phony trades to increase bonus compensation, pleaded guilty in Houston Thursday to falsifying books and agreed to cooperate in the federal prosecution of his other two co-defendants.
Lavielle, who is 34, faces a maximum sentence of twenty years and a fine of $5 million, although the cooperation deal and the recent Supreme Court rejection of mandatory federal sentencing guidelines probably mean that his sentence will be far less than the maximum. Sentencing is scheduled for December 9.
As noted in the previous post on the indictment, Lavielle and fellow Duke traders Timothy Kramer and Todd Reid were indicted for racketeering, conspiracy, wire and mail fraud, money laundering and falsifying corporate books in connection with booking phony electricity and natural-gas trades to boost trading volumes and inflate profits in a trading book that was the basis of their annual bonuses. The indictment alleges that the three rigged 400 phony trades that produced a $50 million profit in the trade book used for bonus calculations between March 2001 and May 2002. The schemes are alleged to have inflated bonuses for the three by a total of at least $7 million.
This is one of the first criminal cases of which I am aware in which senior-level executives have been accused of devising schemes to generate profits in a trading book by using “mark-to-market” accounting in calculating bonuses, on one hand, and to enter losses in an “accrual book” that had no bearing on bonuses, on the other. Duke and many other energy trades commonly used mark-to-market accounting to record profit and loss for energy contracts that might not settle for many years. However, mark to market accounting method has come under intense scrutiny since the demise of Enron Corp. in late 2001 because of the latitude that the method allows in recording profitable results in trading operations.

New class lawsuit legislation that will facilitate removal of most class actions from state to federal courts moved closer to Congressional approval yesterday as the Senate prepared to approve it. The House of Representatives has already committed to ratifying the bill so long as the Senate does not materially amend the legislation, and President Bush has already publicly stated that he will sign the legislation into law.
Under the legislation, most large class actions with aggregate claims of more than $5 million would be subject to removal to federal court, where most defense attorneys prefer defending class action cases.
A few exemptions remain that would allow primarily local controversies to remain in state court, such as cases in which at least two-thirds of the class members are from the state of the state court in which the class action is filed. A similar exemption exists for cases involving injuries that occurred primarily in one state.
The theory behind the legislation is to prevent class action plaintiffs’ lawyers from forum shopping class actions in the state courts to find the most “damages friendly” venue for such cases. However, class action plaintiffs’ lawyers have forum shopped class actions in federal courts for years, so the main impact of the legislation is simply to reduce the supply of available courts in which plaintiffs’ lawyers can initiate a such a lawsuit.
The rest of the political debate regarding the bill is largely partisan drivel.

Knox Nunnally is a well-known and highly regarded trial lawyer at Vinson & Elkins in Houston. Knox has been writing a series for the Texas Lawyer on tips for trial lawyers, and the latest segment in the series provides a number of common sense tips. Knox makes two particularly insightful points:

[Get] to know all of the people associated with the court at the courthouse. This means you need to know, on a personal level, the clerk of the court, This means you need to know, on a personal level, the clerk of the court, the bailiff, the court reporter and whoever else assists with the trial. . . . during a trial any one of those court personnel could have some contact with the jury. It is always to your advantage if court personnel feel positively about you, because you never know when some gratuitous comment could be made that either advances or sinks your case. These folks also usually prove to be the best shadow jury I have ever known concerning who?s winning and who?s losing during the course of a trial.

Perhaps even more important is the following point, which unfortunately is contrary to the adversarial approach to litigation that has become increasingly common in recent years:

One of the most important tips concerns getting along with opposing counsel. Years of trial combat taught me it is far better to try to get along with the other side rather than allowing everything to become a heated battle. It seems today that so many of our relationships with opposing counsel deteriorate more quickly; cases become almost exclusively a motion practice, with personal recriminations creeping into the pleadings and arguments. I remember a case I tried to a jury verdict (and lost) with Ronald Krist, a truly splendid lawyer. It was a case we fully lost) with Ronald Krist, a truly splendid lawyer. It was a case we fully prepared, took to trial and ultimately settled after the verdict without needing one hearing before the court on any kind of dispute. That is a rare occurrence today. The trial business is tough enough without making it tougher with scorched-earth tactics. It is also true that what goes around, comes around.

Read the entire article. Definite clear thinking from a first rate (and first class) lawyer. Hat tip to the Illinois Trial Practice Weblog for the link to Knox’s article.

Wounded Russian oil company but American debtor-in-possession OAO Yukos has dismissed five banks from its tortious interference lawsuit that it has brought in federal court in Houston in connection with its pending chapter 11 case. Here are the previous posts on the Yukos case.
The lawsuit involves several Western banks alleged involvement in the financing of an auction bid on Yukos’ former production unit called Yuganskneftegaz (“Yugansk”), the Siberian oil giant that represents about 1% of world oil production. In December, the Russian government scheduled an auction of Yugansk to generate proceeds to pay Yukos’ alleged $28 billion tax debt to the government, which prompted Yukos’ to file a chapter 11 case in Houston in an effort to delay the auction. The Russian government went ahead with the auction despite the automatic stay under 11 U.S.C. ß 362 and a Bankruptcy Court TRO enjoining the auction, and Yukos then initiated the lawsuit against a number of Western financial institutions for alleged involvement in financing the winning $9.3 billion auction bid in violatio of the automatic stay and the TRO.
Yukos dropped affiliates of ABN Amro Holding NV, BNP Paribas SA, Calyon, JP Morgan Chase & Co. and Dresdner Kleinwort Wassertein from the lawsuit. Those banks had originally been members of a consortium of Western financial institutions that was prepared to finance an auction bid for Yugansk, but Yukos is now satisfied that these banks had nothing to do with the winning auction bid.
On the other hand, one of the banks that Yukos did not dismiss is Deutsche Bank, which is challenging the jurisdiction of the U.S. Bankruptcy Court over Yukos. The hearing on Deutsche Bank’s motion to dismiss the Yukos case is presently scheduled for February 16th in U.S. Bankruptcy Judge Letitia Clark’s Houston courtroom.

Less than a month after it was announced, the tentative settlement by 10 of 12 WorldCom Inc. directors to pay $54 million (including $18 million out of their own pockets) to settle the class-action claims against them has collapsed after U.S. District Judge Denise Cote rejected a key provision of the deal.
The agreement unraveled as the plaintiffs withdrew from the settlement after Judge Cote rejected the provision in the deal that would have prevented the remaining defendants in the lawsuit to reduce their liability on a judgment by assessing a portion of the responsibility for that judgment to the settling defendants. As noted in this earlier post, a similar tentative settlement early in the Enron case that would have resolved civil and criminal charges against Arthur Andersen was also scuttled by a dispute over a similar provision.
Consequently, unless the plaintiffs and the directors revise the deal to delete the above-described provision, the 10 directors will have to stand trial starting Feb. 28 along with the other defendants in the case.
My sense is that cooler heads on the plaintiffs side will prevail and the settlement will eventually get done. However, stranger things have happened in such a high profile case than leaving $54 million on the table. The plaintiffs may figure that its worth it to go for the gusto against the financial institutions because they can always settle with the directors on similar economic grounds after obtaining a big judgment against, or settlement with, the remaining banks.