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. […]
This essay summarizes the critiques and responds. Part I reviews the four-step argument that corruption is the right word for what is happening to the bankruptcy courts. Bankruptcy judges are under pressure to attract big cases. Courts have changed substantive rules and rulings to attract them, affecting such matters as professional fee awards, trustee appointments, deference to consensus, critical vendor orders, conflicts of interest, executive retention bonuses, insider releases and many others. That every significant trend in big cases bankruptcy has been in favor of the professionals, executives, and DIP lenders who are capable of bringing the courts additional cases demonstrates that at least some of the judges are acting in bad faith. That is, at least some of the changes are driven by the desire to get cases, not a good faith belief that the changes are legal or desirable.
. . . Part II responds to a variety of objections to [the argument that court competition caused high reorganization failure rates in Delaware and New York during the period from 1991-96 and high reorganization failure rates nationally when the competition spread to the rest of the country in 1997].
TK
please go read your own blog.
this is not a problem; you are only talking about agency costs
moreover, “matters as professional fee awards, trustee appointments, deference to consensus, critical vendor orders, onflicts of interest, executive retention bonuses, insider releases and many others” are just agency costs
move on to something important
Moe, the decision to file a chapter 11 case in one location over another is an agency cost and is not the focus of Professor LoPucki’s research.
Possible corruption in the federal judicial system that favors certain bankruptcy courts over others is not and agency cost and is the primary issue that Professor LoPucki addresses.
TK
more certainly a judge who favors certain propositions just to keep his appointment is just an agency cost, nothing, more–as they say in Star Wars, move on
All an agency cost is someone helping themselves as opposed to serving those to whom they owe a duty. As you has written too many times, it really is nothing, is not wrong, should not be illegal, or of any moment of concern. that just has the elites and big boys get ahead.
Moe, my point about agency costs is that criminalization of them is neither fair nor a cost-effective form of regulation. Assessing responsibility in a civil lawsuit is fairer and more cost-effective because you can involve all possible responsible parties in the process.
Neither LoPucki nor I would suggest that “the race to the bottom” among certain Bankruptcy Judges should be regulated through criminalization absent clear evidence of a crime (such as bribery). However, unlike the case of addressing corporate agency costs in a civil lawsuit, the civil justice system does not have a realistic civil remedy for judicial corruption (i.e., a governmental agency cost). As they say, you can’t sue City Hall.
TK
You have never answered my most effective criticims of your “agency cost” theory.
Recalling that stock is like a currency (it can be used to buy other companies) the number one reason to for “criminalization of them [agency cost]” is to keep crooks like Lay and Skilling from pumping their stock in order to buy and loot good companies that have honest books. Said differently, what you overlook (deliberately, I believe) is that bad stock, like bad money, drives out good. We actually suffer from too little regulation. American businesses would be far better if held to the standard of care of trial lawyers or even the lower standard of care to which we hold doctors.