"Let us not assassinate this lad further, Senator. Have you no sense of decency, sir, at long last? Have you left no sense of honor?"
—Joseph Welch to Sen. Joseph McCarthy, June 8, 1954

Prof. Lynn LoPucki of UCLA Law School has followed up a series of law review articles in which he analyzed subsequent failure of confirmed chapter 11 cases with a provocative new book published by the University of Michigan Press entitled Courting Failure: How Competition for Big Cases Is Corrupting the Bankruptcy Courts.¹ While Prof. LoPucki's prior work hinted (sometimes less subtlely than others) at his theory explaining why chapter 11 cases confirmed in the Southern District of New York and Delaware wind up in subsequent chapter 11s within five years, he has pulled out all of the stops in Courting Failure. Prof. LoPucki here indicts most of the bankruptcy reorganization system. He saves his greatest scorn for bankruptcy judges in the Southern District of New York and Delaware, accusing them of violating judicial ethics by subverting the Bankruptcy Code in an effort to attract large cases to those jurisdictions.

The quote at the beginning of this review is from the McCarthy era hearings before the House UnAmerican Activities Committee (HUAC). Joseph Welch, the lawyer defending certain officers of the Department of Army from accusations of Communist ties, was interrupted by Sen. McCarthy, who told him that the committee had "reliable information" that an associate at Welch's law firm had Communist ties. The quote is Welch's response, which drew a standing ovation. The HUAC was shut down soon after this exchange. One of the many problems with HUAC's activities was that it would rely on certain facts (such as a person's membership while in college in some organization that espoused socialist ideals) and used those facts to engage in character assassination in a politically motivated witch hunt. It is the great leap of faith between the "fact" and the theory that must be carefully examined, especially when the theory involves character assassination and besmirching personal and professional reputations.

And herein lies my problem with LoPucki's book. It is an unsupported hypothesis masquerading as well-researched fact. The facts upon which LoPucki launches his character assassination are simple enough. He has created a database that includes all bankruptcy cases filed by large public companies in the U.S. bankruptcy courts since Oct. 1, 1979—a database that encompasses 683 cases.² Upon a review of the database, LoPucki determined that a statistically significant number of chapter 11 cases that were confirmed in the Southern District of New York and Delaware filed bankruptcy again within five years.

LoPucki takes these "facts" and builds the ultimate theory of his book—that this subsequent failure rate is attributable to only one reason: The bankruptcy judges in New York and Delaware are subverting the Bankruptcy Code for personal gain. Courting Failure concludes that the current venue provisions of the bankruptcy law enable such corruption and must be returned to the provisions of the former Bankruptcy Act, where state of incorporation was not an option for venue.

What "personal gain" do bankruptcy judges derive from their subversion of the bankruptcy laws? This is a fair question, since bankruptcy judges are not paid a commission based on the number of plans they confirm. LoPucki advances three reasons why bankruptcy judges would disregard canons of judicial ethics in order to compete for big cases.

First, bankruptcy judges who preside over the reorganization of large public companies have the opportunity to work with the leading financial and legal professionals involved in those cases, and as such they are able to bask in the glow of reflected glory. The judge becomes, in the words of LoPucki, "the most powerful person in the room. Millions and sometimes even billions of dollars turn on his or her decision. The status that power confers extends beyond the courtroom." LoPucki gives lip service to the fact the judges presiding over mega-cases must work harder, put in more hours, and otherwise are under more stress than their counterparts.

The second reason is that "celebrity comes along with the power." The judge gets to see his or her name in print frequently (not unlike, for example, law school professors who advance flamboyant theories and find themselves quoted in many newspapers), and of course they have "standing invitations from professional organizations to travel to resort cities...to give speeches and be honored." If they return to the practice of law, clients with big cases will seek them out. What's more, the celebrity extends even to their obituaries which "will likely mention the big cases over which the judge presided...."

The third reason is so that the judge can keep his or her job. LoPucki surmises that when a bankruptcy judge is up for reappointment at the end of the initial 14-year term, the lawyers in his or her particular city will retaliate against the judge who does not bend the rules to attract big cases by giving the judge bad evaluations and blocking his or her reappointment. After all, large bankruptcy cases mean large fees, and all lawyers want the big fees. Accordingly, to the extent that a bankruptcy judge is viewed as a "problem" such that large national cases stay away from the particular city (thereby depriving local lawyers of lucrative fees), those lawyers will be extremely upset with the judge and will do everything in their power to block the reappointment. LoPucki attempts to illustrate his point with the fact that these powerful bankruptcy lawyers were able to block the reappointment of 8 percent of bankruptcy judges during the period 1998-2002 (which, of course, means that 92 percent of bankruptcy judges during that time period were reappointed). LoPucki largely ignores the fact that it is the circuit court of appeals that ultimately appoints (or declines reappointment of) bankruptcy judges, and not lawyers. While lawyers are interviewed in certain instances, they are by no means a deciding factor.³

LoPucki further surmises that if certain bankruptcy judges are willing to subvert the system by giving in to the junta of powerful legal and financial advisors who choose venue, they will make all of the other bankruptcy judges (and venues) "irrelevant." So how, exactly, does a scheming judge attract the large cases with all of the celebrity, power, glittering obit potential and boondoggles that it brings? To LoPucki, that's simple as well. All a bankruptcy judge has to do is let it be known (either through the grapevine or through decisions) that he or she will easily grant extensions of exclusivity, not appoint trustees and actually allow debtor-in-possession (DIP) to remain in control, grant first-day orders and otherwise have predictable procedures for large companies. To clinch the "sale" of their jurisdiction, these unethical judges dangle the holy grail of all incentives: They go easy on professional fee applications.

But LoPucki's analysis does not withstand scrutiny. He pillories Bankruptcy Judge Arthur Gonzales (who presided over the Enron case) for his failure to appoint a chapter 11 trustee (after he made sure any attempt to move the case to Houston was thwarted, of course). This is precisely why (or so LoPucki speculates) the Southern District of New York was chosen for the Enron filing: Kenneth Lay knew that no trustee would be appointed. Of course, by the time Enron had filed its chapter 11, Lay was already gone and there was a third-party professional turnaround firm (Zolfo Cooper) running Enron. In addition, Judge Gonzales appointed an independent examiner to examine all of the financial transactions of Enron. LoPucki does not explain why the appointment of a trustee would have done anything for the case that the court-appointed outside management couldn't do (and ultimately did do) for Enron. Nor does LoPucki argue that creditor recoveries would have been enhanced. These are the trifling details not contained in the database.

On the issue of fees, LoPucki points to the "fact" that a Philadelphia bankruptcy judge, David Scholl, was denied reappointment in 2000 "apparently solely on the basis of adverse comments [from bankruptcy lawyers] received during the public comment period." Judge Scholl refused to approve fees in excess of $200 per hour for senior partners (in the 1980s), and as a result, Philadelphia was not the venue of choice for any of the 43 cases that otherwise should have been filed (in LoPucki's opinion) in Philadelphia. LoPucki hypothesizes that enraged Philadelphia bankruptcy lawyers blocked his reappointment because his stance on fees denied Philadelphia big cases and big fees.

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LoPucki is certainly entitled to his opinion. When his opinion is dressed up as statistical fact, he crosses the line from good-faith comment to unfounded character assassination. He attacks a constituency that is unable to defend itself.

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The choice of Judge Scholl as an example shows either that LoPucki was unaware of, or was uninterested in, the true facts behind many of the examples that he uses. Judge Scholl was in fact denied reappointment in 2000. Was Judge Scholl's denial of reappointment a result of his adverse position on fees? That is highly unlikely. Scholl sued the Third Circuit on procedural grounds when he was denied reappointment, and even after he went through that process, he was still denied reappointment. A judge is not reappointed where "the incumbent [bankruptcy judge] has failed to perform the duties of a bankruptcy judge according to the high standard of performance regularly met by U.S. bankruptcy judges." Regulations of Judicial Conference of the United States, §5.01(b). Notwithstanding LoPucki's belief that the wrath of jilted lawyers during the public comment period kept Judge Scholl from reappointment, in fact, of all of the comments received on Judge Scholl during the comment period, only 4 percent of the questionnaires returned were "negative."⁴ While the reappointment process is understandably confidential, for LoPucki to state that Judge Scholl's position on attorneys' fees resulted in his denial of reappointment shows how little background analysis he did to support his theories. One cannot help but wonder whether or not Judge Scholl's denial of reappointment had something to do with other factors—such as his widely reported threat, while a sitting federal bankruptcy judge, to file a class action lawsuit against the federal government to force his health care provider to cover the costs of more than four Viagra pills each month under the health benefits programs for federal employees.⁵ Perhaps it had to do with his widely known consumer advocate position as a bankruptcy judge (which itself could have a tendency to "skew" the bankruptcy system).⁶

LoPucki has substantial problems with the venue provisions of the current bankruptcy law and urges that they be significantly "tightened," which would preclude bankruptcy filings in states of incorporation (such as Delaware). He also urges that the "affiliate" venue rule be done away with. LoPucki ignores the fact that the venue provisions of the current bankruptcy law are neither new nor novel. Venue under the Bankruptcy Act of 1898 provided that a possible basis for the venue for bankruptcy filings was the place of incorporation. In the mid-1930s, a raging debate went on about whether federal law should exclude state of incorporation from the venue options available to debtors, with the New Deal reformers winning this fight by the passage of the Chandler Act. Under the Chandler Act, venue options for the reorganization of publicly held corporations (chapter X) were limited to the state of a firm's principal place of business or assets. That notwithstanding, the Bankruptcy Act also had a chapter XI, which was also available for the restructuring of public corporations, and chapter XI still allowed venue in the state of incorporation. As such, an increasing number of public companies began filing under chapter XI of the Bankruptcy Act, a strategy the Supreme Court vindicated in the mid-1950s.⁷ In 1973, the Bankruptcy Act's venue rules were consolidated and that rule included as the sole venue option for corporations the principal place of business and principal assets. The 1973 rule was superseded by the Bankruptcy Code's enactment in 1978, which once again revived the place of incorporation as a venue option. In short, the Code did not create a new and revolutionary venue option that clever lawyers have sought to capitalize on. That venue option has been in existence since the Bankruptcy Act of 1898, off and on. LoPucki is simply joining in the old debate that has been ongoing for 70 years.⁸

The data contained in LoPucki's book is fine as far as it goes. The real problem with Courting Failure is the unsupported and scurrilous conclusions that LoPucki draws from that data. By his own admission, LoPucki has never been in any large chapter 11 cases, so he views the process from the outside without the filter of experience. As an academician, he has the luxury of being able to ignore troublesome facts to the extent that they don't support his theories. LoPucki is at war with the current system. He does not agree with the bankruptcy law's venue provisions, the judicial discretion given to bankruptcy judges under the system, corporate governance and corporate law in general, and even the system of a DIP.

LoPucki is certainly entitled to his opinion. When his opinion is dressed up as statistical fact, he crosses the line from good-faith comment to unfounded character assassination. He attacks a constituency that is unable to defend itself. Bankruptcy judges are not going to engage in public debate about whether the actions they take in cases are proper or ethical. While LoPucki believes that about half of the chapter 11s of large public companies in New York and Delaware should never have been confirmed, and at least in following his theory would never have had their plans confirmed in other jurisdictions, there really is no call for besmirching the reputations and character of bankruptcy judges who are doing the best they can in extremely complex cases, which have real implications for employees and constituents that go well beyond any legal dispute that may be before the judge. If he's correct, then regardless of whether Congress brings back the more restrictive venue provisions of yesteryear, the bankruptcy judges in the Southern District of New York and Delaware must be appropriately disciplined. They are, by LoPucki's indictment, unethical and "tainted."

Why would an otherwise respectable law school professor level such a charge at bankruptcy judges? Perhaps because it brings celebrity. Courting Failure is chock full of sound bites that will make LoPucki a well-quoted source. Maybe it will get him standing invitations from professional organizations to travel to resort cities to give speeches. Maybe he will make decent royalties on his book, but at what cost to the reputation of honorable and dedicated judges?

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Footnotes

¹ Prof. LoPucki's research for this book was supported by a grant from the ABI Endowment Fund. Return to article

² An abbreviated version of the database is available for review at http://lopucki.law.ucla.edu. Return to article

³ For example, on p. 20, LoPucki states that lawyers, by being critical of a judge up for reappointment, can block that reappointment. On p. 22, he points to the specific instance of Bankruptcy Judge Carol Kenner, who was given "lower than average marks" by the bankruptcy bar in Boston. That notwithstanding, in 1998 the First Circuit Court of Appeals not only reappointed her to a second term as a bankruptcy judge, but also placed her on the circuit's Bankruptcy Appellate Panel. If these lawyers were so powerful and their criticism so determinative, why was Judge Kenner reappointed? Such cases do not fit LoPucki's preconceived theory. Return to article

⁴ See Scholl v. United States, No. 00-737C (U.S. Court of Federal Claims, Dec. 4, 2002) at 4. Return to article

⁵ Class Action Reporter, May 27, 1991 (Vol. 1, No. 80). Return to article

⁶ If there is any doubt, it is very easy to discern David Scholl's tendencies. In his 14-year term, he authored approximately 1,300 bankruptcy decisions! Return to article

⁷ See Skeel, "Bankruptcy Judges And Bankruptcy Venue: Some Thoughts on Delaware," 1 Delaware Law Review 1, 14 (1998). Return to article

⁸ Of the 10 largest cases filed in 2004, only one was filed in Manhattan and only one was filed in Wilmington. Return to article