Court Competition: Bad for Bankruptcies?

Some observers believe that widespread venue shopping is working to the disadvantage of small and midsized creditors and debtor's employees who can...
Dave Cook and Stephen TaubMay 4, 2005

About 60 percent of recent big corporate bankruptcies have been filed outside the firms’ hometown headquarters, according The National Law Journal, which cited Lynn LoPucki, a professor at the University of California at Los Angeles School of Law.

The Law Journal noted that “forum shopping” — the selection by lawyers of a venue that would be preferable to their clients — is itself legal, and that bankruptcy law gives large companies that do business in many locations “wide latitude” in their choice of forum for a given case.

According to the legal newspaper, however, LoPucki asserted that trying bankruptcy cases “is a billion-dollar-a-year industry and judges are competing for this” under pressure from bankruptcy lawyers who want to keep business in their local courts.

“Delaware went from no forum shopping during the entire decade of the 1980s to having 87 percent of the [large cases] by 1996,” said the professor. The Law Journal also noted that New York was able to attract the filings of Enron Corp., WorldCom Inc., and Adelphia Communications Corp.

In addition, LoPucki’s use of the word “corrupt” to describe the competition for cases has incensed many members of the bankruptcy bar. “These allegations are baseless and offensive to both the bench and the bar,” James Sprayregen, a bankruptcy specialist with law firm Kirkland & Ellis, told the Law Journal. “The idea that judges are going to do the wrong thing so they will have more work to do isn’t something I have seen in 20 years of practice all over the country.” Other attorneys have also taken exception to that characterization, reported the paper.

Even so, the publication noted that a number of experts, including several judges, believe that widespread venue shopping is working to the disadvantage of small and midsized creditors and debtor’s employees who can’t afford to challenge the practice. (See also our 2003 feature story on the Polaroid bankruptcy, “What’s Wrong with This Picture?“)

LoPucki maintained that his research calls out a number of negative consequences of competition for bankruptcy cases, according to the Law Journal, including:

• Loss of court restraints on professional fees;

• The ability of managers of failing companies to retain control;

• The ability of those managers — with the consent of judges — to award themselves “huge retention bonuses”;

• Increased payment to designated “critical vendors” at the expense of other secured creditors.

“As far as I can tell, [LoPucki’s assertions] are pretty accurate,” Robert Martin, a U.S. bankruptcy judge in Madison, Wisconsin, told the publication.