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Book Review of LoPucki, Courting Failure:

My new article, "Is Forum-Shopping Corrupting America's Bankruptcy Courts? Review of Lynn M. Lopucki, Courting Failure: How Competition for Big Cases is Corrupting the Bankruptcy Courts," (forthcoming in the Georgetown Law Journal) is now available for download on SSRN and BEPress.

As the title indicates, this is a book review of essay of Lynn LoPucki's fascinating and stimulating new book Courting Failure, which compiles LoPucki's voluminous empirical work over the past decade together with many fascinating case studies of problems with the current Chapter 11 process, including its treatment of many of the recent bankruptcy corporate scandals (such as Enron, WorldCom, etc.). In addition to being stimulating and informative, it is a rollicking great read and is written in a style that would be entertaining to a more general audience. It is also sure to be very controversial and will frame the academic and policy debate in this area for the next several years.

Here's the Abstract for my review:

Abstract:

In his new book, Courting Failure: How Competition for Big Cases is Corrupting the Bankruptcy Courts, Professor Lynn LoPucki's book argues that that current bankruptcy venue rules have spawned an improper "competition for big cases" that has "corrupted" America's bankruptcy courts. LoPucki argues that this competition has harmed the bankruptcy system and the economy, transferring wealth from creditors and employees to incumbent management and bankruptcy professionals. He also argues that the competition that has corrupted the American bankruptcy system is being replicated internationally, resulting in a similar competition and similar harm on the global stage.

This essay reviews LoPucki's book and its central theoretical and empirical arguments. LoPucki offers powerful empirical evidence that something is amiss with much of current American bankruptcy practice. This essay will try to flesh out in more detail the model and theoretical foundations that implicit underlie LoPucki's indictment of bankruptcy forum-shopping (and other forms of forum-shopping as well). Empirical evidence standing alone is insufficient to draw conclusions about whether forum-shopping is in general good or bad without a clearly-stated hypothesis to test. Instead, it is necessary to also have a theoretical model sufficient to generate testable hypotheses as a predicate both for determining whether forum-shopping is good or bad on net, as well as the likely effects of reform proposals. Although LoPucki identifies several problem areas in the current Chapter 11 reorganization process, it is not as clear that all of these problems can be clearly attributed to runaway forum-shopping. Instead, they may simply be good-faith errors or mistakes, for which continued competition may be beneficial, in that the competition may actually expedite the process of self-correction.

This review essay develops a model of the institutions and incentives governing the forum-shopping competition described by LoPucki in an effort to determine whether the empirical observations proffered by LoPucki can be best explained as the outcome of improper forum-shopping competition. The essay then closes with an analysis of provisions of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, noting that many of the provisions in the legislation offer substantive responses to many of the problems identified by LoPucki.

Its a fast and entertaining read and I recommend it highly. Comments are much appreciated.

Robert Woolley (mail):
Well, I have learned more about corporate bankruptcy in the last hour than in my whole life up to today. Thank you. All sorts of enlightenment about stuff I had no idea was occurring.

One puzzlement, though. You seem to accept as a given that bankruptcy judges are engaging in forum-shopping, with the only question whether this is a good thing or a bad thing, in terms of economic efficiency (e.g., p. 44). Perhaps I'm missing something terribly obvious, but I don't see the evidence that they are forum-shopping. Do you assume that, for example, that Judge Balick's ruling that seems to have triggered the flow of cases to Delaware was self-interested, in any way other than the desire to arrive at the legally correct decision?

If all she did was apply the law as she saw it, in as disinterested a manner as humans are capable of, then the resulting outcomes, I think, would naturally occur, without anything that I would label as forum-shopping by the courts. Corporations see that their self-interest is served by filing in Delaware because of the predictability and consistency of the judgments; the judgments increase in predictability and consistency the same way that any professional mastering a complex skill becomes more adept at optimizing outcomes and reducing variability of output when no variability of input justifies it. The interactions between court and corporations are self-reinforcing, even if only the latter are forum-shopping.

Of course, the judge, seeing a heavier caseload, has huge incentives to streamline the process, making it more efficient, which again redounds to corporations increasingly choosing Delaware. But is it "forum-shopping" (either good or bad) to simply figure out ways of handling an expanding caseload without an correspondingly expanding calendar? If that's what you mean by positive, efficiency-seeking forum-shopping, then OK. But it seems that these things would transpire even if the judge never gave a moment's thought to competition with other bankruptcy courts, which is what the term "forum-shopping" suggests to me she would have to be doing.
8.11.2005 6:18pm
Lynn M. LoPucki (mail):
Robert Wolley wonders in his post what my basis is for saying that the bankruptcy courts are actually competing for cases rather than merely attracting them. The strongest evidence relates not to Delaware, but to other courts responding to Delaware. In Chicago, for example, the Chief Bankruptcy judge set up a "focus group" to advise the court as to the reasons why Chicago companies were forum shopping to Delaware. The court made recommendations and the Chicago court adopted them. In Houston, Dallas, Los Angeles and about a half dozen other cities, the courts set up advisory committees that recommended the adoption of many Delaware practices — including liberalizing the award of attorneys fees. Nearly all big city courts adopted these "Delaware Rules." Of course, that may be merely because Delaware Rules are efficient, but it is more than a little suspicious that every one of the trends in changing court practices favors the case placers and none favors other parties who don't have the power to control which court gets the case.
8.12.2005 4:16pm