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94–939 PDF 2004

ADMINISTRATION OF LARGE BUSINESS BANKRUPTCY REORGANIZATIONS: HAS COMPETITION FOR BIG CASES CORRUPTED THE BANKRUPTCY SYSTEM?

HEARING

BEFORE THE

SUBCOMMITTEE ON 

COMMERCIAL AND ADMINISTRATIVE LAW

OF THE

COMMITTEE ON THE JUDICIARY 

HOUSE OF REPRESENTATIVES

ONE HUNDRED EIGHTH CONGRESS

SECOND SESSION

JULY 21, 2004

Serial No. 114

Printed for the use of the Committee on the Judiciary

(

Available via the World Wide Web: http://www.house.gov/judiciary 

(II)

COMMITTEE ON THE JUDICIARY 

F. JAMES SENSENBRENNER, JR., Wisconsin, Chairman 

HENRY J. HYDE, Illinois 

HOWARD COBLE, North Carolina 

LAMAR SMITH, Texas 

ELTON GALLEGLY, California 

BOB GOODLATTE, Virginia 

STEVE CHABOT, Ohio 

WILLIAM L. JENKINS, Tennessee 

CHRIS CANNON, Utah 

SPENCER BACHUS, Alabama 

JOHN N. HOSTETTLER, Indiana 

MARK GREEN, Wisconsin 

RIC KELLER, Florida 

MELISSA A. HART, Pennsylvania 

JEFF FLAKE, Arizona 

MIKE PENCE, Indiana 

J. RANDY FORBES, Virginia 

STEVE KING, Iowa 

JOHN R. CARTER, Texas 

TOM FEENEY, Florida 

MARSHA BLACKBURN, Tennessee 

JOHN CONYERS, JR., Michigan 

HOWARD L. BERMAN, California 

RICK BOUCHER, Virginia 

JERROLD NADLER, New York 

ROBERT C. SCOTT, Virginia 

MELVIN L. WATT, North Carolina 

ZOE LOFGREN, California 

SHEILA JACKSON LEE, Texas 

MAXINE WATERS, California 

MARTIN T. MEEHAN, Massachusetts 

WILLIAM D. DELAHUNT, Massachusetts 

ROBERT WEXLER, Florida 

TAMMY BALDWIN, Wisconsin 

ANTHONY D. WEINER, New York 

ADAM B. SCHIFF, California 

LINDA T. SA ́ NCHEZ, California

PHILIP G. KIKO, Chief of Staff-General Counsel 

PERRY H. APELBAUM, Minority Chief Counsel 

SUBCOMMITTEE ON COMMERCIAL AND ADMINISTRATIVE LAW

CHRIS CANNON, Utah Chairman

HOWARD COBLE, North Carolina 

JEFF FLAKE, Arizona 

JOHN R. CARTER, Texas 

MARSHA BLACKBURN, Tennessee 

STEVE CHABOT, Ohio 

TOM FEENEY, Florida 

MELVIN L. WATT, North Carolina 

JERROLD NADLER, New York 

TAMMY BALDWIN, Wisconsin 

WILLIAM D. DELAHUNT, Massachusetts 

ANTHONY D. WEINER, New York

RAYMOND V. SMIETANKA, Chief Counsel 

SUSAN A. JENSEN, Counsel 

DIANE K. TAYLOR, Counsel 

JAMES DALEY, Full Committee Counsel 

STEPHANIE MOORE, Minority Counsel 

(III)

C O N T E N T S 

JULY 21, 2004

OPENING STATEMENT 

Page 

The Honorable Chris Cannon, a Representative in Congress From the State 

of Utah, and Chairman, Subcommittee on Commercial and Administrative 

Law ........................................................................................................................ 1

The Honorable Melvin L. Watt, a Representative in Congress From the State 

of North Carolina, and Ranking Member, Subcommittee on Commercial 

and Administrative Law ...................................................................................... 2

WITNESSES 

Ms. Roberta A. DeAngelis, Acting United States Trustee, Region 3, on behalf 

of Executive Office for United States Trustees, Washington, DC 

Oral Testimony ..................................................................................................... 4

Prepared Statement ............................................................................................. 5

Mr. Lynn M. LoPucki, Security Pacific Bank Professor of Law, UCLA School 

of Law, Los Angeles, CA 

Oral Testimony ..................................................................................................... 9

Prepared Statement ............................................................................................. 11

Mr. Lester Brickman, Professor, Benjamin N. Cardozo School of Law, Yeshiva 

University, New York, NY 

Oral Testimony ..................................................................................................... 16

Prepared Statement ............................................................................................. 18

APPENDIX 

MATERIAL SUBMITTED FOR THE HEARING RECORD

Study entitled, ‘‘Financial Analysis of Asbestos Companies Under Chapter 

11 Reorganization,’’ submitted by Mr. Watt ...................................................... 93

Study entitled, ‘‘The Impact of Asbestos Liabilities on Workers in Bankrupt 

Firms,’’ submitted by Lester Brickman .............................................................. 131

(1)

ADMINISTRATION OF LARGE BUSINESS BANKRUPTCY REORGANIZATIONS: HAS COMPETITION FOR BIG CASES CORRUPTED THE 

BANKRUPTCY SYSTEM? 

WEDNESDAY, JULY 21, 2004

HOUSE OF REPRESENTATIVES, 

SUBCOMMITTEE ON COMMERCIAL

AND ADMINISTRATIVE LAW, 

COMMITTEE ON THE JUDICIARY, 

Washington, DC.

The Subcommittee met, pursuant to notice, at 3:07 p.m., in Room 

2141, Rayburn House Office Building, Hon. Chris Cannon (Chair of 

the Subcommittee) presiding. 

Mr. CANNON. The Subcommittee will please come to order. 

Increasingly, bankruptcy courts have become the courts of last 

resort for businesses that need to address extensive claims filed 

against them. From a societal perspective, Chapter 11 of the Bankruptcy Code reflects the premise that the debtor is economically 

‘‘worth more alive than dead.’’ The perceived benefit of this process 

is that, theoretically, it preserves the going concern value of the 

business, enables the debtor to repay its creditors in part, and provides continued employment for its workers. 

From the creditor’s perspective, Chapter 11 is a testing ground 

for the debtor’s viability. The debtor can be made to account for its 

past and present activities, as well as its future business plans. Interested parties may investigate the debtor’s financial health and 

the desirability of continuing the debtor’s business. 

The progress of a Chapter 11 case is also monitored by the judiciary and the Justice Department. Although bankruptcy judges were 

removed from the day-to-day administration of bankruptcy cases in 

1978 in response to concerns about cronyism in the bankruptcy system, they still serve as the tribunals who must resolve most issues 

and controversies that arise in bankruptcy cases, including those 

that are important to the integrity of the system such as those 

dealing with conflicts of interest. 

In addition, the United States Trustee Program, a component of 

the Justice Department, has administrative oversight responsibility 

for maintaining the integrity of the bankruptcy system. The program serves as the ‘‘integrity watchdog’’ and is charged with the 

responsibility to ensure that bankruptcy estates are administered 

promptly and efficiently. To that end, the program must review applications to retain and compensate professionals in Chapter 11 

cases and file objections when appropriate grounds exist. In addiVerDate 0ct 09 2002 13:41 Dec 23, 2004 Jkt 089266 PO 00000 Frm 00005 Fmt 6633 Sfmt 6601 G:\WORK\COMM\072104\94939.000 HJUD1 PsN: 94939
2

tion, the program must monitor the debtor’s progress toward confirmation. 

A series of recent trends and developments, however, have called 

into question whether the integrity of the bankruptcy Chapter 11 

cases is being compromised. These concerns have not gone unnoticed by the media. The Wall Street Journal, for example, published not one but two editorials last month criticizing the bankruptcy system with respect to how it treats asbestos claims. 

Today’s hearing will focus on some of these issues. For example, 

it is my hope that the witnesses will address the question of whether the current law and system adequately address the unique 

issues presented by mass torts and future claims. I believe Professor Brickman, in particular, is prepared to discuss that issue. In 

addition, my colleagues and I are interested to hear about whether 

the current law with respect to where Chapter 11 cases may be 

filed is being manipulated to the detriment of other interested parties and other ramifications of forum shopping. Professor LoPucki, 

I understand, is prepared to address that issue. We are also fortunate to have a representative from the Department of Justice who 

will explain the United States Trustee Program’s efforts to 

proactively protect the integrity of the bankruptcy system particularly with respect to conflicts of interest by professionals retained 

in Chapter 11 cases, compensation requests, and other instances of 

overreaching by participants in these cases. 

I now turn to my colleague Mr. Watt, the distinguished Ranking 

Member of the Subcommittee and ask him if he has any opening 

remarks. 

Mr. WATT. Thank you, Mr. Chairman. I appreciate the Chairman 

convening the hearing. It’s refreshing, I guess, to have a hearing 

that you don’t really know what the outcome is likely to be. And 

that is the way the process really ought to work. We should be educating ourselves about these issues on an ongoing basis. And it 

looks like we’ve got an outstanding panel of people who are capable 

of educating us. 

So, no sense in me talking any longer. We can get directly to it. 

And I look forward to hearing the testimony. 

Mr. CANNON. Thank you. Without objection, the gentleman’s entire statement will be placed in the record. All Members may place 

their statements in the record at this point. Without objection, so 

ordered. 

Without objection, the Chair will be authorized to declare recesses of the Subcommittee today at any point. Hearing none, so 

ordered. 

I might point out we expect votes at about 4 p.m.. And so we are 

trying to move through so that we don’t delay our witnesses while 

we vote. 

I ask unanimous consent that Members have 5 legislative days 

to submit written statements for inclusion in today’s hearing 

record. Without objection, so ordered. 

I am now pleased to introduce the witnesses for today’s hearing. 

Our first witness, Ms. DeAngelis, appears on behalf of the Executive Office of the United States Trustees, a component of the Department of Justice, that provides policy and management direction 

to the United States Trustees Program. The program operates 

3

through a system of 21 regions. Since March of last year Ms. 

DeAngelis has served as the acting trustee for Region 3 which comprises the judicial districts of Delaware, New Jersey, and Pennsylvania. 

Prior to her present assignment, Ms. DeAngelis served as the Assistant United States Trustee for the District of Delaware from 

May 2001 to January 2003. Before entering public service, she was 

a partner in the law firm of Fox Rothschild where she specialized 

in bankruptcy law. Ms. DeAngelis obtained her undergraduate degree from Alvernia College, and law degree from Seton Hall School 

of Law. 

Our next witness is Professor Lynn LoPucki. Professor LoPucki 

is the Security Pacific Bank Professor of Law at the UCLA Law 

School. Before entering academia in 1980, Professor LoPucki practiced bankruptcy law for 8 years. Since then he has taught at Harvard, Cornell, Washington University, and the University of Pennsylvania Law Schools. Over the course of his academic career, Professor LoPucki has authored two books and numerous articles on 

debtor-creditor relations. His most recent book, ‘‘Courting Failure: 

How Competition for Big Cases is Corrupting the Bankruptcy 

Courts,’’ is scheduled to be published next year. Not soon enough. 

Professor LoPucki received both his undergraduate and law degrees from the University of Michigan. He obtained his LL.M. from 

Harvard. 

Our final witness is Professor Lester Brickman. Since 1976 Professor Brickman has been associated with the Yeshiva University’s 

Benjamin N. Cardozo School of Law where he currently teaches 

contractual law and legal ethics. Over the course of his academic 

career he has taught at the University of Toledo Law School, Fordham Law School, and Oxford Universities. 

Professor Brickman has both published and lectured extensively. 

He has participated in various activities intended to promote professional responsibility standards in the legal profession, including 

his work as a Member of the Committee on Professional and Judicial Ethics of the Association of the Bar of the City of New York 

and the New York State Bar Association’s Committee on Professional Ethics. Professor Brickman obtained his undergraduate degree from Carnegie Tech, his law degree from the University of 

Florida, and his LL.M. from Yale University. 

I extend to each of you my warm regards and appreciation for 

your willingness to participate at today’s hearing. In light of the 

fact that your written statements will be included in the hearing 

record, I request that you limit your oral remarks to about 5 minutes. Accordingly, please feel free to summarize or highlight the salient points of your testimony. You’ll note we have a lighting system in front of you. After 4 minutes it turns yellow. After the fifth 

it turns red. You don’t need to stop, but just be aware that the time 

is over and to finish your thoughts up. We would appreciate that. 

I don’t like cutting people off, but I’ll tap the gavel. It’s our custom 

to tap the gavel at 5 minutes so we don’t go on forever with our 

questions from Members, although when only the Ranking Member 

and I are here, we’re pretty collegial about that as well. 

4

I would now ask the witnesses to please stand and raise your 

hand right hand to take the oath. Are you all aware we need to 

do the oath? 

[Witnesses sworn.] 

Mr. CANNON. Let the record reflect each of the witnesses answered in the affirmative. 

Ms. DeAngelis, would you now proceed with your testimony. Let 

me say Mr. Watt often laughs at how fast I read, but we need to 

get through these sort of technicalities quickly. And, by the way, 

we help the recorder by giving her a copy of what I have done. But 

we would appreciate now—as Mr. Watt said, we are both exploring 

here and the whole Committee is exploring this issue. It’s an issue 

we care enormously about and look forward to hearing all of your 

testimony. Ms. DeAngelis. 

TESTIMONY OF ROBERTA A. DeANGELIS, ACTING UNITED 

STATES TRUSTEE, REGION 3, ON BEHALF OF EXECUTIVE OFFICE FOR UNITED STATES TRUSTEES, WASHINGTON, DC 

Ms. DEANGELIS. Thank you, Mr. Chairman, Mr. Watt. I appreciate the opportunity to appear before you on behalf of the Department of Justice to discuss the role of the United States Trustee in 

reviewing applications to employ and compensate professionals in 

large Chapter 11 cases. Chapter 11 debtors are authorized to employ attorneys, accountants, and other necessary professionals to 

assist them in their reorganization efforts. 

Similarly, official committees of creditors and equity security 

holders which are appointed under section 1102 of the Bankruptcy 

Code are authorized to employ professionals to assist in carrying 

out their responsibilities. 

Congress has imposed special rules governing the employment 

and compensation of bankruptcy professionals. Most importantly, 

professionals may not be employed or paid without approval of the 

bankruptcy court. Court approval is sought by filing an application 

which is noticed to the United States Trustee and other parties in 

the case. 

In my written testimony I describe in greater detail the activities 

of the United States Trustee regarding the retention and compensation of professionals. The number of actions we have taken in 

the amount of fee reductions, fee expense reductions, obtained 

alone cannot adequately convey the significance of the actions that 

we take. Just as with other regulatory or enforcement agencies, our 

selection of the right case and obtaining the right result may have 

deterrent and other salutary effects that promote the integrity of 

the process, including the expanded disclosure of conflicts and 

greater restraints on fees. 

In my written testimony I provide several examples of recent 

cases in which the United States Trustee litigated important matters of retention and compensation of professionals. Let me briefly 

describe two of them. In Re Pillow Tex, the Court of Appeals for 

the Third Circuit sustained the United States Trustee’s position 

and held that the bankruptcy court could not approve an employment application until it had resolved allegations that proposed 

counsel for the debtor had received a preferential transfer and 

therefore was not disinterested. 

5

The law firm settled the matter after remand for a six-figure 

disgorgement. In In Re Flemming Companies, the United States 

Trustee for Region 3 objected to the fee applications of debtor’s 

counsel. In a published opinion, the bankruptcy court found that 

the two firms had rendered services which unnecessarily generated 

litigation and did not benefit the estate. The court also found that 

the hourly rates of one of the firm’s practitioners were higher than 

the hourly rates charged by similarly experienced attorneys in 

other practice areas within the same firm. 

In the area of fee review, the courts, the United States Trustee, 

and others have explored new approaches including some of the following: Courts have appointed fee examiners and fee review committees who submit periodic reports with recommendations for 

compensation awards. The United States Trustee sometimes uses 

an internal automated fee review program that permits computerized analysis of fee applications to identify, among other things, 

possible duplication of effort such as multiple attorneys appearing 

at meetings and interoffice conferences and the cost of particular 

tasks such as the aggregate time that is expended to develop a 

plan of reorganization, for example. 

Some courts require professionals to submit budgets reflecting 

anticipated fees and expenses so that the court, the debtor, and the 

parties have a better ability to evaluate the likely future course of 

the case and the costs of professionals. 

In summary, Congress has prescribed a comprehensive regimen 

of legal standards and procedures governing the retention and compensation of professionals employed in Chapter 11 cases. Bankruptcy courts are expressly required to review and approve the employment of all professionals and the payment of all fees and expenses. The responsibility to identify noncompliance with these 

standards and procedures in Chapter 11 is a responsibility that is 

shared among the court, the United States Trustee, and other participants in the bankruptcy system. 

I appreciate the opportunity to discuss some of the challenges 

that this responsibility presents as well as some of the emerging 

issues and possible approaches for future action. And I would be 

happy to answer any questions from the Subcommittee. Thank you. 

Mr. CANNON. Thank you Ms. DeAngelis. 

[The prepared statement of Ms. DeAngelis follows:]

PREPARED STATEMENT OF ROBERTA A. DEANGELIS

Mr. Chairman and Members of the Subcommittee: 

I appreciate the opportunity to appear before you on behalf of the Department of 

Justice to discuss the role of the United States Trustee in reviewing applications 

to employ and compensate professionals in large chapter 11 bankruptcy cases. As 

the Acting United States Trustee for Region 3, I have responsibility for some of the 

largest cases filed in the country, including those filed in the district of Delaware. 

Title 11 of the United States Code, known as the Bankruptcy Code, provides a 

comprehensive scheme for the employment of bankruptcy professionals who are paid 

from bankruptcy estate funds. Under 28 U.S.C. § 586 and other provisions of law, 

the United States Trustee has authority to review, comment upon, or object to applications to retain and compensate bankruptcy professionals. 

Chapter 11 debtors are authorized to employ attorneys, accountants, and other 

necessary professionals to assist them in the reorganization process. Similarly, official committees of creditors or equity security holders, which are appointed under 

11 U.S.C. § 1102, are authorized to employ professionals to assist the committees 

in carrying out their responsibilities. In light of the multiplicity of interests present 

6

in bankruptcy cases and the frequent lack of natural tension that exists in the typical two-party civil proceeding, Congress has imposed special rules governing the 

employment of bankruptcy professionals. Most importantly, professionals may not 

be employed without approval of the bankruptcy court. Court approval is sought by 

filing an application which is noticed to the United States Trustee and, frequently, 

to other parties in the case. The terms of engagement must be disclosed, including 

any contingency fee arrangements. 

The applicant must demonstrate that it is eligible for employment. The Bankruptcy Code and Rules impose a burden of full disclosure. The professional is required to submit to the court an application that states the following: the specific 

facts showing the need for the services to be rendered, the name of the person to 

be employed, the reasons for the selection, the particulars of the services to be rendered, and the terms of compensation. In addition, a verified statement is required 

from the professional that sets forth all connections the professional has or had with 

the debtor, creditors, any other party in interest, their respective attorneys and accountants, the United States Trustee, or any person employed in the office of the 

United States Trustee. Full and complete compliance requires that the professional 

report all connections, not just those connections that, in the judgment of the professional, may be relevant. It is the court’s task to determine whether the connections 

are disqualifying. In its administration of chapter 11 cases, the United States Trustee endeavors to assure that the self-reporting required of professionals is provided 

and that disqualifying connections are brought to the attention of the court. 

The basic requirements for the employment of a debtor’s professionals are contained in 11 U.S.C. §§ 327, 328, and 101(14). Among other things, professionals ‘‘may not hold or represent an interest adverse to the estate [and must be] disinterested.’’ In section 101(14), the term ‘‘disinterested person’’ is defined and sets 

forth five disqualifying conditions. Some of these conditions are general, but others 

are more specific. For example, directors and officers who served in those capacities 

within two years of the filing are per se excluded from employment. The basic requirements for committee professionals are contained in 11 U.S.C. § 1103. These requirements are similar, but not identical to, those governing the debtor’s professionals. The notice requirements are contained in Federal Rule of Bankruptcy Procedure 2014 and local rules. 

Professionals employed by the debtor or official committees may be paid fees and 

reimbursed for expenses out of estate funds. Congress has established a scheme for 

the application, review, and approval of fees in 11 U.S.C. §§ 330 and 331. Other 

basic requirements are set forth in the Federal Rule of Bankruptcy Procedure 2016 

and local rules. Professionals may be compensated only after application, notice to 

parties, and approval by the bankruptcy court. Congress set forth the standards for 

approval of fees and expenses in § 330. The court may allow ‘‘reasonable compensation for actual, necessary services’’ and ‘‘reimbursement for actual, necessary expenses.’’ By statute, the court must weigh such factors as time spent in rendering 

services, customary compensation charged by comparably skilled practitioners in 

non-bankruptcy cases, complexity of the services rendered, and benefit to the estate. 

Courts may award interim compensation, but all such interim awards are subject 

to final review and modification at the end of the case. 

There are also other provisions of the Bankruptcy Code governing compensation 

of third parties for making a substantial contribution to the chapter 11 estate, but 

those involve more narrow circumstances and are not addressed in this testimony. 

Although only the bankruptcy court may approve employment and compensation, 

and although creditors and parties in interest may object to employment and compensation, the United States Trustee Program considers its authority to review 

these applications to be an important tool in carrying out its mission to uphold the 

integrity and efficiency of the bankruptcy system. The precise level of United States 

Trustee review depends upon a variety of factors, including the success of the case 

and participation by other parties. Review also may vary according to the size and 

staffing of an office. In some offices, trained paralegals may undertake an initial review, but attorneys may conduct the entire review in other offices. In addition, 

standard operating procedures may vary according to local practice and the circumstances of a particular case. Offices often are able to resolve many questions or 

disputes informally without resort to litigation. For example, some deficiencies can 

be remedied by supplemental disclosure. Similarly, fee reductions may be obtained 

prior to filing an objection or by amending the application. Furthermore, the substantive outcome may vary somewhat from district to district according to controlling case law. 

The United States Trustee Program has published fee guidelines to help standardize the content and organization of applications. The centerpiece of the guidelines is a task-based billing approach by which applicants organize their time enVerDate 0ct 09 2002 13:41 Dec 23, 2004 Jkt 089266 PO 00000 Frm 00010 Fmt 6633 Sfmt 6621 G:\WORK\COMM\072104\94939.000 HJUD1 PsN: 94939
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1Data reported herein include actions in chapter 7 and chapter 11 cases. Entered data exclude 

some reductions obtained by fee committees on which the United States Trustee is a participant. 

In addition, actions taken to achieve additional disclosures and fee reductions prior to filing an 

application are not captured in the database. 

tries by discrete activities so that the costs and benefits of accomplishing specific 

tasks can be more easily determined. 

As the Program has reported to the Subcommittee in previous hearings, we have 

made numerous management improvements over the past three and one-half years. 

Among our management advances has been institution of an automated Significant 

Accomplishments Reporting System by which we measure the work done in our field 

offices. In the future, these data should assist field office managers and the national 

Program leadership in setting priorities and allocating scarce resources. Although 

it is particularly difficult to quantify work done in the review of chapter 11 retention 

and fee applications, we do collect limited information.1

We have recently compiled our Fiscal Year 2003 data which will be published 

shortly and made available in an Annual Report to be distributed to members of 

Congress, the bankruptcy community, and the general public. Based upon data entered by our field offices, in Fiscal Year 2003, Program staff took 9,264 actions on 

employment and compensation applications. These actions ranged from informal negotiations to filing and arguing objections in court. A high percentage of these actions led to a successful result, including satisfactory amendment of an application 

or favorable adjudication by the bankruptcy judge. A total of 3,746 formal objections 

were filed in court. As best we can quantify the results, our actions directly resulted 

in fee or expense reductions of $44.8 million. 

We also have compiled data for the first six months of Fiscal Year 2004. From 

October 1, 2003, through March 31, 2004, Program staff took 2,965 actions on employment and fee applications. A total of 1,559 formal objections were filed in court. 

As best we can quantify the results, our actions resulted in fee or expense reductions of $34.9 million. 

Numbers alone cannot adequately convey the significance of the actions we have 

taken. Just as with other regulatory or enforcement agencies, our selection of the 

right cases and obtaining the right results may have deterrent and other salutary 

effects that promote the integrity of the process, including the expanded disclosure 

of conflicts and greater restraint on fees. Following are examples of recent cases in 

which the United States Trustee litigated important matters of retention and compensation of professionals.

• In In re Pillowtex, Inc., 304 F.3d 246 (3d Cir. 2002), the Court of Appeals for 

the Third Circuit sustained the United States Trustee’s position and held that 

the bankruptcy court could not approve an employment application until it 

resolved allegations that proposed counsel for the debtor had received a preferential transfer and, therefore, was not disinterested. The law firm settled 

the matter after remand for a six figure disgorgement.

• In In re Safety Kleen, Case No. 00–02303 (Bankr. D. Del.), the United States 

Trustee for Region 3 objected to the retention of a financial advisory firm because a principal of the firm had served as the debtor’s CFO pre-petition and 

was connected to a lawsuit against the debtor. In a related matter arising in 

In re Harnischfeger, Case No. 99–02171 (Bankr. D. Del.), the United States 

Trustee moved to disqualify the same firm and for disgorgement due to its 

failure to disclose connections involving the firm’s investment affiliate and the 

appointment of one of the firm’s principals to the board of one of the debtors. 

After extensive litigation, a settlement was reached, which was approved by 

the court, in which the firm disgorged $3.25 million.

• In In re Fleming Companies, Inc., 304 B.R. 85 (Bankr. D. Del. 2003), the 

United States Trustee for Region 3 objected to the fee applications of debtor’s 

counsel. In a published opinion, the Bankruptcy Court found that the two 

firms had rendered services which unnecessarily generated litigation and did 

not benefit the estate. The court also found that the hourly rates of one of 

the firm’s practitioners were impermissibly higher than the hourly rates 

charged by similarly experienced attorneys in other practice areas within the 

same firm.

• In United States v. Schilling (In re Big Rivers Elec. Corp.), 355 F.3d 415 (6th 

Cir. 2004), approximately $2.6 million in fees awarded to the examiner were 

disallowed based on objections filed by the United States Trustee for Region 

8 and other parties. The court ruled that the examiner failed to adhere to the 

standards of behavior required of a bankruptcy professional and was not entiVerDate 0ct 09 2002 13:41 Dec 23, 2004 Jkt 089266 PO 00000 Frm 00011 Fmt 6633 Sfmt 6621 G:\WORK\COMM\072104\94939.000 HJUD1 PsN: 94939
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tled to any of the $2.6 million in fees originally awarded, including $960,000 

in fees already in his possession which he was required to disgorge.

• In In re Jore Corp., 298 B.R. 703 (Bankr. D. Mont. 2003), the United States 

Trustee for Region 18 moved to disqualify debtor’s counsel because of counsel’s failure to disclose it represented the debtor’s primary lender in unrelated 

matters. The court granted the motion to disqualify and disallowed more than 

$1.8 million in fees.

• In In re 360Networks (USA), Inc., Case No. 01–13721 (Bankr. S.D.N.Y.), the 

debtor’s law firm agreed to reduce its fees by $1.35 million after the United 

States Trustee for Region 2 questioned the nature and manner of the firm’s disclosures. In its final fee application, the firm revealed for the first time 

that, pre-petition, it received significant payments from the debtor that might 

qualify as preferential payments. The reduction in fees was approved by the 

court.

In recent years, the chapter 11 bankruptcy landscape has changed and new issues 

have emerged. This may require new approaches by the courts, United States Trustees, and others. Some of these issues are highlighted in recent chapter 11 cases associated with corporate malfeasance that occurred in the late 1990s. Other issues 

have emerged as law firm, business, and finance practices have evolved. 

In the area of conflicts of interest and compensation, the United States Trustee 

is confronting dynamic situations in which new fact scenarios must be applied to 

established statutory and case law. Examples include the following.

• Investment banks, financial advisors, and turnaround firms often have affiliates that manage investment funds that provide financing or capital to reorganize bankrupt companies.

• Financial services firms wish to serve on creditors’ committees and continue 

to trade in the debtor’s securities. Case law does not proscribe trading, but 

requires, at a minimum, erection of ethical barriers.

• Professionals and other third parties increasingly seek releases and exculpation, even though the bankruptcy discharge traditionally only protects debtors and is not designed to affect claims between third parties. In In re United 

Artists Theatre Co. v. Walton (In re United Artists Theatre Co.), 315 F.3d 217 

(3d Cir. 2003), the United States Trustee brought an action decided by the 

U.S. Court of Appeals for the Third Circuit. The Court held that agreements 

to indemnify financial advisors for their negligence may be reasonable under 

§ 328(a).

Published reports from bankruptcy experts tell us that the spike in public company and other mega-chapter 11 filings has subsided. Although many of the largest 

business reorganization cases were filed in 2001 and 2002, some remain pending in 

bankruptcy court. The size and complexity of some of these cases are of unprecedented magnitude. The resulting fee applications are of similar unprecedented proportions. This has prompted the courts, United States Trustees, and others to consider new approaches to fee review. Among the new approaches taken have been 

the following.

• Courts have appointed fee examiners and fee review committees who submit 

periodic reports to the court with recommendations for professional compensation awards. Some of these committees have professional staff and some are 

comprised only of major participants in the case. Several months ago, the 

United States Trustee Program conducted an informal survey of our field offices and identified at least fifteen on-going fee committees.

• Automated fee review procedures have been employed in a number of cases. 

Courts have allowed payment to private companies that conduct computerized 

analysis of fee applications to identify, among other things, possible duplication of effort (e.g., multiple lawyers at meetings and inter-office conferences) 

and the cost of particular tasks (e.g., aggregate time expended to develop a 

plan of reorganization). The United States Trustee also sometimes uses an internal computer program that is effective under certain circumstances. With 

automated fee review systems, professionals submit data in electronic format. 

The computer program allows fees to be analyzed across the board for all professionals employed in the case. Full text searching allows particular entries 

to be identified, grouped, and totaled. Among other things, this helps identify 

excessive meetings and consultations among professionals in different firms 

employed in the case.

• Some courts require professionals to submit budgets reflecting anticipated 

fees and expenses so that the court, debtor, and parties may better evaluate 

9

the likely future course of the case and the costs of professionals. Other devices have also been employed to encourage cost-cutting, including discounts 

off of standard hourly rates.

These and other strategic approaches have been and ought to be continually explored by the courts, the United States Trustees, and others to enhance the quality 

of fee review, especially in larger chapter 11 cases. A single approach may not be 

effective for all cases. Cases of different size and complexity may call for different 

methods of review. In addition, scholarly research may assist in determining anticipated costs of reorganization. Although each case is different, compilations of empirical data may help identify excessive costs or raise red flags to prompt further inquiry of professionals whose charges exceed a normal range. 

Congress has prescribed a comprehensive regimen of legal standards and procedures governing the retention and compensation of professionals employed in chapter 11 cases. Bankruptcy courts are expressly required to review and approve the 

employment of all professionals and the payment of all fees and expenses. The responsibility to identify non-compliance with these standards and procedures in chapter 11 cases is a responsibility shared among the courts, the United States Trustees, 

and other participants in the bankruptcy system. I appreciate the opportunity to 

discuss some of the challenges that this responsibility presents, as well as some 

emerging issues and possible approaches for future action. 

I would be happy to answer any questions from the Subcommittee.

Mr. CANNON. Mr. LoPucki, would you give us your testimony 

now? 

TESTIMONY OF LYNN M. LoPUCKI, SECURITY PACIFIC BANK 

PROFESSOR OF LAW, UCLA SCHOOL OF LAW, LOS ANGELES, 

CA 

Mr. LOPUCKI. For the past 20 years I have been engaged in empirical research regarding big bankruptcy cases. Since about 1990, 

the bankruptcy courts have been competing for these cases. The 

competition has corrupted the bankruptcy courts and it’s also been 

damaging the companies themselves. The easiest way to understand this is historically. In 1974 and in 1975, the Bankruptcy 

Rules Committee adopted liberal venue rules that in the context of 

big bankruptcy cases essentially allowed companies to file wherever they schose. They could pick their court. 

During the 1980’s the companies exercised that prerogative. The 

forum shopping rate, by which I mean companies filing in a district 

other than where their headquarters is located, increased from 

about 20 percent to about 40 percent. In 1990, Delaware, which 

had not been active at all in the 1980’s—the bankruptcy court was 

a one-judge court with a single big case. In 1990 the Delaware 

court attracted two big cases; in 1991, four; in 1992, six; by 1996, 

the Delaware court had an 87 percent market share. That is, they 

got 13 of the 15 big cases filed anywhere in the United States. 

That same year, the National Bankruptcy Review Commission 

recommended legislation to bring an end to the forum shopping. 

The Delaware district court revoked the reference of Chapter 11 

cases that year to the bankruptcy court. It’s a complicated story 

that I won’t go into here, but by 1998—by the end of 1998, it was 

clear that Congress would not act on the National Bankruptcy Review Commission’s recommendation. And the lawyers, and professionals throughout the United States in big cities, essentially took 

the matter into their own hands by pressuring the bankruptcy 

courts to become competitive for these cases. And the courts responded. 

10

If you can go to the PowerPoint that will show the graph, the 

percentage of cases—can we get forward to that? You can see here 

the increase in cases over—I’m sorry, the increase in forum shopping over the past 24 years. Essentially that big peak there is 

when Delaware almost got all of the cases. Aside from that, it’s 

been a steady increase. It has leveled off a little in recent years but 

it’s leveled off at a rate of 60 to 70 percent of all the cases being 

forum shopped. 

Going to the next graph, you can see the market shares of these 

courts. The New York court was dominant in the 1980’s, the Delaware court dominant in the 1990’s. You can see the Delaware court 

declining a little in recent years because the dockets are full in 

Delaware, and so the court is not quite as attractive as it previously had been. 

Now, with the next graph, you can see these boxes that represent 

the 98 large public companies that came out of bankruptcy during 

the years when Delaware—the years that I call Delaware’s ascendency from the time they started in 1990 to 1996 when they had the 

87 percent market share. They did reorganize 26 companies in 

Delaware during that period. 

Then, going on to the next graph, you can see the failure rates 

for those reorganizations. Within 5 years of the company emerging 

from bankruptcy, supposedly reorganized, 42 percent of the companies failed as compared with only 4 percent in all of the other 

bankruptcy courts. 

You can measure failure a lot of different ways. This one measures it by refiling, the next graph measures it including companies 

that fail without reentering bankruptcy, and you can see it’s a different proportion but still four times as high in Delaware as in the 

other courts. 

These failures are not explained by a difference in the cases. The 

Delaware and New York cases are larger, but larger cases don’t fail 

more often. 

The Delaware and New York companies were not in greater financial distress. We measured about eight different ways. They 

were not in greater financial distress than the companies that went 

into other courts. They were not apparently more complex cases, as 

some of the lawyers argued to us. We found that they had fewer 

classes of creditors in their plans than the companies that were reorganized in other courts. But the failure is explained by competition. The Delaware court was faster, and faster cases failed more 

often. Delaware attracted prepackaged cases, and prepackaged 

cases failed only in Delaware. New York had high failure rates in 

the 1980’s when it was attracting cases. When it stopped attracting 

cases, its failure rates fell. When Delaware came in, they came in 

with high failure rates. And when the other courts more recently 

have begun tracking Delaware, adopting the same kinds of procedures, their failure rates have gone up. 

Now, there is also some other damage going on as a result of the 

competition. There have been, over this period of time since 1990, 

huge changes in the operation of the system. Some of these 

changes in the 1980’s, there were almost no 30-day prepackage 

cases. You can’t do a 30-day prepackage case and comply with the 

law. But by the 1990’s, late 1990’s, lots of courts were doing 30-

11

day prepacks. In the 1980’s, CEOs—the failed CEOs—were generally forced out of office. In the 1990’s they began getting retention bonuses in order to stay. In the 1980’s there were very few, 

almost none I think, companies—sales of companies that were approved by the court without planned formalities and disclosure to 

creditors. By the late 1990’s it was commonplace. In the 1980’s 

there were trustees appointed in some cases. In the 1990’s—after 

1992 that essentially disappeared. Even in Enron, perhaps the 

most egregious fraud case in history, no trustee was appointed. 

There were no critical vendor orders in the 1980’s, but in the 

1990’s and by 2002 there were critical vendor orders being entered, 

giving preferential treatment in the hundreds of millions of dollars; 

in a single case in K-Mart, $200 to $300 million of preferences for 

some creditors over other creditors. 

All of these changes are happening without any legislative 

amendment. Nothing big happened in this field between the 

eighties and the 1990’s to cause this change. No legislative amendments, no judicial opinions, no policy discussions of any of these 

things. It’s competition that is driving the change in the courts 

today. 

Thank you. 

Mr. CANNON. Thank you Mr. LoPucki. 

[The prepared statement of Mr. LoPucki follows:]

PREPARED STATEMENT OF LYNN M. LOPUCKI

Mr. Chairman and Members of the Subcommittee: 

I. INTRODUCTION

The Bankruptcy Courts of the United States have inadvertently been thrown into 

competition for big bankruptcy cases. That competition is changing bankruptcy law 

and practice in ways not contemplated by Congress and corrupting those courts. 

By ‘‘corrupting’’ I mean that a substantial number of bankruptcy judges are deciding particular matters not as they believe they should, but as they believe they must 

to maintain the flow of cases to their courts. I can identify no particular decision 

as corrupt, but I can show a pattern of decisions by the bankruptcy courts for which 

corruption by the pressures of court competition is the most reasonable explanation. 

I can also show that the competition is having an adverse effect on reorganizing 

companies. Specifically, companies that reorganized in the courts most successful in 

attracting cases were two to ten times more likely to fail after bankruptcy than were 

comparable companies reorganized in other courts. 

II. WHY BANKRUPTCY COURTS COMPETE FOR BIG CASES

Bankruptcy judges want large cases for at least three reasons: 

1. For the judge, a large bankruptcy case is a career opportunity. The judge will 

be able to work with the nation’s leading bankruptcy professionals and the proceedings will be followed by the media and the bankruptcy community as a whole. 

Judges who attract numerous large cases are likely to become celebrities. 

2. The cases are of economic importance to the judges’ communities. The courtawarded professional fees in a single, large bankruptcy case are almost invariably 

in the millions of dollars, and may be as high as a billion dollars (the projected estimate for the total court-awarded fees in the not-yet-completed Enron case). Fees 

paid without court award in these cases may be equally large. In most large cases, 

most fees paid will go to local professionals. Thus, attracting the case of a large company to the bankruptcy court in a city brings substantial revenues to the bankruptcy professionals in that city. Attracting all of the big bankruptcies in the United 

States to a single court—as the Delaware Bankruptcy Court nearly succeeded in 

doing in 1996—could bring billions of dollars to a local economy annually. 

3. The loss of cases to other courts humiliates the bankruptcy judges, lowers their 

standing in their communities, and may even cost them their jobs. Most—but not 

all—large, bankrupt companies are linked in the minds of the public to the city in 

which they have long maintained a national headquarters. Examples are Enron 

12

with Houston and Polaroid with Cambridge, Massachusetts. The bankruptcy court 

at that location is a sort of ‘‘natural venue’’ where the company is expected to file. 

The company that files in Delaware or New York is seen as rejecting the local court. 

That rejection often leads to criticism of particular bankruptcy judges for failure to 

take what action was necessary to retain ‘‘their’’ cases. To illustrate the scope of the 

problem, of the 24 companies headquartered in the Boston area that filed bankruptcy since 1980, only 4 (17%) filed in the Boston Bankruptcy Court. For Alexandria, Virginian, the number is 2 of 13 (15%). Some cites, including Philadelphia, 

West Palm Beach, and Ft. Lauderdale have lost all of their cases. 

In some cases, the criticisms appear warranted. One or more of the local judges 

may have poor skills or temperament. In other cases, the criticisms are unwarranted. The judge is simply following laws and rules the court-selecting lawyers and 

executives prefer to avoid. 

Bankruptcy judges are not Article III judges and do not enjoy life tenure. They 

serve 14 year terms and must apply for reappointment to continue in office. A recent study by Bankruptcy Judge Stan Bernstein of the Eastern District of New York 

found that more than 8% of the bankruptcy judges who applied for reappointment 

during the period 1998 to 2002 were not reappointed. Stan Bernstein, The Reappointment of Bankruptcy Judges: A Preliminary Analysis of the Present Process 

(unpublished manuscript October 15, 2003). Other bankruptcy judges won reappointment, but only after their competence had been challenged and they had 

been, in Judge Bernstein’s words, ‘‘put through the wringer.’’ Because the Courts 

of Appeals usually seek the opinions of local bankruptcy lawyers as part of the reappointment process, bankruptcy judges are probably more sensitive than Article III 

judges to how they are viewed in their communities. 

III. HISTORICAL ROOTS OF THE PROBLEM

In 1974 and 1975, the Bankruptcy Rules Committee liberalized the venue rules 

for cases under Chapters X and XI of the Bankruptcy Code. The new rules gave corporations the option to file their bankruptcy cases at (1) the corporation’s domicile 

or residence (later interpreted to mean its state of incorporation, (2) the corporation’s principal place of business (essentially, its headquarters), (3) the corporation’s 

principal assets in the United States, or (4) where the case of an affiliated corporation was already pending. A member of that Rules Committee informed me that at 

the time these rules were adopted, large public companies rarely filed bankruptcy 

cases and the committee was not focused on how the rule would apply to such companies. Committee members believed that if their liberal venue rules were abused, 

the bankruptcy courts would exercise their broad power to transfer cases to the 

most appropriate venues. 28 U.S.C. § 1412. 

In the context of a large, public company that operates through subsidiaries in 

all parts of the United States, the effect of these liberal venue rules has been to 

allow the company to file in the bankruptcy court of its choice. The Enron case 

serves as an illustration. Enron Corporation was incorporated in Oregon. Enron’s 

headquarters, and the bulk of its 25,000 employees were in Houston, Texas. Enron 

chose to file its bankruptcy in the New York Bankruptcy Court. (References to the 

‘‘New York Bankruptcy Court’’ are to the Manhattan Division of the United States 

Bankruptcy Court for the Southern District of New York.) To accomplish that, 

Enron directed its New York subsidiary, a corporation with 157 employees, to file 

a bankruptcy petition with the New York Bankruptcy Court. A few minutes later, 

Enron Corporation filed in New York on the basis that the New York court was a 

court ‘‘in which there [was] pending a case . . . concerning [Enron’s] affiliate.’’ Numerous creditors joined in a motion to transfer Enron’s cases to Houston. The New 

York Bankruptcy Judge denied the motion. 

Through the 1980s, the rate of forum shopping (defined as filing away from the 

company’s headquarters) in large public company bankruptcies rose from about 20% 

to 40%. Most of the shopping was to New York. During that decade, the Delaware 

Bankruptcy Court had the case of only one large, public company. That company, 

Phoenix Steel, had both its headquarters and its operations in Delaware. The onejudge Delaware Bankruptcy Court began attracting cases in 1990. That year it had 

two, including Continental Airlines. Delaware attracted four big cases in 1991 and 

six in 1992. In 1992, Congress awarded the Delaware Court a second bankruptcy 

judgeship. The Delaware Court’s market share rose steadily until 1996, when 87% 

of the large, public companies filing for bankruptcy in the United States (13 of 15) 

chose the Delaware Court. 

In 1996, the National Bankruptcy Review Commission adopted a recommendation 

designed to end the rampant bankruptcy forum shopping. That recommendation 

13

was to delete the provisions of the venue statute that authorized filing at the debtor’s place of incorporation or where the case of an affiliate was pending. 

In 1997, a study requested by the Judicial Conference of the United States and 

conducted by the Federal Judicial Center revealed that Delaware’s Chief Bankruptcy Judge routinely had ex parte contacts (for scheduling purposes) with representatives of large, public companies that intended to file in Delaware, and in the 

course of those contacts, identified the judge that would be assigned to the case once 

it was filed. Seventeen days after the release of the Federal Judicial Center’s report, 

the Delaware District Court took the unprecedented step of revoking the reference 

to the Bankruptcy Court of all newly-filed Chapter 11 cases. Although the District 

Court asserted that its action was taken merely to assist the Bankruptcy Court with 

its heavy docket, the action was widely interpreted as a rebuke to the Bankruptcy 

Court. Large, public company bankruptcy filings in Delaware declined in 1997, but 

resumed their rise in 1998. 

By 1998, it was apparent that Congress would not act on the recommendation of 

the National Bankruptcy Review Commission. Over a period of two or three years, 

bankruptcy lawyers in at least a dozen cities, including New York, Chicago, Houston, Dallas, Los Angeles, and Miami, approached their local bankruptcy judges to 

request that the judges make their courts more competitive with Delaware by liberalizing their awards of professional fees and mimicking other Delaware practices. 

Beginning in 1999 and 2000, nearly all of the courts responded by making changes 

in local rules and practices, including those regarding the award of professionals 

fees. 

By 2000, an unprecedented rise in the number of big case bankruptcy filings nationally had overwhelmed the resources of the Delaware Bankruptcy Court. The 

Delaware Court had been awarded its second bankruptcy judge on the basis of six 

big cases in 1992. In 2000, the Delaware Court attracted 45 big cases. The effect 

of the overload was to make Delaware a less-attractive venue. Most of the overflow 

went to New York. Since 2000, the Delaware Bankruptcy Court has captured 34% 

of all large, public company filings in the United States and the New York Bankruptcy Court has captured 20%. 

IV. ADVERSE EFFECT ON REORGANIZING COMPANIES

Evidence suggests that the court competition has resulted in the destruction of 

many large, public companies that otherwise could have been saved. In a study of 

all 98 large, public companies filing bankruptcy and emerging as public companies 

from 1991 through 1996, Joseph Doherty and I found that 42% of Delaware-reorganized companies filed a second bankruptcy case within five years of the confirmation 

of their plans, as compared with 19% of New York-reorganized companies, and only 

4% of companies reorganized in Other Courts. Lynn M. LoPucki & Joseph W. 

Doherty, Why Are Delaware and New York Bankruptcy Reorganizations Failing?, 55 

VANDERBILT LAW REVIEW 1933 (2002). Roughly twice as high a proportion of the 

Delaware and New York-reorganizing companies (25%) went out of business while 

in financial distress during that five-year period. 

The high failure rates for Delaware and New York-reorganized companies cannot 

be explained by any salient differences in the companies choosing to reorganize in 

those courts. On a variety of measures, the Delaware and New York-reorganizing 

companies were not in worse financial difficulty than those reorganizing in Other 

Courts. The Delaware and New York-reorganizing companies were somewhat larger 

than the Other Court-reorganizing companies, but the larger companies in our study 

did not fail more frequently than the smaller ones. We found no significant differences by industry among the two sets of cases. 

We found several indicators that the reorganization process was less effective in 

Delaware and New York. Although the firms filing in Delaware and New York had 

pre-bankruptcy earnings no lower than those of the firms filing in Other Courts, the 

firms filing in Delaware and New York had sharply lower earnings than the firms 

filing in Other Courts during the five years after they emerged from bankruptcy. 

Average post-bankruptcy earnings for firms emerging from Delaware reorganization 

were a negative nine percent. The corresponding average for firms emerging from 

New York reorganization was a negative three percent. For firms emerging from 

Other Court reorganization, the corresponding average was a positive one percent. 

Delaware and New York reorganizations were significantly quicker than reorganizations in Other Courts, and quicker reorganizations were generally more likely to 

fail. Even though the Delaware and New York-reorganizing companies were larger 

than the Other Court-reorganizing companies, the plans in Delaware and New York 

reorganizations divided the creditors into fewer classes, suggesting possible superficiality in the reorganization process. 

14

V. ADVERSE EFFECT ON COURT PROCESSES

In addition to its obvious adverse effect on the integrity of the bankruptcy courts, 

the competition for big cases is also having an adverse effect on court processes. The 

choice of a bankruptcy court is made by the top executives of a debtor corporation. 

Those executives usually have little experience with bankruptcy courts and so are 

heavily dependent on information and advice furnished by the bankruptcy attorneys 

retained to represent the corporation. In some cases, financial institutions that will 

make post-petition loans to the debtor corporation may also play a role in selecting 

the bankruptcy court. Generally speaking, however, pre-petition creditors are excluded from the court selection process. 

It follows that courts wishing to attract cases must appeal to the debtor’s executives, attorneys, and post-petition lenders. (I refer to them collectively as the ‘‘case 

placers.’’) To make this appeal, the judges are under pressure to favor case placers 

on a number of key issues in the court’s cases generally. The court must establish 

a reputation for generosity with professional fees and tolerance for the professionals’

conflicts of interest. The court must approve the compensation proposed for the top 

executives, even when that compensation includes huge ‘‘retention’’ loans and bonuses for the same executives that caused the company’s failure. The court cannot 

appoint a trustee to replace corrupt management, even in such extreme cases as 

Enron, Worldcom, Global Crossing, and Adelphia. The court must be willing to approve provisions in the reorganization plan that release the case placers from liability for the case placers’ own wrongdoing. A judicial panel that did not yield to these 

pressures would not be attractive to case placers and would not get future filings. 

Over the past fifteen years, the pressures of competition have resulted in major 

changes in the operation of the bankruptcy system. These changes were not preceded by Congressional action, appellate decisions, or even policy discussions. They 

evolved because the case placers wanted the changes and the bankruptcy courts 

stretched or broke the law to accommodate them. These are three examples of such 

systematic changes: 

1. Thirty-day prepackaged cases. Prepackaged cases are specifically authorized in 

the Bankruptcy Code. A debtor ‘‘prepackages’’ its case by distributing a plan and 

disclosure statement to creditors prior to filing the bankruptcy case, and obtaining 

a sufficient number of votes in favor of the plan to meet the requirements of the 

Bankruptcy Code. Only then does the debtor file a bankruptcy case and submit the 

plan, disclosure statement, and ballots to the court for approval. The court can confirm a prepackaged plan only if the court first determines that the disclosure statement provided information adequate for informed voting, the plan complies with the 

provisions of the Bankruptcy Code, and the vote is sufficient for approval. To assist 

the court in that process, the Code requires that the U.S. Trustee appoint a Creditors’ Committee and convene a meeting of creditors after the filing of the case. 

Under the pressures of competition, some bankruptcy courts have dispensed with 

these two requirements—even though they have no legal authority to do so—and 

rubber-stamp whatever prepackaged cases are submitted to them. The creditors in 

these cases receive no official representation, even though there may be an unofficial committee purporting to represent their interests. By so doing, those courts 

make it possible for a debtor to obtain confirmation of its prepackaged plan in 

slightly over thirty days from the date of filing. Some of these courts have adopted 

local rules or guidelines directing that confirmation hearings be set thirty days after 

filing (Los Angeles). One court has adopted a local rule authorizing the cancelling 

of the meeting of creditors required by Congress in the event it cannot be completed 

by the confirmation hearing (New York). 

Before confirming a plan of reorganization, the court is required to determine that 

‘‘confirmation of the plan is not likely to be followed by the liquidation, or the need 

for further financial reorganization, of the debtor....’’ 11 U.S.C. § 1129(a)(11). In 

our study, Doherty and I found that confirmation of a prepackaged plan by the 

Delaware Bankruptcy Court was followed by a distress liquidation or further financial reorganization in nine of 14 cases (54%). 

2. ‘‘Critical vendor’’ orders. The Bankruptcy Code prohibits the preferential payment of some creditors over others when both have the same legal rights. The opinions of the appellate courts are pretty much uniformly in accord. But in the mid1990s, under the pressures of competition, some bankruptcy courts began approving 

preferential payments to so-called ‘‘critical vendors’’—suppliers whose cooperation 

was needed for reorganization and who would not provide it unless the debtor paid 

its pre-petition debt to the supplier in full. In their early years, critical vendor orders were rare and covered only small numbers of creditors. But by 2002, critical 

vendor orders were being approved in most large public company cases. In some, 

the orders authorized preferential distributions of hundreds of millions of dollars to 

15

hundreds or even thousands of creditors. In the Kmart case, for example, the Chicago Bankruptcy Court permitted the distribution of $200 million to $300 million 

in preferential payments to 2,300 supposedly ‘‘critical vendors’’ selected by the debtor. The Bankruptcy Court’s order was reversed on appeal, but the damage was in 

large part irreversible because the money had already been distributed. 

3. Section 363 sales. The Bankruptcy Code specifically authorizes the use of Chapter 11 to sell a company. The Courts of Appeals held that debtors may do so pursuant to a plan of reorganization after adequate disclosure to creditors and a vote, or, 

if the debtor has ‘‘sound business reasons’’ for doing so, under section 363 of the 

Bankruptcy Code without a plan, adequate disclosure, or a vote. Until the courts 

began competing for cases in the 1990s, section 363 sales of entire companies were 

rare. 

In the 1990s, such sales became common. The competing courts so frequently and 

easily waived the requirement of ‘‘sound business reasons’’ that debtors began arranging sales and announcing those sales prior to even filing the debtors’ bankruptcy cases. Since 1997, the Delaware Bankruptcy Court has given final approval 

to sales of seven large public companies, each in less than 50 days of the filing of 

the company’s case. Once the bankruptcy court has finally approved a 363 sale, the 

sale is final. Section 363(m) of the Bankruptcy Code prohibits the reversal of that 

approval on appeal. 

Section 363 sales of large public companies now routinely occur without adequate 

disclosure to creditors or the opportunity for creditors to vote on a plan. (A creditor’s 

committee is generally appointed and consulted, but that committee often works 

under severe time pressure and may not be representative of creditors as a group.) 

The section 363 sale procedure is fraught with potential for abuse. The case placers often have interests in the sales that conflict with those of the creditors, employees, suppliers, and taxing authorities of the debtor. The top managers may be purchasers or they may expect to be employed by the buyer. Some of the managers receive large stock bonuses from the buyer after the sale is complete. Investment 

bankers retained as financial advisors often recommend sales that will result in 

large fees to themselves; they may steer the debtor to a court that will approve the 

sale without question. Discovery of such abuses is difficult because the sales occur 

quickly, in near secrecy, and there is no legal avenue for review. 

VI. SOLUTIONS

In addition to the serious adverse effects described in the preceding section, the 

competition for big bankruptcy cases has also had some positive effects on the bankruptcy courts. The Delaware court pioneered the development of the omnibus hearing that reduced travel expenses and inconvenience for out-of-town lawyers. That 

court also set a new standard for judicial availability, achieved an unprecedented 

level of judicial experience and expertise in the handling of large cases, and has perhaps the best-functioning PACER website in the country. Unfortunately, these benefits are far outweighed by the accompanying problems. 

The essence of the court competition problem is that only a few of the many parties interested in the outcome of the case select the court. To attract cases, the 

courts must cater to the interests of those few, at the expense of the debtor, the 

creditors, and other interested parties. Allowing those other parties to participate 

in case selection is not practical because so much activity occurs in the first few 

days of the bankruptcy case. To achieve a reasonable level of efficiency in the handling of a big bankruptcy case, the issue of venue must be settled no later than on 

the day the case is filed. 

The simplest solution would be to amend the bankruptcy venue statute to require 

that debtors file in their local bankruptcy courts, that is, the courts where they have 

their headquarters or their principal assets. Such an amendment would not eliminate all forum shopping because firms could move their headquarters or assets in 

the period before filing. Complete elimination of forum shopping is not, however, 

necessary to solve the problem. Forum shopping need only be reduced to a level at 

which the loss of cases by a court no longer constitutes a serious threat to the 

judges of that court. The integrity of the judges can take care of the rest. 

An alternative solution would be to assign three or four regional courts to handle 

large bankruptcy cases. The law would require that all large debtors file their petitions with a single judge, along with a simple statement of facts relevant to venue. 

Based on that statement, the judge would assign the case to the most appropriate 

of the regional courts on the same day the case was filed. The advantage of this 

solution is that it would permit the development of large-case expertise among the 

judges, without forcing them to compete for the cases. 

16

Each of the subjects discussed in this Statement is also discussed in greater detail 

in the manuscript of my book, Courting Failure: How Competition for Big Cases is 

Corrupting the Bankruptcy Courts. The book will be published by the University of 

Michigan Press in January, 2005.

Mr. CANNON. Mr. Brickman, would you please give us your testimony now? 

TESTIMONY OF LESTER BRICKMAN, LESTER BRICKMAN, PROFESSOR, BENJAMIN N. CARDOZO SCHOOL OF LAW, YESHIVA 

UNIVERSITY, NEW YORK, NY 

Mr. BRICKMAN. Mr. Chairman, I have focused my written statement on the process of administering the major bankruptcies of 

former producers and installers of asbestos-containing products. 

Some brief history and background. Asbestos litigation today remains a high-growth enterprise. In the year 2003, more than 

110,000 new claimants surfaced. That’s the most ever in a single 

year. Though defendants and their insurers have so far paid out 

over $70 billion, they may have to pay out an additional $130 to 

$140 billion before the litigation is concluded. 

The litigation has become, in my judgment, a weapon of mass 

business destruction which cuts ever deeper into the American industrial process and product distribution system, thus far accounting for 70 bankruptcies, plus some insurance company bankruptcies, plus additional insurance company bankruptcies that will 

be happening over the next several years. 

In my written statement I present a brief overview of asbestos 

litigation drawn largely from my article on the subject published 

earlier this year. In it I conclude that asbestos litigation today 

mostly consists of a massive client recruitment effort generating 

claims of injury by those with no medically cognizable asbestos-related injury, supported by specious medical evidence and by litigants’ testimony, which frequently follows scripts prepared by their 

lawyers which are replete with critical misstatements. It is thus 

beyond cavil that asbestos litigation represents a massive civil justice system failure and has become what I term a malignant enterprise. 

An increasing amount of asbestos claiming is now being channeled through the bankruptcy process where the leading plaintiff 

law firms, a baker’s dozen or so, exercise substantial if not near 

total control. Latent with boundless conflicts of interest which are 

largely ignored by the bankruptcy courts, this handful of law firms 

not only constitutes the asbestos creditor’s committees, they create 

the bankruptcy plans, establish the criteria for the payment of the 

very claims that they are asserting, effectively select the trustees 

to operate the section 524(g) bankruptcy trusts, and constitute the 

trust advisory committees which have authority over trustees’ actions and veto power over changes in the trust structures. 

The trust distribution procedures that they create allow these 

lawyers to treat substantial proportions of the trust’s assets as 

piggy banks, essentially accessible at will, irrespective of whether 

their claimants are actually injured or had actual exposure to a defendant’s product. 

17

In fact, for some trusts now being approved, all that is required 

to demonstrate the requisite exposure is for the claimant to sign 

a form saying ‘‘I was exposed.’’

Though bankruptcy trust assets already approximate $6 billion, 

that amount pales when compared to an additional approximately 

$40 billion to be added to trust assets as up to a score of companies 

now in the bankruptcy process create such trusts. 

One effect of Congress’s adoption of section 524(g) is that from 

the moment an asbestos bankruptcy commences, it is an overriding 

reality that the company will not be able to emerge from bankruptcy unless the plaintiff lawyers, representing the substantial 

portion of asbestos claimants, approve of the restructuring plan. 

The same small cadre of plaintiff lawyers who appear in most asbestos bankruptcies have thus been vested with near complete and 

substantially unchecked power to dictate the terms of the plan. 

Every bankruptcy judge understands this, and with rare exception, 

accepts, adopts, and otherwise ratifies whatever is needed to satisfy 

plaintiff lawyer demands. This unbridled power is compounded by 

the perverse provision in 524(g) that the 75 percent requirement be 

met by the number of claimants on a one-claimant/one-vote basis, 

not by the value of their claims. 

While plaintiff lawyers hardly need any additional stimulus to 

sponsor additional screenings to generate additional claimants who 

have no asbestos-related illness, this provision does just that. Its 

perverseness, I suggest, is palpable. 

The central conclusion I advance in my written statement is that 

the asbestos bankruptcy practices that I have described, coupled 

with some of the implementations of bankruptcy law in the bankruptcy courts that would cede this near unbridled power to plaintiff 

lawyers, constitutes an unprecedented assault on the integrity of 

the bankruptcy process. 

Besides invoking its oversight role to restore both the balance 

and the integrity of the bankruptcy process by creating an investigatory mechanism, I recommend that section 524(g) of the Bankruptcy Code be amended to modify those perverse provisions that 

promote bogus claims and repose near unbridled power in the 

hands of plaintiff lawyers. 

Finally, Mr. Chairman, I would like to request approval to supplement my written statement with the article on asbestos litigation that I earlier referenced. 

Mr. CANNON. Without objection, so ordered. Thank you Mr. 

Brickman. I really appreciate your testimony, the testimony of all 

the panelists. 

And I must say Mr. Brickman you were pretty direct, very 

thoughtful in your statements. I don’t think they were overdrawn, 

but very direct about what the cost to society could eventually be 

because of this. 

[The prepared statement of Mr. Brickman follows:]

18

PREPARED STATEMENT OF LESTER BRICKMAN


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Mr. CANNON. I would like Ms. DeAngelis and Mr. LoPucki, if you 

wouldn’t mind responding to some of the things that Professor 

Brickman said. Is this a crisis or has he overstated? Do we have 

tools in place, Ms. DeAngelis, to control that, or is Mr. Brickman 

correct when he says 524(g) gives unbridled power to claimants’ attorneys. You in particular, Ms. DeAngelis, you’re speaking for the 

trustees, have you some control over this? Are your controls sufficient? 

Mr. LoPucki, if would you give us your comments, your perspective, I would appreciate that as well. 

Ms. DEANGELIS. Mr. Chairman, the provisions of 524(g) and their 

workings are reviewed by the United States Trustee as a plan provision, and we review it to assure that the provisions that are set 

out in the plan comply with the requirements of the Code. 

As to how those provisions work after the plan has been confirmed, I cannot speak to that. 

Mr. CANNON. Actually I’m asking another question here. I think 

what Mr. Brickman is saying is that the terms of 524(g) create a 

context for abuse. And what I am asking you, are you dealing with 

that abuse? I mean we’re destroying—we destroyed 70 companies, 

according to Mr. LoPucki. Did you say that we have 70 companies 

in bankruptcy, plus some other bankruptcies of insurance companies, plus bankruptcies—and there are many of those; some of our 

leading companies of America are under terrific stress. When you 

think that Pfizer, a drug company, would have this problem, but 

in their history they owned a manufacturing facility that used asbestos. 

What I need to understand from you—and I think that the whole 

panel will be interested—is do you think that either Mr. Brickman 

is overstating this, or that your tools are adequate to meet the concerns that he has raised? 

Ms. DEANGELIS. I think many of the concerns that Mr. Brickman 

raised are problems that exist within mass tort litigation that are 

brought into bankruptcy and are not inherent or result from the 

524(g) injunction. They’re problems that exist within the tort system itself. 

The statements that he makes with regard to the control by 

plaintiff’s counsel, with respect to issues of conflict that they may 

have, with regard to the securing a number of plaintiffs to be represented by them, those are all issues that exist. 

Mr. CANNON. What Mr. Brickman is saying, there is an advantage in bankruptcy court to have more complainants who comprise 

75 percent of the number of people that are creditors, therefore 

there is an inducement. Does the Justice Department have tools to 

deal with that tendency toward abuse? 

Ms. DEANGELIS. The Justice Department, Mr. Chairman, has 

tools provided by the Code, which is to examine the issues presented to look at 524 to assure that it is met. I would note one 

thing; Mr. Brickman makes—there’s a point that’s made about approval that’s needed in order for a plan to be confirmed that is not 

unique to section 524(g). Approval is an inherent provision that is 

required within plan confirmations generally. In order to obtain 

confirmation of a plan, generally classes within the plan must accept it. And so that’s not a unique provision to 524. 

78

Mr. CANNON. Right. But I am trying to go someplace else. Mr. 

Brickman is saying, with great clarity, that there is abuse in this 

system. I am asking you if you have the tools to deal with that 

abuse, or do we need more tools or does that abuse not exist? I 

need to join that issue with what is happening in our bankruptcy 

courts. I know what the effect is on businesses that are being targeted. Is the court in the confines—we have torts. These things are 

going through the tort system. But increasingly we’re moving into 

these complex bankruptcies based upon the future claims in asbestos. Is that court stuff? Are the rules that we’re playing under sufficient to avoid the kind of abuse that Mr. Brickman has so eloquently expressed? 

Ms. DEANGELIS. The provisions of the Code as we deal with them 

in day-to-day cases are adequate to meet the needs, I think, of the 

cases that come before the courts. The issues that are raised, the 

concerns that are raised by Mr. Brickman, I think are issues that 

all of us can continue to think about, and if there are views that 

the Justice Department has that could better inform Congress at 

such time we’d be happy to he present them. I’m not prepared 

today to present any. 

Mr. CANNON. Thank you. We’ll come back to this because my 

time has expired. But let me point out as we think about it—we’re 

the deliberative body here—as we are thinking about it, companies 

are going bankrupt that are otherwise contributing dramatically to 

the success and benefit of our economy and country. So I want to 

come back to this. 

Mr. LoPucki I’d ask you to follow up when I have time again. But 

now I yield 5 minutes to the gentleman from Virginia. 

Mr. WATT. Thank you, Mr. Chairman. This is very disturbing 

testimony that we have heard from the last two witnesses at least. 

Reassuring testimony from the first witness. So I am trying to get 

to the bottom of a couple of things because I just want to be clear. 

The refilings—could I get maybe the one chart that was put up 

about refilings? I have it attached to my testimony, so I have the 

information or plan failures, plan failure within 5 years of confirmation. Let’s look at that chart. 

What I’d like to do is try to reconcile or merge the last two witnesses’ testimony, Professor LoPucki and Professor Brickman, so 

that I am clear on whether the issues that we are dealing with, 

and perhaps even the purpose of this hearing, is an assault on asbestos litigation or whether we are talking about bankruptcies in 

general. 

So the question I am asking, Mr. LoPucki, Professor LoPucki, is 

of the plan failures that are identified either from Delaware, New 

York, or all other courts, the 54 percent, the 31 percent in New 

York, the 14 percent from all other courts, how many of those were 

asbestos cases? 

Mr. LOPUCKI. I am not certain, but I believe none of them were. 

Mr. WATT. So the issue that you have put your finger on as a 

witness here today is really an unrelated issue to the issue that 

Professor Brickman has put his finger on; is that right? 

Mr. LOPUCKI. I think there are two separate problems here. 

Mr. WATT. All right. And your concern is about forum shopping 

and Mr. Brickman—Professor Brickman’s concern is about the 

79

abuse of the bankruptcy court by asbestos litigants. Is that—would 

I be fair in characterizing it that way? 

Mr. LOPUCKI. I would put it a little differently. I was not disturbed by the first 15 years of forum shopping. It was when the 

courts began to react to the forum shopping by changing what they 

were doing in order to attract cases. That’s what I see as the problem here. 

Mr. WATT. What benefit would there be to a court to attract a 

bankruptcy case? 

Mr. LOPUCKI. This is $1 billion a year business. 

Mr. WATT. Well, but the courts, the judges, are not in a profitmaking posture, I hope. I would like to think that a bankruptcy 

litigant filing a case in Delaware, New York, or North Carolina 

would get the same result theoretically. I like to look at our justice 

system as being a justice system that delivers justice regardless of 

where the case is filed. So what would be the benefit to a judge 

or—I mean, I can understand the potential convenience of lawyers, 

convenience of litigants, might be factors; the lawyers and the experts are getting a lot of money out of this, but certainly no court 

ought to be doing stuff to attract cases. Or are they? 

Mr. LOPUCKI. I agree that they should not be doing things to attract cases. 

Mr. WATT. Why are they, if they are? 

Mr. LOPUCKI. These are not article III judges. These are judges 

that serve 14-year terms. At the end of the 14 years they have to 

seek reappointment to the bench. The lawyers will be surveyed at 

that point about their competence. There are cities around the 

country where there are lots of corporate headquarters. The companies are filing bankruptcy, but they’re all going out of town. Boston, for example, lost 20 of the 24 companies. Boston companies 

that file bankruptcy, those companies went somewhere else for 

their bankruptcy. 

So the bankruptcy community in that city puts the pressure on 

to the judges, and the judges are from that community. These are 

their friends. These are the people who got them the judgeship in 

the first place. So they’re sensitive to the needs of the people in 

their city. 

Mr. WATT. Do you think that under that scenario, people, lawyers, would want to be filing in their home city, not someplace else? 

Am I missing something here? If I were trying to influence and get 

a hometown verdict, why would I, if I lived in Boston or North 

Carolina, move the case to Delaware? 

Mr. LOPUCKI. If they go to Delaware or New York, they’ll retain 

Delaware or New York counsel most likely. The local lawyers, the 

lawyer, say, from Boston will have little or no role in the case. 

There may not even be——

Mr. WATT. But that seems counterproductive. I thought it was 

human nature of most lawyers that I know to want to retain authority and control and influence in a case, not to defer it to somebody in another State. 

Mr. LOPUCKI. The Boston lawyer would like to retain the case 

but the Boston lawyer can’t, because they go to a New York lawyer 

or they go to a Delaware lawyer who will file the case in Delaware 

or New York. 

80

Mr. CANNON. Would the gentleman yield? If you have got a 

large—if you’re outside counsel to a large corporation and you have 

a deal with the corporation to try to get it to the next phase of its 

existence, and that means bringing in Delaware counsel, for instance, isn’t this actually a way to enhance fees? Is that where 

we’re headed; that you got lawyers working the system to increase 

their revenues over the long term or what—in other words, I agree 

with Mr. Watt that nobody is going to try and give up business, 

but if it’s a deal where your fees continue to get paid because 

you’re in a bankruptcy court that is sensitive to the interest of 

bankruptcy counsel, and as counsel you’re probably going to be better off going to Delaware, is that where we’re headed? 

Mr. LOPUCKI. Think of it as two different bankruptcy bars. Say 

the lawyers in Boston and the lawyers in New York, they’re both 

trying to get a particular case. So the executives in that company 

are going to seek advice. If they happen to seek, as a lot of them 

do, seek advice from New York counsel, they will probably end up 

in a New York bankruptcy. The Boston attorney won’t have anything to say about that. Their own in-house counsel will want what 

the executives want, and what the executives want is very often at 

odds with what the company needs. That is to say, the company 

often gets sacrificed in this to the interest of specific individuals involved. 

Mr. WATT. But if—aren’t you just saying that the client in this 

case is the company who’s looking for—looking to file bankruptcy? 

And isn’t that always the case, that they’re going to try to find 

counsel that will—I mean, the counsel is always going to be answerable; that happens in every case where you got a filing. 

They’re going to start off being answerable to whoever retains 

them; isn’t that right? 

Mr. LOPUCKI. Yes. 

Mr. WATT. And that changes in some way——

Mr. LOPUCKI. Well—— Mr. WATT.—in this process? 

Mr. LOPUCKI. What’s different here is that these companies have 

their choice of any court in the country. In most litigation you’re 

very limited in the choices that you have. You select an attorney, 

there is some forum shopping going on in any kind—probably in almost any kind of litigation. But the forum shopping is more common in the bankruptcy litigation, and it’s more dangerous because 

so many cases are moving that the courts are actually responding. 

So that the executives will be told if you take this case to New 

York, you will not get a trustee appointed. If you file in your local 

bankruptcy court, you, the executive, may be out of office the day 

after you file. But if you go to one of these courts that is trying to 

get cases, they won’t appoint a trustee in your case, because if they 

did, they wouldn’t get the next case. 

Mr. CANNON. The gentleman’s time has expired. I would like to 

follow up on this point. What I think you’re saying compared with 

some of the things you said earlier, is all about executives and control of the company and not about the benefit of the company. 

Mr. LOPUCKI. I call these people the case placers. The attorneys 

are a major part of this, the bankruptcy lawyers, because the executives have to rely on them. The executives themselves, though, 

81

typically a CEO and maybe some other people in the company, usually control where the case goes and then post-petition lenders may 

be involved. But the creditors don’t get any involvement. They don’t 

get any choice. They’re dragged along to the court that will be best 

for those people placing the case. 

Mr. CANNON. So going back to what you said earlier about law 

firms competing for the bankruptcy business, what they’re saying 

to the leadership of the company, hey babe, come here, we got the 

best deal for you. 

Mr. LOPUCKI. Our court can do more for you. 

Mr. CANNON. So if Boston is losing out, that’s because—I take it 

where you’re going is because the lawyers in Delaware are saying 

we got a better deal for you down here. 

Mr. LOPUCKI. That’s exactly right. 

Mr. CANNON. That better deal is not for your creditors but for 

you the leadership of the company. 

Mr. LOPUCKI. Yes. Precisely. 

Mr. CANNON. Ms. DeAngelis, is this a problem that we need to 

deal with from your perspective? Because you got people flooding 

into your area because they get a better deal. 

Ms. DEANGELIS. The issues that we look at with regard to retention of professionals is not why a company has chosen a particular 

law firm to represent it, but, rather, to look at the issue of whether 

the professional that is going to be—you know, that has been chosen by the company, whether it meets the test established. 

Mr. CANNON. I understand you’re looking at that rather—let me 

say this, but you have a case of a professional in the asbestos arena 

in particular—we have been looking generally—but in asbestos you 

have a guy who is sort of an old boy, at least as reported in the 

Wall Street Journal, who is making $100,000 a month compared to 

some relatively minor salary he was making as a professor of law. 

Isn’t that the kind of thing that you need to look at in the big picture, to say my goodness, we have abuses going on here, we have 

enough money going to this professional—not in this case, but in 

aggregate—that we’re getting distortion of the bankruptcy system. 

Ms. DEANGELIS. I think we need to remember, though, that there 

is a distinction between those counsel over whom the bankruptcy 

court has jurisdiction to look at retention and fees and those that 

the court does not. The court does not look at the employment 

agreement, the terms of it, the scope of it, for individual attorneys 

who represent creditors. It only looks at the retention of sort of eligibility and compensation with respect to those professionals that 

are going to render service to the debtor, to the committees, to certain other constituencies, and will be paid from the estate. 

Mr. CANNON. Maybe from multiple estates. But if you’ve got 

somebody who is working on these complex issues, making an extraordinary amount of money, as a professor may be making 

$100,000 or $200,00 a year, 10 or 12 times that on a monthly basis 

over a year, if a person is that distorted in his payment, is it possible, is there some way—are you looking at, are people in your situation looking at the effect of that kind of payment on the judgment of the person who’s there when the old—the Wall Street Journal talked about was the old-boy system. So you got people winking 

and nodding, having ex parte communications with the judges, and 

82

bankruptcy is moving on all to the benefit of some people like the 

executives and to the detriment of the creditors. Is this not—are 

you familiar with that article in the Wall Street Journal? 

Ms. DEANGELIS. I am. And what I would indicate is the attorneys that were the subject of that article, the old boys in a sense, 

they’re counsel who represent individual claimants. They are not 

counsel. 

Mr. CANNON. You had a consultant who is subject to your review, 

as I understand it, who is consulting the courts, he was a special 

counsel to the courts; and that should be under your jurisdiction, 

is it not? 

Ms. DEANGELIS. If it is, if it is a professional who has been retained in the case—some of the asbestos cases were a little different. The issue with respect to the particular consultant was not 

that he was retained in the case, but that he was retained by the 

court as the court’s adviser. 

Mr. CANNON. Would you have any role in overseeing those kind 

of people who are retained by the court? 

Ms. DEANGELIS. That’s a very unique situation and they are not 

professionals who are being retained either under 327 or 1103 of 

the Code. 

Mr. CANNON. So it is just the judge who is the person in a position to see that an adviser to his court gets paid. 

Ms. DEANGELIS. And, again, I would suggest that is a very, very 

unusual, unique situation. 

Mr. CANNON. I think Mr. Watt was making the point that this 

is not just about asbestos, but asbestos is the growing new complex 

bankruptcy prepackaged environment that we’re going into. So 

that’s—I’m actually quite concerned about where we’re headed and 

about the uniqueness of bankruptcy if it means the system is not 

going to work. 

Ms. DEANGELIS. I think the system does work with regard to 

those professionals over whom we have oversight. And with respect 

to them, we file the appropriate motions if we feel that the fees are 

unreasonable. 

And I would bring to your attention a recent case which was a 

consultant whose retention was sought. And we were successful in 

disgorging $2 million with respect to those services. 

So with respect to professionals over whom the court has oversight, we will continue to exercise our authority in looking at the 

terms of the retention, looking at the fees to try to determine the 

reasonableness of them; you know, recognizing that some of these 

large cases now require additional ways of dealing with what are 

very substantial fees. 

Mr. CANNON. You said oversight of the people, the consultants 

that the court hires, but you mean that are still subject to your jurisdiction so the court can hire a special master of some sort that 

is beyond your control; and, as I understand it, the only control on 

those people is the judge and his judgment. 

Ms. DEANGELIS. That’s the case. And, again, that was the case 

in—with respect to some of the asbestos litigation. 

Mr. CANNON. So I understand we’re agreed that there is a huge 

problem out there when you get forum shopping and judges that 

83

have old-boy networks and get paid huge amounts of money to people who end up exercising a significant role in this process. 

And maybe, Mr. LoPucki and Mr. Brickman, if I could have you 

respond to that concern and where we’re headed. Obviously most 

folks, Mr. Brickman—on asbestos, I am deeply concerned about asbestos. And, Mr. LoPucki, you’re looking at asbestos. I think you 

said those are the next big cases. Can you give us feedback on 

what we need to be worried about there? 

Mr. LOPUCKI. With respect to the asbestos cases, we’re very spe- cialized in academia. I am studying cases that are $220 million and 

over. I have all of those cases in any database. That includes about 

8 or 10 asbestos cases. The asbestos companies generally are in 

good financial condition other than the fact that they have the asbestos liability hanging over them. That’s the reason that they 

don’t show up in the 5 years after emergence in those refilings. 

Within 5 years after emergence, you see none of these asbestos 

companies. 

And there was another study done by another academic that 

came to this same conclusion, I think more generally, that the asbestos companies are typically companies that are strong except for 

their asbestos problem. 

Mr. BRICKMAN. Mr. Chairman, in my written statement I detailed numerous instances of abuses and conflicts of interest over 

which the U.S. Trustee does have jurisdiction. And with very rare 

exception, the U.S. Trustee does not exercise that jurisdiction to 

deal with conflicts of interest that are absolutely pervasive. 

For example, there are in effect interlocking directorates running 

all of the asbestos bankruptcies. These are the Asbestos Claimants 

Committee. The U.S. Trustee appoints claimants to the claimants 

committee who immediately resign in favor of their lawyers. These 

lawyers serve on multiple ACCs, Asbestos Claimants Committees, 

so that they’re controlling multiple asbestos bankruptcies; they are 

rife with conflicts of interest, because a number of these debtors 

have potential claims against other debtors, claims for contribution. 

These are some complex issues. 

Nonetheless, what I can say, with great certainty, is that the office of U.S. Trustee here has not done the job that has been accorded to it by the statutes, by the Congress. 

And you need look no further than what goes on with the office—

with the asbestos claimants committee, which is that basically, 

once the U.S. Trustee appoints the claimants, it steps away and 

does not see, does not want to see, perhaps what results thereafter, 

which is that the plaintiff lawyers then step in. They have the 

proxies. You have plaintiffs lawyers that have conflicting interests. 

Some represent mesothelioma cases, some represent unimpaired 

cases. These conflicts of interest are endemic. They pervade the entire asbestos bankruptcy process. 

Mr. CANNON. Mr. Brickman, you have written a lot of material. 

If you’d make that available to us, we’d like to make that part of 

the record. 

Mr. BRICKMAN. I will. 

Mr. CANNON. Thank you. We both have gone over a little bit and 

if I can ask one more question. That was a pretty direct statement. 

Would you like to respond to that? 

84

Ms. DEANGELIS. I would. The formation of creditors’ committees 

in asbestos cases follows the same procedure that we utilize in all 

cases, which is for us to form a representative committee of the 

types of claims that are—that fall within that particular class. 

With respect to asbestos claimants, we will form a committee that’s 

made up of the asbestos claimant, not attorneys. 

And we will put on that committee claimants who have representative interests, those who have what some refer to as minimal impairment, you know, through those who are representatives 

of estates for claimants who have died as a result of their asbestos 

injury. Once that committee is formed, it has authority to act and 

to enact its own bylaws. And if in its process it allows and authorizes counsel to appear on its behalf, that is an appropriate exercise 

of its corporate authority. We will become involved when there are 

allegations of mismanagement and fraud or allegations that the individual member is not meeting the fiduciary duty and we will remove members from committees in those instances. 

Mr. CANNON. And that would mean removing the lawyer. 

Ms. DEANGELIS. No, it would be removing the member. If, in 

fact, a member has resigned, then that information we clearly 

would want to know because then there would be no basis upon 

which an attorney sits, but if the attorney is sitting pursuant to appropriate bylaws that have been enacted or appropriate resolutions 

of the members, then we do not get, you know, we don’t sort of impose ourselves within that process. 

Mr. CANNON. Mr. Brickman, you seemed intent on responding to 

that. 

Mr. BRICKMAN. The appointment of the claimants to the asbestos 

creditors’ committees to represent the diverse interests is immediately superseded. The reality of asbestos litigation and bankruptcy is that these are immediately superseded by the plaintiff attorneys who control the show. The U.S. trustee is saying, well, we 

don’t—that’s not our purview. We don’t pay any attention to the reality of the process. We look only at the formality of the process. 

But the reality of the process is that there are conflicts of interest 

on the part of the people who run the asbestos claimants committees. And as I said earlier, interlocking directorates, which compound those conflicts of interest in incestuous ways. 

Mr. CANNON. And which, outside of the bankruptcy context, have 

resulted in many and apparently many, many more bankruptcies 

of companies caught in the problem. Mr. LoPucki has talked about 

where you have complex issues of whose interest is at stake, whose 

going to represent that interest, and where that counsel will come 

from. My time—we actually have gone way over time on both sides. 

I’ll yield back and recognize the Ranking Member for 5 minutes. 

Mr. WATT. Thank you, Mr. Chairman. I obviously didn’t walk 

into this hearing with any preconceived notions about where it 

would come out, but it seems to me that we probably ought to 

make sure that we don’t leave some wrong impressions, which was 

why I wanted to be sure that the problem that Professor LoPucki 

identified and the problem that Mr. Brickman identified really are 

two separate problems. Both of you all agree. 

Mr. BRICKMAN. Yes. 

85

Mr. WATT. Okay. Mr. LoPucki, Professor LoPucki, apparently is 

concerned that creditors don’t have enough input into the process 

once the bankruptcy is filed. Professor Brickman seems to be saying that the creditors in asbestos cases, if they were to exercise the 

authority that they had appropriately, might have too much authority in the process. It’s the asbestos claimants that are the 

creditors in those cases. So I want to make sure that nobody goes 

out of here thinking that these two things come together to form 

one great big problem. That’s what I want to be clear on, because 

asbestos cases have enough issues independent of getting them tied 

up into all the problems with bankruptcy for us to then give—pile 

on to them in another way to say that they are creating the bankruptcy problems that professor LoPucki has identified. They are 

not doing that, and I want to be clear on that. If we can be clear 

on it, I am going to give Professor Brickman a chance to clarify it 

for us if—not to express concerns about asbestos litigation in general, but to make sure that these are two separate problems. Professor Brickman, you’re familiar with a study done by Professor 

George Benston. 

Mr. BRICKMAN. No, I’m not. 

Mr. WATT. Okay. All right. In that study, which I ask unanimous 

consent that we be allowed to submit for the record. 

Mr. CANNON. Without objection so ordered. 

Mr. WATT. And I’m not defending the results of this study. I 

want to be clear on that because I don’t have any idea whether his 

study is better than yours or is different than yours or even covers 

the same territory. But as relates to the problem that has been 

identified by Professor LoPucki, he makes it absolutely clear, if his 

study is correct, that those problems are not asbestos bankruptcy 

problems, they are—because it is a different—there are five or six 

points that he concludes in his executive summary. 

First, each of the seven companies studies, and he lists them 

here, they will be part of the record. Remain profitable after the 

bankruptcy was over. Number two, changes in the Chapter 11 companies total assets showed that they continued to be viable ongoing 

enterprises after the bankruptcy. Number three, that total employment at these companies increased or did not materially decline 

after the bankruptcy. 

Number four, that all the companies met their obligations to 

fund employee pensions after the bankruptcy. And Number five, or 

six or whatever the appropriate next number is, these companies 

should do well in the future. And he’s identified these companies. 

So these are not repeat failure companies like the ones that have 

been identified by Professor LoPucki. Is that right? Are we together 

on that? 

Mr. LOPUCKI. I agree entirely. 

Mr. WATT. Okay. All right. Now, the question I have—are you in 

agreement with that Professor Brickman, before I——

Mr. BRICKMAN. Is the study you’re referring to a study of asbestos bankruptcies? 

Mr. WATT. Yes. 

Mr. BRICKMAN. Okay. I am familiar with that study. I didn’t 

know it by title. 

86

1The RAND Institute study entitled ‘‘Asbestos Litigation Costs and Compensation: An Interim 

Report,’’ is not reprinted in this hearing but is available on-line at www.rand.org/publications/

Mr. WATT. And the companies are Babcock and Wilcox, Owens 

Corning, Armstrong World Industries, Building Materials Corporation of America, W.R. Grace and Company, U.S. Gypsum Corporation, Federal Mogul Corporation, all of them have filed bankruptcy, 

and his study of those seven companies reached the conclusions 

that—now, I’m not verifying the accuracy of the study, but I’m saying that if you look at the criteria that have been applied by Professor LoPucki, those companies don’t fit that criteria as the problems—as being the problems that Professor LoPucki has identified. 

Now, that’s not to say that there are not other problems. But I’m 

wondering whether the concerns you’re having have more to do 

with—have less to do with bankruptcy and more to do with your 

concerns about the way asbestos litigation is proceeding. 

Mr. BRICKMAN. I understand. 

Mr. WATT. Do they or do they not? 

Mr. BRICKMAN. They do not. Asbestos bankruptcy is simply a 

continuation of asbestos litigation in another forum. And the problems that I pointed out in my written statement are problems in 

the bankruptcy process. To be sure, they’re an outgrowth from 

problems in the litigation and the tort system, but the problems I 

point out are problems in bankruptcy. In the article that I’m going 

to make part of the record, I go into asbestos litigation in the tort 

system. 

But in my written statement I look at the bankruptcy process. 

In addition, with regard to the study that you cite, it is contradicted by a study done by a Nobel Prize winning economist coupled 

with another study that indicates that approximately 500,000 jobs 

were either lost or not created as a consequence of asbestos litigation. 

Mr. WATT. Well, let’s make sure we get that one in the record 

too, for the purpose of—those two studies in the record. I mean I’m 

not trying to bias this one way or another. I started with my opening statement saying I didn’t know what the problems were in this 

area, and/or what the real result of this hearing would be. So I 

don’t have a dog in the outcome of this fight. I just want to make 

sure that the record is full and complete so that if we start trying 

to argue toward some particular result at the end of this hearing, 

we’ll have the full range of information to make an intelligent set 

of judgements from it. 

Mr. Brickman, can you make those two studies available to us 

for inclusion in the record. 

And I’m happy to yield back Mr. Chairman. I know I am well 

over my time. 

Mr. BRICKMAN. Yes, I can. I cited to them in my law review article and be happy to make them available. 

Mr. CANNON. Did you want to make any additional comment on 

the subject? 

Mr. BRICKMAN. I just will give you the two studies, one is done 

by the Rand Institute and the other is a study by Joseph Stiglitz 

and the company that he runs titled ‘‘The Impact of Asbestos Liabilities on Workers in Bankrupt Firms.’’ 1

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DB/DB397/DB397.pdf. The study entitled ‘‘The Impact of Asbestos Liabilities on Workers in 

Bankrupt Firms’’ is reprinted in the Appendix. 

Mr. CANNON. Thank you. 

Mr. BRICKMAN. I’ll make those available. 

Mr. CANNON. Let me just, that in my mind there’s a clear distinction between problems in bankruptcy and problems that are 

unique to asbestos. My concern and part of the reason for this 

hearing is that the new cases we’re going to be seeing in bankruptcy, the new complex cases are these pre-packaged asbestos 

cases. 

So my concern here and where I would like to go in the next couple of minutes is to get a sense of how the playing field is going 

to work as we move into these increasingly complex but narrowly 

issued bankruptcy cases, where I think you said, Mr. LoPucki, 

you’ve got healthy companies except for the asbestos and so their 

failure rate—there are many differences that exist between large 

bankruptcies and asbestos bankruptcies. They are huge. A large 

company with a complex bankruptcy, where the company’s failing 

and is not healthy is I think substantially different from where you 

have the healthy company that has an asbestos problem that is 

going to suck resources out of it, reduce jobs available in America, 

and that’s where I’m concerned about the playing field, and in particular, the trustees and the trustees’ role. 

And Mr. Brickman, maybe if I can come back to you. Or actually, 

Mr. LoPucki. We’re talking about the difference between these 

kinds of healthy companies that have asbestos and others. As you 

look at the future and see the kinds of distortions that you have 

testified about, relating to the motivations for companies to go to 

certain jurisdictions, the motivations for certain jurisdictions to try 

and attract this large legislation, how does that affect asbestos 

companies in particular in the future. 

Mr. LOPUCKI. Most of these major asbestos companies have chosen the Delaware bankruptcy court. The question I have that I cannot answer, but I think it’s important here, is the question whether 

the plaintiffs have figured out a way to participate in court selection. Because if they have not, then it will be the interests of others 

who will be served, because the cases will go to the courts that 

serve those others. Whoever’s picking the court, that’s whose going 

to win in this system. So the issue here, to my mind, is do the 

plaintiffs, do they have a way that they can get some leverage on 

the company to pick the court, which I’m doubting it, but I’m just 

not—I just don’t have the information necessary to know. 

Mr. BRICKMAN. Can I supplement that? In pre-packaged bankruptcies the plaintiff lawyers do have that control over picking the 

court. 

Mr. CANNON. You’re right. Because when you say ‘‘plaintiffs,’’ you’re talking about the plaintiffs in the litigation system, not the 

plaintiffs in bankruptcy. So to be clear, you’re saying that when 

you get a pre-packaged bankruptcy, that’s because the tort lawyers 

are talking to the stakeholders, some of the stakeholders in the corporation. They’re talking to the stakeholders and they have the 

choice about where to go and who are those stakeholders? The executives——

88

Mr. WATT. If the gentleman will yield, that seems to me to be 

a big jump. It might be true, but it seems to me to be a big jump. 

Mr. CANNON. Well, I think the reason we are taking that jump 

is because Mr. LoPucki said much earlier that the number of CEOs 

who are retained has skyrocketed. Is that not correct? 

Mr. LOPUCKI. They are more likely to be retained in office now. 

Much more like the than they were in the 1980’s. 

Mr. CANNON. And I suspect that has a lot to do with where they 

choose to go to bankruptcy and how they negotiate with the plaintiffs bar to get them to a court where they are going to be—— Mr. WATT. Well, if the gentleman would yield, as I understand 

it, in asbestos litigation, that’s not even an issue because you’re not 

trying to chase the CEO out. So that’s not a criteria. You’re trying 

to retain the CEO because—and the objective, remember, of Chapter 11 in general is to come out the other side of the bankruptcy 

with a vibrant company that continues to hire people, that we don’t 

lose a business. That was the whole—that’s the whole purpose. 

Mr. CANNON. Reclaiming my time. I can’t believe that we are at 

odds on this particular issue because the guys who get screwed 

when the CEO stays in office and gets bonuses, are the people who 

work on an hourly rate. 

Mr. WATT. No. 

Mr. CANNON. Or lose their jobs. Because a piece of the business 

disappears. 

Mr. WATT. What I’m doing is differentiating this issue so that it 

doesn’t make it sound like this is all about asbestos cases. That is 

not the objective in these asbestos cases because what you’re trying 

to do in the asbestos cases is to—and Professor Brickman indicated, yes, they are trying to make the company stronger. 

Mr. CANNON. Reclaiming my time. We agree, and I think we understand each other and the distinction between asbestos and 

nonasbesots is well taken because these are healthy companies as 

they come out. But my point and what I’d like to get some feedback 

from everyone on the panel is this question. Are we—are the interests of certain players like the executive team, and the plaintiffs 

coming into alignment at the cost of society, at the cost of the hourly worker, at the cost of the security of his job or even the possibility of a job? 

Are we getting—as we move in from this complex litigation that 

has changed because of this complex bankruptcy litigation which 

has changed because we have had courts trying to attract business 

and trustees apparently trying to attract business, and a system 

trying to attract business, in the process, are we getting a distortion which means that CEOs and their executive team and their 

in-house lawyers, and the lawyers that are trying to attract business to their areas are working with, in particular, in the asbestos 

cases the plaintiff’s bar to come through a system which minimizes 

the pain for the executives and optimizes their benefit? And that’s, 

I think, the question and indicates the overlap between these two 

issues. Mr. LoPucki. 

Mr. LOPUCKI. If you have a pre-packaged asbestos case, I take 

that to mean that the plaintiffs attorneys have made an agreement 

with the company as to how they are going to settle the matter. 

They have not filed the bankruptcy yet, but they have made their 

89

deal. In that situation, historically what’s happened is that the 

companies will go to a court like the Delaware court that will not 

inquire into the deal, but will simply approve the deal. They will 

rubber stamp the deal so you lose all of the bankruptcy protections 

for various parties in that case. Everything—the court will treat it 

as a 30-day pre-pack. They’ll file the case. Thirty days later they’ll 

have a hearing and it’s all over with. Nobody to represent anyone 

in the case. 

Mr. CANNON. And these courts can handle a lot of pre-packaged 

cases and the local bar gets the huge benefit of having a much better, much more attractive environment for the people making decisions in the corporations. Am I getting the point here? 

Mr. LOPUCKI. Yes, you are. 

Mr. CANNON. Mr. Brickman do you want to add to that? Because 

what I am seeing here, and this stinks. This really, really stinks. 

Mr. BRICKMAN. What Professor LoPucki said hit the nail right on 

the head. That is exactly what happens. There’s been only—in only 

one instance has a bankruptcy judge refused to approve the prepackaged plan, and though it was a Delaware bankruptcy, he’s a 

California bankruptcy judge who was, I guess, visiting in Delaware. 

But in all other cases, the bankruptcy judges just hold their noses 

and approve the plan. That’s the plan with the $20 million bonus 

payment to Joe Rice. This is the plan—well, we haven’t seen the 

approval yet, but in the Owens Corning bankruptcy, the first plan 

that the debtor brought forward aroused the wrath of the plaintiff 

lawyers. They came back with a second plan, which was far more 

accommodative to their interests at the expense of the commercial 

creditors. 

But in that second plan there was $70 million set aside for the 

corporate executives, which I did not see in the first plan, though 

I can’t say with certainty that it didn’t exist. It simply wasn’t in 

the first plan. So that there is a coincidence of interest generated 

between the plaintiff lawyers and the CEOs and corporate officers; 

and the people that lose are the shareholders, the people that lose 

are the people with serious injuries because the plaintiff lawyers 

largely represent the persons without any injury, the claimants 

without any injury cognizable by medical science. 

The mesotheliomas, the cancers, those claimants get short shrift 

in this process. The futures representative is selected by the company and the plaintiff lawyers, and they control the actions of that 

person. They pay his salary. It’s laughable to suppose that that 

person is going to protect the interests of future claimants in that 

pre-packaged bankruptcy plan because he is under the direct control of the plaintiff lawyers and the company who are negotiating 

in their mutual interest. 

Moreover, as these bankruptcies develop, especially the pre-packaged bankruptcies, they generate more power for the plaintiff lawyers in the pre-bankruptcy stage. That is to say, the ability of the 

plaintiff lawyers to control the bankruptcy process gives them leverage in what I’ll call the pre-bankruptcy process to go to a CEO 

and demand that he agree to settle cases in the tort system because he understands the power that they exercise within the 

bankruptcy process. That accrues under the bankruptcy process beVerDate 0ct 09 2002 13:41 Dec 23, 2004 Jkt 089266 PO 00000 Frm 00093 Fmt 6633 Sfmt 6601 G:\WORK\COMM\072104\94939.000 HJUD1 PsN: 94939
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cause the plaintiff lawyers will end up controlling a majority of the 

stock of the reorganized company. 

So the CEO knows that if they want to be a participant in that 

new company, he has to follow the wishes of plaintiff lawyers because they will be his bosses. It is rife with conflicts of interest 

throughout the entire process and I do hope this Committee does 

take additional steps of an oversight nature to spread this on the 

record. 

Mr. CANNON. I take it, Ms. DeAngelis, that as long as these 

things are all done by the rules, you don’t—your division doesn’t 

have much to do with the fraud or other problems that might occur 

here that seriously and substantially distort our system. 

Ms. DEANGELIS. They are provisions within the Bankruptcy Code 

that set out the requirements for confirmation of a pre-packaged 

bankruptcy case. That’s our job to review the plans that have been 

filed, to monitor the process, and to comment when the procedures 

or the provisions are not appropriate, to bring those matters to the 

attention of the court. 

Mr. CANNON. If you’ve got, I think Mr. Brickman talked about 

people using a script from their lawyer. They’re suggesting that 

they’re not telling the truth when they give testimony, or people 

who go to doctors who don’t—who produce evidence that may not 

objectively otherwise exist, do you have the power to deal with 

those kinds of abuses. 

Ms. DEANGELIS. Those are generally issues with regard to validity of claims. With respect to validity of claims, very seldom will 

the United States trustee get involved in what is clearly a twoparty dispute where parties are represented by counsel. We do not 

look at the validity of claims, unless there are allegations of fraud 

or misconduct or criminal conduct, in which case we would refer it 

to the U.S. attorney. 

Mr. CANNON. For criminal action. 

Ms. DEANGELIS. That’s right. 

Mr. CANNON. So if you sense there’s some problem out there 

you’re going to call on the prosecutors. 

Ms. DEANGELIS. That’s right. If there is information presented to 

us that—that’s credible, we will refer to. 

Mr. CANNON. Let me just make a distinction for the record and 

you can correct me if I’m wrong. You refer to this as two-party actions with lawyers, with counsel. But what we are dealing with 

here are complex parties that have many, many people, and I think 

what Mr. Brickman is saying is that there are inherent conflicts 

between and among them and certainly between parties within and 

parties without that litigation. So my sense is that while you want 

to see the rules played by, we’ve got a group of people that have 

figured out, that is, the bankruptcy bar, including the plaintiffs 

and the defense and plaintiffs lawyers in asbestos cases and executives as we move out in the circle here, that are playing a game 

by your rules but coming up with outcomes that are highly distortive of our economic system. But you’re going to play the referee 

in a relatively small area of that larger conflict and you think you 

have enough authority to do that. 

Ms. DEANGELIS. We enforce the Bankruptcy Code as it is written. And I, again, want to reiterate that the conflicts that exist 

91

with regard to the asbestos plaintiffs bar are conflicts that are inherent in the mass tort system and they come into bankruptcy just 

by virtue of the bankruptcy having been filed. They are not the 

type of representations—because they are representations of individual claims, of claimant, they are not the representations over 

which either the bankruptcy court has authority, over—or over 

which we exercise oversight. 

Mr. CANNON. Thank you. Because that’s, I think, exactly the 

point that I have been trying to get to for much of this discussion. 

The fact is you’ve got some people in America, some groups of people who figured out how to get out from under—how to solve their 

problems in ways that are inherently full of conflicts and inherently enormously important for the American economy. I think Mr. 

Watt had a question. I yield the time to him for that. 

Mr. WATT. I just wanted to say that I think it’s unfair for us to 

ask Ms. DeAngelis to defend the whole integrity of the bankruptcy 

system. I mean, she didn’t come here to do that. If it’s—if there are 

shortcomings in that system, as she said, her job is to enforce the 

Bankruptcy Code. And if the code itself is inadequate, it’s because 

we wrote it inadequate. Now, there might be problems—and we 

ought to put our fingers on that. 

Mr. CANNON. Will the gentleman yield? May I just point out that 

I don’t mean to put on you the spot on this, Ms. DeAngelis. I think 

you answered the questions marvelously. You have performed very 

well here. But I think inherently what we have is we are asking 

the trustees to do things they can’t do, and we need that clear so 

we can say what do we need to do here because we’ve got a system 

that doesn’t have anything to do with trustees but is destroying our 

manufacturing base in America. And I think that’s vitally important. 

So I hope that this is not taken personally. I think you’ve done 

a marvelous job answering questions, and especially the last answer was very clear. 

Mr. WATT. But I hope the Chair is also aware that that exists 

in a number of instances. It’s not only in the bankruptcy system. 

It’s not only in the tort litigation system. There are a number of 

instances where people are scratching each others’ back, you know. 

There are mergers taking place constantly, where there are golden 

parachutes. I mean, you know, so this is not unique to just this 

area. And I’m not defending it in this area. But the question I 

wanted to get to, though, it seems to me that if anybody is not protecting the integrity of the system it’s not Ms. DeAngelis’ office. It 

might be the judge’s. And so that leads us to the question of whether going to longer tenured judgeships—this whole thing of judges 

competing for cases is troubling, more troubling, is as troubling to 

me as some of the other allegations because I never thought a 

judge—none of the judges I ever went in front of competed for 

cases. They were trying to get rid of them so that they had less and 

less to do. I hear a different scenario here. Competition for cases 

that may be aimed at getting tenures extended at the end of the 

7-year term or whatever the term is. 

Mr. LOPUCKI. Fourteen years. 

Mr. WATT. Fourteen year term. Is a solution that you’re suggesting or one of the solutions that you might be suggesting going 

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to some different kind of an appointment system or a life-time tenure where they wouldn’t have to compete or what would your suggestions about how to solve that be. 

Mr. LOPUCKI. Life-time tenure would probably be a positive 

change. But at this stage of this competition, I think it’s too late 

for that to solve the problem. We have the court in Delaware, 

which has created a large industry, many people have moved to 

Delaware in reliance upon this industry being there. Congress is 

about to give Delaware four more judges, it appears. You’ve got a 

very large thing that is in place there now and won’t stop just because——

Mr. WATT. Maybe we should not just give them the judges and 

then they will be so overburdened that they can’t frustrate the system like you’re saying they’re frustrated or are frustrated in another way. 

Mr. LOPUCKI. That might be an effective approach to it. I would 

think that the judges in Delaware right now are working extremely 

hard, very long hours. 

Mr. WATT. But they’re still competing for cases is what I hear 

you say. 

Mr. LOPUCKI. They are. Less intensively now because they’re 

awaiting these new judges that they’re scheduled to receive and 

that they think they will receive. If they get the judges then those 

judges will be there and those judges will need to have cases. And 

even if they are article three judges, at that point in time, what 

can you do, if you’re a bankruptcy judge in Delaware, where there 

are no cases unless you attract those cases. 

Mr. WATT. I yield back. 

Mr. CANNON. Mr. LoPucki, are you aware as to whether or not 

bankruptcy judges get retirement when they finish their 14-year 

term? In the claims court, a judge who finishes his or her tenure 

term then gets the same payment for life. It’s a retirement. And 

the theory there is that you’re not causing judges to try and get 

reappointed. In the case of the claims court, the biggest party is 

the Federal Government, and it would be unseemly to have a 

claims court judge against a—need to go to the Government to get 

reappointed. In that case, do you know, if——

Mr. LOPUCKI. No, I don’t know how their retirement system 

works. 

Mr. CANNON. We will check that. I want to thank the panel. I 

think this has been very, very instructive. The information has 

been very good. And I hope that we will take a deeper look at this. 

Maybe focusing on a—given the transition that we have here, between complex cases that are now moving into pre-packaged asbestos cases and the conflicts that are obvious and we appreciate your 

particular comments Mr. Brickman in that regard about the inherent conflicts. We may want to just take this up again and look 

more closely at it. So I want to thank you for your being here. And 

we are adjourned. 

[Whereupon, at 4:35 p.m., the Subcommittee was adjourned.] 

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A P P E N D I X 

MATERIAL SUBMITTED FOR THE HEARING RECORD

STUDY ENTITLED, ‘‘FINANCIAL ANALYSIS OF ASBESTOS COMPANIES UNDER CHAPTER

11 REORGANIZATION,’’ SUBMITTED BY MR. WATT


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STUDY ENTITLED, ‘‘THE IMPACT OF ASBESTOS LIABILITIES ON WORKERS IN BANKRUPT

FIRMS,’’ SUBMITTED BY LESTER BRICKMAN


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Æ


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