Where Do You Get Off? A Reply to Courting Failure's Critics

By historical accident, the bankruptcy venue statute gives large public companies their choice of bankruptcy courts. Over three decades a competition for those cases has developed among some United States Bankruptcy Courts. The most successful courts - Delaware and New York - today attract more than two thirds of the billion-dollar-and-over cases. The courts compete principally because the cases represent a multi-billion dollar a year industry in professional fees alone, because local lawyers pressure judges to compete, and because judges who lose the competition are stigmatized and may not be reappointed. In February 2005, the University of Michigan Press published my book, Courting Failure: How Competition for Big Cases Is Corrupting the Bankruptcy Courts. In September 2005, Professor William C. Whitford convened a conference of leading bankruptcy scholars at the University of Wisconsin Law School to provide a critique. The papers from that conference, written by Douglas G. Baird, Mechele Dickerson, Melissa B. Jacoby, Judge Robert D. Martin, Robert K. Rasmussen, David A. Skeel, Jr. and Charles J. Tabb, will be published along with this response in a symposium issue of the Buffalo Law Review. This essay summarizes the critiques and responds. Part I reviews the four-step argument that corruption is the right word for what is happening to the bankruptcy courts. Bankruptcy judges are under pressure to attract big cases. Courts have changed substantive rules and rulings to attract them, affecting such matters as professional fee awards, trustee appointments, deference to consensus, critical vendor orders, conflicts of interest, executive retention bonuses, insider releases and many others. That every significant trend in big cases bankruptcy has been in favor of the professionals, executives, and DIP lenders who are capable of bringing the courts additional cases demonstrates that at least some of the judges are acting in bad faith. That is, at least some of the changes are driven by the desire to get cases, not a good faith belief that the changes are legal or desirable. Courting Failure argues that court competition caused high reorganization failure rates in Delaware and New York during the period from 1991-96 and then high reorganization failure rates nationally when the competition spread to the rest of the country in 1997. Part II responds to a variety of objections to this argument. Melissa Jacoby argues that high reorganization failure rates spread too quickly to be the result of competition. I respond that despite the problems with that thesis, it remains the best explanation of the evidence. Baird and Rasmussen argue that the failure of Delaware's prepackaged cases should not count because judges don't compete for prepackaged cases. I respond with evidence they do. David Skeel argues that Delaware's high failure rate may be the result of a selection effect in which the weakest companies chose the Delaware court and were put on a short leash by saddling them with heavy debt. I respond by noting the complete lack of any evidence of a selection effect despite substantial efforts to find one.