[House Hearing, 108 Congress]
[From the U.S. Government Printing Office]



 
   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

                                ______


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94-939                 WASHINGTON : 2004
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                       COMMITTEE ON THE JUDICIARY

            F. JAMES SENSENBRENNER, Jr., Wisconsin, Chairman
HENRY J. HYDE, Illinois              JOHN CONYERS, Jr., Michigan
HOWARD COBLE, North Carolina         HOWARD L. BERMAN, California
LAMAR SMITH, Texas                   RICK BOUCHER, Virginia
ELTON GALLEGLY, California           JERROLD NADLER, New York
BOB GOODLATTE, Virginia              ROBERT C. SCOTT, Virginia
STEVE CHABOT, Ohio                   MELVIN L. WATT, North Carolina
WILLIAM L. JENKINS, Tennessee        ZOE LOFGREN, California
CHRIS CANNON, Utah                   SHEILA JACKSON LEE, Texas
SPENCER BACHUS, Alabama              MAXINE WATERS, California
JOHN N. HOSTETTLER, Indiana          MARTIN T. MEEHAN, Massachusetts
MARK GREEN, Wisconsin                WILLIAM D. DELAHUNT, Massachusetts
RIC KELLER, Florida                  ROBERT WEXLER, Florida
MELISSA A. HART, Pennsylvania        TAMMY BALDWIN, Wisconsin
JEFF FLAKE, Arizona                  ANTHONY D. WEINER, New York
MIKE PENCE, Indiana                  ADAM B. SCHIFF, California
J. RANDY FORBES, Virginia            LINDA T. SANCHEZ, California
STEVE KING, Iowa
JOHN R. CARTER, Texas
TOM FEENEY, Florida
MARSHA BLACKBURN, Tennessee

             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         MELVIN L. WATT, North Carolina
JEFF FLAKE, Arizona                  JERROLD NADLER, New York
JOHN R. CARTER, Texas                TAMMY BALDWIN, Wisconsin
MARSHA BLACKBURN, Tennessee          WILLIAM D. DELAHUNT, Massachusetts
STEVE CHABOT, Ohio                   ANTHONY D. WEINER, New York
TOM FEENEY, Florida

                  Raymond V. Smietanka, Chief Counsel
                        Susan A. Jensen, Counsel
                        Diane K. Taylor, Counsel
                  James Daley, Full Committee Counsel
                   Stephanie Moore, Minority Counsel













                            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














   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 addition, 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 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.
    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.
    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. Sec. 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. Sec. 1102, are authorized 
to employ professionals to assist the committees in carrying out their 
responsibilities. In light of the multiplicity of interests present 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. Sec. Sec. 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. Sec. 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. Sec. Sec. 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 Sec. 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 entries 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\
---------------------------------------------------------------------------
    \1\ Data 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.
---------------------------------------------------------------------------
    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 entitled 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 Sec. 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 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.
    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-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 court-awarded 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 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. Sec. 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 one-judge 
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 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.
                  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. Sec. 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 mid-1990s, 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 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.
    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.
    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:]

                 Prepared Statement of Lester Brickman







    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.
    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 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 
profit-making 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.
    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, 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 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 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 
specialized 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?
    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.
    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.
    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\
---------------------------------------------------------------------------
    \1\ The 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/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----
    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 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 pre-packaged 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 because 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 two-party 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 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 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.]
                            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






  Study entitled, ``The Impact of Asbestos Liabilities on Workers in 
             Bankrupt Firms,'' submitted by Lester Brickman