[House Hearing, 108 Congress]
[From the U.S. Government Publishing Office]
ADMINISTRATION OF LARGE BUSINESS BANKRUPTCY REORGANIZATIONS: HAS
COMPETITION FOR BIG CASES CORRUPTED THE BANKRUPTCY SYSTEM?
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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
______
U.S. GOVERNMENT PRINTING OFFICE
94-939 WASHINGTON : 2004
_________________________________________________________________
For sale by the Superintendent of Documents, U.S. Government Printing
Office Internet: bookstore.gpo.gov Phone: toll free (866)512-1800;
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Washington, DC 20402-0001
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
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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
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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?
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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\
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\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.
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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