Chapter 11 ‘Corruption’ Critic Exits as Forum Shoppers Shift

Welcome back to the Big Law Business column. I’m Roy Strom, and today we look at a law professor’s decades-long fight against “corruption” in the bankruptcy courts. Sign up to receive this column in your Inbox on Thursday mornings.

For nearly three decades, Lynn LoPucki did yeoman’s work to detail what was happening in America’s biggest bankruptcies. The law professor’s research will perhaps be remembered most for one word: “corruption.”

That’s how he described a bankruptcy system where in recent years just three of the country’s 375 bankruptcy judges heard more than half of the largest cases.

“Forum shopping” is now well-known in legal circles as the practice of filing lawsuits in places where a client is more likely to get a sympathetic judge. Bankruptcy lawyers often use the strategy to try to steer major reorganizing cases in front of judges perceived as friendly to their clients’ cause.

LoPucki long ago concluded courts have an incentive to compete for the biggest cases, since bankruptcy rules give companies wide discretion as to where they can file for Chapter 11 restructuring. Granting favorable rulings for the system’s repeat players helps judges stay on the bench, let’s them oversee interesting work, and ensures their “constituents”—the lawyers who appear before them—have jobs, he has argued.

His use of the word “corruption” to describe the system in the early 2000s led to a torrent of criticism from bankruptcy judges and other academics. The response prompted LoPucki to draft a rebuttal in 2006, asking critics: “Where do you get off?”

Now LoPucki is packing it in. He stopped updating a bankruptcy database that’s collected detailed information on more than 1,200 cases dating back over 40 years.

LoPucki’s critique still permeates reform discussions, but forum shopping remains nearly universal in major bankruptcy cases.

“It’s a disappointment to spend so much time and to not affect any kind of change at all,” LoPucki said in an interview. “But that seems to be the nature of policy work today. Congress doesn’t seem to be able to take constructive action with regard to problems.”

Forum shopping creates popular bankruptcy venues, like Delaware in the late 1990s or Houston more recently. But it doesn’t lead to better results, according to LoPucki. Delaware, for instance, in the 1990s experienced unusually high rates of “failed” Chapter 11 cases—defined as a company quickly filing a second bankruptcy.

In what’s likely his last paper on bankruptcy, LoPucki last year said courts that are willing to accept speedy, “one-day” bankruptcies are winning the competition. That’s despite his assessment that complying with Chapter 11 procedures in a one-day case “is impossible.”

It’s part of his final critique: Chapter 11 has descended into “lawlessness.”

LoPucki’s database began in 1994, predating PACER’s introduction of electronic federal court records. He shuttered the operation at the beginning of the year after the main researcher on the project retired, LoPucki said. It was also losing some of its value, he said, since so many bankruptcies today are filed by non-public companies owned by private equity firms. His research was on public companies.

Lynn LoPucki

Photo courtesy of Lynn LoPucki

The longtime UCLA law professor now writes about corporate law at the University of Florida Law School.

Readers of this column will recognize the LoPucki database as the source of much of my reporting on Big Law bankruptcy fees. It was the basis for a story that reported Kirkland & Ellis had notched a record 40% market share on big cases in 2020.

LoPucki’s “corruption” charge is also relevant to what this column often covers—how personal incentives and money can drive behavior in law firms and, more broadly, the legal system. Plenty of academics loathed LoPucki’s critique. They seemed particularly upset that he suggested something other than the law was deciding how cases were resolved.

Place me in the camp that agrees with LoPucki’s word choice—a system with a faulty design can easily be corrupted. And a bankruptcy system that resulted in more than 50% of major cases being heard by just three judges—as Georgetown Law professor Adam Levitin showed happened in 2020—does not seem to be working the way it was designed.

LoPucki doesn’t have much hope that Congress will pass rules that limit where companies can file for bankruptcy, which could end the competition for cases. But some popular courts have recently bowed out.

The Southern District of New York in Dec. 2021 adopted a local rule that expanded the pool of judges who’d be selected to oversee large Chapter 11 cases. That meant companies could no longer ensure Judge Robert Drain would oversee their case if it was filed in the White Plains courthouse, where for years he was the lone bankruptcy judge. (The rule change came amid scrutiny of the Purdue Pharma bankruptcy, which Drain oversaw, and he retired from the bench last year.)

The Eastern District of Virginia enacted a similar change, making its popular Richmond court’s two-judge panel less attractive. The court handled big-name bankruptcies including those for Toys “R” Us Inc., Gymboree Corp., and Pier 1 Imports Inc.

Today, LoPucki said the competition remains mainly between two courts: Houston and Delaware. While that might seem like progress, he’s not satisfied.

“It does not solve anything,” he said. “It doesn’t end the competition.”

Worth Your Time

On Litigation Funders: Two litigation funders are fighting over nearly $9 million that one funder says a personal injury law firm took to pay off debts to another funder, Emily Siegel reports. The dispute shows how litigation funding has expanded from being used to finance specific cases to bankroll law firms.

On Unexpected Litigation Funders: One of the biggest winners in the $787.5 million settlement between Fox News and Dominion Voting Systems Inc. is a private equity firm that acquired a big stake in the voting technology company in 2018, Bloomberg News’ Erik Larson reports. State Street Capital LLC is poised for a huge return on its investment thanks to the litigation.

On Shearman & Sterling: Despite battling through staff cuts, a failed merger, and a leadership change, Shearman & Sterling’s M&A practice is thriving, Mahira Dayal reports. The firm’s deal work for principals jumped to 11th place in the first quarter, up from 30th in the same period a year ago.

On Taxes: A Williams & Connolly partner and his wife agreed they owe more than $7 million in tax liabilities, Aysha Bagchi reports. Robert Shaughnessy, who focuses on civil litigation, and his wife Susan were sued by the government in September and filed a motion agreeing to the seven-figure judgment this week.

That’s it for this week! Thanks for reading and please send me your thoughts, critiques, and tips.