Cannon starts probe of bankruptcy system

WASHINGTON — Rep. Chris Cannon launched an inquiry Wednesday into whether some bankruptcy judges may be courting high-profile cases and publicity by allowing higher fees for the lawyers and bankruptcy professionals who handle them — and by overlooking potential conflicts of interest they may have.

As chairman of the House Judiciary Subcommittee on Commercial and Administrative Law, Cannon, R-Utah, said trends suggest that shopping for friendly courts by bankruptcy professionals is increasing, which may cost creditors and debtors.

He said at a hearing Wednesday that those trends "call into question whether the integrity of the bankruptcy system, at least with respect to large Chapter 11 (reorganization) cases, is being compromised."

UCLA law professor Lynn M. LoPucki testified his research shows that since 2000, "The Delaware Bankruptcy Court has captured 34 percent of all large, public company filings in the United States, and the New York Bankruptcy Court has captured 20 percent." The remainder are scattered nationally.

LoPucki said those courts offer professionals higher fees and more professional-friendly rules. Other courts nationally, at the urging of their local professionals, have begun to mimic them, apparently to seek a share of the bigger cases.

Why? "For the judge, a large bankruptcy case is a career opportunity," LoPucki said. "Judges who attract numerous large cases are likely to become celebrities."

He notes that bankruptcy judges are not appointed for life, but instead for 14-year terms. He said handling big cases increases their chances for reappointment. He said more judges seem to try to compete for big cases because losing a local case to another court is seen as humiliating for the judge.

LoPucki said big corporations can file for bankruptcy where they incorporate, where their headquarters are located, where they have their principal assets or where the case of an affiliated corporation is already pending. He said that allows large corporations to file virtually anywhere they choose.

He said corporation executives "usually have little experience with bankruptcy courts," so they depend heavily on lawyers, accountants and others on where to file. "It follows that courts wishing to attract cases must appeal to the debtor's executives, attorneys and post-petition lenders."

He said they do that by establishing a "reputation for generosity with professional fees and tolerance for the professionals' conflicts of interest."

However, Roberta A. Deangelis, acting U.S. Bankruptcy Trustee for Region Three in the mid-Atlantic states, said trustees nationally work hard to challenge and stop any conflicts of interest or too-high charges that they identify in cases.