Spring break included time to read several books. Some are relevant to a GlobalTort topics, including one highly relevant to the deep flaws in the usual chapter 11 approach to dealing with asbestos and other mass tort situations.
As regular readers of this blog know, I’m anything but a fan of the outcomes in most (not all) of the asbestos chapter 11 cases because the cases are conducted with large measures of secrecy, and too often produce results in which billions of dollars are paid out to people who would not be paid in most (any?) state court tort system. The frustration is not just academic – I tried one of the cases to judgment (trial in 2007, judgment in 2008), and then briefly was involved in a second such case until a grossly incorrect ruling eliminated the "standing" of the client. In both cases, state law was by and large ignored by the parties in settlements they crafted to generate hundreds of millions of asbestos claims. Worse yet, the chapter 11 bankruptcy judges rubber stamped almost all of the settlements, thus aiding and abetting the trampling of state law and common sense.
So, to learn more about how chapter 11 could be so flawed, I read Professor Lynn LoPucki’s 2005 book: Courting Failure: How Competition for Big Cases is Corrupting the Bankruptcy Courts. It’s a great telling of a depressing story, with large amounts of objective data to prove the conclusion set out in the book’s title. Go here for a small website that includes his database of research on chapter 11 cases and related information. Go here for a detailed review of the book. Go here to download a related paper that tells much of the story in fewer words.
A key question the book addresses is: when legal systems compete with each other, does decision-making move towards or away from faithful application of existing law ? According to Professor LoPucki, the answer plainly is that competition between legal systems results in a “race to the bottom” as systems ignore established law in favor of expedient outcomes that appeal to the desired legal clientele. To prove the point, the book begins by reminding readers of the corporate law history in which New Jersey and Delaware gutted existing corporate law in order competed to attract corporate charters. That introductory reminder is by itself a valuable lesson, and a reminder of why "trust busting" later became part of our legal vocabulary when New Jersey trusts were attacked by new federal laws and enforcement efforts.
Courting Failure then turns to its real focus, the history of and reasons behind the extreme and objectively proven forum shopping that has caused so many the filing of so many large public company chapter 11 cases in Delaware. As the boo explains, Delaware was once a legal "backwater" with only one bankruptcy judge. Delaware’s status changed because of, among other things, a pair of Delaware bankruptcy venue decisions that were never overturned in court or over-ridden by statute, thus paving the way for today’s concentration of chapter cases in Delaware . In s a similar vein, Prof. LoPucki also details several other Delaware rulings and actions that could not possibly be explained by any rule of law learned in courses on federal jurisdiction. And, Professor LoPucki’s subjective points are nicely buttressed by objective data analyzing chapter 11 case filings by public companies.
Prof. LoPucki’s ultimate point is that Delaware’s bankruptcy court created its own significant industry by providing "predictable" bankruptcy rulings that have little to do with bankruptcy law, and the chapter 11 system failed when judges rubber stamped outcomes. As to rubber stamping, Courting Failure explains that too many bankruptcy courts approve a plan if there are no objections. Therefore, chapter 11 plans can be and are approved, and can go effective, if objectors are eliminated through erroneous trial rulings or special deals. As a result, the trial court proceedings often are the final word. Courting Failure also is helpful because it teaches enough about bankuptcy politics and history to better understand how and why it is that the Chrysler and GM cases so quickly shot through the chapter 11 system. .
The book does not focus on the asbestos chapter 11 cases. That said, it’s plain that the same principle applies to and explains why the chapter 11 asbestso plans often (not always) disregard the actually applicable state law rules that should govern the claims.
My overall message about the book ? Read Professor LoPucki’s book to better understand how and why competition between legal systems is indeed a recipe for a race to the bottom. Read it also for proof that the forum shopping" accusations so often lobbed against some plaintiff’s lawyers apply at least equally strongly to some corporate lawyers and their clients, aided and abetted by other participants in the bankruptcy system who have found ways to turn "predictability" to their own ends. The biggest lesson of all is that agreed chapter 11 plans and settlements too often are a terrible outcome on the merits.