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Bankruptcy Courts Seem to Be The World’s Biggest Litigation Funders, But Fail to Apply Free Ma

A couple of observations on the Lehman bankruyptcy fees now that the case is back in the news as total professional fees approach $ 850 million, and Weil’s fees edge just over $ 200 million. The fees rankle many because lawyers are being paid stunning hourly rates, such as over $ 1,000 for partners, and over $ 500 for young lawyers. Those numbers make no sense when much of it is for work that’s nothing more or less than complex commercial litigation that could be done by many of the thousands of really good commercial litigation lawyers in the United States.

One observation is that the issues here are not new; the scale is simply bigger. Because this is not a new issue, critical thoughts and ideas are out there, and have been for some time. Indeed, expert ideas and commentary readily available from Professor Lynn LoPucki and others. Consider, for example, the following information stated on Professor LoPucki’s website page at UCLA Law:

“LoPucki has engaged in empirical research on large public company bankruptcies for the past twenty-five years and has been quoted in several hundred news articles on the topic in just the past five. His Bankruptcy Research Database http://lopucki.law.ucla.edu provides data for much, if not most, empirical work on the topic. LoPucki’s book, Courting Failure: How Competition for Big Cases Is Corrupting the Bankruptcy Courts (University of Michigan Press 2005) shocked the bankruptcy world with empirical evidence regarding the effects of forum shopping and court competition. The debate over those allegations has dominated recent scholarship in the field. LoPucki and his frequent coauthor, Joseph W. Doherty, are currently working on another book, Controlling Professional Fees in Corporate Bankruptcies, under contract with Oxford University Press.” (emphasis added).

Some defend the fees by saying the leaders of the estate are adding value, often by bringing lawsuits to recover money. What that really means is that the Lehman bankruptcy estate is the world’s biggest litigation funder for litigation from one entity, and the US bankruptcy court system is the world’s biggest collection of litigation funders.. Unfortunately, the US Trustee’s office and the judges apparently lack the resources or desire needed to manage the fees paid to bring lawsuits. So, in place, there is a bankruptcy cartel in which a few judges and lawyers take most of the big cases and work. That’s possibly the least free market approach one could devise, except that it is at best problematic to see courts competing for cases.

So, why not bring free market principles into play for doing the litigation? District judges overseeing class action cases innovated competitive bidding and selecting among competing legal representatives, as described here, and here, back in 2006. The Federalist Society was pushing the concept back in 2002. Also see this paper on awards to class representatives.

Bankruptcy courts can and should at least be demanding competitive bids for doing litigation, and perhaps even to represent the estate. Yes, some will argue that the debtor should get its choice of counsel, but ask: why? The business went badly enough that it cannot operate with government court help. What reason is there to think the current owners and managers will make a good choice on counsel?

In sum, there are plenty of reasons why some say it’s well past time to end the bankruptcy court cartels created by a few firms and courts, with forum shopping as a big part of the equation. For more on the forum shopping and competition between courts, see Professor LoPucki’s book, Courting Failure: How Competition for Big Cases Is Corrupting the Bankruptcy Courts (University of Michigan Press 2005). Hopefully the new book on controlling fees will be out soon !!

#Bankruptcy

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About Kirk

Since becoming a lawyer in 1983, Kirk’s over 30 years of practice have focused on advising a wide range of corporations, associations, and individuals (as both plaintiffs and defendants) on both tort and commercial law issues centered around “mass torts.”

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