H2H: LoPucki Strikes Back
Joe and I don't propose "a dramatic change in §363 practice." We think sale under §363 should continue to be an option under the current legal standard — "sound business reasons [for not going though the Chapter 11 process of disclosure and plan confirmation]."
What we do propose is to end the disastrous competition among the bankruptcy courts for large, public company bankruptcies. Because the judges are competing for cases, they can't also perform their function as regulators of the sales. They can't ask the hard questions—such as whether the proponents of the sale own a beneficial interest in the buyer. They can't control professional fees. They can't appoint trustees when the managers of the companies have been engaged in fraud. (Two good examples are Enron and Refco. The system failed to replace either management with a trustee despite a clear Congressional mandate.)
Our §363 sale study is one of several, by a variety of researchers, that show serious problems in the bankruptcy courts' handling of large public company bankruptcies since the competition began: high refiling rates by companies reorganized in the competing courts, rents extracted by managers, suspicious patterns of decision making by the competing courts, and higher professional fees in forum shopped cases.
The competition arose by historical accident. The two major organizations representing unsecured creditor interests—the National Association of Credit Managers and the Commercial Law League—along with the National Bankruptcy Conference and the National Bankruptcy Review Commission have all endorsed legislation to end the competition.
Court competition—a form of regulatory competition—doesn't work in situations where one side picks the court and the other can do nothing about it. When that kind of competition has arisen in other contexts—tort and class action forum shopping for example—Congress has acted to eliminate it. The bankruptcy court competition is permitted to continue only because Senator Joseph Biden (D-Del.) wields tremendous power in the Senate.
In 2005, Congress rewarded the Delaware bankruptcy court by raising the number of Delaware bankruptcy judges from two to six. So far this year, six of the seven large public companies that filed bankruptcy anywhere in the United States (86%) filed in Delaware. The New York court—triumphant as recently as 2005—must now respond or risk fading into obscurity. One who seeks to do no harm should insist on studies showing court competition to produce no harm before permitting clever strategists to make such a dramatic change in large, public company bankruptcy. That showing hasn't been made.