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The bankruptcy system came in for harsh criticism at a congressional hearing last week, with much of the blame being pinned on attorneys. On July 21, the House Judiciary Subcommittee on Commercial and Administrative Law heard from two law professors. Lynn M. LoPucki of the University of California at Los Angeles School of Law alleged that liberal choice-of-venue rules allow corporate bankruptcy attorneys to play the bankruptcy courts off against each other, to the detriment of their clients and creditors. Focusing on asbestos-related bankruptcies, Lester Brickman of Yeshiva University Benjamin N. Cardozo School of Law claimed, “The leading plaintiff law firms, a baker’s dozen or so, exercise substantial if not near total control over the bankruptcy process.” They do not exercise that control in the best interests of the victims most harmed by asbestos, he alleged. No attorneys were invited to speak, according to House Judiciary Committee spokesman Terry Shawn. “We invited the United States trustee, who testified about the Justice [Department's] oversight of the system and the professionals in it,” he wrote in an e-mail message. In her prepared testimony, Roberta A. DeAngeles, acting U.S. trustee for Region 3, highlighted cases in which U.S. trustees had moved to disqualify attorneys because of conflicts of interest or had challenged fee claims, but she did not directly address LoPucki’s and Brickman’s allegations. She declined to be interviewed for this story. Venue shopping LoPucki claimed that venue rule changes made in the 1970s allow large companies to file for bankruptcy virtually anywhere they wish. By having its New York subsidiary file for bankruptcy in the Southern District of New York, for instance, Enron Corp. was able to file there the next day, over the objections of creditors and former employees who wanted the proceedings to be held near the company’s headquarters in Houston, LoPucki said. LoPucki alleged that bankruptcy judges actively encourage venue shopping because presiding over big cases adds to their prestige and because they need the goodwill of the local bankruptcy bar to win reappointment every 14 years. The competition is particularly fierce between the Delaware federal court, which has overseen 34% of filings by large public companies in the last four years, and the Southern District of New York, with 20%, he said. Beginning in 1998, LoPucki asserted, “bankruptcy lawyers in at least a dozen cities” successfully urged their local bankruptcy courts to stay competitive by raising attorney fees and adopting streamlining changes in the rules that he believes favor company management at the expense of shareholders and creditors. Bankruptcy lawyer Stephen H. Case of New York’s Davis Polk & Wardwell said, “Competition between different parts of government is a good thing, because it helps keep government under scrutiny.” Case readily admitted steering his clients to venues that will pay his going rate, but added that he explains to clients that his partners will not allow him to work for less. Samuel Gerdano, director of the American Bankruptcy Institute, an Alexandria, Va.-based research organization, said that LoPucki has his supporters among the bankruptcy bar, particularly among those who don’t practice in the two main venues. The institute, about 65% of whose members are attorneys, provides some of the funding for LoPucki’s research, Gerdano said. In an interview, Brickman said his “baker’s dozen” includes Dallas’ Baron & Budd and Oakland, Calif.’s Kazan, McClain, Abrams, Fernandez, Lyons & Farrise. Brickman said that the firms achieve their bargaining power in the bankruptcy process by aggregating a large number of cases without regard to the merit of the plaintiffs’ claims, thus depleting victim-compensation trust funds. Frederick M. Baron of Baron & Budd dismissed Brickman as “a paid witness and expert for the asbestos industry.” That assessment was seconded by Steven Kazan of Kazan McClain. Baron claimed that Brickman came to his conclusions about some victims being shortchanged by looking at an inadequate sample of cases. Brickman’s claims are “complete garbage,” he said.

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