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A study that claims companies filing for bankruptcy protection in Delaware are at least three times more likely to require a second Chapter 11 reorganization than businesses filing elsewhere is drawing fire from First State practitioners. At least two local analyses are in progress to challenge the study by University of California at Los Angeles Law Professor Lynn LoPucki, who blames Delaware judges for the high return rate. And, not surprisingly, some Wilmington, Del., bankruptcy experts are happy to talk about the study’s supposed errors. “The report contains certain significant flaws due to inaccurate assumptions,” said Laura Davis Jones of the Wilmington office of Los Angeles’ Pachulski Stang Ziehl Young & Jones. “Confirmation of Chapter 11 cases in this district are thoroughly analyzed by professionals and advisers on all sides of the table before the plans are presented to the court.” John McLaughlin, formerly with the U.S. Trustee’s Office in Philadelphia and now at Wilmington’s Young Conaway Stargatt & Taylor, suggested that a difference in philosophies among federal districts might account for the study’s results. Some districts, he said, might “kill off the weak cases early on … and since they never get to confirmation, the only cases that do get to confirmation probably have a lot of inherent strengths and they don’t come back.” Bankruptcy experts at Wilmington-based Richards Layton & Finger reportedly were working on another analysis of the study, but no attorneys there could be reached for comment. Delaware’s so-called Chapter 22 rate is high because the state’s federal bankruptcy judges are approving weak reorganization plans in the interests of moving cases through the court system quickly, claimed bankruptcy law experts familiar with the study. The study provides more ammunition for critics of Delaware’s bankruptcy courts, who claim the state’s booming bankruptcy business is due to a court system that gives too much leeway to debtors at the expense of creditors and other parties. Delaware’s opponents have unsuccessfully pushed Congress to bar corporations from filing for Chapter 11 in states where they are incorporated but don’t have any operations. Some of this opposition, however, apparently isn’t based on how Chapter 11 cases should be handled, but the loss of great volumes of bankruptcy business to Delaware. Whatever is being done in the First State appears to be working. Delaware has the nation’s hottest bankruptcy courts, with nine of the 16 largest business reorganization cases in 1999 filed in Wilmington, according to BankruptcyData.com, which monitors bankruptcy filings. This year, 62 percent of the big-dollar corporate Chapter 11 cases also have been filed in Delaware, according to the LoPucki study. That means Delaware’s two bankruptcy judges hold sway over billions in assets and debts carried by distressed companies like Safety-Kleen Corp, an industrial waste recycler. The Columbia, S.C.-based company listed $4.4 billion in assets and $3.1 billion in debt in its May Chapter 11 filing. But Safety-Kleen and other companies filing here have a greater chance of needing to file a so-called Chapter 22 case simply because they chose to file their original Chapter 11 petition in Delaware, according to LoPucki’s study. From 1983 to 1996, 32 percent of the companies that reorganized in Delaware had to file another Chapter 11 case within six years — some as quickly as eight months, according to the study. The national average for recidivist Chapter 11 filings during those years was 10 percent, the study notes. The only other bankruptcy court with a Chapter 22 rate close to the First State’s was New York’s Manhattan-based bankruptcy courts, with a 28 percent tally over that period. “Large public companies in need of bankruptcy reorganization seem to be flocking to the courts least likely to reorganize them successfully,” said LoPucki of UCLA Law School. Both McLaughlin and Jones view LoPucki’s attack on Delaware bankruptcy judges as unwarranted. “Judges are not making these decisions themselves,” Jones said. “Parties spend millions of dollars before a case gets to the judge. “These [reorganization] plans that are presented to a judge do not come from a vacuum. They are a result, generally speaking, of much negotiation and professional analysis from all sides of the table — not just the debtor.” “The mere fact that we even have a Chapter 11 is a legislative pronouncement and not a natural right,” said McLaughlin. “Once the Congress has pronounced the minimum standards for each of the chapters, as it has done in Chapter 11, then those are the standards, and if they are met, there is nothing improper, immoral or fattening about confirming the case.” “Some standards,” he said, “are objective and some subjective. The Congress left with the judiciary the power to determine those subjective things, so then you get into the judge’s philosophy or a whole district’s philosophy.” Some districts might have the philosophy of dissolving weak companies before their cases get to the confirmation stage, he said. Thus, these districts would only confirm reorganizations of companies that are at relatively small risk of requiring Chapter 11 protection again. Other districts might allow debtors and creditors a greater opportunity to resurrect a weak company. “In a jurisdiction that does permit some creativity, some ability by the parties-in-interest to voice with their money and with their claims the belief of a viability of an enterprise, I really don’t see that that is a bad outcome,” McLaughlin said. Added McLaughlin, “The court is granting greater respect to the will of Congress and the intent of the Bankruptcy Code and permitting the parties-in-interest … to adjust their own debts; that’s the way it’s supposed to work.”

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