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Delaware, whose new state slogan is “It’s Good Being First,” is finding that is not always the case. The state’s corporate law has been criticized for 100 years for being pro-business. Now that law is under attack for its role as the premier venue for large corporate reorganizations in federal bankruptcy court. But as has historically happened with Delaware, the first state in the country to ratify the U.S. Constitution, some lawyers and academics are quick to defend the court that sits in Wilmington. The latest salvo against the so-called “Chapter 11 capital” comes from Lynn M. LoPucki, a law professor at the UCLA School of Law. He’s released a new study that concludes Delaware is a bankruptcy mill grinding out broken companies. The paper, to be published in the Vanderbilt Law Review in November, answers critics of his 2001 study. LoPucki and statistician Joseph W. Doherty found that 54 percent of the large companies that emerged from Chapter 11 in Delaware from 1991 to 1996 either returned to the court for another reorganization or went out of business within five years. That compares to a 14 percent failure rate for other courts, excluding the New York courts, which had a failure rate of 31 percent. Businesses reorganized in Delaware had average annual earnings losses of 9 percent over the five-year period after reorganization. In other courts, reorganized businesses saw a 1 percent profit, except for New York, where companies suffered a 3 percent loss. LoPucki found that the degree of a company’s distress before filing had no relationship to the success or failure of the reorganized business. LoPucki blames the bankruptcy judges for not being more demanding in determining the feasibility of reorganization plans. “Delaware has a culture of serving corporate America,” he said. Now other courts are emulating Delaware in a “classic race to the bottom,” he said. If Delaware gets two more judges as proposed in the bankruptcy reform bill before Congress, its market share will increase, he said. Kenneth N. Klee, a law professor at UCLA, praises the study and says the “unassailable” data raises important questions about what’s good for the economy and the American people. HARD TO DEFINE But some question LoPucki’s classification of some mergers as failures. They say it’s hard to define “success” in bankruptcy. “It’s very striking data, but because of the way he structured the study, it’s really hard to know what to make of it,” said David A. Skeel Jr., a professor at the University of Pennsylvania Law School. Thomas J. Salerno, chairman of the reorganization practice group at Squire, Sanders & Dempsey, said LoPucki doesn’t understand that bankruptcy is a court-supervised negotiation between the debtor and creditors, not a litigation process. Harvey R. Miller of New York’s Weil, Gotshal & Manges agrees. If everyone consents to a plan, a judge doesn’t have the resources to launch an independent analysis, both say. “Where all parties are in support of the reorganization plan and the record before the court is uncontroverted, it would be inappropriate for a court to retain its own professionals to engage in fact finding,” said Mark D. Collins, head of the bankruptcy group at Richards, Layton & Finger in Wilmington. Robert K. Rasmussen, a professor at Vanderbilt University School of Law, said he believes sophisticated creditors, particularly those who provide debtor-in-possession financing, would be up in arms if there was a problem. LoPucki acknowledges he’s opened a can of worms. When raising money for the latest study, the American Bankruptcy Institute and the National Conference of Bankruptcy Judges turned him down, he said. “There’s a fight in this country over where the big cases are going to be heard. That’s what it comes down to,” said Ralph R. Mabey, a former bankruptcy judge for the District of Utah who heads the international reorganization practice at LeBoeuf, Lamb, Greene & MacRae of New York. “But I would say the bloom is off the rose in Delaware. More cases are being filed elsewhere and the problem is being mitigated.” Former bankruptcy Judge Helen S. Balick, who was chief judge during the survey years, declined to comment. Calls to the sitting bankruptcy judges in Wilmington were referred to David Bird, the clerk of the court. He said the court has a policy not to comment to the press.

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