Judge Shopping in Bankruptcy

Several months ago, I did a long post about how Purdue Pharma's bankruptcy was the poster child for dysfunction in chapter 11.The gist of the argument is that the procedural checks and balances that make chapter 11 bankruptcy a fair and credible system have broken down because of a confluence of three trends:

1. increasingly aggressive and coercive restructuring techniques;
2. the lack of appellate review for many key issues; and
3. the rise of “judge-shopping” facilitated by bankruptcy courts’ local rules.

I've written it up into a full length paper, forthcoming in the Texas Law Review and available here.

While writing the paper I was surprised to learn just how bad and concentrated the judge shopping has become in chapter 11. There are 375 bankruptcy judges nationwide. Yet last year, 39% of large public company bankruptcy filings ended up before a single judge, Judge David R. Jones in Houston. A full 57% of the large public company bankruptcy cases filed in 2020 ended up before either Jones or two other judges, Marvin Isgur in Houston and Robert D. Drain in White Plains. 

I discuss the implications of the supercharged judge shopping in the paper, but let me say here what no no practicing attorney (or US trustee) is able to say, because I don't have to worry about appearing before these judges in the future: these judges should be recusing themselves from hearing any case that bears indicia of being shopped into their courtroom, if only to avoid an appearance of impropriety. 

Comments

[O]

If we're all being honest now, here's another hard truth: most bankruptcy judges aren't competent to hear mega chapter 11 cases. At best they did consumer work or small businesses in private practice and are completely overwhelmed. The recent book on the Caesars restructuring, The Caesars Palace Coup, is pretty scathing in describing Judge Goldgar.

Assigning mega cases to a single district is anachronistic. There should be a single bankruptcy court with jurisdiction over all mega cases, and only mega cases, staffed with competent judges (like Drain, Jones and Isgur).

[Adam Levitin]

O--I have no reason to think that most bankruptcy judges lack the competency to hear big chapter 11s. (And Caesars bondholders have plenty of reason to be happy to Judge Goldgar.) These things aren't rocket science. Intercreditor fights aren't real hard to understand. It's just a distributional squabble. That said, I take your point that it might make sense to have a formally separate system for mega cases.

More importantly, judge shopping has absolutely nothing to do with judicial competence. There's a rota of judges in Manhattan and Delaware with lots of successful big case experience, but the big cases aren't filing there. Instead, they're going to Houston, Corpus Christi, White Plains, and Richmond. It's not that the judges who get the big cases in those districts are better or more competent than the other judges. It's that the bar thinks that these judges want the big cases.

I don't know whether these judges actually want to preside over mega cases. All what matters is that the bar thinks that this handful of judges want the mega cases.

If you are an attorney and you think the judge wants to attract mega cases, that tells you all you need to know. You know that the judge will rule your way on every important issue in the case because if the judge doesn't, you'll take your business elsewhere next go around. It's not an idle threat. That's what happened to Delaware after Sontchi tangled with K&E in Samson Resources (and also after Walrath tangled with K&E back in 2003).

Assigning all mega cases to a single court is certainly one way to solve the forum shopping problem. Of course, it's not clear where that court would be. Manhattan? Delaware? Houston? DC (as a neutral ground)? And I think there's a lot to be said for having cases heard where the debtor's principal place of business is located.

[Ed Boltz]

From the consumer side of the bankruptcy world, it seems that the anonymous O's perspective is completely wrong in two ways- most bankruptcy judges do not come from a consumer practice, but are well-connected Chapter 11 attorneys, and the "hard truth" is that most of those erstwhile Tall Building Lawyer judges aren't competent to understand the lives of the consumers appearing before them, getting completely overwhelmed by the grind and the frustrations/heartaches of ruling on those cases.

[RST]

Venue is an interesting issue, but its not the Courts or the Judges fault (they have no control over case filings). The law firm who gets the debtor/client along with management are the ones determining venue under the applicable venue provisions. Venue for these big companies is not going to be perfect for all creditors. Perhaps these Judges do an excellent job an have substantial experience with certain complex chapter 11 issues. It is what it is. I also do not think it is good practice to name Judges as if something was going on! This can have a chilling affect. Chapter 11 is the same in Delaware, NY, Texas, perhaps there are different local rules, administrative orders but the law and code are the same. All of our Bankruptcy Judges take the same oath and they do an excellent job. With all the prestige of mega 11 cases, they dominate the Courts dockets and time allocation. Perhaps certain judges have a sort of niche in certain corporate bankruptcies. Example retired Bankruptcy Judge William Bodoh in Youngstown Ohio was known for presiding over many steel industry chapter 11 cases.

[Adam Levitin]

RST--I don't think you get the issue. The point isn't whether venue is perfect. And it's not about venue choice. It's about judge picking. No litigant should be able to select his or her judge. That's just basic fairness of process.

As far as control, the courts absolutely have control over venue. When it's inappropriate, they can boot the case, and on rare occasion they have (see, e.g., Patriot Coal getting booted out of SDNY).

If you think Chapter 11 is really the same in Delaware, NY, Texas, etc. and that all the judges are equally excellent, what explains filings in jurisdictions that have little connection with the debtor's actually business (e.g. Los Angeles Dodgers of Delaware)? Not all judges or jurisdictions are created equal.

If you actually read my paper, you'll see that this isn't about judges with niche industry expertise being sought out. Oil and gas 22s did their first round in Delaware or Manhattan (which have experienced benches) and are now going to Texas (which didn't have that much big case experience prior to 2016) or taking steps to steer their cases to the single (less convenient) judge in White Plains, rather than the seven in Manhattan.

The problem is that there is a handful of judges who are clearly signaling to the mega case bar that they want their cases. For example, SDTX put Jamies Sprayregen (who isn't even admitted to practice in Texas) on its complex case advisory committee. The only reason to do that is to make sure that Kirkland, the leading case placer, files cases in SDTX. And Kirkland's only going to keep filing in SDTX if it gets the outcomes it wants. Indeed, they have a duty to their clients to do so.

Lynn LoPucki called this system "corrupt." That raised a lot of hackles, and I'm not using that word--it's got the wrong connotations. But it is a system that is badly in need of reform, as it has real impacts on folks who are not professional creditors.

[pina4]

Judges Jones and Isgur have completely revamped the SDTX's procedures to attract these filings. Rumor has it that they have personally invited such filings by the large firms (e.g. Kirkland), and the SDTX rules assign all mega cases to them.

[David]

Does the ethic of zealous representation require debtors’ attorneys in mega cases to file in one of those favorable districts if possible?

[Adam Levitin]

I think so. One who has done a good deal of judge shopping has argued to me that it would be malpractice not to. It would surely be malpractice to file without consideration of the venue with the moat favorable law. But perhaps picking a judge is different.

[Karen]

You assume [wrongly] that our courts are concerned with the appearance of impropriety. Hint: they aren't.

I've never met a judge who can't be bought.