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Venue Reform: Once More Unto the Breach

posted by Adam Levitin

Chapter 11 venue reform is back and not a moment too soon. The perennial problem of forum shopping has devolved into naked judge picking with what appears to be competition among a handful of judges to land large chapter 11 case. The results are incredible: last year 57% of the large public company bankruptcies ended up before just three judges, and 39% ended up before a single judge. When judges compete for cases, the entire system is degraded. Judges who want to attract or retain the flow of big cases cannot rule against debtors (or their private equity sponsors) on any key issues. If they do, they are branded as "unpredictable" and the business flows elsewhere. The result is that we are seeing a weaponization of bankruptcy and procedural rights, particularly for nonconsensual or legacy creditors being trampled.  

Recognizing this problem, Rep. Zoe Lofgren (D-CA) and Ken Buck (R-CO) introduced the bipartisan Bankruptcy Venue Reform Act of 2021, H.R. 41931. The bill would require debtors to file where their principal place of business or principal assets are located—in other words in a location with a real world connection with the debtor's business. 

Now, I know that there's inevitably the response of "but expertise!" Defenders of status quo suggest that judge picking isn't such a bad thing because debtors are seeking out the really good judges for their expertise. Hogwash. Debtors aren't seeking out great judges. They are seeking out judges who are great for them. The quantum of judicial wisdom is irrelevant to debtors. What matters is the judge's willingness to enter the orders the debtor wants. 

Here's the proof. Consider the super-speed prepacks that have become more common in recent years (mainly Kirkland & Ellis specials). These super-speed prepacks are cases that are going from petition to confirmation in as little as 24 hours. They're basically drive-thru bankruptcies. The super-speed prepacks are getting filed before just a handful of judges, particularly Judge Robert Drain and Judge Marvin Isgur. Now Judges Drain and Isgur are both knowledgeable, hardworking judges. But that's irrelevant for these quickie cases. When you're in and out of bankruptcy court in 24 or 48 hours, it really doesn't matter whether you have a great judge or not; there's no chance for the judge to do anything meaningful except derail the case by saying "wait." These judges aren't chosen for their expertise. Instead, they're chosen because debtors believe that they will rubber stamp their plans. 

The chapter 11 is often a game of inside baseball. The chapter 11 bar (and bench) speaks a peculiar jargon consisting of Code citations and colorful phrases like bad boy guaranty, carve-out, cramdown, cramup, dropdead, takeback paper, writ of rachmones, etc. It's a substantially closed circles of the same firms appearing in the same court rooms. Chapter 11 culture values the deal, and that dynamic helps get deals done: the parties know each other and have a way of speaking to each other and they know that they'll be dealing with each other again most likely. The problem is that bankruptcy law is a delicate balance of deals and procedural rights, and judge-picking tilts the scales toward deals that run roughshod over procedural rights and screw folks like tort creditors and landlords. Venue reform is an important step to getting bankruptcy law back in balance with itself. 

Comments

This reform should also either restrict the UST from objecting to improper venue in consumer cases, leaving that for creditors only, or specifically make video or telephonic hearings the default presumption for Meetings of Creditors in consumer cases, as regular people often end up with absurdly long and expensive travel times to distant court locations due to the quirks and foibles of district borders

One fight at a time Ed.

Just like with Ch. 13 debt limits being told to wait their turn for an increase and not ask to go along when they're raised in Ch. 12 or Subchapter V?

Can I get an Amen!!!

Short, sweet & to the point; balance of dealmaking vs procedural rights is delicate

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