What's Rite Aid Doing in Trenton?

The big news this past week in bankruptcy was the resignation of Judge David R. Jones of the Southern District of Texas bankruptcy court after his romantic involvement with an attorney at Jackson Walker, who represented Chapter 11 debtors before him was revealed. That story is still unfolding (to be seen if there is bar discipline or even criminal charges), but let's not beat around the bush:  the real story is venue.

Specifically, the Jones scandal appears to go straight to the heart of Houston's meteoric rise as the premier Chapter 11 filing destination: Kirkland and Ellis would file large cases, sometimes with no obvious venue hook, in SDTX, where the cases would end up before one of two judges on a complex case panel:  Judge Jones or Judge Marvin Isgur, who was Jones's former law partner. In other words, file in Houston and you've got a 50% chance of getting Judge Jones, and even if you get Judge Isgur, the two judges worked very closely, mediating each others cases, for example.

Now that's all normal exploitation of the rules, but where a lot of questions emerge is from Kirkland having Jackson Walker as co-counsel. That's something Kirkland only did in Houston, meaning that Jackson Walker was really more like local counsel. It's quite strange as local counsel is not required under SDTX rules and, in any case, Kirkland has its own Houston office with restructuring partners. Other large firms filing cases in Houston have not had on local counsel. This story probably isn't over yet.

Now, having left a hot mess behind in Houston, now Kirkland is moving on...to Trenton, New Jersey, where once again there seems to be some venue funny business with Rite Aid

Rite Aid has filed for bankruptcy in New Jersey, and its case has been assigned to Chief Judge Michael Kaplan (he of LTL fame) in the Trenton vicinage. Rite Aid Corporation, the parent company, is a Delaware corporation, headquartered in Harrisburg, Pennsylvania. 112 of its 2,309 stores are located in New Jersey, and it has two New Jersey entities in its corporate family:  Lakehurst and Benson Corp. and Rite Aid of New Jersey, Inc. Both are headquartered in Pennsylvania.

Lakehurst and Benson (case no. 23-18992) appears to be the first entity to file, enabling all of its affiliates to bootstrap into New Jersey. That's all well and good by the venue rules. What's strange, however, is the assignment of the case to Judge Kaplan. The New Jersey bankruptcy local rules provide that:

A petition commencing a case must be filed in the vicinage in which the debtor is domiciled or in which the debtor maintains its residence, principal place of business, or principal assets.

Well, Lakehurst and Benson isn't domiciled in NJ, nor does it maintain a residence, or principal place of business there. And it's petition says that the principal assets are located where its headquarters is...in Pennsylvania. So the New Jersey local rule doesn't say anything about the proper place to commence the case. That alone should be telling that the company has no business filing for bankruptcy in New Jersey, but it still raises the question of how cases get assigned when they do not fall within the parameters of the local rule. 

Perhaps it was random assignment and Kaplan just happened to get the case. There'd be a 12.5% chance of that. Of course, we've recently seen another big Chapter 11 case end up before Judge Kaplan that should by rights have been heard by one of the Newark judges: BlockFi.

We've seen other districts--SDNY, EDVA--patch up the holes in their case assignment rules after some egregious abuses. Will New Jersey follow suit? Or will New Jersey ride the venue tiger as long as it can? In any case, I hope that after the Houston meltdown the UST is going to be very aggressive in filing transfer motions in Chapter 11 cases with improper or questionable venue. We've seen venue abuses in too many cases:  Purdue, Boy Scouts, NRA, etc. When debtors can pick their court--or even their judge--it undermines confidence of the entire bankruptcy system.

Meanwhile, I'm waiting to see what the doughty academic defenders of the current system have to say about Judge Jones. I expect that someone will argue that a judge's ability to engage in pillow talk with debtor's counsel is a coordination device that is essential for the efficient and rapid resolution of cases. And the lack of objection will be taken as evidence that this is in fact the best of all possible worlds.

 

Comments

[Rob]

"Lakehurst and Benson (case no. 23-18992) appears to be the first entity to file, enabling all of its affiliates to bootstrap into New Jersey."

Think Rite Aid of New Jersey, Inc. (23-18991) went before LandB (23-18992). Looks like they have a retail location in Trenton, which is their PPOB.