Let's End Bankruptcy Judge Shopping

Credit Slips bloggers Adam Levitin, Stephen Lubben, and I joined eight other academics in putting our names to a letter calling for the Southern District of Texas to end its practice of having a "complex chapter 11" panel composed of two bankruptcy judges. This procedure ensures that large corporate debtors filing chapter 11 know their cases will be heard by one of these two judges rather than being randomly assigned among the judges on the court. Congress has authorized up to six bankruptcy judges for the Southern District of Texas. Although I do not speak for Levitin and Lubben, I wanted to elaborate on my reasons for signing the letter.

Corporate bankruptcy venue abuse remains overdue for reform as explained by Credit Slips bloggers just a few times both on and off the blog. For some examples, see here, here, here, here, here, and here. The problem with the complex chapter 11 panel is even worse because it creates the appearance of being able to pick your own judge. Whatever benefits there are from having a specialized panel for large cases, and I am sure there are some, they are not worth the corrosive effect on public confidence in an impartial system of justice. Because the bankruptcy court created the complex chapter 11 panel as a local administrative procedure, the same court could end it with a stroke of a pen.

As I tell junior scholars, try to think of the arguments against your position. Here, there are first several that can be rejected out of hand. First, although I do not think anyone actually argues this, it cannot be persuasive that the panel systematically benefits particular stakeholders in the process. That would be not just the appearance of bias but actual bias. Second, it is true that large corporate chapter 11 cases require a lot of judicial time. Having two judges take all the large chapter 11s frees up the other judges, but I am sure the bankruptcy judges in the Southern District of Texas and elsewhere would agree that lessening judicial workload for its own sake is not a legitimate function of the bankruptcy system. Third, it cannot be that only a select few bankruptcy judges are competent to hear large chapter 11s. Corporate bankruptcies are no more or less complex than many legal issues, such as patent disputes, antitrust, or securities law, that end up in front of federal judges of varying experience and backgrounds.

The more serious arguments are laid out by Lubben, one of the signatories to the letter, in a Credit Slips post here about the benefits of forum shopping more generally. In a word, it comes down to efficiency. Having courts or judges specialize in large, corporate cases lowers costs through experience, speed, increased predictability, or some other mechanism. I actually think that is all likely true. Although I was once skeptical of the claim, the evidence has led me to change my mind. 

Efficiency is not the overriding goal of a judicial system. Indeed, it is far down the list. In the last week, my educational duties gave me reason to reread Professor Tom Tyler's monumental work, Why People Obey the Law. Establishing a literature that has only grown and reinforced his original findings, Tyler shows that, when evaluating the legitimacy of a rule or outcome, people care less about instrumental reasons and more about procedural justice. That is, people care more about whether the rule or outcome came from a fair system rather than the rule or outcome reaching a result that benefits them personally. Credit Slips blogger Pamela Foohey has written papers about procedural justice in the bankruptcy context (here and here). Among the factors that determine the legitimacy of an outcome are whether the decision-maker is perceived as unbiased, trying to reach fair outcomes, and considering all points of view. The social costs from systems that are viewed as illegitimate are huge--just look around the world at nations where governments have low levels of perceived legitimacy from their citizens. These social costs swamp whatever benefits we gain from efficiency.

It is not that the existence of the complex chapter 11 panel will somehow lead to rioting in the streets.  Our bankruptcy system, however, has been taking on more contentious issues in the public spotlight, from opioids and Purdue Pharma, to the talc liability in LTL/Johnson & Johns, to the damage Alex Jones inflicted on those who were inconvenient to the lies he wanted to peddle. If we want people to have confidence and respect for these outcomes and those in other cases, they must view the bankruptcy system as procedurally legitimate. In addition, hundreds of thousands of consumers each year turn to the same system each year for help with their personal financial lives. If the system is come to be seen as illegitimate in some cases, it will be seen as illegitimate in others. 

The spotlight is on the Southern District of Texas because of the ethics investigation into and then resignation of Judge David Jones. Much focus has been on his approval of fees for his long-time romantic partner. Receiving less attention is that, as a partner in a Houston bankruptcy law firm, she stood to gain from having the city be seen as a destination for large corporate bankruptcies. It was no secret that the complex chapter 11 panel was a way to do that and that Judge Jones played a key role in creating it. A 2020 headline from the Houston Chronicle profiling Judge Jones says it all: "Meet the judge who saved the Texas bankruptcy practice." The appearance of extrajudicial considerations affecting decisions is enough to undermine the procedural legitimacy of the court. Even with new members, the complex chapter 11 panel cannot overcome its origin story.

The complex chapter 11 panel in Houston is just one part of a larger problem. Judge shopping happens elsewhere and especially now through filings that happen in a courthouse with one judge, avoiding the other judges in the district who sit in a different courthouse. I still do not understand how Purdue Pharma ended up in White Plains, New York. The Southern District of New York took steps to stop it from happening again. Levitin posted just the other day about the odd circumstances of how Rite Aid found its way to Trenton, New Jersey, instead of Newark. 

One of the many privileges of my job is that over the years I have come to know many bankruptcy judges. It might be the best bench in the country at any level. Its judges are merit selected. They collaborate through national organizations and contribute in many ways to making the system better. They regularly participate in bench-bar activities to improve the administration of justice. Both in public meetings and in private conversations, they give thoughtful commentary on the art of judging. From those closest to it, the judges exude procedural fairness. They give me confidence in the system, but I know it and know them. My hope is that they will step back and consider how this looks to a broader public. As the letter notes, the Southern District of New York and the Eastern District of Virginia already did so. It is time to take the easy step of putting an end to bankruptcy judge shopping everywhere.

Comments

[Adam Levitin]

Bob,

I can give you the answer to the Purdue Pharma venue mystery:

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3851339

[Bob Lawless]

First of all, this is a fantastic exchange that makes it look like we don't read each other's papers. Let's leave that impression there.

Second, yes, I know that, but I still don't understand how it was in any way shape or form legitimate. I was trying to be polite . . . Midwestern values and all. It was venue by declaration, a phrase we have previously agreed that I hold the trademark on. See https://www.creditslips.org/creditslips/2023/03/who-knew-silicon-valley-was-on-park-avenue-manhattan.html.

[Stephen Lubben]

Hey, look at this, I remembered my login. Anyhow, let me start by saying that I see a difference between judge shopping and venue shopping, and I'm more concerned about the first. But I acknowledge the difference can sometimes be subtle – see 1990s Delaware, for example.

I also think that Bob's point about efficiency is key. Too often efficiency these days just means "I get to do whatever I want, so long as 2/3rds of the class agrees with me. Don't ask how I got the 2/3rd on board." Presumably there is something to chapter 11 other than providing a framework for rubber stamping deals among insiders.

[Ben Goldgar]

The problem with the efficiency argument in favor of a complex bankruptcy panel, or even a separate complex bankruptcy court, is that it's so much boot-strapping. The judges in places like S.D.N.Y., D. Del., and S.D. Tex. are better at handling big chapter 11 cases, not because the judges are smarter necessarily, but because they have more experience with those kinds of cases. And they have more experience with them because they get them all the time. The rest of us don't. And so it goes. The system has become self-sustaining, and now people are pushing to make that system permanent.

In more than 20 years on the bench, I've had exactly one major chapter 11 case -- Caesars. People disagree on how well I handled that one. Since the case is still pending (amazingly), I won't venture an opinion, except to say this: had I had more than one major case in my judicial career, I would have done a better job.

[Maureen Tkacik]

Judge Goldgar,
If you were gonna have one major case at least that was a pretty epic one. Thanks for your service.