Bankruptcy Lawyers Run Successful Businesses in Some US Cities

When JC Penney filed for bankruptcy, he had a choice between federal courthouses. Dallas was only 20 miles from the retailer’s head office. Delaware, its legal domicile, offered a reputable set of experienced judges. New York City too, where many of the law firms involved in his case were based.

Instead, JCPenney dropped off his papers hundreds of miles away in Corpus Christi, Texas. Due to this venue’s local rules on major matters, the petition was moved along the Gulf Coast of Mexico to the Houston courtroom of Judge David Jones.

Jones went out of regular court hours to oversee the “first day” bankruptcy hearing on a Saturday. Because of his flexible schedule, he was able to approve orders, including one that avoided suspending the wages of thousands of JC Penney employees. The company came out of bankruptcy at the end of 2020 after Jones handled a complex showdown between hedge funds and bidders for the company.

Houston has become a preferred destination for businesses seeking Chapter 11 protection, a feature of a U.S. system that gives businesses the freedom to file their cases in virtually any federal bankruptcy location they choose.

Proponents argue that the system has favored a group of expert legal scholars to sort through complicated corporate structures and messy fights between claimants. Some scholars derisively call it “forum shopping”. Now lawmakers are pursuing bills to end this practice.

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Houston last year received a third of bankruptcy filings in the United States where the debtor’s debts were over $ 500 million, which matches the long-established Wilmington, Delaware court, according to data compiled by the Financial Times from BankruptcyData.com. The largest city in Texas in 2020 handled 41 cases, more than any other location in America, including cases as large as JC Penney, Neiman Marcus and Chesapeake Energy.

Other unexpected courts have also attracted cases: Richmond, Va. Has become a hub for individual bankruptcies, including Toys R Us and J Crew. A Johnson & Johnson subsidiary that makes talc-based products and faces product liability claims late last year chose the Western District of North Carolina, where five other cases of “Mass crime” were in progress. J&J head office is in New Jersey.

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Purdue Pharma, after choosing a court in Westchester County, New York, was almost certain which judge oversaw its 2019 bankruptcy, a case that determined how much the founding Sackler family would pay to settle potential liability for opioid deaths. that the drug company had manufactured.

Supporters of the American system say it saves both business and jobs.

But critics say that the slackening of the court selection process is conducive to abuse and weakens the legitimacy of the Chapter 11 bankruptcy process. They argue that it prompts some judges to subconsciously turn to the best law firms that represent individuals. companies, knowing that lawyers advise their clients on the choice of location.

“The judge is the star and the mastermind of a mega case, which makes the presidency of such a bankruptcy very attractive to some prominent people,” said Adam Levitin, former corporate lawyer and law professor at Georgetown University.

U.S. bankruptcy law creates an incentive to shop around, critics say, as policies on issues such as lease terminations and liability protections can vary by location.

When a New York Federal District judge ruled to overturn the Purdue Pharma bankruptcy settlement last month, she wrote that the liability waivers the Sackler family received in return for a contribution of $ 4, $ 3 billion to a settlement with opioid victims should not “depend on where a bankruptcy filing is made.”

Before gravitating to Houston, the so-called “mega-bankruptcies” were concentrated in New York and Delaware. These two locations emerged in the 1980s and 1990s not because of the proximity to the corporate headquarters. On the contrary, a high concentration of lawyers attracted business there, then more judges.

Judges can be determining factors in contested bankruptcies. They are free to choose a restructuring plan proposed by the company. They can allow aggrieved creditors to make an alternative proposal. Judges also decide on appropriate fees for lawyers, bankers and other professionals, which can run into the hundreds of millions of dollars.

Jones, the bankruptcy judge in Houston, dismissed the idea that his courthouse had become a magnet for big business because his judges favored debtors.

In an interview with the Financial Times, he said that he and his fellow bankruptcy judge Marvin Isgur had become popular in part because they were both financial and business experts, which enabled them to handle disputes involving complex balance sheet restructurings. In addition, the Houston court has tried to be efficient, in particular by making court personnel available at night and on weekends.

“I don’t like to see my name in the newspaper. The goal was really to create a pitch that we could all be proud of, ”Jones said. “I work really hard every day. My philosophy is that the case should never be about the judge. The case should be on the constituents in order to make the right transaction.

Lawyers say there is value in familiarity.

“My clients look to us for our advice and experience with particular judges and tribunals. For example, they want to know that I saw this judge handle a case like this, ”said Madlyn Primoff, partner at the law firm Freshfields.

“What I always love is when you have an experienced bench that approach things very honestly. I could advise my client on reasonable expectations. I would rather do that than be sent to a jurisdiction that I am unfamiliar with.

As an alternative, some academics and lawyers have proposed a national bankruptcy court where senior judges would be available to hear important cases, putting an end to shopping around.

Lawmakers have also recently introduced legislation to reform the bankruptcy process. A Invoice sponsored by U.S. Senators John Cornyn, a Republican from Texas, and Elizabeth Warren, a Democrat from Massachusetts, would require companies to file bankruptcy claims close to their core businesses.

Another bill would ban shields from responsibility for parties accused of wrongdoing in bankrupt companies, while a third targets alleged abuse of privately funded companies that go bankrupt.

There are signs that the judiciary is feeling hot. The North Carolina judge who first took on the Johnson & Johnson talc case moved it to New Jersey. The Virginia court, where only two judges heard major cases, recently began dividing assignments randomly among eight judges.

The Southern District of New York, where Purdue Pharma automatically appointed Judge Robert Drain in Westchester County, has just agreed to randomize the selection among its nine bankruptcy judges.

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