Label-Maker’s Court-Shopping Move Faces Fast Judicial Review (1)

Holdout creditors of Multi-Color Corp. got a second chance to challenge the label-maker’s restructuring after a federal appeals court set a fast-track schedule to decide whether the roughly $6 billion bankruptcy should be dismissed or moved to another court.

A federal appeals court in Philadelphia asked all sides to submit their positions this week, days after the creditors sought to overturn a ruling allowing Multi-Color to file for Chapter 11 in New Jersey despite having almost no connection to the state. Appellate courts typically give parties weeks or even months to file the papers needed for an appeal.

Multi-Color, based in Atlanta, filed for bankruptcy at the end of January with plans to quickly win approval of a lender-backed deal to reduce debt to about $2 billion from about $6 billion. The company’s only connection to New Jersey was a set of bank accounts established 16 days before it filed. Judge Michael Kaplan overruled creditor objections, saying the rules for filing Chapter 11 cases were broad enough to allow Multi-Color to exploit a “loophole.”

Read more: Multi-Color Venue ‘Loophole’ Allowed by Congress, Judge Says

For decades, critics have argued that loose venue rules have helped turn courts in Wilmington, Delaware, and Manhattan into hubs for large Chapter 11 cases and, in some instances, helped companies avoid unfavorable rulings. Supporters of the rules say companies and creditors benefit from the flexibility, and the expertise certain judges bring to complex restructurings results in better outcomes for employees and lenders alike.

The practice, known as forum shopping, “upsets the Bankruptcy Code’s carefully calibrated balance of debtor and creditor rights, tilting the playing field to favor the debtor and its allies,” law professor Adam J. Levitin wrote in a court filing urging the appellate court to dismiss the bankruptcy or move it to another venue.

Levitin argued that Kaplan has handled an unusually high share of large cases filed in New Jersey, based on his review of assignments among the state’s eight bankruptcy judges. “The disparity in assignments can lend itself to a perception of judge shopping, making manufactured venue hooks all the more concerning,” wrote Levitin, who teaches at Georgetown University Law Center. Because Levitin is not involved in the bankruptcy case, he filed his views in a so-called friend-of-the-court brief.

Kaplan declined to comment on the case involving Multi-Color, saying in an email Tuesday that it would not be appropriate for him to address a pending legal matter. Speaking more generally about case assignments in New Jersey bankruptcy court, Kaplan said the math behind Levitin’s assertion was incorrect.

Because of retirements and judges “asking temporarily to be placed off the Chapter 11 wheel for personal reasons,” there were often only seven judges taking Chapter 11 cases during that period and never more than eight, Kaplan said. The number of cases going to Kaplan is also skewed by a policy that assigns the same judge to a case that files bankruptcy a second time. For example, when retailer Rite Aid filed its second insolvency case, Kaplan automatically picked it up.

Kaplan is one of only two judges in Trenton. A ninth New Jersey judge, Eamonn J. O’Hagan, took office in February. Several large companies have filed for bankruptcy in New Jersey in recent years, including WeWork, Bed Bath & Beyond, and David’s Bridal.

Read more: Atlanta Firm Draws Creditor Ire Over NJ Court Shopping Maneuver

Multi-Color also disputed Levitin’s claims, saying large corporate bankruptcies filed in New Jersey have been “distributed broadly across the bench.” The company said any court must account for a judge’s workload and availability to handle time-sensitive matters, such as when a company first files Chapter 11 and needs immediate access to cash to keep operating.

The company said the creditor group challenging venue is motivated “by financial interests and negotiating leverage in the restructuring, not by any principled concern about the geographic appropriateness of the forum.”

Levitin said Tuesday that he’s not arguing that 100% of the cases are going to Kaplan, or that every big Chapter 11 case should be assigned without any thought — courts should take into consideration workload, vacation time and potential conflicts of interest. However, the number of big cases going to Kaplan are “way outside of what you’d expect from a random distribution,” he added.

The creditor group includes BTG Pactual Asset Management US, Canyon Capital Advisors and Owl Creek Asset Management, court papers show. They are fighting a reorganization plan backed by Multi-Color’s private equity sponsor, Clayton, Dubilier & Rice, and key lenders including Apollo Capital Management, Ares Management and Arini Capital Management.

The holdout creditors say the reorganization includes a $657.5 million financing package that unfairly favors the lenders, according to court documents. The loan proposal would provide Multi-Color with fresh cash to use while in bankruptcy and refinance some older debt as well. The company was scheduled to be in court Wednesday afternoon seeking approval for the financing.

In recent years, Houston and New Jersey have also become popular destinations for large bankruptcy filings. The dispute over Multi-Color could test the limits of a company’s ability to hand-pick its court.

(Updates with court hearing about bankruptcy loan in the next-to-last paragraph.)

To contact the reporters on this story:
Steven Church in Wilmington, Delaware at schurch3@bloomberg.net;
Jonathan Randles in New York at jrandles5@bloomberg.net

To contact the editors responsible for this story:
Irene García Pérez at igarciaperez@bloomberg.net

Michael B. Marois, Cristin Flanagan

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