A push to prevent large corporations’ bankruptcy venue shopping is gaining momentum in the wake of public outcry over Purdue Pharma LP’s Chapter 11 case.
The U.S. Bankruptcy Court for the Southern District of New York—which heard the OxyContin manufacturer’s case—last month issued a new rule to assign its judges randomly to bankruptcy filings, an effort aimed at curbing forum shopping. It follows introduction of federal legislation on bankruptcy forum shopping that gained the backing of 43 state attorneys general, and a House Judiciary Committee hearing earlier in the year.
Bankruptcy law gives corporate debtors wide latitude to pick the court where they file Chapter 11, regardless of their headquarters location. The issue emerged in several high-profile bankruptcies, including Johnson & Johnson’s bankrupt unit LTL Management LLC, the National Rifle Association, Boy Scouts of America, J. Crew Group Inc., and Mallinckrodt Plc.
Forum shopping has been controversial for years. Proponents say opting for judges with experience in certain areas leads to smoother proceedings. Critics argue that it allows large companies to benefit themselves at the expense of creditors, workers, and the public.
As the practice has become more pervasive, critics’ cries have gotten louder, resulting in more proposals to combat it. And debtors who had been focused on New York and other former first-choice destinations could start to consider other options.
Under the New York rule, “mega” Chapter 11 cases worth at least $100 million will be randomly assigned to one of the district’s judges regardless of the courthouse where the initial filing occurs. Purdue filed Chapter 11 in the Southern District of New York’s White Plains courthouse in an apparent move to have Judge Robert Drain oversee the case.
“I think there is a growing realization that it’s a problem when debtors are able to pick which judge they get,” said Georgetown Law professor Adam Levitin.
New York’s rule is a good example of what can be done locally to reduce forum shopping, said Laura Napoli Coordes, a professor at Arizona State University’s Sandra Day O’Connor College of Law. But while the rule suggests momentum for change, forum shopping will continue without national attention, she said.
“Wealthy corporations shouldn’t be able to run across the country to find a favorable court to file bankruptcy,” Sen. Elizabeth Warren (D-Mass.), one of the Senate bill’s lead sponsors, said in a statement provided to Bloomberg Law.
Warren, along with Sen. John Cornyn (R-Texas), introduced the Bankruptcy Venue Reform Act (S. 2827), which would require bankruptcy filings where a company has its principal place of business or principal assets.
The issue must be addressed nationwide, Warren said.
The New York court’s rule “signals an acknowledgment of the problem,” Warren said. “These days most big chapter 11 cases are being filed in jurisdictions where this rule does not exist.”
Purdue’s bankruptcy plan ruffled feathers by blocking opioid-related lawsuits against the drugmaker’s owners, the Sackler family, even though their personal assets weren’t within creditors’ reach. Drain’s order confirming the plan is currently being heard on appeal.
Critics argue the practice allows distressed companies to file bankruptcy cases in courts with judges known for approving certain pro-debtor requests, such as liability releases for non-bankrupt third parties even if affected creditors don’t affirmatively vote in favor of them.
Allowing such practices hurts workers, creditors, and consumers, Warren said.
Others defend the practice as a way for bankrupt companies to ensure predictability. It also ensures that potentially complex cases wind up before judges with the right experience and temperament.
But even some bankruptcy judges have suggested that an overhaul is needed, if only to counter the negative optics of the practice.
“The public needs to have confidence that what we’re doing is being done for all the right reasons,” Judge Marvin Isgur of the U.S. Bankruptcy Court for the Southern District of Texas said last month.
“And even though I’m convinced that we are all doing that, I think we do need venue reform,” he said during an American Bankruptcy Institute event.
There needs to be “a 21st century post-pandemic conversation around venue,” Bankruptcy Judge Shelley Chapman of the Southern District of New York said at the same event.
Cecelia G. Morris, chief judge of the Southern District of New York’s bankruptcy court, has said the new rule is aimed at better balancing new large bankruptcy cases among judges within the district amid a lull in case filings nationwide.
But the rule change is largely a reaction to Purdue’s bankruptcy, said Lynn LoPucki, a bankruptcy professor at the UCLA School of Law.
The case attracted negative publicity for the Southern District of New York and brought the forum shopping issue and judges’ competition for big cases to the fore, he said.
In New York, bankrupt companies will no longer know ahead of time which judge they will get. The new policy could mean New York’s pull as a major bankruptcy venue will diminish, LoPucki said.
The rule is a sign that the court is withdrawing from competition for high-profile bankruptcies in the wake of greater public scrutiny of such cases.
“I think that the chief judge in the Southern District of New York has seen that there’s a train coming and is wisely getting out of the way,” he said.
Whether the rule itself has a measurable impact depends on debtors’ experience with individual judges, comfort with uncertainty, and the law in the district as compared to others, said Kenneth Rosen, a bankruptcy attorney with Lowenstein Sandler LLP.
There’s already growing attraction to venues like Virginia, Texas, and North Carolina, Rosen said. The question is whether debtors’ attorneys will now prefer one of the other magnet districts, he said.
In fact, other courts—like the Southern District of Texas—have instituted rules to increase their attractiveness for large Chapter 11 cases, LoPucki said.
“When one court steps down, another court takes over,” he said. “And as long as the law permits the courts to compete, the courts are going to compete.”
How long the New York-based bankruptcy court may stick with the new rule is also an open question, said Todd Zywicki, a professor at George Mason University’s Antonin Scalia School of Law.
The U.S. Bankruptcy Court for the District of Delaware attempted a similar move in the late 1990s, he said. But the practice stopped.
The New York rule is “obviously also a reflection of the fact that somebody, somewhere is getting political pressure with respect to these cases,” Zywicki said.
Whether or not other districts will follow suit, New York’s rule change sets an example for others to consider as venue shopping has become “increasingly pervasive,” Coordes said.