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Purdue Pharma Bankruptcy Spotlights Venue Shopping Battle (1)

July 30, 2021, 10:01 AM; Updated: Aug. 2, 2021, 3:33 PM

Purdue Pharma LP’s seeming ability to handpick its bankruptcy case judge has renewed discussions over a fight to stop large companies from forum shopping.

The issue recently has become harder to ignore, as Purdue, the National Rifle Association, the Boy Scouts of America, and other large organizations maneuver to get the court—and the judge—that they believe will most benefit them, without regard to their base of operations.

A recently introduced House bill (H.R. 4193) would require Chapter 11 proceedings to take place at the location of the debtor’s principal place of business or main assets.

“The bankruptcy system is supposed to work for everyone, but in many cases it works only for the powerful,” House Judiciary Committee Chairman Jerrold Nadler (D-N.Y.) said during a July 28 hearing on corporate abuse of bankruptcy law. “And too often it works best for big corporations and the very wealthy who have not even filed for bankruptcy.”

Judges’ predilections and where proceedings are held can have large ramifications for bankruptcy plan payouts. Once largely considered to be an esoteric legal strategy affecting deep-pocket creditors, the forum-shopping issue also has had profound effects on recent cases with large bases of working- and middle-class claimants, such as the Boy Scouts of America.

Three bankruptcy judges out of 375 heard 57% of all large public company Chapter 11 cases in 2020, David Lieberman of Webster, Chamberlain & Bean LLP said, citing research by Georgetown Law professor Adam Levitin.

The Boy Scouts, which filed in Delaware, is based in Texas. The NRA filed for bankruptcy in Texas despite being headquartered in Virginia and incorporated in New York.

“There are several high-profile cases that highlight the question in a way that’s more salient to the public,” said University of Chicago Law School professor Anthony Casey.

Distressed companies with savvy bankruptcy lawyers are steering cases to courts known for approving certain pro-debtor requests, and with little regard for the venues’ proximity to creditors, forum shopping critics say. The process also alienates employees and consumers from the restructuring process, they say.

Others defend the practice as a way to ensure predictability and a judge with the right experience. Companies benefit from having their proceedings heard in sophisticated bankruptcy jurisdictions, Casey said.

Remote hearings that became pervasive during the Covid pandemic also have stirred conversations on whether court locations matter at all.

Forum shopping also avoids undue influence from local politicians in situations where a case affects their constituencies, Casey said.

Manufacturing Jurisdiction

Nearly two decades of legislative efforts in both chambers of Congress have failed to gain much traction. Venue shopping became more pronounced after the 2008 recession pushed major companies to seek refuge in two of the busiest bankruptcy courts—the U.S. Bankruptcy Court for the Southern District of New York, and the U.S. Bankruptcy Court for the District of Delaware.

Both courts are known for efficient and predictable handling of major business reorganizations. More recently, the U.S. Bankruptcy Court for the Southern District of Texas and the U.S. Bankruptcy Court for the Eastern District of Virginia have developed similar reputations.

“You can sort of manufacture jurisdiction by making sure you have an entity in the district you want to file in,” McGuireWoods LLP attorney Douglas Foley said. “Big firms that file cases have some certainty as to which judge they’re going to get and what types of rulings they’re going to get.”

People had lots of “innocent explanations” for companies gravitating toward Delaware and Manhattan, said Lynn LoPucki, a bankruptcy scholar at UCLA School of Law.

But a recent shift of major cases to venues with only one or two judges—like Richmond, Va., Houston, and White Plains, N.Y.—has changed the debate, according to LoPucki, who manages a database of large, publicly traded companies’ bankruptcies.

Those judges “are giving the people who bring them the cases whatever they want,” he said.

White Plains Judge

Stamford, Connecticut-based Purdue filed its case in the Southern District of New York’s White Plains location, ensuring that proceedings ended up with Judge Robert Drain, the only jurist at the suburban courthouse who hears corporate bankruptcies.

The company filed bankruptcy just six months after changing the corporate address for one of its units to White Plains.

Purdue could have filed Chapter 11 in Connecticut, or even Manhattan, part of the same district as White Plains and featuring a much larger bench of experienced judges.

The company said in a statement that its White Plains entity, Purdue Pharma Inc., has been in New York state since it was incorporated in 1990. “White Plains is about 15 miles from our corporate headquarters and is the closest federal Bankruptcy courthouse,” it said.

Drain has a debtor-friendly reputation, and the company and its owners are trying to protect their assets, Lieberman said.

“It’s hard to sort of turn a blind eye and not realize what’s happening to try to get Judge Drain,” Foley said. “People file in White Plains because they know they’re going to get him.”

The OxyContin manufacturer now is on the verge of court approval for its plan to settle the legal claims of addiction victims, state governments, and municipal entities that have borne the brunt of the U.S. opioid crisis. The plan would release the controlling family—the Sacklers—from future opioid-related lawsuits in exchange for their contribution of roughly $4.2 billion to a larger settlement fund.

“I just hope that these higher profile cases will get someone’s attention,” Elissa Miller of SulmeyerKupetz said, referring to legislative activity brewing on the issue.

Changing Calculus

The House bill, if passed, could go a long way to appease venue-shopping critics and limit cases like Purdue’s.

Reps. Zoe Lofgren (D-Calif.) and Ken Buck (R-Colo.), who introduced the bill, said it will “ensure the case is heard in a court familiar with all the affected stakeholders.”

Versions of the measure have been revived at various times since the early 2000s, but has never picked up enough steam to get a floor vote.

But Purdue’s bankruptcy and the public outrage the case has generated “changed the calculus,” Lieberman said.

—With assistance from Claire Hao

(July 30 story updated to include an additional source of bankruptcy case statistics.)

To contact the reporter on this story: Alex Wolf in New York at awolf@bloomberglaw.com

To contact the editors responsible for this story: Laura D. Francis at lfrancis@bloomberglaw.com; Roger Yu at ryu@bloomberglaw.com

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