Texas Bankruptcy Court Sticks to Judge Practice Others Banished

One of the most popular bankruptcy courts in the US still employs a case assignment system that others have cut off, despite growing complaints the method provides unfair advantages to bankrupt companies.

The US Bankruptcy Court for the Southern District of Texas assigns large, complex Chapter 11 cases to one of two judges. The practice, which gives top bankruptcy law firms predictability about who will be handling a case, has led to accusations the court encourages, and rewards, venue shopping—accusations only growing louder after one of the two judges on the panel was forced to resign under an ethics scandal.

“Judge shopping has already damaged public confidence in the fairness of the judicial system, particularly given the ethics scandal unfolding in the Southern District of Texas, and it is time for that to be restored,” professors and other bankruptcy experts wrote to the federal judiciary.

The issue has been in the spotlight after the government last month alleged California-based drug developer Sorrento Therapeutics blatantly manufactured a connection to Houston so it could file its bankruptcy in the Texas court.

But changing the system is complicated. Under bankruptcy law, the judge assigned to the case is the one who decides whether the company’s venue choice is appropriate.

For judges, handling the biggest cases can bring prestige, influence, and more business for the local bar that the judge likely came up through. Turning cases away over venue concerns could threaten their popularity.

In the case of Sorrento, the judge overseeing the bankruptcy rejected the government’s complaints Monday. His decision narrowly focused on the timeliness of the complaint, offering no clear resolution to the broader dispute over venue shopping at Houston’s two-judge bankruptcy panel.

“His decision only serves to foster further distrust of the federal judiciary’s willingness to impartially and fairly dispense justice to all,” said Bruce Markell, a Northwestern University professor and former bankruptcy judge.

Now, advocates have called on the Southern District of Texas to follow the lead of the Eastern District of Virginia and Southern District of New York, which have started randomly assigning cases to a large panel of judges, even as the change dented the courts’ popularity among law firms deciding where to file their clients’ cases.

“The rules in Houston with the complex panel are the exception, not the norm,” Arnold & Porter restructuring partner Tyler Nurnberg said.

District Court Death Knell

Some debate whether venue-shopping is even a problem, with debtors’ attorneys often arguing the best judges should be tapped to handle the hardest cases. Proponents of venue flexibility say it lets companies file in courts that allow them to maximize the value they can distribute to creditors.

But critics of the two-judge bankruptcy court panel in Texas say it encourages egregious venue-shopping through predictable judge assignments, allowing companies and their lawyers to pick judges that will give them the most favorable outcomes and skewing cases against creditors.

The question is how to change it. Outside of bankruptcy courts, the Judicial Conference of the US, which oversees federal courts, on Tuesday changed its policies to limit “the ability of litigants to effectively choose judges” when filing a lawsuit in order to secure more favorable rulings.

Random case assignment “promotes the impartiality of proceedings and bolsters public confidence in the federal Judiciary,” Judge Robert J. Conrad, Jr., secretary of the conference, said in a release.

In the Eastern District of Virginia, it was the local district court that decided to intervene to curb a two-judge panel in Richmond. The bankruptcy court there was becoming more popular, with Toys “R” Us and J. Crew filing there between 2017 and 2020.

But Judge David J. Novak of the US District Court for the Eastern District of Virginia excoriated the panel in a 2022 opinion for too eagerly handing out litigation releases to non-bankrupt people and entities, drawing more debtors to Richmond.

“The practice of regularly approving third-party releases and the related concerns about forum shopping call into question public confidence in the manner that these cases are being handled by the bankruptcy court in the Richmond division,” Novak wrote.

Novak went further, making the court less attractive to out-of-town business by tying fees in one case to market rates in Richmond, rather than the higher rates charged by attorneys coming in from larger markets. His order was quickly followed by a bankruptcy court rule change to randomly assign large cases, and resulted in a steep decline in major Chapter 11 cases in the district.

“There was a lot of pressure from that on the Eastern District of Virginia, and honestly that has probably been a cautionary tale for Texas” about not curbing new filings, said Robert Miller, a bankruptcy professor at the University of South Dakota.

Purdue Prompts Changes

Outside pressure also helped change the situation in the Southern District of New York. When Purdue Pharma filed Chapter 11 in 2019 in White Plains, New York, it ensured its case would be assigned to Judge Robert Drain, the only judge in that courthouse who heard corporate bankruptcies.

The move drew scrutiny from Congress, and a public outcry that Purdue hand-picked its judge. The Southern District of New York bankruptcy court, which also has locations in Manhattan and Poughkeepsie, in 2021 began randomly assigning large bankruptcies to judges, regardless of which courthouse the case was filed in.

At the time, Chief Judge Cecelia G. Morris said the change was related to nationwide trends. But others see it as a direct response to the criticism the court received.

“That’s a natural reaction by a court, which is very concerned about ethics and any appearance of impropriety,” said Rachel Ehrlich Albanese, co-chair of DLA Piper’s restructuring practice.

‘Perception’ of Fairness

The same outside pressure hasn’t prompted changes in Texas.

Judge Marvin Isgur, one of the founding members of the Southern District of Texas’ two-judge panel, has worried about judge-shopping in the past. Debtors at one time engaged in “divisional forum-shopping,” filing at specific courthouses within the district to steer themselves to a particular judge, Isgur said.

“We wanted this to be a situation where people came in, they took a draw, it’s a two-judge draw, but it’s still two,” Isgur said on an American Bankruptcy Institute podcast in 2022. “And so we changed it to where it doesn’t matter what division you pick. You can’t hand-pick your judge under our rules. And it’s important. I want the perception, not just the reality of fairness.”

Isgur’s chambers declined an interview request for this story. His podcast comments appear to be related to a 2018 rule that said any complex Chapter 11 case “will be assigned on a consolidated docket across all divisions within the Southern District of Texas,” and randomly assigned to one of the two complex case judges.

But that change still isn’t as broad as the random assignments adopted by other courts. And the situation didn’t change after David R. Jones, one of the two judges on the complex case panel, resigned after revelations his live-in girlfriend worked for a bankruptcy firm with business before his court.

“The SDTX bankruptcy court is ‘selling’ its venue, and part of its unique selling proposition is a guaranty of case assignment to one of two judges who want to attract mega cases and understand the need to ‘sell’ the venue to debtors,” Georgetown bankruptcy professor Adam Levitin has written. Levitin pointed to comments Jones made saying he was concerned about developing the next generation of bankruptcy lawyers in Texas.

The exact motivations for the formation of Texas’s panel remain an open question. But they might not be that relevant, said Boston College professor Edith Hotchkiss.

“Did they set out to increase their own business? I don’t know,” Hotchkiss said. “Did they increase their business? Absolutely.”

“The end result is what you have to, I think, be concerned about,” she added.