February 13, 2024 - We have written in the past about how debtors in Chapter 11 bankruptcy proceedings have frequently been able to select not only the court in which the case is filed (commonly known as “forum shopping”) but also, more recently, even the judge who would preside over their cases (commonly known as “judge shopping”). The Creditor Rights Coalition (CRC) has proposed a rule to the Committee on Rules of Practice and Procedure for federal courts (the “Rules Committee”) that would require that “mega bankruptcy cases” (cases in which a debtor has greater than $100 million of assets or liabilities) would be randomly assigned to any bankruptcy judge of the district in which the case is filed. The LSTA and many academics support the proposal.
Debtors have been able to choose their judges through two distinct avenues. The first is by selecting jurisdictions, like the Southern District of Texas (SDTX), that have set up “complex case panels” to which all mega cases in the district are assigned. The second is by filing in bankruptcy districts that have separate, geographically driven sub-divisions within each division (for example, New Jersey and, until recently, the Southern District of New York (SDNY)).
The proposed rule is a reaction to a trend in the bankruptcy world over the past few years in which the majority of mega cases were handled by a small number of judges. For example, in 2020, 55% of all large company bankruptcy cases came before a handful of judges, with 50% of those coming before Chief Judge Jones and Judge Isgur of the bankruptcy court of the SDTX. The Purdue Pharma case has caused the biggest reaction to judge shopping. The Connecticut-based company filed for bankruptcy in White Plains, New York, because the debtors knew the case would be assigned to (now-retired) Judge Robert Drain, the only judge sitting in that sub-division of the SDNY. The debtors’ reorganization hinged on obtaining approval of non-consensual “third-party releases” for the owners of Purdue and they knew that Judge Drain was receptive to approving such releases. (Judge Drain ultimately did approve the plan of reorganization and the issue of whether the non-consensual third-party releases approved in that case are permissible in bankruptcy is currently before the United States Supreme Court). In general, debtors select judges because they expect favorable treatment from those courts – a “home court advantage,” so to speak.
Interestingly, several courts have already addressed the issue of judge shopping on their own. For example, the SDNY in November 2021 revised its case assignment rules to require random assignment of mega cases irrespective of the district in which it is filed. Similarly, the Eastern District of Virginia, which for some time was a popular venue for mega cases, changed its rules to require random assignment. But not every court has been so forthcoming. In response to a request from stakeholders, the District Court overseeing the SDTX bankruptcy court refused to get rid of its complex case panel. As a result, the CRC and its partners are asking the Rules Committee to require random judge selection for mega cases in all bankruptcy courts across the nation, thus prohibiting complex case panels and requiring courts to ignore geographic divisions within their districts.
The bankruptcy rules process tends to move slowly so this process may take some time. We will continue to follow this important development.
