November 8, 2021 - by Elliot Ganz. A recent law review article by Lynne LoPucki of UCLA has brought into stark relief a controversial and contentious tactic that has fundamentally changed the practice of complex bankruptcy case resolution. In “Chapter 11’s Descent into Lawlessness” LoPucki argues that “the bankruptcy courts that compete for big cases frequently ignore the Bankruptcy Code and Rules.” Judicial competition is just the latest spin on the issue of “bankruptcy venue shopping” that has been long been debated by scholars and legislators. Venue shopping is when a debtor strategically files for bankruptcy in a jurisdiction that is only tenuously related to the location of its primary place of business. Traditionally, the favored jurisdictions were Delaware and the Southern District of New York but more recently, with the development of case assignment rules in several jurisdictions, not only have the jurisdictions changed, but the method of venue shopping has morphed as well. The strategy can now be more accurately described as “judge shopping” and the judges of choice are in Houston, TX, White Plains, NY, Richmond, VA, and Delaware. (Indeed, as we’ve noted previously, Houston has become the dominant district for mega cases and, together with Delaware and New York, presided over 84% of all big cases in 2020. Just three judges handled 57% of all public company bankruptcy filings in 2020, one of whom, David Jones of Texas, handled 39% of all such cases alone).
LoPucki uses the one-day bankruptcy of Belk, a North Carolina department store chain, as an example of the many ways in which bankruptcy courts purportedly ignore the law and rules to make themselves attractive to the “case placers”, i.e., the debtor’s managers and attorneys and the DIP lenders, that select the bankruptcy courts in which to file. He contends that the loose judge-shopping rules have led to competition among some bankruptcy courts to attract the big cases and a resulting “long descent into lawlessness as the competing courts waived one procedural requirement after another in their effort to attract cases”. LoPucki also argues that none of the bankruptcy reforms suggested by legislators or other scholars will be effective so long as the case placers get to choose the judge. What is the value of a reform, he wonders, when presiding judges simply ignore the law?
As we have written previously, bankruptcy venue laws and rules have long been targets for reformers in Congress. This year, bills have again been introduced in the House and the Senate that would limit most Chapter 11 filings to the court where a debtor’s principal place of business is located, thereby ending the venue and judge shopping. The chances that these bills pass into law this session are slim given the opposition that is likely to come from members of Congress whose constituents benefit from venue shopping as well as the general difficulty getting any bills passed in the current circumstances. We will continue to closely follow the issue and the legislation.