Houston becomes a magnet for successful U.S. bankruptcies

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When JC Penney filed for bankruptcy, he had a choice of federal courthouses. Dallas was just 20 miles from the retailer’s headquarters. Delaware, his legal home, offered a reputable set of experienced judges. The same was true for New York City, where many of the law firms involved in his case were based.

Instead, JCPenney filed his paperwork hundreds of miles away in Corpus Christi, Texas. Due to the local rules of that place on large cases, the petition was transferred to the Gulf Coast to the Houston courtroom of Judge David Jones.

Jones walked out of regular court hours to oversee the “first day” bankruptcy hearing on a Saturday. Thanks to his schedule flexibility, he was able to approve orders, including one that avoided suspending the pay of thousands of JC Penney employees. The company emerged from bankruptcy at the end of 2020 after Jones managed a complex showdown between hedge funds and bidders for the company.

Houston has become a preferred destination for businesses seeking Chapter 11 protection, a feature of a US system that gives businesses the freedom to file in virtually any federal Georgia bankruptcy laws location they choose.

Proponents argue that the system encouraged a group of expert lawyers to sort through the complicated corporate structures and messy fights of plaintiffs. Some scholars derisively call it “forum shopping”. Now lawmakers are pursuing bills to end the practice.

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Last year, Houston received a third of U.S. bankruptcy filings where debtor debts exceeded $500 million, matching the long-established court in Wilmington, Delaware, according to data compiled by the Financial Times from BankruptcyData.com. Texas’ largest city in 2020 handled 41 cases, more than any other place in America, including major cases such as JC Penney, Neiman Marcus and Chesapeake Energy.

Other unexpected courts have also drawn cases: Richmond, Va., has become a hub for retail bankruptcies, including Toys R Us and J Crew. A subsidiary of Johnson & Johnson that makes talc products and faced product liability lawsuits late last year picked the Western District of North Carolina, where five other cases of “mass civil liability” were underway. J&J’s headquarters are in New Jersey.

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Purdue Pharma, after choosing a court in Westchester County, New York, was virtually certain the judge oversaw its 2019 bankruptcy, a case that determined how much the founding Sackler family would pay to settle potential liability for opioid deaths that the drug company had manufactured.

Proponents of the US system say it saves both business and jobs.

But critics say the laxity in the court selection process is ripe for abuse and weakens the legitimacy of the Chapter 11 bankruptcy process. companies, knowing that the lawyers advise their clients on the choice of location.

“The judge is the star and ringmaster of a mega-deal, which makes presiding over such a bankruptcy very attractive to certain figures,” said Adam Levitin, a former corporate lawyer and law professor at Georgetown University.

US bankruptcy law is an incentive to shop around, critics say, as policies on issues such as lease termination and liability protections may vary by location.

When a judge in the U.S. District of New York ruled to overturn Purdue Pharma’s bankruptcy settlement last month, she wrote that the liability releases the Sackler family received in return for a $4. $3 billion to a settlement with opioid victims shouldn’t “be dependent on where a bankruptcy filing is filed.”

Before the gravitation to Houston, the so-called “mega bankruptcies” were concentrated in New York and Delaware. Both of these locations emerged in the 1980s and 1990s not because of proximity to corporate headquarters. On the contrary, a high concentration of lawyers attracted cases there, and then more judges.

Judges can play a key role in contested bankruptcies. They are free to choose a restructuring plan proposed by the company. They can allow aggrieved creditors to make an alternative proposal. Judges also decide appropriate fees for lawyers, bankers and other professionals, which can run into the hundreds of millions of dollars.

Jones, the Houston bankruptcy judge, dismissed the idea that his courthouse had become a magnet for big cases because his judges favored debtors.

In an interview with the Financial Times, he said he and fellow Houston-based bankruptcy judge Marvin Isgur became popular in part because they were both financial and business experts, which allowed them to manage disputes that involved complex balance sheet restructurings. In addition, the Houston court had made efforts to be efficient, in particular by having court personnel available at night and on weekends.

“I don’t like to see my name in the newspaper. The goal was really to create a pitch that we could all be proud of,” Jones said. “I work very hard every day. My philosophy is that the case should never be about the judge. The case should relate to the constituents in order to effect the correct transaction.

Lawyers say familiarity has value.

“My clients look to us for our advice and experience with particular judges and courts. Like, they want to know that I saw this judge deal with a case like this,” said Madlyn Primoff, a partner at law firm Freshfields.

“What I always like is when you have an experienced bench that approaches things very honestly. I could advise my client on reasonable expectations. I would prefer that to being sent to a jurisdiction I don’t know not.

As an alternative, some scholars and lawyers have proposed a specialized national bankruptcy court where seasoned judges would be available to hear major cases, ending venue shopping.

Lawmakers also recently introduced legislation to reform the bankruptcy process. A Invoice sponsored by US Senators John Cornyn, a Republican from Texas, and Elizabeth Warren, a Democrat from Massachusetts, would force companies to file bankruptcy petitions near their core businesses.

Another bill would ban shields from responsibility for parties accused of wrongdoing in failing companies, while a third targets alleged abuses of failing private equity-backed companies.

There are signs that the judiciary is feeling the heat. The North Carolina judge who took over the Johnson & Johnson talc case transferred it to New Jersey. The Virginia court, where only two judges have heard large cases, recently began randomizing assignments among eight judges.

The Southern District of New York, where Purdue Pharma automatically got Judge Robert Drain in Westchester County, just agreed to randomly select from among its nine bankruptcy judges.

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