The Judge Behind the Curtain
by | posted in: Bankruptcy Administration and Jurisdiction, Bankruptcy Roundtable Updates | 0

By Melissa B. Jacoby (Graham Kenan Professor of Law – University of North Carolina School of Law)

Melissa Jacoby

After a district court halted OxyContin maker and hawker Purdue Pharma’s exit from bankruptcy by finding its restructuring plan unlawful in late 2021, the yellow brick road of this high-profile case forked in two. One path is traditional: more appellate process. The United States Court of Appeals for the Second Circuit agreed to review Purdue’s restructuring plan on a fast track and oral argument is expected to be scheduled for late April 2022. The second path reflects a popular development in the federal judiciary: the presiding bankruptcy judge appointed another sitting judge as a mediator to oversee negotiations between representatives of the Sackler family and states whose appeal had prevailed in the district court. According to the judicial mediator’s most recent report, the Sackler family has offered more money to resolve the dispute; many, though not all, of the objecting states are on board to settle. Expectations that a deal can be brokered run high. 

Purdue Pharma is not the only big restructuring in which a judicial mediator has been tasked with managing a high-stakes matter. As another recent example, six judges from different federal courts served as mediators in the Puerto Rico bankruptcy for almost five years: from June 23, 2017 through January 22, 2022. 

The use of sitting judges for this behind-the-scenes work is the topic of my forthcoming article. Why are judges mediating other judges’ cases, particularly when Congress encouraged use of private neutrals for alternative dispute resolution? Are traditional judicial accountability measures effective when judicial mediators work with parties and lawyers in a process that lacks a citable record? Finding that the standard accountability measures are an awkward fit for judicial mediation, the article calls on the Judicial Conference of the United States, the policy-making body for the federal judiciary, to take steps to maximize the benefits and minimize the risks of these practices. Whatever your own experiences have been with bankruptcy-related mediations, I hope you find this project useful. 

The full article is available here.

Chapter 11’s Descent into Lawlessness
by | posted in: Bankruptcy, Bankruptcy Administration and Jurisdiction, Bankruptcy Roundtable Updates, Jurisprudence, Workouts and Pre-Packs | 0

By Lynn M. LoPucki (Security Pacific Bank Distinguished Professor of Law, UCLA School of Law)

Lynn M. LoPucki

The bankruptcy courts that compete for big cases frequently ignore the Bankruptcy Code and Rules. This Article documents that lawlessness through a detailed examination of the court file in Belk, Inc.—a one-day Chapter 11—and a series of empirical studies.

Chapter 11’s lawlessness reached a new extreme in Belk. Belk filed in Houston on the evening of February 23, 2021. The court confirmed the plan at ten o’clock the next morning, and the parties consummated the plan that same afternoon. Almost none of Chapter 11’s procedural requirements were met. The court did not give creditors notice of the disclosure statement or plan confirmation hearings until after those hearings were held. Belk filed no list of creditors’ names and addresses, no schedules, no statement of financial affairs, and no monthly operating reports.  No creditors’ committee was appointed, no meeting of creditors was held, and none of the professionals filed fee applications. The ad hoc groups that negotiated the plan failed to file Rule 2019 disclosures. Because no schedules were filed, no proofs of claim were deemed filed. Only eighteen of Belk’s ninety-thousand creditors filed proofs of claim, and Belk apparently just made distributions to whomever Belk considered worthy. 

The procedural failures in Belk are just the tip of the iceberg.  The competing courts are ignoring impermissible retention bonuses, refusing to appoint mandatory examiners, failing to monitor venue or transfer cases, granting every request to reject collective bargaining agreements, and providing debtors with critical-vendor slush funds. The article is available here. 

Estimating the Need for Additional Bankruptcy Judges in Light of the COVID-19 Pandemic
by | posted in: Bankruptcy Administration and Jurisdiction, Bankruptcy Reform, Bankruptcy Roundtable Updates | 0

By Benjamin Iverson (BYU Marriott School of Business), Jared A. Ellias (University of California, Hastings College of the Law), and Mark Roe (Harvard Law School)

Ben Iverson
Jared A. Ellias
Mark Roe

We recently estimated the bankruptcy system’s ability to absorb an anticipated surge of financial distress among American consumers, businesses, and municipalities as a result of COVID-19.

An increase in the unemployment rate has historically been a leading indicator of the volume of bankruptcy filings that occur months later.  If prior trends repeat this time, the May 2020 unemployment rate of 13.3% will lead to a substantial increase in all types of bankruptcy filings.  Mitigation, governmental assistance, the unique features of the COVID-19 pandemic, and judicial triage should reduce the potential volume of bankruptcies to some extent, or make it less difficult to handle, and it is plausible that the impact of the recent unemployment spike will be smaller than history would otherwise predict. We hope this will be so.  Yet, even assuming that the worst-case scenario could be averted, our analysis suggests substantial, temporary investments in the bankruptcy system may be needed.

Our model assumes that Congress would like to have enough bankruptcy judges such that the average judge would not be pressed to work more than was the case during the last bankruptcy peak in 2010, when the bankruptcy system was pressured and the public caseload figures indicate that judges worked 50 hour weeks on average.

To keep the judiciary’s workload at 2010 levels, we project that, in the worst-case scenario, the bankruptcy system could need as many as 246 temporary judges, a very large number. But even in our most optimistic model, the bankruptcy system will still need 50 additional temporary bankruptcy judgeships, as well as the continuation of all current temporary judgeships.

Our memorandum’s conclusions were endorsed by an interdisciplinary group of academics and forwarded to Congress.

Practice Makes Perfect: Judge Experience and Bankruptcy Outcomes
by | posted in: Bankruptcy Administration and Jurisdiction, Bankruptcy Reform | 0

By Benjamin Charles Iverson (Brigham Young University), Joshua Madsen (University of Minnesota, Twin Cities, Carlson School of Management), Wei Wang (Queen’s School of Business), and Qiping Xu (University of Notre Dame, Department of Finance).

Prior studies document the influence of bankruptcy judges’ discretion on restructuring outcomes, yet we know little about how judicial experience affects the bankruptcy process. We study how the accumulation of job-specific human capital influences judges’ efficiency in handling large corporate bankruptcy filings, using 1,310 Chapter 11 filings by large U.S. public firms overseen by 309 unique bankruptcy judges in 75 bankruptcy courts between 1980 and 2012.

Using random assignment of judges to cases for empirical identification, we show that cases assigned to a judge with twice as much time on the bench realize a 5.5% decrease in time spent in reorganization. This reduced time in court translates into savings of approximately $2 million in legal fees alone for a typical case in our sample. Judges’ time on the bench is associated with higher probability of emergence but not higher recidivism. The combined evidence suggests that more experienced judges are overall more efficient. We also find that it takes up to four years for a new judge to become efficient and that judges who see a higher volume of business filings and a greater diversity of cases by size and industry early in their tenure become efficient faster than those who don’t. We find little evidence that judges’ general experience and personal attributes consistently affect case outcomes.

Our analyses highlight a potential benefit of allowing firms to file in courts with more experienced judges. Restricting this flexibility (e.g., through the proposed Bankruptcy Venue Reform Act of 2017) may impose a cost on firms by forcing them to file in courts with less experienced judges.

The full article is available here.

The Roundtable has previously posted on potential Bankruptcy venue reforms, including a summary of the Bankruptcy Venue Reform Act of 2018 introduced by Senators John Cornyn, R-TX, and Elizabeth Warren, D-MA. For a critique of current venue rules—and a possible solution—see Prof. Lynn LoPucki, “Venue Reform Can Save Companies.” For a defense of the current system, see the Roundtable’s summary of the Wall Street Journal’s “Examiners” Panel on venue reform.

Bankruptcy Step Zero
by | posted in: Bankruptcy Administration and Jurisdiction | 0

Authors: Douglas G. Baird and Anthony J. Casey

In RadLAX Gateway Hotel, LLC v Amalgamated Bank, the Supreme Court’s statutory interpretation focuses on an emerging theme of its bankruptcy jurisprudence: the proper domain of the bankruptcy judge. While one might expect the Court to approach that question of domain as it has for administrative agencies, that is not the approach taken. This article explores the Court’s approach to bankruptcy’s domain. In doing so, we connect three principal strands of the Court’s bankruptcy jurisprudence. The first strand, embodied in Butner v United States, centers on the idea that the bankruptcy forum must vindicate nonbankruptcy rights. The second, most recently addressed in Stern v Marshall, focuses on the limits of bankruptcy judges in deciding and issuing final judgment on the issues before them. Bankruptcy judges must limit themselves to deciding issues central to the administration of the bankruptcy process. RadLAX is the continuation of a third strand that makes it plain that the Court reads ambiguous provisions of the Bankruptcy Code to narrow the range of decisions over which the bankruptcy judge may exercise her discretion — at least when the exercise of that discretion might impact nonbankruptcy rights. The resulting bankruptcy jurisprudence is in stark contrast with the Court’s approach in administrative law. This paper attempts to make sense of this state of affairs and connect it with the realities of bankruptcy practice today.

The article is available here on SSRN.