The good people at Bloomberg News asked if I wanted to elaborate on a post I did about procedural justice and chapter 11 forum shopping. The resulting opinion piece is here: "Bankruptcy Venue Shopping Breaks Perceptions of Judicial Fairness." It should not be behind a paywall.

The piece builds on the procedural justice literature about the noninstrumentalist concerns that drive perceived legitimacy of a legal system. It is easy to find a court decision legitimate when the court rules in your favor, or as a nonparty, you agree with it. For the legal system to work, parties have to respect decisions they don't agree with. Fortunately, social scientists have told us a lot about what drives perceptions of judicial legitimacy.

Spoiler alert: picking your own judge ain't it.

The FTX bankruptcy plan proposed today has gotten a lot of attention for the fact that it is promising to pay (over time) 118% of allowed customer claims. That's not quite as great as it sounds given that customer claims were locked in at their November 2022 values. Getting 118% isn't nearly as good as getting 300% (roughly the appreciation of Bitcoin since November 2022), but it's a heckuva lot better than getting the typical "cents on the dollar" bankruptcy treatment.

But there is something here that could be controversial:  the payment of post-petition interest on customer claims at a 9% "Consensus Rate." (The 118% is with two years of 9% interest.)

(more…)

Johnson & Johnson is preparing to take a third crack at addressing its toxic talc liabilities through bankruptcy in what we might call a "Texas Three-Step". And as with J&J's previous attempts, this one has some pretty glaring issues.Yet because of J&J's ability to forum shop and even picks its judge, it will likely be able to sidestep adjudication of many of the issues and avoid appellate review entirely. Instead, J&J's strategy is going to be to ram a seriously deficient plan through with the assistance of its hand-picked judge and then avoid appellate review through the equitable mootness doctrine. It's a strategy that might work. And if it does, it is a sign that the bankruptcy system is seriously broken.

(more…)

A recent, disturbing, and truly scandalous development in Chapter 11 mass tort cases is the phenomenon of debtors trying to stuff the ballot box with "junk" claims, that is claims that should by all lights be disallowed as unenforceable and therefore ineligible to vote on a plan. Debtors have recognized that they can strategically co-opt part of the mass tort bar to push through plans:  debtors offer small payments to claims that ought to be disallowed (and thus to the attorneys representing those claims on contingency fee) in order to get those claimants to vote in favor of a plan that forces a low-ball payment on the legitimate tort claimants. While debtors have to pay a bit for the "junk" claims' votes, they come out ahead in the end because by flooding the electorate with the junk claims, they can overwhelm the voting power of the legitimate claims and stick the legitimate claimants with a much lower payment than otherwise.  

(more…)

Law360 has a nice Q&A with Chief Judge Michael Kaplan of the New Jersey bankruptcy court. The interviewer rightly asked Judge Kaplan why New Jersey has recently become a Chapter 11 filing destination. Judge Kaplan's answer is telling:  

What do filers look for? They look for predictability, and we have a body of work that you can look at to get a sense, whether it be third-party releases, whether it be bidding procedures, whether it be outlook on examiners or mediation. I believe we have really gained exposure, probably initially with the LTL Management case. Not my work on that case as much as our clerk's office, our chambers, how we can handle a deluge of filings and the multiple committees and the scheduling.

Judge Kaplan is partially right here. Filers are absolutely looking for predictability. But that's only half of the story. They are looking for a venue that is predictably favorable. If you're shopping around for third-party releases, you aren't going to file in the 5th Circuit, where you can predictably not get one. As I've explained at length, the predictability trope that is sometimes used to defend venue shopping is really about predictability giving the debtor the outcomes it wants on major issues: appointment of an examiner, third-party releases, retention of right to investigate avoidance actions, etc.  And with LTL Management, particularly with his denial of the motion to dismiss in LTL 1.0 and then reluctant granting of the motion to dismiss in LTL 2.0, Judge Kaplan made clear the sort of reception large debtor firms could expect in Trenton.  One might even say it's predictable. 

By sheer coincidence, the first problem I taught in my financial restructuring class today was about a bankrupt fertility clinic that is behind on its electric bill and is having trouble coming up with the funds to provide adequate assurances to the power company that it will pay its future bills: if the electricity is cut off, all the frozen zygotes and embryos will thaw and become unviable. 

I found myself wondering how this would play out in Alabama now. Suppose the debtor could not provide adequate assurances. Would the DIP/trustee or utility face some sort of liability for wrongful death if what one of my students termed "the biological material" melted?  I assume the Barton doctrine would provide some level of protection to the DIP or trustee. (I also assume the bankruptcy judge would have broad immunity for his or her official acts.) I'm not sure if the power company could even have liability, but given the potential scale of liability, it's probably not worthwhile cutting off the power, even if the risk of liability is very small.

I know that similar sorts of issues can emerge in hospital or nursing home bankruptcies, where there are patients who have to be transferred to other facilities in the event that the debtor is liquidating, but that's addressed by 11 USC 704(a)(12). Maybe an embryo that is frozen at a fertility clinic is now a "patient" at a "health care facility." Otherwise, I'm not sure what would create a duty for the trustee/DIP to preserve the embryos.