HOUSTON - When Enron filed for bankruptcy, the troubled energy firm, like many major Texas companies before and after, opted for an east coast venue, rather than litigate in a Houston federal courtroom only a few blocks away.
That trend may be coming to an end, as one law professor says Texas’ Southern District has devised a way to hang on to its cases, enacting a work order to ensure all “complex” Chapter 11 causes are expedited by going to one of two federal judges, Chief Bankruptcy Judge David Jones and Judge Marvin Isgur.
Lynn LoPucki, a UCLA law professor, says landing and keeping a “complex” case, the term used to describe big corporate cases, in their court is a matter of prestige for federal bankruptcy judges, a desire to be the judge who decides General Motors and not some common consumer Chapter 13 case.
“This is court competition run amok – it’s not a natural or normal condition,” said LoPucki. “The judges are coming from the local bar. It’s a social thing and it’s a threat. No judge wants to be the judge who drove the cases away -- the judge can lose the job. And the judge doesn’t want to be an unpopular judge anyways.”
Federal bankruptcy judges do not have a lifetime appointment. Every 14 years lawyers who practice in the judge’s jurisdiction are surveyed on how well the judge is doing, which can put pressure on the judge, LoPucki says.
With no certainty on which judge would hear the case, Houston bankruptcy cases were disappearing because the individuals who forum shop cases didn’t want them there, he added.
In recent months, however, several energy companies, such as Linn Energy and Goodrich Petroleum, have selected the Southern District of Texas instead of filing in Delaware or New York, which handle the vast majority of Chapter 11 corporate cases.
In fact, since 2007 Houston has received only 2.6 percent of those cases, while Wilmington (Delaware) netted 46.3 percent and New York captured nearly 20 percent of complex Chapter 11 cases filed, according to data supplied by a UCLA database.
When it comes to certain fields of law, LoPucki says courts are in competition with one another, bankruptcy and patent litigation being the two most prominent.
For example, Delaware, until recently, use to be king in patent litigation but now Texas’ Eastern District reigns supreme as the venue of choice for patent suits.
“The importance of competition is it gives tremendous power to whomever chooses the court,” LoPucki said. “The problem is the courts want these cases. The problem is the things they’re willing to do to get them – those things include allowing high fees and favoring the parties that give them cases.”
When asked what would motivate a party to forum shop a specific venue, LoPucki said it’s more favorable to go where “courts are willing to bend the law” in order to bring in cases.
“The extraordinary thing is not Houston keeping its cases, but that case placers choose to travel thousands of miles to get a different court,” he added. “They’re getting something from that court.”
According to LoPucki, “case placers” are the individuals driving forum shopping and consist of the lenders financing the bankrupt company’s debt and the lawyers who represent them.
Just because a company is based in Houston doesn’t mean it has to file in Houston.
LoPucki says corporations can set up shell companies in the venue of its choosing for the sole purpose of filing or transferring the case to that particular district.
“The competition is for the bigger cases – the courts don’t want the little cases,” LoPucki said. “It’s not the ‘complexity’ of it – it’s the size of it. The fees run proportionately to the size of the company.
“And so when a court says it has special rules for complex cases, they’re saying if you’re a big case you can come here instead of having a random draw of judges. And which judge you get is a very important goal in shopping.”
“So what Houston has done is to reduce the number of judges to two. And those two judges have probably been selected as judges whom case placers will want to get.”
Houston’s two complex bankruptcy judges, Jones and Isgur, did not respond to requests for comment.
Unlike arbitration, where the two sides select an arbitrator they agree upon, only one side is choosing when a case is forum shopped, says LoPucki.
“That doesn’t show that you are the best – it shows you are the most favorable to one side, which basically shows that you are the worst,” LoPucki said.
A May 11 Reuters article cited speed and lower fees as a reason why six energy companies filed in Houston since March.
LoPucki said debtors look for speed for various reasons.
“For one, they might want to do their cases quickly so their opponents can’t react,” he said. “They might want to do the … case quickly so they expend lower fees.”
The current Chapter 11 complex cases in Jones’ court include: HII Technology, Buccaneer Resources, Goldking Holdings, Luca International Group, Sherwin Pipeline, ESP Petrochemicals, Tristream East Texas and Energy XXI, court records show.
Isgur’s complex hearing schedule shows the following cases on the docket: RAAM Global Energy, Black Elk Energy Offshore Operation, Haverhill Chemicals, Petroleum Products and Services, Southcross Holdings, Juniper GTL, Goodrich Petroleum and Ultra Petroleum.
LoPucki founded the UCLA-LoPucki Bankruptcy Research Database in 1994 and continues to direct it. The database collects data on large, public company bankruptcies and disseminates it to bankruptcy researchers throughout the world.