Bankruptcy Venue Shopping Breaks Perceptions of Judicial Fairness

I once doubted claims that Chapter 11 forum shopping produced some benefits, but evidence convinced me otherwise. Yet I still think we need to change the rules.

A rich social-science literature shows people care who wins or loses a case, but they also care a whole lot about how the court arrived at its decision. People who believe a process was fair are much more likely to view a decision they don’t like as legitimate and comply with it.

This literature distinguishes distributive justice and procedural justice. The former is about instrumentalist concerns over outcomes, and the latter is about noninstrumental concerns regarding the way the legal system arrives at those outcomes.

For any court process to be seen as fair, people must see the judge as unbiased and believe the judge based the decision only on the evidence presented. Parties also should have had an opportunity to make their arguments. And the judge must have considered those arguments even if they ultimately rule the other way.

Most important, people must perceive the judge as motivated only by a desire to be fair and not by motives extraneous to the issues at hand.

Chapter 11 forum shopping violates most of these criteria. Some bankruptcy judges have openly admitted wanting to attract large Chapter 11 cases. Procedural justice is about perception. It is telling that most other countries don’t tolerate forum shopping the way the US legal system does.

Given the ease with which it can be manufactured, Chapter 11 today is venue by declaration. And for particularly large companies, venue rules have become functionally nonexistent

Corporations have cited law firm retainers, office leases, or PO boxes as their “principal assets” in a preferred venue. These things are “assets” only in a legalistic sense. They have no tangible form and can exist wherever we might want to imagine them to be, especially if that place is convenient for venue. These sorts of assets rarely have any connection to the purpose of the venue statute, which was to put Chapter 11s where the debtor conducted its business.

None of those observations are intended to criticize the lawyers involved. They developed creative legal strategies, within boundaries of reasonable argumentation, to advance their clients’ interests. That is their job, and I would expect nothing less if I were their client.

It was the courts’ job to consider the bigger picture to say “no.” They abdicated their responsibility for reasons that are well-rehearsed: national fame, professional accolades, and appreciation of the local bankruptcy bar. Even if Congress meant for courts to read the bankruptcy venue statute as flexibly as they have, which I doubt, the broad venue transfer statute gives courts ample authority to resist venue abuse.

The primary defense of the state of affairs is that it works better than the alternatives. Some say some judges are more expert in large corporate cases, although judges of varying experience hear many complex disputes in areas such as antitrust or securities regulation. Some say the advantage is “predictable” outcomes, although whether predictable is better largely depends on which party you ask. Others say concentrating cases in a few jurisdictions results in lower costs, although research has linked higher fees to forum-shopped Chapter 11 cases.

The legal system’s overriding goal isn’t efficiency. In a democratic society, the judicial system needs the citizenry to have faith in the courts’ legitimacy. When people perceive a legal system to have legitimacy, they are more likely to comply with its commands. Fortunately, we know a lot about what determines perceptions of legal legitimacy.

Even if judges do consider only the evidence presented in a case, the battle for big cases gives the perception that external considerations are driving decisions. Local rules that funnel all cases to one or two judges exacerbate the problem. The perception that a party has picked its judge especially violates the criteria for procedural justice.

When it removes cases far away from the locus of the corporate activity, forum shopping hinders people’s ability to appear in court. Online hearings help, but they aren’t a full substitute for being in person. Even as contentious as its Chapter 11 was, PG&E Corp. was able to get its bankruptcy plan confirmed by giving its fire victims a sense they were being heard through a series of face-to-face meetings. It helped that the dispute wasn’t being heard in a distant courtroom.

Bankruptcy is about the hard fact that there isn’t enough money to go around. It breaks promises once made by the debtor, and promise-breaking inevitably carries a sense of injustice. Our moral instincts are against what bankruptcy courts must do every day.

The bankruptcy system has also become increasingly public-facing, with cases such as Johnson & Johnson, Alex Jones/Infowars, the National Rifle Association, Purdue Pharma, and numerous Catholic dioceses. If we expect the public to receive the bankruptcy system’s decisions as legitimate, we need to fix the Chapter 11 venue rules.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Robert M. Lawless is Max L. Rowe professor of law and co-director of the program on law, behavior, and social science at the University of Illinois College of Law.

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