{"id":3363,"date":"2022-07-20T12:12:25","date_gmt":"2022-07-20T16:12:25","guid":{"rendered":"https:\/\/www2.law.temple.edu\/10q\/?p=3363"},"modified":"2022-07-20T12:12:25","modified_gmt":"2022-07-20T16:12:25","slug":"vertical-forum-shopping-in-bankruptcy","status":"publish","type":"post","link":"https:\/\/law.temple.edu\/10q\/vertical-forum-shopping-in-bankruptcy\/","title":{"rendered":"Vertical Forum Shopping in Bankruptcy"},"content":{"rendered":"

Forum shopping has long been an issue in chapter 11 reorganization, chiefly because liberal venue rules permit gamesmanship.  Section 1408<\/a> of the Judicial Code allows a corporate debtor to \u201cbootstrap\u201d into the bankruptcy court of any district where at least one entity in the group was formed.  If a forum is chosen \u201cstrategically,\u201d Professors Lynn LoPucki<\/a> and Bill Whitford<\/a> first warned (in 1991), \u201cthe choice can have an important effect on the distribution of the losses emanating from a bankruptcy reorganization.\u201d<\/p>\n

They were describing what may be called \u201chorizontal\u201d forum shopping:  picking among the nation\u2019s roughly 200 bankruptcy panels to find the one the debtor considers best for its situation.  Cases such as LTL Management <\/a><\/em>and Purdue Pharma <\/a><\/em>suggest there is another kind to think about, a variation on what proceduralists call \u201cvertical\u201d forum shopping.<\/p>\n

Vertical forum shopping typically concerns competition between state and federal courts, and the rule of decision they apply (i.e., Erie v. Tompkins<\/a><\/em>).  Bankruptcy has a similar state-federal dynamic, but also presents the potential for broader, and more problematic, competitions.<\/p>\n

LTL <\/em>involves the chapter 11 reorganization of Johnson & Johnson\u2019s tort-feasing talc subsidiary.  The debtor had been formed shortly before bankruptcy in a controversial \u201cdivisive merger,\u201d which many viewed as little more than a fancied-up fraudulent transfer.  Talc plaintiffs moved to dismiss the case on grounds that it was not commenced in good faith.<\/p>\n

In a thorough and thoughtful opinion, U.S. Bankruptcy Judge Michael Kaplan denied the motion because he believed the economic benefits of reorganization appeared to outweigh alternatives.  But, the motion to dismiss also raised \u201ca far more significant issue: which judicial system\u2014the state\/federal court trial system,\u201d or chapter 11 \u201cserves best the interests of th[e] bankruptcy estate,<\/em> comprised primarily of present and future tort claimants with serious financial and physical injuries.\u201d<\/p>\n

This question- which system?- is bankruptcy\u2019s version of vertical forum shopping. On one hand, Judge Kaplan is probably right about the economics:  chapter 11 is likely to pay more to more talc claimants than litigation in other courts.  Non bankruptcy litigation might produce a few outsize winners\u2014billion-dollar verdicts or multi-million-dollar settlements\u2014but there may be little left for most judgment creditors to collect.<\/p>\n

On the other hand, chapter 11\u2019s distributive benefits can trade off against what we might call \u201cdignitary\u201d interests, including individual rights to a \u201cday in court\u201d and a jury trial.  Congress intended to preserve some dignitary protections in chapter 11 cases, including the right to a jury trial of contingent and unliquidated personal injury and wrongful death claims.  But the rise of channeling injunctions and nondebtor releases has undermined those protections.<\/p>\n

In Purdue Pharma<\/em>, for example, the debtor\u2019s controversial plan would give personal injury creditors a bare right to a jury trial against the company, and cap recoveries at about $48,000\u2014surely not enough to cover the cost of the trial.  Worse, it would eliminate the right entirely as to the Sackler family, which owned and controlled the company when it committed two sets of confessed drug crimes.  The viability of those releases is pending before the Second Circuit Court of Appeals.<\/p>\n

Vertical forum shopping in chapter 11 can threaten not only the role of other courts, but also other branches of government.  Again, while LTL <\/em>spotted the issue, Purdue <\/em>crystallized it.<\/p>\n

A supplemental injunction at the beginning of Purdue<\/em> halted administrative and regulatory actions against Purdue and the Sacklers.  While this left the possibility of criminal prosecution, the U.S. Department of Justice negotiated deals with the Sacklers and Purdue that made it practically impossible for states to prosecute (and, of course, many preferred to settle with the Sacklers rather than fight, anyway).<\/p>\n

Purdue Pharma <\/em>and LTL <\/em>are likely to be very different cases.  The bankruptcy judge and the debtors in Purdue <\/em>resisted important efforts to vindicate dignitary concerns, such as a bellwether trial of allegations against the Sacklers or a fulsome examination of them.  Tragically, the lack of those efforts may have undercut the Sacklers\u2019 proposed payout, leading the judge to declare himself \u201cbitter<\/a>\u201d at Purdue\u2019s six-hour confirmation hearing last September.<\/p>\n

In LTL, <\/em>by contrast, Judge Kaplan and the debtors have signaled a willingness to deploy these types of mechanisms, should the case remain in bankruptcy.<\/p>\n

At this point, it is too early to know.  Angered by the brazen nature of the divisive merger, the talc plaintiffs have appealed to the Third Circuit.<\/p>\n

The full article in its original form can be found in the Harvard Law Bankruptcy Roundtable Blog here<\/a>.<\/p>\n

Professor Lipson discusses dignitary issues implicated by vertical forum shopping in chapter 11 in a draft paper, The Problem of Social Debt.  <\/em>Email him for a copy at (jlipson [at] temple [dot] edu).<\/p>\n

Jonathan C. Lipson is Harold E. Kohn Chair and Professor of Law at Temple University-Beasley School of Law. He is also a founding faculty editor of The Temple 10-Q and was pro bono counsel to an opioid survivor in the Purdue Pharma case.<\/em><\/p>\n

 <\/p>\n

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 <\/p>\n","protected":false},"excerpt":{"rendered":"

Professor Jonathan Lipson discusses the emerging issue of vertical forum shopping in chapter 11 bankruptcy cases. <\/p>\n","protected":false},"author":33,"featured_media":3364,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[47,13,8],"tags":[77,337,2465,2466,2467,1473,673,2468,2469],"coauthors":[289],"class_list":["post-3363","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-bankruptcy","category-business-law-practice","category-faculty-authored","tag-bankruptcy","tag-chapter-11","tag-federal-court","tag-forum-shopping","tag-judicial-code","tag-purdue-pharma","tag-reorganization","tag-section-1408","tag-state-court","masonry-post","generate-columns","tablet-grid-50","mobile-grid-100","grid-parent","grid-33"],"yoast_head":"\nVertical Forum Shopping in Bankruptcy - The Temple 10-Q<\/title>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/law.temple.edu\/10q\/vertical-forum-shopping-in-bankruptcy\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Vertical Forum Shopping in Bankruptcy - The Temple 10-Q\" \/>\n<meta property=\"og:description\" content=\"Professor Jonathan Lipson discusses the emerging issue of vertical forum shopping in chapter 11 bankruptcy cases.\" \/>\n<meta property=\"og:url\" content=\"https:\/\/law.temple.edu\/10q\/vertical-forum-shopping-in-bankruptcy\/\" \/>\n<meta property=\"og:site_name\" content=\"The Temple 10-Q\" \/>\n<meta property=\"article:published_time\" content=\"2022-07-20T16:12:25+00:00\" \/>\n<meta property=\"og:image\" content=\"https:\/\/law.temple.edu\/10q\/wp-content\/uploads\/sites\/12\/2022\/07\/thumbnail_Lipson_Forum-Shopping-FINAL.jpg\" \/>\n\t<meta property=\"og:image:width\" content=\"360\" \/>\n\t<meta property=\"og:image:height\" content=\"640\" \/>\n\t<meta property=\"og:image:type\" content=\"image\/jpeg\" \/>\n<meta name=\"author\" content=\"Jonathan C. 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