District Judge to Purdue: "You Don't Get to Choose Your J...

"[Y]ou don't get to choose your judge." That's what US District Judge Colleen McMahon wrote to Purdue Pharma, in response to a letter Purdue had written to her addressing a possible motion to withdraw the reference to the bankruptcy court for a third-party release and injunction. 

The irony here is incredible. I suspect that Judge McMahon does not realize that judge picking is precisely what Purdue Pharma did to land its case before Judge Drain, rather than going on the wheel in Bowling Green and risking landing a judge who does not believe that there is authority to enter third-party releases.

The problem with judge picking is that it creates an appearance of impropriety. And judge picking is the original sin in Purdue's bankruptcy. It has tainted everything in the case. It will mean that however much money the Sacklers pay, there will always be the suspicion that they would have had to pay a lot more had the case been randomly assigned to another judge, who might not have stayed litigation against them for nearly two years.

To recall: Purdue is based in Connecticut, but with significant manufacturing operations in Rhode Island. All of its entities, but one are Delaware entities. That one entity—Purdue Pharma, Inc. (PPI)—is a general partner in a set of internal partnerships, but it's a non-equity general partner; it receives a (I suspect nominal) fee for its services. In other words, it's a rent-a-general-partner. The general partner is a New York corporation, but it lists its address as Purdue's headquarters in Connecticut.

198 days before the Purdue bankruptcy, PPI changed its agent for service of process to an agent with a White Plains, New York address, and requested that copies of all service go to Marshall Huebner at Davis Polk, Purdue's bankruptcy lawyer. When Purdue filed for bankruptcy, PPI was the first case to file. PPI was used to establish SDNY venue, and then all of the other Purdue entities bootstrapped into SDNY. That much is kosher. Bootstrapping of venue is clearly allowed under the existing venue statute, even though it results in some ridiculous situations, such as the Los Angeles Dodgers of Delaware. 

But merely getting SDNY venue doesn't guaranty a particular judge. The SDNY local rule on case assignment provides:

Where the principal place of business in the District of the debtor set forth on the petition is in (i) New York County or Bronx County, the Clerk shall assign the case to a Judge sitting in New York County; (ii) Rockland County or Westchester County, the Clerk shall assign the case to a Judge sitting in Westchester County; or (iii) Dutchess County, Orange County, Putnam County, Sullivan County, Ulster County or Greene County, the Clerk shall assign the case to a Judge sitting in Dutchess County. No case assignment will be based upon a post office box address.

PPI's petition lists its principal place of business as being in Connecticut. That should have resulted in it going on the wheel for random assignment, not being assigned to Judge Drain. (Yes, I know the rule is silent about non-NY entities, but there's also nothing assigning those non-NY entities to White Plains.) There is nothing on the petition that indicates a Westchester County connection. Yet, when PPI filed, it was already so sure it was getting Judge Drain, that it had his initials included in the case caption (with the case number remaining to be filled in), on a document that would have been prepared even before there was a case assignment indicated in the PACER system. So how did Purdue manage to get Judge Drain? As far as I can tell, it did so by indicating that it was a Westchester-based entity in the court's ECF system, rather than on the petition itself. The ECF interface has a menu for indicating the debtor's county, and the case assignment actually operates based on the ECF system, rather than on the petition (i.e., the ECF system is not complying with the local rule). So Purdue gets Judge Drain through a slight of hand in the ECF system that is premised on being a Westchester location by virtue of that being the address for its service of process. Purdue very deliberately picked its judge, even though, as Judge McMahon write, "You don't get to pick your judge."

The usual response to the judge picking complaint is two fold. First, there is an argument about certain judges having particular expertise or predictability.  And second, there's an argument made from the lack of transfer motions. 

The expertise argument is hard to credit. Bankruptcy judges are not appointed by a political process, but by the courts of appeals with input from the bar. They all bring a high level of expertise to the table. There's certainly variation among them in terms of style, etc., but the best proof that it's not about expertise is the judge picking that has gone on in the super-speed 24-hour bankruptcies. There's very little chance for a judge to do anything in a 24-hour drive-through case other than derail the case. All of those super-speed cases have been shopped into the courtrooms of two just two judges (one of whom is Judge Drain). This isn't about expertise. It's about willingness to accommodate aggressive restructurings.

If you want further evidence on the expertise point, look at how business has sapped away from Delaware in recent years, despite having an experienced, well-regarded bench. One very well-regarded Delaware judge, however, (rightly) laid into Kirkland & Ellis in a case for pulling a fast one on a pro se creditor, and Kirkland took its business to Richmond and Houston. Again, this isn't about expertise. Debtors don't want a great judge. They want a judge who's great for them.

It's true that no one made a motion to transfer the Purdue's case. But that doesn't prove anything. There are good reasons why parties are not going to make that motion, and it has nothing to do with being cool with judge-picking. Making the transfer motion risks irritating the judge because it implies that the lawyer does not believe that the judge will in fact be impartial. And indeed, Judge Drain's behavior at the June 16 Purdue hearing illustrates exactly that:  he takes the matter personally, as he stated on the record because he thinks that “the notion that judges slant their rulings in order to lure future cases to their courts is an offensive fantasy”. Indeed, Judge Drain takes it so personally that he engaged in “confrontational questioning” and “yelled at Mr. Lipson [appearing pro bono on behalf of the parent of a teenager who died from an Oxycontin overdose] throughout the approximately five-hour hearing."

While Judge Drain the whole idea that there's judge-picking going on is “just simply a load of hooey”. The facts beg to differ. The list of forum shops into Judge Drain's courtroom in recent years is impressive. Since 2011, I count at least 23 large cases that have forum shopped into Judge Drain's courtroom. Some of these were garden variety forum-shops, where the debtor bootstrapped its way in to the court via filing of a long-standing affiliate (e.g., Sears, A&P) or having property in Westchester (e.g., Hostess), but a bunch of others involved recently manufacturer affiliates (e.g., New Cotai Ventures), or simply rented short-term office space in one of a few Westchester office buildings the addresses of which appear on numerous petitions (e.g., Sungard, Deluxe, Frontier, FullBeauty, Cenveo, Global A&T, Ezra Holdings, Roust, Excel Maritime). Debtors are going to extreme lengths to get into Judge Drain's courtroom.

Now add in the fact that in 2018, 17% of all large public bankruptcy case filings ended up before Judge Drain. And that's not counting a bunch of other large, private cases that got shopped into his court. So in 2019, when Purdue files for bankruptcy, chapter 11 lawyers have to recognize that there's a good chance they will end up appearing before Judge Drain again at some point in the future. What chapter 11 lawyer in his right mind would want to anger a judge before whom they might have to appear repeatedly?  While Judge Drain thinks that “It’s hard to imagine anything more illogical than that” lawyers who think they are likely to make future appearances before a judge “won’t want to anger the judge".  I’m not sure what’s illogical against recognizing that strategies are different in a multi-stage game than a single-stage game. This is Game Theory 101. Of course lawyers are going to behave differently if they think they might have to deal with Judge Drain in the future, whether in Purdue or another case.

On top of this, there are financial costs to filing a transfer motion and the benefits of transferring the case are uncertain. While Purdue certainly had its reasons for wanting Judge Drain, having the case transferred to another judge hardly guaranties a different outcome. So, a transfer motion has high risk and financial costs and uncertain benefit. Is it surprising that no one filed such a motion? That doesn't mean that it's right or appropriate that Purdue's case is before Judge Drain. As Judge McMahon wrote, "You don't get to choose your judge." The appearance of impropriety that arises from judge picking is insurmountable. It's the original sin in the Purdue bankruptcy, and it's a shame that such an important case is indelibly tainted by it. 

If it seems that I've been beating this judge picking horse pretty heavily of late, it's because I think it is fundamentally undermining the big case bankruptcy system. It needs to stop. At the very least, it creates an appearance of impropriety, and I fear that it is in fact affecting substantive outcomes, as debtors target their filings to judges who they believe will be more likely to accept their arguments. Debtors' counsel aren't making $1,790/hr for being wrong. Purdue is the most egregious example of what's going on, but it's hardly the only one. The chapter 11 system does a lot of good, but judge picking is allowing it to be weaponized for a tool to abuse outsider creditors, and that's just wrong. Obviously, wholesale venue reform is desireable, but in lieu of that, there's a lot that can be done through local rules that limit judge picking or through amendment of the Federal Rules of Bankruptcy Procedure. That means no "complex case panels" and no geographic assignment rules for large cases. Want a model? Check out the Middle District of Florida's local rule 1073-1, which "is designed to prevent anyone from choosing the judge to whom the case is to be assigned, and all persons shall conscientiously refrain from attempting to circumvent this rule." Fix judge picking, and it will fix the unfortunate weaponization of chapter 11.