For two decades, the largest corporate bankruptcies involving Texas companies were filed in Delaware or the Southern District of New York.
Executives at Enron, American Airlines and Energy Future Holdings all chose to flee bankruptcy courts in Texas for the more experienced jurisdictions on the East Coast. Texas law firms saw very little legal work from their bankruptcy practices as a result.
Then came David Jones, a brilliant and energetic Porter Hedges partner-turned-federal bankruptcy judge in the Southern District of Texas. Judge Jones, who was appointed in 2011, spent five years reworking the local rules to offer large businesses needing to restructure under Chapter 11 of the U.S. Bankruptcy Code a fast track and user-friendly system that would be responsive 24 hours a day, seven days a week.
And it worked.
Not only did large Texas corporations — Neiman Marcus, J.C. Penney, CEC Entertainment (Chuck E. Cheese) and Bristow — file for bankruptcy in their home state, but companies across the globe. — Luxembourg-based Pacific Drilling, London-based Seadrill Partners and Los Angeles-headquartered California Pizza Kitchen — chose the Southern District in Houston as the scene of their massive restructurings.
Over the past six years, the Houston bankruptcy court was the home to more business bankruptcies with $100 million or more in assets and debt than any other jurisdiction. With the rise of the Southern District as a destination for large and complex restructurings came boatloads of high-paying legal work. In fact, bankruptcy practices were the most profitable in 2020 when other practices, such as litigation and M&A, were shut down due to the Covid pandemic.
Now, lawyers at those corporate law firms are afraid that the heyday of big-dollar corporate restructurings in Texas may be nearing an end.
“Did these corporations file in the Southern District because of the new rules or was it because they wanted David Jones as their judge?” said Sid Scheinberg, a partner at Godwin Bowman. “There is no doubt that companies will be hesitant to file in the Southern District because of this.”
Judge Jones resigned this past weekend amid an ethics investigation by the U.S. Court of Appeals for the Fifth Circuit regarding a romantic relationship the judge has had for more than five years with a former partner at Jackson Walker, a law firm that represented debtors and creditors in scores of bankruptcies before Judge Jones.
Southern District Bankruptcy Chief Judge Eduardo Rodriguez reassigned all of Judge Jones’ cases to other judges. Judge Marvin Isgur, who was Judge Jones’ mentor, has returned to the complex bankruptcy panel to tackle many of the cases from Judge Jones’ docket.
But the fallout from the resignation for the legal industry in Texas may be significant. Drug store chain Rite Aid reportedly considered filing for Chapter 11 protection in Houston but instead chose to file in New Jersey this weekend.
Johnson & Johnson reportedly has considered bringing its “Texas Two-Step” efforts to the Southern District of Texas by refiling bankruptcy for its LTL Management subsidiary in hopes that the Houston court and the Fifth Circuit will be more favorable in its efforts to resolve tens of thousands of lawsuits related to its talc powder. But sources say J&J’s legal advisors are rethinking that strategy because of Judge Jones’ resignation.
“It is hard to read the tea leaves on what is going to happen, but I am sure that some debtors who would have filed in the Southern District will now give it a second thought,” said Texas Tech law professor Sally Henry, an expert on bankruptcy law.
Henry points out that Judge Isgur is only a temporary fix and that Judge Christopher Lopez, the second jurist on the Southern District’s complex panel, is new to the position. Judge Lopez replaced Judge Isgur on the complex panel on Jan. 1.
“Judge Lopez and Judge Isgur are highly regarded, but people will have a concern about their capacity to handle many more cases,” Henry said. “Until the Fifth Circuit appoints a new judge to replace Judge Jones, debtors and lenders may feel uncomfortable with the Southern District. In bankruptcy cases, the advisors care strongly about predictability.”
Henry and other bankruptcy experts do not believe that Judge Jones’ resignation and the investigation will result in a wave of filings from creditors or debtors seeking to have their cases reopened or reconsidered.
“I think it would have to have been a bizarre past ruling by Judge Jones to get cases revisited, but if weird things happened in Judge Jones’ past cases, we would have heard about it before now,” she said. “I highly doubt we are going to see much activity other than pro se filings.”
Bankruptcy law expert Nancy Rapoport, the former dean at the University of Houston Law Center and now a professor at the University of Nevada—Las Vegas, described the situation with Judge Jones and his resignation “a nightmare for the bankruptcy bench” in the Southern District because of the pending Fifth Circuit investigation and what it will reveal.
“No one knows yet,” Rapoport said. “It’s too early to see how this issue sorts itself out. But all eyes are on the famous post-Watergate question: ‘What did they know and when did they know it?’”