Monday, December 23, 2024

How Kirkland Uses Court Shopping to Get an Edge in Bankruptcy

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In the insular world of bankruptcy court, law firms exert extraordinary control over which districts become flush with billion-dollar cases and lavish legal fees by targeting courts they think will best serve them.

In this system, Kirkland & Ellis LLP—the biggest player in giant corporate bankruptcies, and the largest law firm in the world by revenue—stands out.

Kirkland didn’t invent forum or judge shopping, and it’s not the only firm that scouts judges and districts in its quest to help its clients quickly get in and out of Chapter 11. But an analysis of its forum shopping playbook, part of Bloomberg Law’s examination of the inner workings of US bankruptcy courts, shows how one firm can give—and take away.

When rulings don’t go in its favor or controversy erupts in courts where Kirkland has been a steady presence, it often stops taking its business there and brings new cases elsewhere, a Bloomberg Law analysis of its court filings shows.

In at least three instances, the shift from one district to others came after questions surfaced in cases in which Kirkland was involved, a review of court filings compiled by BankruptcyData.com found. Its actions in Houston, Delaware, and Richmond reveal the pattern. In Houston, the newest example, a romance scandal involving a judge and local lawyer cast a spotlight on cases in which Kirkland was lead counsel. After the controversy broke, the firm went from filing multiple Houston cases annually to filing none, Bloomberg Law found.

“If a court doesn’t come through for Kirkland in one case, Kirkland won’t take them another one,” bankruptcy expert Lynn LoPucki, a professor at the University of Florida Levin College of Law, said in an interview.

Chicago-based Kirkland is a driving force in the bankruptcy system. From 2011 to 2020, it represented the debtor in more than 20% of large public company bankruptcies, more than double its nearest competitor. Kirkland bills heartily for its services, with top partners charging more than $2,000 an hour to help distressed companies navigate their financial trouble.

Kirkland has grown into the world’s biggest-dollar law firm, bringing in more than $7.2 billion in 2023, according to AmLaw data. That was $1.5 billion more than the next largest firm, Latham & Watkins LLP. Kirkland’s roughly 3,500 lawyers generated more than $2 million in revenue apiece last year, on average, the sixth highest figure among the country’s 100 largest firms, AmLaw data show.

Kirkland didn’t reply to specific questions about its movement of bankruptcy cases and declined an in-person interview. Instead, it issued a statement saying its venue choices have been deemed appropriate by courts.

“Any debtor’s counsel considers numerous factors before recommending a venue that provides its client the best chance to successfully restructure, including the law that would apply to key issues in a case, how a court is likely to rule on those issues, and any experience with the judges who might be assigned to handle the case,” said a spokesperson.

“Kirkland is no different.”

Market Power

In a system in which law firms have great discretion on where they file cases, Kirkland is noteworthy for its ability to shift its cache of major bankruptcies to favored courts. Those filings deliver a financial jolt to the local legal community and help transform sleepy bankruptcy districts.

“Unlike any other firm around, Kirkland exercises market power over bankruptcy courts,” Georgetown University law professor Adam J. Levitin wrote in a 2023 law review article about venue shopping, a practice ingrained in the US bankruptcy system.

Indeed, some analysts have described both “good forum shopping and bad forum shopping,” noted Susan Block-Lieb, a Fordham Law professor who teaches bankruptcy courses.

Companies will surely want their complex cases heard by courts that frequently handle such matters, she said. “Why is it a bad thing to allow the litigants the discretion to choose the most experienced courts?” Block-Lieb asked.

But questions surface when firms “choose a court that they are pretty darn sure is going to rule in a particular way,” she said. “They shop around for the judge that’s most sympathetic to the case they have in mind.”

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Forum shopping can “undercut the narrative that bankruptcy is uniform,” said Laura Coordes, a professor at Arizona State University’s Sandra Day O’Connor College of Law.

“These actions indicate that firms are chasing the court(s) that they believe will give them the best outcome,” Coordes said in an email. “This reinforces the narrative that certain courts are biased or ‘debtor-friendly’ – even if they are not.”

In many ways, Bloomberg Law found, Kirkland has followed through on a playbook two former partners detailed in a 2007 essay about venue shopping. The principles of that analysis haven’t changed, said one of the authors, Jonathan Friedland.

“Advisers typically take advantage of the wide latitude the code gives to a company in deciding where to file for bankruptcy … and then analyzing which bankruptcy courts … are most likely to rule on those issues in a manner most favorable,” they wrote.

“Happy hunting!” they concluded.

Deleware’s Dip

For decades Kirkland regularly filed large Chapter 11 bankruptcies in Delaware, a favored spot for law firms. Then in 2015, a judge raised sharp questions in the bankruptcy of Samson Resources Corp., in which Kirkland was the debtor’s counsel, suggesting senior lenders would “kill” the oil and gas company if they didn’t get what they wanted.

“I’m trying to remember if I’ve ever been this furious in my career,” Delaware bankruptcy Judge Christopher Sontchi said in one hearing. “And you don’t want me to make a decision when I’m this angry, but you’re being pigs, hogs. You’re asking for something I don’t want to give you, and you’re saying you’re going to kill the company if I don’t. I’m offended and furious.”

Later in the case, Kirkland also wanted Samson to pay for the potential costs of defending its legal services. Sontchi rejected that request. The judge, who retired in 2022, declined comment.

Then Kirkland stopped bringing cases in Delaware.

After filing a case in May 2016, it didn’t file again in Delaware until October 2017, an unusually long absence.

“Kirkland’s message to Delaware was clear – give us grief, and we’ll take our business elsewhere,” wrote Georgetown’s Levitin.

“Coming from a firm that handles a fifth of all megacase filings, it is a weighty threat, especially to a judicial district like Delaware that is able to justify its seven temporary bankruptcy judgeships based solely on its flow of large chapter 11 filings,” he added.

Kirkland has since resumed bringing cases in Delaware, which has remained a major venue for large Chapter 11s. Since 2019, the Delaware court has been Kirkland’s second-favored venue, behind Houston. The firm did not answer a question about the gap.

Richmond Surprise

In a law journal article titled Chapter 11’s Descent into Lawlessness, LoPucki detailed how Kirkland could alter a court’s dynamics simply by filling it with cases.

Of the 292 large public company cases filed from 2011 to 2021, Kirkland filed 64, or 22%, he noted.

“Kirkland made those new courts and Kirkland could break them,” he wrote. “That positioned Kirkland to control them.”

In the Eastern District of Virginia, historically not a favored venue for large bankruptcies, Kirkland made the court important, then left it.

By 2017, the Richmond court had sprung to life thanks in part to Kirkland. As in Houston, it had two judges who would handle large cases. And as in Houston, companies appreciated the court’s “predictability.” Attorneys liked that the judges were consistent and promptly approved fees.

Toys “R” Us Inc., based in New Jersey, filed bankruptcy in Richmond. Gymboree Corp., a San Francisco-based children’s clothing retailer, did too. Kirkland represented both.

As it did elsewhere, Kirkland teamed up with a law firm with connections to the local court. In Virginia, its co-counsel was often Kutak Rock, a national law firm with a Richmond bankruptcy practice. One of Richmond’s bankruptcy judges, Kevin Huennekens, was a Kutak Rock partner before joining the bench in 2006.

Friedland, the former Kirkland partner who co-authored the 2007 paper, said if he were writing the analysis today he would note that choosing a venue is not just about comfort with the court, but with local counsel.

“You get comfortable with the capabilities and the dependability of somebody,” said Friedland, now with Much Shelist PC. “It’s like I’m going to buy my skirt steak at the market that always has the best skirt steak.”

Kirkland and Kutak handled multiple big cases in Richmond, often, though not always, working together. Each was debtors’ counsel or co-counsel in more than half of the 20 so-called megacases in the Eastern District of Virginia in recent years.

In 2020, Kirkland handled four cases in Richmond. Since 2019, the Eastern District of Virginia ranked No. 5 in the firm’s caseload nationwide.

But then in January 2022, a US District Court judge, David J. Novak, issued a deeply critical ruling of Huennekens’ handling of the bankruptcy filed by Ann Taylor parent Ascena Retail Group. Kirkland represented the debtor.

Novak chided Huennekens for granting third-party releases that essentially protected insiders from future liability.

“The sheer breadth of the releases can only be described as shocking,” Novak wrote.

“The releases close the courthouse doors to an immeasurable number of potential plaintiffs, while protecting corporate insiders who had no role in the reorganization of the company,” he added. “Yet, the Bankruptcy Court … extinguished these claims with little or no analysis.”

Huennekens doesn’t discuss his cases, his office said, declining an interview request.

Novak said the releases had made Richmond a favored venue for “mega” bankruptcies. He voided them and gave the case to another judge, outside Richmond.

“The practice of regularly approving third-party releases and the related concerns about forum shopping call into question public confidence,” Novak wrote.

Kirkland didn’t answer questions about Novak’s ruling or its caseload in Virginia.

Novak’s decision shook the court. Afterward, the court changed its rules so bankruptcies in the Eastern District of Virginia are randomly assigned to a larger panel of judges.

Kirkland was counsel in one Richmond case filed a month before the ruling. It has filed no new cases in the Eastern District since.

Stephen Lubben, a Seton Hall Law expert in corporate finance, said Kirkland is not the only firm to choose courts outside the historically favored hotspots of New York and Delaware.

The biggest issue with venue shopping, he said, “is the perception of the corporate bankruptcy system.”

“The process in many of these jurisdictions can become quite insidious,” Lubben said in an email. “If small creditors – even those with a ‘mere’ $1 million claim – feel that they are not getting a fair hearing, the entire process suffers.”

Houston Hunting

The most recent example of Kirkland’s playbook is in the Southern District of Texas.

Since 2019, Houston has been the single biggest focus of Kirkland’s bankruptcy docket, with the law firm handling 49 cases filed in the Southern District of Texas, Bloomberg Law found.

Kirkland targeted Houston after then-bankruptcy Judge David R. Jones made the court amenable to distressed companies.

Jones became chief bankruptcy judge for Houston in 2015 and put in place rules that turned the district into a powerhouse—including funneling all large Chapter 11s to just two judges. He published his case manager’s cell phone on the court website and didn’t blink at approving four-figure hourly attorney fees.

Kirkland often partnered with Houston’s Jackson Walker, which bills itself as the largest law firm in Texas. Some of its lawyers had been former staffers for Jones, including then-Jackson Walker partner Elizabeth Freeman.

As Houston’s bankruptcy court exploded, Kirkland was a constant presence. In 2020, for instance, the law firm filed or co-filed 24 cases in the Southern District of Texas, a massive total.

Jones approved or oversaw cases in which Jackson Walker was paid at least $13 million. That includes at least $1.1 million in fees Freeman billed herself, the US Trustee reported.

Kirkland was paid more than $162 million in those cases, an opposing law firm said in court papers.

But in October 2023, Jones acknowledged that Freeman was his girlfriend. They owned a home together, property records show.

Priscilla Richman, chief judge of the US Court of Appeals for the Fifth Circuit, issued a scathing public complaint against Jones, who quickly resigned. The US Trustee has since questioned more than $18 million in fees Jackson Walker was awarded, including cases in which Jones mediated.

Suddenly Kirkland was no longer bringing new cases to Houston.

Since the romance scandal surfaced in October 2023, Kirkland has filed zero cases in Houston. Other firms have filed cases since the ethics controversy, but Kirkland’s absence has helped trigger an overall decrease in the district’s popularity for large Chapter 11s.

The Southern District of Texas court has been asked to preserve records regarding Jones as part of a criminal inquiry.

Kirkland did not answer a question about its pace of cases in Houston.

But it did address the Jones-Freeman relationship, writing: “The firm and its lawyers had no knowledge of the relationship between Judge Jones and Ms. Freeman until it became public in October 2023.”

LoPucki, the bankruptcy professor, said law firms such as Kirkland exert too much power.

“It seems obvious to me that you don’t want to run a system where law firms control the courts,” LoPucki said. “When you are providing that large a proportion of their caseloads, you can literally break the court any time you want.”

New Horizons

As it left Houston and Richmond, Kirkland has put its bankruptcy focus elsewhere—including New Jersey, which has become attractive to big law firms.

Kirkland has filed 10 bankruptcies in New Jersey since November 2022. From 2019-2021, it filed none.

In a Q&A with Bloomberg Law last year, Michael B. Kaplan, New Jersey’s chief bankruptcy judge, attributed the hike to cases being “handled well” by the district’s judges. He said he’s connected with lawyers about how the court can best function.

“There’s a comfort level now with national firms and local firms,” he said.

Kaplan admitted it “always hurt a little” to see companies such as New Jersey-based Toys “R” Us file in Virginia.

In a recent statement, he said there is “no question” the court is busy, and that Kirkland is one of the driving factors. The system’s “professional and efficient manner … prompted additional filings by Kirkland and other firms.”

In his court, Kirkland has already scored a victory.

In genetic testing company Invitae Corp.’s bankruptcy, the Justice Department bankruptcy watchdog and unsecured creditors contended Kirkland had a conflict because it also had represented one of the company’s creditors in matters outside of bankruptcy.

Kaplan heard both sides on May 7 and ruled for Kirkland, which won approval to keep the case in his court.

“Simply put,” the judge ruled, “the Court is loath to place such handcuffs on Debtors’ counsel.”

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