Major Chapter 11 cases like Rite Aid and WeWork often cause turbulence in the world of bankruptcy law. The U.S. Bankruptcy Court in New Jersey, an emerging arena for such prominent companies filing for bankruptcy, announced last Thursday that it will maintain its existing case assignment protocol. Cases will continue to be randomly distributed among its judges rather than delegating major cases to a select one or two.

The Response from Chief Justice Michael Kaplan

In response to appeals from creditor rights advocates, including several law professors and the Creditor Rights Coalition, Chief Judge Michael Kaplan addressed the court's case assignment procedure. These advocates had urged the court to avoid the establishment of a 'complex case' panel - a specialized team during the court's ongoing rewrite of Chapter 11 case handling rules.

Chief Judge Kaplan, in an email to the creditor group later reviewed by Reuters, assured that their district would not amend their rules to create such panels or restrict case assignments in any manner. Kaplan was confident in their judges' diverse capabilities and rich experience in handling complex cases.

Larger Bankruptcies and the Power of Random Assignment

Underlining his assertion, Kaplan clarified that all significant bankruptcies recently filed in New Jersey, including those by WeWork, Rite Aid, Bed Bath & Beyond, and David's Bridal, have been distributed to different judges. This unbiased allocation testifies to the court's commitment to upholding the principle of random assignment.

In light of an update to the court's Chapter 11 rules, which haven't seen a revision in 17 years, the court is inviting public opinion. Kaplan clarifies that this rules review is a routine measure to enhance the court's efficiency in handling Chapter 11 cases rather than an initiative to lure companies to file for bankruptcy in New Jersey.

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Concerns Around the Two-Judge Panels and Their Impact

The Creditor Rights Coalition, along with the law faculty group, expressed criticism of the two-judge panel for complex cases in the U.S. Bankruptcy Court for the Southern District of Texas situated in Houston. They also proposed a federal rule alteration mandating all bankruptcy courts to randomly assign cases.

The court in Texas oversees a substantial share of considerable Chapter 11 cases filed in the U.S. in the past few years. Its two topmost judges managed almost half of all significant public company bankruptcies filed in 2020, a fact not overlooked by critics. Even after their leading judge resigned due to an ethics review related to an undisclosed personal relationship with a local bankruptcy lawyer, the court persisted with only two judges handling all its significant cases.

The Creditor Rights Coalition cautioned Kaplan that courts have often used everyday rule updates to channel all significant cases filed within a district to a limited group of bankruptcy judges. Such practices erode public confidence, creating an image of a bifurcated justice system and allowing specific debtors to select their judge. They also appreciated the court's engagement and response to their letter. They hope other courts will follow suit and implement the random assignment of all substantial bankruptcy cases.

On Thursday, the Creditor Rights Coalition's founder, Dan Kamensky, further bolstered this action.

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