It’s been an open secret among bankruptcy attorneys: Avoid filing Chapter 11 petitions in the downtown courts, where three of the nine judges are said to be unfriendly towards debtors.

Stick instead to friendlier courts in the San Fernando Valley and even Santa Barbara.

Well, the party appears to be over.

The chief judge of the Central District of the U.S. Bankruptcy Court, concerned about huge imbalances in the workloads of judges, has issued an order aimed at stopping the practice of “judge shopping.”

“This abuse of the system is offensive to the Court, creates a public pereption of unfairness, distrorts the historic practice of random assignment of cases to judges throughout the Court, and may provide certain unfair advantages to those willing to manipulate the process,” wrote Chief Judge Geraldine Mund in her order, which goes into effect Oct. 1.

The order requires Chapter 11 filers to state under penalty of perjury their company headquarters address and where the majority of the company’s assets are located. The information will then be used by the bankruptcy judge to ensure that the company is filing in the correct jurisdiction.

According to current law, Chapter 11 cases are supposed to be filed in the division in which the debtor is located. A judge in that division is then randomly assigned to the case.

However, there has been an increasing trend of cases being filed in districts with a tenuous connection to the debtor.

One recent case, and one which Mund said was a catalyst for her order, involved Baldwin Builders. The Newport Beach company should have filed in nearby Santa Ana, but instead filed in Santa Barbara, ostensibly because one of the principals had an address there.

Another often-cited example is the Sizzler International Chapter 11 filing last year. Sizzler, based in Los Angeles near Marina del Rey, filed in the San Fernando Valley bankruptcy division instead of in Los Angeles.

A dozen local bankruptcy attorneys interviewed last week pointed to the downtown bankruptcy courts as the chief source of the problem.

And the imbalance in the bankruptcy courts’ workload seems to support that contention. In a related order issued by Mund last week, a number of cases are being transferred from the Valley to the downtown courts to help equalize the caseload.

Bankruptcy attorneys interviewed last week say many attorneys file outside the downtown courts to avoid three of the nine judges that they regard as unpredictable or stricter against debtors. Those are Samuel Bufford, Kathleen March and Vincent Zurzulo.

March, in particular, was singled out by attorneys as someone bankruptcy attorneys want to avoid; they said she has a reputation of being arbitrary in her rulings, both in the final disposition of a case and in motions during a case.

Others said she tends to draw cases out longer than necessary, which they say can have adverse impacts on companies trying to stabilize their finances in the early stages of a Chapter 11 filing.

Conversely, judges in the Valley division Judges Mund, Arthur Greenwald and Kathleen Lax have a reputation as being friendly and more predictable toward bankruptcy counsel.

And because there is only one judge in Santa Barbara Judge Robin Riblet, who is viewed as debtor-friendly attorneys said that filing a case there has its advantages.

None of the attorneys contacted would publicly comment on the downtown judges; some said doing so could have detrimental repercussions if they had to argue cases before those judges.

In an interview with the Business Journal, March acknowledged that she might be strict in her interpretation of the bankruptcy code, but denied that she was arbitrary or unpleasant to deal with.

“Whenever a case comes before me, it is my duty as a bankruptcy judge to follow the code and other applied laws,” she said. “There is no free niceness in bankruptcy. If you give debtors more favorable treatment, that means that you are taking something away from creditors. Does that make me more strict than some of the other judges? You could say that is a fair statement.”

March also acknowledged a perception that judges in the Valley are more oriented towards debtors. “I don’t believe it’s true, but I know the perception is out there,” she said.

When contacted for this story, Zurzulo questioned the premise that bankruptcy attorneys are filing cases in the Valley to avoid specific judges in the downtown courts.

“Just because a few attorneys say this is going on does not mean it’s so. I’ll bet if you contacted the vast majority of attorneys, you will find that they do not hold the judges here (in the downtown court) in any lower esteem. In fact, the overwhelming majority of counsel that fill out anonymous surveys in my courtroom report that they receive fair treatment,” he said.

“The fact is that you are bound to get some negative reaction, and that’s because when people come to my courtroom, someone wins and someone loses.”

Bufford could not be reached for comment late last week.

Mund’s order is unusually candid in assessing the long-standing process of judge shopping.

“Intradistrict forum shopping in the filing of Chapter 11 cases has become a significant problem in the Central District with attorneys filing cases in certain divisions of the Court for the expressed purpose of obtaining certain judges for their cases,” the order says.

The Central District has a main division in downtown LA with nine bankruptcy judges and four major satellite divisions: Santa Ana, serving Orange County, with four judges, San Bernardino, serving the Inland Empire with three judges; the recently created San Fernando Valley division with three judges; and Santa Barbara, with one judge.

Mund said there are several reasons why bankruptcy attorneys try to steer their cases to certain judges.

“For many it is a matter of convenience of counsel, a way of keeping costs down. Others want more certainty that comes with the lower number of judges in the outlying divisions. Still others believe that some judges are looser in their interpretation of bankruptcy law and some are tighter,” she said.

“Whatever the reason, the judges don’t often find out about this until the case is well under way or is finished because no one raises the issue. This is our way of trying to establish venue,” she added.

Judge shopping is not limited to the Central District Court; it’s a nationwide issue.

Several attorneys said that the bankruptcy judges in Delaware where many U.S. companies have taken advantage of the state’s incorporation laws are notorious for their pro-debtor stance.

“If I were representing a company that was incorporated in Delaware and I did not make the bankruptcy filing there, I could leave myself open to malpractice for not giving the best counsel for my client,” one local attorney said.

The situation in Delaware has drawn the attention of Congress, which has appointed a special commission to study the issue and come up with a proposal to limit companies that only have incorporation status in Delaware from filing Chapter 11 bankruptcies there.

All the bankruptcy judges in the Central District are appointed by the Ninth Circuit Court of Appeals to 14-year terms, at an approximate salary of $130,000 a year.

The Ninth Circuit also has the power to discipline bankruptcy judges. Over 1,000 complaints against judges are received each year, according to Mark Mendenhall, assistant to the Circuit Executive at the Ninth Circuit Court of Appeals in San Francisco. Most of the complaints are about outcomes of cases and are summarily dismissed, he said.

All complaints and the names of the judges they are made against are kept confidential. If a review panel appointed by the Ninth Circuit finds a judge guilty of an infraction, the nature of the infraction and the penalty is published in the court record, but the name of the judge is again kept confidential.

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