Professor David Skeel of the University of Pennsylvania Carey Law School discussed the current backlash against the bankruptcy system, and whether new regulations are needed, on the latest episode of Fresh Start.
“Bankruptcy seems to be having an identity crisis right now,” Skeel said. Amid an unusually long string of really controversial filings, Skeel said that the public has “begun to suspect that it’s a rigged game.”
Skeel primarily tackled three areas where the Chapter 11 system could be ripe for reform: judge shopping, the so-called Texas Two-Step and nonconsensual third-party releases.
Skeel said he believes the tools provided by the bankruptcy system are enough for judges to handle potential abuses in the first two areas, without new regulation. Third-party releases, however, are an area Skeel said he believes could be reformed.
Some of the issues that people have worried about, as far as shopping for judges, can and have been corrected by the courts themselves, he said.
Additionally, Skeel told Congress earlier this year that judges already had the tools they needed to protect from abuses stemming from the Texas Two-Step, where companies use a divisive merger to handle liabilities in court for the new entity while the parent stays out of Chapter 11. He did emphasize on Fresh Start, however, that while he believes judges can weed out bad cases, it’s not clear whether they will.
The decision issued by Judge Michael Kaplan in Johnson & Johnson’s (JNJ) LTL Management LLC Chapter 11 case, which let the unit stay in bankruptcy, was defensible, Skeel said, but the language in Kaplan’s opinion “made him a little uncomfortable.”
The only area Skeel felt “it’s plausible that Congress would step in” is nonconsensual third-party releases. He said he thinks there is an argument for eliminating such releases or implementing a higher bar for gaining a release.
Listen to the podcast with David Skeel below: