Latham, Jackson Walker avoid sanctions over bankruptcy forum shopping dispute

Sorrento Therapeutics

27/02/2024 21:29

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      Shareholder had sought $540 millions in sanctions
    

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      Sorrento Therapeutics also faces a motion to move its
bankruptcy
    

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      Sorrento used a new PO Box and bank account to justify
Texas
filing
    

  
    By Dietrich Knauth
       Feb 27 (Reuters) - A U.S. judge has ruled that law firms
Latham & Watkins and Jackson Walker did not commit bankruptcy
fraud by opening up a new bank account and P.O. box to ensure
that a California-headquartered biopharmaceutical company could
file for bankruptcy in Texas.
    U.S. Bankruptcy Judge Christopher Lopez in Houston denied
the motion for sanctions at a court hearing late Monday, saying
that the law firms representing Sorrento Therapeutics  SRNEQ.PK 
had engaged in questionable "legal maneuvering" but had not
committed bankruptcy fraud.
    Timothy Culberson, an attorney and Sorrento shareholder, had
argued that the law firms should be fined $540 million for their
forum shopping, saying that they committed fraud by saying that
the new P.O. box in Houston was the "principal place of
business" for a defunct Sorrento subsidiary, Scintilla
Pharmaceuticals, that was never based in Texas.   
    Sorrento should have filed for bankruptcy in California,
where it was headquartered, or Delaware, where it was
incorporated, but it chose Texas to get in front of a favorable
judge and "defraud" its shareholders and creditors, Culberson
said in court filings.
    Lopez said Culberson presented evidence that the P.O. box
and bank account were created solely so that Sorrento could file
for bankruptcy in Texas. But he said that there was no evidence
that the attorneys engaged in bankruptcy fraud or intended to
deceive the Texas court when they listed the P.O. box as a
"principal place of business."  
    "I don't like it, but it's not sanctionable," Lopez said. 
    Latham & Watkins declined to comment beyond its court
filings, which argued that Sorrento had established Texas as a
proper venue for its bankruptcy filing by opening a P.O. box and
bank account in Houston. Jackson Walker and Culberson did not
immediately respond to requests for comment. 
    Sorrento was one of many companies whose bankruptcy case was
reassigned after the judge presiding over the case, David Jones,
resigned from the bench under an ethics investigation. Jones
admitted to having a long-term romantic relationship with
Jackson Walker attorney Elizabeth Freeman, and he oversaw many
bankruptcy cases that her law firm filed in his Houston court. 
    Culberson alleged that Sorrento, Jackson Walker and Latham
knew about the romantic relationship, and made efforts to ensure
that Jones oversaw Sorrento's bankruptcy, believing that he
would rule in their favor on key issues. 
    The law firms filed paperwork to open the P.O. box just 10
hours before Sorrento filed for bankruptcy, then used it to
justify filing a Chapter 11 petition in Texas, Culberson said in
his court filings.
    Culberson had sought $500 million in sanctions against
Latham & Watkins and $40 million against Jackson Walker, saying
that a steep penalty, roughly equal to 10% of the law firms'
annual revenue, would deter future misconduct. 
    Lopez said there was no evidence that the two law firms had
tried to deceive the court or that they believed that their
actions were illegal. 
    "It's not the first time it's happened in this district, or
around the country," Lopez said. "I hope it's not rampant."
    In future cases, forum shopping can be combated by early
intervention from creditors, shareholders and the U.S.
Department of Justice's bankruptcy watchdog, none of whom
objected when Sorrento filed for bankruptcy in February 2023,
Lopez said.
    U.S. bankruptcy law says that debtors should file for
bankruptcy in the district where they have their "principal
place of business," or "principal assets," or in a district
where an affiliate has filed for bankruptcy. Sorrento first
placed its subsidiary Scintilla into bankruptcy in Texas, then
it filed its own petition, saying that it had filed in Texas
because its affiliate had filed for bankruptcy there. 
    Lopez did not rule on whether Sorrento's bankruptcy should
be transferred out of Texas. He will hear arguments on that
dispute in March. The DOJ's bankruptcy watchdog, the Office of
the U.S. Trustee, has supported shareholders' motion to transfer
the case. 
    The Texas court became a venue of choice for many large
debtors, in part because it assigns all large cases to just two
judges, and Jackson Walker frequently acted as local counsel to
national law firms that filed their Chapter 11 cases in Texas.
Outside creditor groups have lobbied the Texas bankruptcy court
to change its rules to discourage forum shopping abuse, and
creditors in other cases have pushed for Jackson Walker to
return legal fees that it charged in cases before Jones.
    Shareholders and other creditors have also sued Jackson
Walker, Jones, Freeman and other bankruptcy law firms that
represented debtors in Jones' court, alleging that Jones gave
preferential treatment to Jackson Walker clients. 
    A new lawsuit was filed Monday by Morton Bouchard, former
CEO of Bouchard Transportation, who alleged that his company's
bankruptcy lawyers at Jackson Walker and Kirkland & Ellis
charged excessive fees, knowing that Jones would approve them
because his "live-in girlfriend" worked at Jackson Walker. 
    Kirkland, Jones and Freeman did not immediately respond to a
request for comment. 
    The case is Sorrento Therapeutics, U.S. Bankruptcy Court for
the Southern District of Texas, No. 23-90085
    For Sorrento: Caroline Reckler, Ebba Gebisa, Jeff Bjork,
Kimberly Posin of Latham & Watkins  
    For Culberson: pro se
    
    Read more:
    Ethics probe into Texas bankruptcy judge ends following
resignation
  
    Bankruptcy "judge shopping" under fire from creditors,
professors
  

 (Reporting by Dietrich Knauth in New York)