Houston, we have a problem

Scandal has engulfed Houston federal bankruptcy courts as businesses applying for Chapter 11 bankruptcy protection seek to have their cases heard there. Over recent years Houston judges have become renowned for being efficient arbiters of law and providing a debtor friendly arena for bankruptcy cases.

10 hours before filing for Chapter 11 bankruptcy protection, lawyers for California based pharmaceutical company, Sorrento Therapeutics and its subsidiary Scintilla Pharmaceuticals set up a PO Box in a UPS store in Houston. The intention of their actions being to allow its application to be dealt with by a debtor friendly Houston federal bankruptcy court. The reorganisation of Sorrento was subsequently approved.

Sorrento are now weeks away from exiting the bankruptcy protection. However, the revelation that Texas law firm, Jackson Walker, casually walked into a UPS store and set up a post box in Houston, hours before filing for protection has ruffled the feathers of the US Department of Justice.  The Office of US Trustees (an affiliate of the DOJ) have filed a law suit against Sorrento claiming they deployed “an abusive venue manufacturing scheme” to land improperly in Houston. The US bankruptcy code requires companies to be in the district, 180 days prior to filing, this has led to an individual claimant, Timothy Culberson filing a motion to have the Sorrento case moved or dismissed. The claim seeks to recover the $2mn paid to Jackson Walker and the $26mn paid to Sorrento’s primary counsel Latham and Watkins.

To further compound the controversy it transpires that the Judge presiding over the Sorrento case, David R Jones, had a secret relationship with a Jackson Walker lawyer. Consequently, the US Trustee is seeking to recover $13mn in respect of fees paid to Jackson Walker in previous bankruptcy cases where the relationship was not disclosed.

“Law is supposed to be a profession with an ethical foundation, not just trying to check the technical boxes, but to practise those values,” said Melissa Jacoby, a law professor at the University of North Carolina. “At stake is more than the reputation of these firms, but the legitimacy of the system overall.”

Question marks over the legitimacy of setting up a PO box and opening a bank account for Sorrento whose operations and headquarters are over 3 hours flight time away from Houston remains to be litigated. In the mean time it is clear…”Houston, we have a problem!”