Unlock the Editor’s Digest for free
Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
On a Sunday afternoon about a year ago, a partner at a major Texas law firm walked into a suburban Houston UPS Store. There she set up a post office box for a California-based pharmaceuticals company.
The seemingly unremarkable errand is now at the centre of a legal controversy over just how much leeway companies have in shopping for the best place to file for bankruptcy protection.
Scintilla Pharmaceuticals and its larger parent, Sorrento Therapeutics, used the UPS Store PO box to together file for Chapter 11 bankruptcy in a Houston federal court just 10 hours later.
The Houston federal bankruptcy court had become a hotbed for complicated cases as its judges were considered sophisticated and speedy arbiters of the law but also friendly to the wishes of debtors. Houston was so attractive to debtors and their lawyers that even the likes of Sorrento with a reed-thin nexus to Texas were determined to get in.
Sorrento’s reorganisation was eventually approved by the court after a messy fight between the company and various creditors. Its emergence from Chapter 11 is mere weeks away. But this month, the origins of its Texas mailing address have suddenly drawn the interest of the US Department of Justice.
The DoJ’s bankruptcy court affiliate, the Office of the US Trustee, in a court filing now argues that Sorrento deployed “an abusive venue manufacturing scheme” to improperly land in Houston.
The controversy is the latest in a string of incidents that demonstrate the aggressive legal advice that law firms are deploying to win business where top partners can charge above $2,000 an hour.
The Sorrento dust-up comes also amid a broader scandal that has engulfed the Houston federal bankruptcy court. Its chief judge David R Jones resigned in October after admitting an undisclosed, long-standing romantic relationship with a lawyer who appeared frequently in cases he oversaw. Prior to his departure, Jones had overseen the Sorrento case. The fallout from the scandal is now a forensic examination into the at-times ruthless way big bankruptcy gets done in America.
“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.”
The US trustee motion came just two weeks after an individual claimant in the case, Timothy Culberson, filed his own motion to move or dismiss the Sorrento case. The postal box had been included in the original bankruptcy petition from February 2023. But what made Culberson’s filing suddenly explosive were the physical receipts from the UPS Store he collected showing that the box was opened just 10 hours before the overnight bankruptcy filing.
A lawyer from the Texas firm Jackson Walker had paid the fees with a credit card. The bankruptcy code states that a company must be in the district for 180 days prior to the filing. Culberson has asked the court to claw back the $2mn in fees paid to Jackson Walker and the $26mn paid to Sorrento’s primary counsel, the international powerhouse Latham & Watkins.
In response to the motion from the US trustee and Culberson, Sorrento, Latham and Jackson filed a response denying any wrongdoing. Their primary defence states that since Scintilla was designated as a “non-operating entity”, the mailbox along with a Texas bank account with a $60,000 deposit opened three days before the bankruptcy was enough to satisfy the letter, if not the spirit, of the bankruptcy code. Sorrento and its lawyers tartly suggested that those unhappy with its tactics take their grievance to the US Congress.
As it happens, Jackson Walker’s credibility as a law firm is already in question. Judge Jones’s secret romantic partner was a Jackson Walker lawyer. The US trustee is seeking to reverse more than $13mn in fees the firm was paid in about two dozen cases where it failed to disclose the relationship to the bankruptcy court. Jackson has denied wrongdoing and is contesting those efforts.
In the meantime, Sorrento’s remarkable position — that any company can file for bankruptcy far afield from their headquarters, operations or legal domicile by merely opening a bank account and PO box immediately before the moment it completes its court petition — will now be litigated.
Read the full article here
