Turnover on NY bankruptcy court brings heightened uncertainty

[November 07, 2014]  By Nick Brown

NEW YORK (Reuters) - The stable of judges on Manhattan's federal bankruptcy court is undergoing dramatic turnover that could bring more uncertainty to one of the go-to venues for rescuing companies on the brink of financial ruin.

In January, Robert Gerber, the judge overseeing litigation stemming from the General Motors' ignition-switch recall debacle, will assume "recall" status, allowing court administrators to hire a new judge, people familiar with the matter told Reuters.

Two more judges are expected to join the court early next year, meaning that by the end of 2015 a third of the nine-member bench will be new, and at least four veteran judges will have left the bench since 2012.

It is the first time since 2000 that at least three new judges will join the New York court within a year and the change may affect the pace of the court's proceedings, the lawyers' fees and even the court's case load.

Under recall status, common for long-serving bankruptcy judges, Gerber will technically retire but continue to serve. According to one person, Gerber is considering leaving for good at the end of 2015. His chambers declined to comment and he has not announced any such plans publicly.
 

Also gone or leaving are Judge James Peck, who handled Lehman Brothers' liquidation, and Judge Allan Gropper, who adjudicated Kodak’s restructuring and has announced his retirement.

Replacements for Peck and Gropper have been selected and are undergoing background checks, according to Karen Milton, circuit executive for the Second Circuit, which oversees judge succession in Manhattan.

NON-POLITICAL

Bankruptcy judges are not political appointees. Unlike federal judges nominated by the president and confirmed by the U.S. Senate, bankruptcy judges are selected by a panel of federal judges in their district. They are appointed to 14-year terms, are not term-limited and can retire any time.

Gerber, a 15-year veteran known as a thoughtful if occasionally ornery courtroom sheriff, has overseen a number of big bankruptcies, including those of chemical company LyondellBasell, satellite operator TerreStar and GM's whirlwind Chapter 11 sale in 2009.

Among the largest items left on his docket is litigation over whether GM can invoke the terms of the sale to shield itself from claims that it covered up ignition switch defects prior to its bankruptcy.

The case, in which Gerber has to decide whether to invalidate an order that he himself approved, would stay in his courtroom as long as he continued to serve on recall status and would go to a new judge if the case dragged on beyond his departure.

A judge with less personal history in the GM case might rule differently on the validity of the liability shield. Still, it is impossible to tell how a new judge would view future legal arguments, though any conclusions already reached in the case would probably be honored by the new judge.

"BABY JUDGES SCHOOL"

Bench turnover can slow things down in busy courthouses as new judges get up to speed. They even attend an orientation seminar known as "Baby Judges School."

A departing judge's most complex cases, however, would not necessarily go to that judge's successor. For example, when Peck retired, Lehman went to incumbent Judge Shelley Chapman, who has quickly taken the reins and issued complex decisions.

Where new judges could have the biggest impact is behind the scenes. While all judges apply the same federal bankruptcy law, they employ various strategies to foster cooperation between warring stakeholders and take different approaches to issues such as scheduling or settlement talks.

Unlike in other areas of law, judges also get to approve bankruptcy lawyers' fees because every dollar for lawyers is a dollar less for creditors. With top-tier partners charging $1,000 or more an hour, New York lawyers will be watching for any signs of the court getting tougher on fees, which might persuade some to take their cases elsewhere.

"One of the things that drives bankruptcy lawyers to file in New York is they (the judges) are kind and friendly on professional fees," said one lawyer.

Judges from outside the New York bankruptcy industry could be stricter because they are not used to such hefty fees, said bankruptcy expert Stephen Lubben, a professor at Seton Hall University School of Law.

But more likely, Lubben said, the new judges will be ex-bankruptcy lawyers from New York familiar with practices there.

One widely rumored candidate to fill one of the currently open seats is former Judge James Garrity, who now heads Morgan Lewis & Bockius' restructuring practice. Garrity, who served as a Manhattan bankruptcy judge from 1991 through 1999, did not return a call seeking comment. Milton declined to comment on Garrity, or on Gerber's plans.
 

Judge Burton Lifland, who presided over litigation from Bernard Madoff's Ponzi scheme, died this year, while former chief Judge Arthur Gonzalez, of Chrysler and Enron fame, left in 2012. Due to the nature of their status, Lifland and Gonzalez will not be replaced, but their departures represent key veteran losses for the court.

(Reporting by Nick Brown; Editing by Tom Hals and Tomasz Janowski)

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