It is hard to read the legal news these days, especially concerning entertainment, without reading about the spectacle of Relativity Media. Relativity was dubbed the “next-generation global media company” by founder Ryan Kavanaugh, a “helicopter-flying, high-living mogul.” Kavanaugh claimed to have reinvented the movie business with algorithms that minimized the risk of film slates, yet Relativity filed for bankruptcy protection on July 30, 2015, disclosing assets of $560 million but liabilities of more than $1.18 billion. (See “Relativity’s Ryan Kavanaugh Breaks Silence, Points Fingers in Emotional Post-Bankruptcy Interview (Exclusive).”) Relativity is pushing to quickly auction most of its assets. (See “Relativity Media Files Bankruptcy; Film and TV Units for Sale.”) Manchester Securities, claiming to be Relativity’s largest creditor, seeks to slow down the rush to auction, claiming that Relativity has belatedly disclosed key valuation evidence. (See “Manchester Securities Asks Court To Postpone Relativity Bankruptcy Hearing.”)
I have tried a number of contested actions in bankruptcy court. The Relativity case is a good illustration that bankruptcy courts can serve as a forum for resolution of business disputes that can be dramatically different from experiences in state or federal district courts.
Bankruptcy courts are federal courts devoted strictly to resolution of issues under the federal bankruptcy code. Businesses file for bankruptcy protection to reorganize, Chapter 11, or liquidate, Chapter 7. In either case the bankruptcy courts can become a forum for rapid-fire business litigation. The litigation can occur within the reorganization or liquidation proceeding itself. The bankruptcy can also serve as an umbrella for litigation, known as adversary proceedings, which involve the “debtor” and are resolved during the course of the underlying bankruptcy.
The first key difference is speed. In bankruptcy court there are almost never juries. The issues will be resolved by a bankruptcy judge. Issues that could require a full trial in other courts may be resolved in bankruptcy courts via motions, in weeks or months as opposed to years. Adversary proceedings that require a full trial will take less time without a jury and can be set for trial in a matter of months. State court cases can take years to proceed to trial.
The second key difference is expertise. Business clients, even lawyers, sometimes gripe that juries don’t understand business cases or may be swayed by emotions and bias. Judges sometimes ascend to state or district courts with a criminal or government background, without prior experience in business disputes. Bankruptcy judges are usually appointed after significant experience in a firm devoted exclusively to business reorganizations and issues. Business and financial evidence will rarely be lost on the bankruptcy judge.
The third key difference revolves around disclosure and informality. No judge particularly likes discovery disputes, but a certain amount of quarreling over discovery, objections and motions to exclude evidence comes with the territory in state and district court. In bankruptcy court, disclosure is the watchword. Bankruptcy judges expect all parties to err on the side of full disclosure without court intervention. Bankruptcy judges don’t like litigators visiting their courtrooms with objections. Bankruptcy judges usually consider all evidence and treat doubts as to admissibility as questions of weight.
The fourth key difference involves procedures that are unique to bankruptcy courts. A business seeking reorganization is likely to be besieged by creditors and/or litigation. Any business wants to control its reorganization process. However, any hostile creditor or litigation adversary, who believes that the insiders of the business have engaged in wrongdoing, can move to have the business taken over by a trustee, or to dismiss the action or have it converted to liquidation. The bankruptcy court can spawn rapid liquidation over control over, even the fate of, the enterprise.
The final key difference involves overall approach. I still employ themes in bankruptcy cases, though without a jury present the themes can be less homespun and more “lawyerly.” I want the judge to get my point but not in a way that sounds dumbed down. I tend to emphasize the themes that permeate the bankruptcy code, namely full and honest disclosure, value for creditors and a fresh start for the honest but unfortunate debtor.
Bankruptcy courts can be a forum ripe for fast resolution of business disputes. Familiarity with litigation in bankruptcy court can be a valuable tool for the business litigator.