Q&A: Arthur J. Gonzalez

Judge Arthur Gonzalez '82 in The New York Law Journal, February 17, 2012

Media Source

On March 1, Southern District Chief Bankruptcy Judge Arthur J. Gonzalez will step down after nearly 17 years on the bench to become a full-time professor at the New York University School of Law.

Judge Gonzalez, 64, who has been a bankruptcy judge in the Southern District since 1995 and chief judge since 2010, has handled some of the largest-ever bankruptcy filings, including Enron, WorldCom and Chrysler. Before becoming a judge, he served as assistant U.S. trustee in the Southern District, and practiced law at Pollner Mezan Stolzberg Berger & Glass and Gaston & Snow. A 1982 graduate of Fordham University School of Law, the Brooklyn-born Judge Gonzalez first worked as a public school teacher.

In the weeks before his departure, Judge Gonzalez answered the New York Law Journal's questions about his career and the future of bankruptcy law.

Q: What originally attracted you to bankruptcy law?

A: To a great extent my entry into the field of bankruptcy law was not planned or even a goal of mine. I did some work in bankruptcy cases while at the district counsel's office of the IRS during the early 80s, but had no interest in pursuing that line of practice. After leaving the IRS, I was an associate in a firm whose senior partner became a Chapter 11 trustee and I worked on that matter. I was not looking for bankruptcy law to be my area of concentration. I was very content in pursuing a career in tax law and related litigation.

In the early 1990s I was a mid-level associate at Gaston & Snow, which was having financial difficulty. In October 1991, the firm filed for bankruptcy. I returned to government in a managerial role as an assistant U.S. trustee to manage the Southern District of New York office. The U.S. Trustee Program, part of the Department of Justice, has an administrative role in the bankruptcy process. It is there I began to concentrate in bankruptcy law. In 1993, I was named acting U.S. trustee and, in 1994, became the U.S. trustee for Region 2, which is comprised of the Second Circuit. In 1995, I became a bankruptcy judge.

I have enjoyed greatly the variety and complexity of the issues that we confront. The intersection of law and business, as well as the many legal issues that arise, result in an exciting and challenging experience in the law.

Q: How do the demands on a bankruptcy judge differ from those on a district judge?

A: I do not have extensive experience appearing before the district court. Before taking the bench, my federal court experience was almost entirely in the Tax Court and the Bankruptcy Court.

It seems to me that the composition of our respective dockets results in different kinds of demands. As bankruptcy judges, we do not deal with criminal cases and are not then subject to the time requirements and other issues that impact a judge handling those types of cases. Further, there is seldom a jury trial in the Bankruptcy Court. Therefore, I am not competent to comment on the demands criminal cases and jury trials impose on those courts.

However, adversary proceedings within a bankruptcy case are conducted within the same structure as non-jury civil litigation before the district court. So to a great extent, the demands would be the same. One difference may be that a number of our adversary proceedings are not standalone litigation because they have a direct impact on the Chapter 11 cases and that may present unique time pressures. The fact that a ruling in an adversary proceeding may impact the bankruptcy estate does not alter the substantive determination concerning the legal issues presented. Rather, it may have a direct effect on the time frame within which these matters need to be concluded.

The most dramatic difference between the courts from my standpoint would be in the administration of a Chapter 11 case. In most civil matters before a non-bankruptcy court, the events upon which a court rules are historical and the advocates present a record upon which a determination may be made. In the context of a Chapter 11 administration, you have a "real time" process, in that decisions often are made based upon evolving facts regarding the viability of a company, its preservation of value and its future ability to enhance value. Further, the administration of a Chapter 11 case will generally involve not only the business operation of the enterprise but attendant adversary proceedings and claims adjudication process that preset a case management challenge unique to the Bankruptcy Court. Our processes and protocols are sensitive to those demands and we are accustomed to reacting in a very compressed time frame.

Demands of time and resources may come in different ways and under different circumstances in each court but, nonetheless, each court is under a great deal of pressure to meet the demands of its caseload in a timely manner.

Q: How does being a bankruptcy judge in the Southern District of New York differ from being a bankruptcy judge elsewhere?

A: Our docket has a greater concentration of large Chapter 11 cases than most other jurisdictions. Many of the large Chapter 11 cases have a great deal of media coverage and a New York venue probably increases the amount and intensity of that coverage. Also, the Chapter 11 cases often involve extremely complex business structures and legal issues involving those structures. We are often involved in more inter-creditor disputes than seen in consumer cases. Nevertheless, consumer cases also present challenging legal issues that have far reaching impact beyond the parties involved. (There are probably more consumer bankruptcy issues that find their way to the U.S. Supreme Court than business issues.)

Simply put, the difference lies in the case mix, each of which presents its own challenges.

Q: Why does the Southern District get so many high profile cases? Will this continue?

A: For many years there has been a concentration of high-profile cases in the New York and Delaware courts. When attorneys are retained to advise clients regarding a possible Chapter 11 filing, the process includes advising a client on venue options and then on the various benefits of one venue versus another, in the context of the client's goals. It is therefore necessary to assess how the relevant case law in a particular venue impacts the outcome sought. Another consideration would be the experience of the court in handling similar matters. In addition to the experience of the judges, also considered would be the infrastructure of the court as an institution, and the institution's overall experience in handling high-profile cases.

The difference between our court and most others is the level and amount of experience. Throughout the country, talented judges and court staff develop and perfect the way they deal with the caseload presented. They develop an expertise in these areas that facilitate the effective and efficient disposition of cases. We, as an institution, have developed that type of experience and efficiencies in large corporate cases—attributing, among the other considerations mentioned above, to the continued filing of those cases in our court. It is important to note that many cases have been filed in districts other than New York and Delaware and have been handled with great skill and ability by the courts in those jurisdictions. Therefore, to a great extent, it seems to me that the most significant factor in the "choice of venue" consideration is the case law that has developed in the jurisdiction.

The choice of venue made in the auto industry cases is instructive. A primary goal of each auto company filing was to conduct a Bankruptcy Code §363 sale of substantially all the assets. It appears that there were three venue choices under consideration—Detroit, Delaware and New York. Each of the auto companies could have filed in Detroit, as it was the location of the principal place of business and location of its principal assets. Delaware was also an option because it was the state of incorporation of all or most of the corporate family. Finally, New York was under consideration because it was the proper venue choice for one or more of the subsidiaries of each of the auto companies. Each of those three jurisdictions was a proper filing venue under bankruptcy law.

One of the primary concerns in selecting venue would be the case law, most importantly the circuit law, regarding significant issues, such as §363 sales. As among the venue choices, the leading case in this area is a Second Circuit case. Therefore, a venue choice might very well depend on whether the established precedents in a particular jurisdiction would, based upon the facts that debtors believe could be established, lead to a successful outcome with respect to the goals of the case.

It is in this context that decisions are made. I think the Southern District of New York is often the venue of choice because a significant amount of case law, at all levels, has developed here. This provides a measure of predictability. The New York Bankruptcy Court's staff has demonstrated a clear and incisive ability to handle these types of cases.

As to whether the Southern District will continue to receive high-profile cases, I believe that will depend in great measure on whether there is a basis for venue here. And, if so, whether management and the other parties involved during the pre-filing process believe this venue serves the needs of the case.

Q: What have been the most challenging bankruptcy cases you've handled as a judge?

A: The case that presented the greatest challenges over its pendency was Enron. It seemed that different issues would arise every day, and as one issue was decided, it seemed to be replaced by two more. The challenge was to determine issues in a timely manner and set forth the rationale in a written opinion for review in the appellate process.

WorldCom was challenging because of its size and the speed in which it needed to complete its financial and operational restructuring—15 months. It is to my knowledge the largest operational and financial restructuring under the Bankruptcy Code.

The most challenging, within a very specific period of time, was the Chrysler case. Within less than 45 days, the main aspects of the case were concluded. The opinion approving the sale was issued on Sunday night after the sale concluded on Friday night. There was enormous pressure on the parties involved, the court staff, chambers staff and me to ensure a full and fair process and to do so within a very short period of time.

Q: How has bankruptcy practice changed during your tenure?

A: I think the greatest change over my tenure has been the debt structure of the Chapter 11 cases. Most Chapter 11 debtors have a fully secured debt structure. This results in very little ability for most debtors to sustain themselves in a bankruptcy proceeding beyond the willingness of the secured lender to advance funds. Few cases are able to sustain themselves by cash receipts from operations and, therefore, must seek additional lending. They most often do not have any unencumbered assets and are, therefore, often dependent upon the pre-petition secured lender for operational funding. This debt profile was very different prior to the mid-2000s, when large companies often had unencumbered assets which could be used as a basis for post-petition financing. Related to the current debt structure is the increase we see in inter-creditor disputes and how these disputes greatly impact the direction of the cases and dominate them, resulting in seemingly endless litigation. Such litigation has little, if anything, to do with any operational restructuring of a business.

Q: What changes do you expect to see in bankruptcy practice?

A: It is not likely things will change in the near term concerning debt structure, which is a function of the market. However, to the extent the economy improves, we may see a change in the ability of a debtor to maintain itself while in bankruptcy, with funds generated through operations. A debtor may have the ability to secure the funding for a full Chapter 11 process, rather than having to resort to a sale of substantially all of its assets in a relatively short period of time.

Q: What challenges do you expect the court to face after you leave?

A: Similar to all courts, our court is faced with increasing budget cuts. If those budget cuts are accompanied by an increase in bankruptcy filings, there will be an even greater challenge to maintain our current level of services.

Q: What mistakes do you see bankruptcy practitioners make most often?

A: I think that inexperienced bankruptcy practitioners are sometimes not fully prepared to create the record necessary to support the relief requested. This often results in a postponement of the hearing or a denial of the relief sought, which relief might have been granted had a proper record been developed.

Q: What single piece of advice would you like to give new bankruptcy attorneys?

A: In addition to being prepared to support the relief requested, both by developing the factual record and providing the legal basis supporting the relief sought, I think the most successful attorneys also have a very good understanding and appreciation of how the particular relief sought fits into the overall needs of their client.

Q: Concerns have been raised about favoritism resulting from familiarity among bankruptcy practitioners and judges. Do you think those concerns are valid?

A: I cannot say that such issues never arise, but I am quite confident that, whatever the level of familiarity that exists among bankruptcy practitioners and judges, it is not dramatically different than any other group of practitioners and judges within any discipline. This issue is not limited to specialized courts. Courts of general jurisdiction may have specific types of cases that represent a significant portion of the practice before them, which may result in a level of familiarity with the participants, leaving them subject to the same question. So the concerns are not unique to bankruptcy courts.

As to their validity in the Bankruptcy Court, we have attorneys from all over the country appearing in our cases. One would imagine that if the concern were a real one, it would have been raised and aired in an appropriate forum. As to other courts, my observation is the same—the issue would have been raised and addressed.

Q: Have you seen attorney fees rise over time in bankruptcy cases? Do you think they're too high?

A: Under §330 of the Bankruptcy Code, fees in bankruptcy cases are based on market-driven factors. To the extent attorney fees in the marketplace have increased over the years, fees in bankruptcy cases will increase as well. The need for law firms with a multi-discipline practice in the administration of large bankruptcy cases is self evident. The issues are extremely complex and warrant practitioners with the skills and experience to properly address them. Often associated with those skills are high hourly rates.

I think there are three main factors that influence fees in a bankruptcy case: (1) the size and complexity of a case, (2) the amount of litigation, and (3) the length of time the case remains pending. Recently, the length of time that large cases have remained in bankruptcy may have been shorter; nevertheless, the significant increase in the level of complexity and the amount of litigation involved has driven the increase in overall fees.

Although much is written about the hourly rates as a cause of the increase in fees, I think it is a factor but I do not believe it impacts the bottom-line number as much as the factors I mentioned above.

As a starting point, the attorney fees must be reasonable. The process to determine the reasonableness is impacted by many factors. In focusing on fees, one should not look at the amount in a vacuum. My observation is that, although the amount paid in fees makes headlines, seldom are those fees viewed in the context of the needs of the case, including the skills and expertise required of the practitioners to preserve and create value in these cases.

In Enron, I approved $760 million in fees up to the time of confirmation and the total amount has probably risen to $1 billion. The Enron estate has distributed $22 billion to date, and according to the recent status report will not be distributing much more. In Enron, the skill and experience level required of the professionals, in responding to issues and preserving the value of the estate, resulted in a large dollar amount of fees. In assessing the fees, it may be useful to look at the fees paid to professionals during Enron's pre-petition operations in constructingthe various financial transactions at issue, as well as the fees incurred as a product of Enron operating as a regulated industry, and compare those fees with the fees paid during the bankruptcy case in examining and litigating with respect to those financial transactions, as well as in responding to the numerous regulatory investigations. This analysis would provide a context within which to evaluate the overall amount of fees.

Fees are fair game for criticism and I have no doubt that some fees in these large cases, as well as other cases, may not be reasonable. However, I believe it is the exception and not the rule. And when it occurs, it should be addressed regardless of its actual impact on distributions from the estate. However, we need to look at these large cases with a realistic understanding of how complex and large these corporate enterprises are.

Where fees receive far less attention but are far more significant to the viability of a case are in small or medium-size cases, where the administrative expenses are a much higher percentage of the value of the enterprise and often may cause the failure of a Chapter 11 case because of the debtor's inability to satisfy such claims and maintain a high enough cash flow to operate its business.

As to the level of fees, maintaining an open and participatory process is expensive, particularly given the size, complexity, amount of litigation, and length of time that a case may remain pending.

Q: Are there any reforms you would like to see in bankruptcy law?

A: The American Bankruptcy Institute has created a commission to look into possible reforms. I am a member of that commission and believe that, through the commission's efforts, sound recommendations will be made. As far as commenting on any, I would prefer to wait and see what is presented by the ABI commission.