Interview with Professor Jonathan Lipson
Posted on August 18th, 2016

by Marie Kelly and Steven Walsh; edited by John Basenfelder


Professor Jonathan Lipson is the Harold E. Kohn Professor of Law at Temple University Beasley School of Law where he teaches Contracts, Bankruptcy, and Transactional Skills.

TLR: So Professor Lipson, tell us generally what areas of the law your research and scholarship focus on?

JL: Most of my work is about business failure. So it’s significantly about corporate bankruptcy, but I also look at corporate law and commercial law generally. This is mostly because the bankruptcy system in the United States never just involves the Bankruptcy Code, which is a federal law that tries to deal with problems of business failure. Instead, the reality is that business failure covers a whole bunch of other fields as well, and so I teach those other courses and my research often looks into those other areas, as well.

TLR: What sparked your interest in business failure?

JL: Partly it was accidental. I graduated from law school in 1990 and I was recruited to go to a big firm in New York.  The only department in that firm that was really active at that time was the so-called “commercial department.” It was too “down-market” to call it bankruptcy. But they were obviously very busy because there was a big recession.

So at one level it was just purely opportunity but it also seemed to me that it was a great field for somebody who had not yet clearly formed ideas about what he wanted to do.  Bankruptcy is one of the last refuges for generalists. So, in the same way that I teach and write about corporations and commercial law as well as bankruptcy, that’s what corporate bankruptcy lawyers do.

Business bankruptcy lawyers really have to know a huge range of fields of law in ways that I think other business lawyers often don’t. It’s very easy to get very narrow in practice very quickly. So I viewed it as a way of keeping options open. And I also thought it was a good way to learn a variety of skills because it’s not purely transactional, it’s not purely litigation, it’s a mixture of both. And so I figured it would expose me to a broad range of subject matter and skills. I hoped that I would, as I went through, figure out what I liked more and what I didn’t like.

But I have to confess that I never really thought that failure itself was inherently interesting. Or at least I didn’t realize that I would find it inherently interesting. But it is, because it’s the core economic problem: You have too little pie to feed too many mouths and so the question becomes, “Well how do you decide who gets what?  Do you divide it up evenly? Or do you exclude some people? What do you do?”

TLR: Then there were huge scandals like Enron that were in the national spotlight and that may have fueled that interest in a way, or made it easier. . . .

JL: Enron was not really the first wave of prominent bankruptcy scandals, but it was certainly the most prominent to that point. Enron and WorldCom. People tend to forget about WorldCom, which, in some ways, was . . . less interesting because it was just straight fraud. Whereas Enron was fraud, but of a very different kind. It was a much more complicated. Bankruptcy has become this process now that affects hundreds of millions of people because when large companies go into bankruptcy, that affects their thousands and thousands of employees and millions of customers. For example, when United Airlines has, say, 50,000 employees, its bankruptcy matters to all of them. I think lots of people care about it so it gets a lot of attention in the media. And that will continue to be the case because companies will continue to borrow more money than they can pay and they will need the bankruptcy process to sort it out.

TLR: Speaking of specific bankruptcies, one thing you’ve been working on is the Jevic case or the Jevic appeal. You worked on a Supreme Court amicus brief in that. If you would, just give us a summary of the facts in that case and why it’s important.

JL: Sure. Jevic is a case from the District of Delaware, which is the bankruptcy court that has more large, chapter 11 cases than any other bankruptcy court. I think many people will tell you it’s the most important court, because of that. . . .

Jevic was a trucking company in New Jersey and it went into bankruptcy in 2008 after it was acquired in a leveraged buyout. Sun Capital, a private equity fund paid a lot of money to acquire the company and borrowed money against the assets of the company to do the deal. The company couldn’t service the debt so it went into bankruptcy. Pretty classic pattern.

What happened then in the case is not entirely clear, but the company was not able to continue operating. So almost immediately, it terminated all of their drivers. And given the way employment law works, those drivers were entitled to about $8 million in “WARN Act” claims that they were not paid. Under the Bankruptcy Code, they are entitled to . . .  be paid fourth in order of priority before all the general unsecured creditors and other folks get paid.

Because the company’s assets were fully encumbered and the company wasn’t operating anymore, the question was, “Should the secured creditors just take the company and walk away or is there something else worth salvaging here?” A committee of unsecured creditors had been appointed and their job in the case was to investigate that question. To figure out whether there is something else here.

They concluded that there was. There was what’s called a fraudulent transfer cause of action against the private equity fund that had taken the company, purchased the company, as well as the lenders that financed this and the prior shareholders who sold. So the argument was everybody had engaged in what’s called a constructive fraudulent transfer. It wasn’t that people intended to commit fraud, but for a variety of complex reasons the committee believed that the elements needed to state a cause of action to avoid the whole leveraged buyout as a constructive fraud existed—so they sued.

The complaint survived motions to dismiss so I think Judge Shannon believed that there was something to the case. But we don’t know much more about the litigation than that. The parties then . . .  sat down and tried to negotiate over the course of a year or two, some kind of resolution. If the fraudulent transfer lawsuit succeeded it meant that some or all of the liens of the lenders would be avoided and all of a sudden the bankruptcy estate would have lots of money to distribute to lots of other folks. If it failed, then secured creditors take all their assets and they go home, and nobody else gets anything. So it’s kind of an all or nothing game. And in an all or nothing game situation what people normally do is they negotiate some kind of settlement.

In Jevic everybody except the drivers came to a deal. They then faced this question: well how do we implement this deal? Ordinarily what you would do in bankruptcy if you have a deal, even for a company that is just liquidating—like Jevic—is you’d have something called a plan of reorganization. A plan of reorganization requires a fair amount of process because you’ve got to have a disclosure statement and you’ve got to have a variety of hearings on whether the plan meets a number of tests under the Bankruptcy Code. But, if the plan satisfies those tests then it would be confirmed and distributions would be made.

The settlement that these folks had constructed could have been placed in a plan and creditors would have either voted for it or not, and if they didn’t then they would have to start over. For reasons that aren’t clear, these folks didn’t want to do that. Maybe they didn’t want to spend the money on the process or they believed that they would lose in the plan process.  We don’t know. So they instead devised an alternative way of implementing the settlement, which was through something called a structured dismissal. And, the key point here is that everybody agreed to the structured dismissal except these drivers, who were entitled to $8 million as a priority claim. The settlement basically said, “Well drivers you’re not getting anything on account of your priority claim. But, we’re going to skip over you and give some money to some junior folks and we’re going to pay off counsel to the creditors’ committee and we’re going to discharge, or eliminate, whatever fraudulent transfer cause of action there was. So this is a settlement of that lawsuit and therefore nobody can ever bring it and drivers your priority claim is just not going to get paid.”

This settlement was in front of Judge Shannon and he really had a hard choice: he can either approve it or not. And he approved it. He said, and I am paraphrasing, “This is a really ugly case but, you know, nobody has the money to pay a lawyer to litigate the fraudulent transfer suit and I don’t think there is anything here,” although he didn’t explain why he thought that because a year and a half earlier he denied the motions to dismiss. So he approved the settlement and it’s appealed by the drivers because they’re grumpy about not having gotten paid for their $8 million priority claim. The district court affirms. The Third Circuit Court of Appeals two to one affirms the bankruptcy court. Right now there is a petition for certiorari in front of the Supreme Court about whether this particular structured dismissal is appropriate.

The petitioners were the drivers and they say, “look, if you’re distributing assets of a debtor’s estate, a corporate debtor’s bankruptcy estate, you’ve got to follow the priority rules that Congress created. This is not optional. Right. And the priority rules say we’re entitled to $8 million in claims before anyone else would get paid. So, the $2 million that was paid to the unsecured creditors and the lawyers for the unsecured creditors shouldn’t have gone to them. It should have gone to us first because we had $8 million in claims.” The respondents’ view is this is just a settlement and we want settlements and we like settlements and it’s really unfortunate that the drivers didn’t come to the table but there is nothing that prohibits the judge from approving this.

To me the really interesting question in the case isn’t so much about the ability to skip over their priority claim, although that’s the one that has gotten the most attention, but instead the second feature of the settlement– the structured dismissal which was that it eliminated the fraudulent transfer cause of action that the drivers could have had. This is where it gets a little complicated. This power to avoid the leveraged buyout transfers, with the liens and so on, isn’t just created by the Bankruptcy Code. There is a state law version of it in New Jersey, and in every state, that creditors like the drivers could have pursued even if the company had never gone into bankruptcy—or if the case had been dismissed without a “structured” dismissal.

And, while I understand how the bankruptcy court could say, “Okay you can’t sue in bankruptcy court for this anymore,” I don’t understand how the bankruptcy court could say, “I’m dismissing the case, but state court in New Jersey: you can’t entertain this cause of action either. Drivers, you can’t pursue this cause of action either. Even though you never agreed to it, and your priority claim never got paid for it.” So that, to me, is the really interesting thing about it: Can the bankruptcy court, in dismissing a case, strip the drivers of these claims? A plan of reorganization could. A plan of reorganization could do so even over their dissent. But that’s precisely because plans involve a whole lot of process. So they get to vote, along with other creditors, and it doesn’t have to be unanimous. It can be majority and a plan probably could have gotten the settling folks the same outcome. But those who organized the settlement didn’t want a plan, they wanted something else. And the question is whether this “something” else is permissible? I think the answer should be no under these facts.

Whether the Supreme Court agrees to take the case has yet to be seen. They take very few cases. So, I have no idea if they’ll take this one. But I wrote a brief for a group of law professors in support of the petition. There were several other sets of amici as well. A bunch of state attorneys general filed their amicus brief in support of the petitioners because they are often trying to collect priority taxes.  They worry that the same sort of structured dismissal could be used to eliminate their priority tax claims in other cases. A group called the National Employment Law Project, NELP, filed a brief also in support of the petition.

So, it’s an important case in that it’s one thing to say, everybody agrees and we’re going to dismiss the case without screwing around with a plan . . . . But this is exciting because you had a pretty legitimate objection from the drivers both with respect to priority and . . .  these state law fraudulent transfer claims that they would have had but for this dismissal order. It’s sort of technical but it ends up being about how far can distress investors, like the private equity folks here, go in using settlement agreements. A settlement agreement is a contract to alter the Bankruptcy Code’s rules and the system that Congress thought they were getting. So, that’s what I think it’s ultimately about.

TLR: It sounds like bankruptcy implicates a lot of different areas of the law, such as employment, contracts, procedure, and process.

JL: It does and that’s why bankruptcy ends up being the last refuge of generalists. Because, am I an expert in something called the “WARN” Act, the Worker Adjustment Retraining and Notification Act? No, but I know that if you fire a bunch of employees without giving them sixty days notice, they have a claim under the WARN Act. I knew that before this case because I represented a retailer in a chapter 11 that had to let a whole bunch of people go and we couldn’t give the WARN notice because they realized, “oh we’ve got to shut down everything yesterday.” So we had to deal with the fact that they had a WARN Act priority wage claim.

TLR: Yeah, it sounds like common sense that the retailer couldn’t avoid the firings. Perhaps this reflects, like you said, a policy choice that contract law should come into play more in bankruptcy.

JL: Well, a policy choice about contract but also settlements. We do want people to settle. Bankruptcy is interesting in part because it is a process that takes place in a court. But it usually doesn’t involve trials.  or anything resembling litigation as you would have learned about litigation in civil procedure. So then the question becomes: who can get screwed in the settlement? To what extent can you and I agree to settle something that hurts somebody else? That’s a question that’s obviously at the heart of contract law. It’s one of the core questions about the economics of contract. But it’s also a really significant challenge for courts generally. Because, if you think about any class action settlement, right, I mean almost all class action lawsuits end up in settlements.

Mostly it doesn’t matter because the settlement is probably going to give you an iTunes card for twenty bucks and either you get it or you don’t. But in a case like Jevic, the employees are looking for eight million dollars, and then it starts to matter. And so, the underlying issue is actually really hard because the courts have this very mushy set of standards. In the Third Circuit it’s called the Martin test, in bankruptcy, which says “well you balance a bunch of factors . . . and then you declare victory and say, “please go away.”

And I say this with all due respect to the Third Circuit, because I don’t know what else they’re supposed to do. Settlements by definition are very hard to get into. And the whole point is, “Judge, we don’t want you to get into it. We’ve decided that we can agree after all. And so therefore we’re going to have a contract replace the lawsuit.” That’s the settlement agreement.

So the underlying issue is hard and crosses into many, many fields. Federal securities law settlements, products liability settlements, antitrust settlement  . . . all these class action lawsuits end up facing the same kind of problem. Bankruptcy, I think, makes it more acute because you have people who are both hungrier and there is less to go around. And I think bankruptcy lawyers, I don’t know if it’s fair, but I think bankruptcy lawyers like to think of themselves as having somewhat greater expertise in finessing settlements because that’s what the system promotes. We [ask] “where’s the deal, let’s find the deal, figure out the deal?” Whereas the litigators of the world say, “well we’re going to litigate with you and if we have to settle we will.” But, I think the presumption is that force rather than trading is the modus operandi for litigators.  For bankruptcy lawyers, it’s the other way around.

TLR: Could you give us a general idea of some other things that you’re working on or where you are headed next?

JL: Sure. I’m finishing up a bunch of projects. So I’ve written a paper about this larger problem of the role of contracts in bankruptcy that is coming out in the Harvard Business Law Review, and there is more to be done on that project generally. But there is also a paper that I’ve been threatening to write for years about a workshop that I teach here. It’s called the Transactional Skills Workshop. The paper isn’t really so much about that but about the theory of transactional lawyering and the theory of teaching people transactional lawyering. It turns out that there isn’t much theory of either, really. There is a very famous article that I force all of my students in this workshop to read by a man named Ron Gilson, who is brilliant. He has a theory about why people hire lawyers to do deals. And it’s basically an economic theory and it doesn’t make a lot of sense. But it’s a great paper and people have spent a lot of time chewing on it. I have a somewhat different response to the paper about real value that transactional lawyers bring to the process. And I hope it’s just a little richer than I think his theory is.

But then, you know, the equally important question is “how do you teach it?” If we live in a world where people actually want graduates of law school to know how to practice law, which wasn’t true when I graduated from law school, but is today, and you accept the proposition that at least a plurality and probably a majority of people will be transactional lawyers and not going to be litigators, then you need some theory about how you are going to teach this to people. Because whatever your theory of advocacy or litigation might be, we don’t really have an analogous theory of transactional law. So this paper is,  at least as I think about it now, going to try and take a swat at both of those points because I think they’re related.

TLR: That sounds really interesting. Do you generally have any advice for future transactional attorneys?

JL: The practical advice is: learn as much about business as you can while you’re in law school. Which means taking things like Accounting for Lawyers, which sounds abysmal but actually is interesting. Take Corporate Finance, that kind of stuff. The business law courses are important too, but the truth is that part of what makes business law so interesting is that it’s about business.

You might say: “well business is about numbers, and man I don’t want to do that. I went to law school because I can’t do that.” But it’s not. Business is really about people. It’s just about politics and personal politics and lower case “p” politics. Who’s trying to screw whom and, can they do it and who has power and who doesn’t and all of that kind of stuff. So, it ends up being—it’s only as interesting as human behavior. So if you think that other people are interesting, you would actually probably find business law interesting. You might not. But, business ends up being really interesting because  t’s just about how people conduct their lives. If you asked me in law school if I thought I’d be a business lawyer I’d have said “you’re insane” for a bunch of reasons including that I thought, “well I’m lousy at math” and “business sounds really boring.” But I would have been wrong about both. It turns out to be super interesting. But I think that while Temple does a very good job of training people to be good lawyers in a traditional sense, like most other law schools we don’t offer great exposure to more business oriented things. We actually probably offer a little bit more than most law schools, through ITS and ITP and my Workshop, but I think our students don’t often think about it.  I am glad you’re doing this interview.  This may help to change that.