USA October 5 2021
Here we go again – proposed bankruptcy venue legislation is back after previous “reform” efforts came up empty. For those seeking legislative action, what are the chances for venue reform now?
Venue for bankruptcy cases is governed by 28 U.S.C § 1408, which provides that corporations may file in the district (a) in which their “domicile, residence, principal place of business in the United States, or principal assets in the United States” have been located during a majority of the prior 180 days, or (b) in any district where an affiliate, general partner or partnership has filed. Because of the different bases for venue, a company may have multiple choices where to file its chapter 11 case. For instance, if the company is incorporated in Delaware, like many companies are, venue in Delaware is permitted even if the company is headquartered in another state and otherwise has no connection to or assets located in Delaware. Alternatively, if the company has an affiliated debtor incorporated or located in a state, the company can file in its affiliate’s venue, even if the affiliate is insignificant in size or importance. All of this optionality may lead to “forum shopping,” meaning a company is strategically able to choose where to file its bankruptcy case, based on factors such as favorable case law in the district, the particular judges (and at times the fact that there is only one judge) in the district or the procedures employed in the district for complex cases. These choices can in many cases be dictated by lenders, who view the judges or jurisprudence in those districts as more favorable to their positions. Oftentimes, these choices lead to filings in Delaware, the Southern Districts of New York and Texas, as well as the Eastern District of Virginia—jurisdictions which are favored by debtors and lenders—which has resulted in a concentration of bankruptcy filings, especially by large public companies, in those jurisdictions.
The ramifications of this forum shopping are significant. For instance, many corporate chapter 11 cases are filed far away from the location of the company’s employees and creditors, in jurisdictions where the company only has tangential contact. This may limit the debtor’s employees and smaller creditors from having meaningful access to the proceedings. The concentration of large corporate cases in just a few select jurisdictions may limit diversity of judicial opinions by limiting the judges who are asked to decide complex and novel issues of law. Further, creditors who are sued by debtors—for instance, for recovery of preferential transfers—must defend themselves in jurisdictions with which they have little to no connection, forcing them to hire local counsel and significantly increasing the cost of defense.
These concerns, however, may be outweighed by other factors. For example, many bankruptcy cases use free, online case dockets, and particularly since the onset of COVID-19, increasingly hold hearings via telephone or Zoom. Local creditors are therefore able to stay actively engaged in a bankruptcy case regardless of where the case is filed. Furthermore, reform critics argue that concentration of large bankruptcy cases in select jurisdictions allows complex issues to be expeditiously decided, since the judges in those jurisdictions have substantial experience handling large complex cases. Lastly, it bears noting that although some believe that the integrity of the bankruptcy system is jeopardized with the current venue provisions, a party in interest may seek a change of venue in the interest of justice or for the convenience of the parties.
Previous efforts to reform bankruptcy venue have failed. Most recently, in 2018, Senators John Cornyn (R-Tex.) and Elizabeth Warren (D-MA) introduced the “Bankruptcy Venue Reform Act of 2018.” This bill would have required corporate debtors to file for bankruptcy protection in the district in which their principal assets or principal place of business was located. The bill did not receive a vote in either the House or Senate.
For those favoring venue reform, however, hope springs eternal. On June 28, 2021, Representatives Zoe Lofgren (D-Cal.) and Ken Buck (R-Tex.) introduced the “Bankruptcy Venue Reform Act of 2021” (H.R. 4193). Subsequently, on September 23, 2021, Senators Warren and Cornyn introduced the Senate’s substantively identical version of the “Bankruptcy Venue Reform Act of 2021.” The new bills would require a debtor to file where its headquarters or principal assets are located, severely limit the ability to use affiliates to establish venue and require a debtor to establish by “clear and convincing evidence” that venue in the selected jurisdiction is proper.
What are the chances for this latest bankruptcy venue reform? Unfortunately for reform advocates, the chances appear quite slim for any movement on the current bills and it is likely that the bills will run into strong resistance like prior reform efforts. For instance, right now it is unclear where House Judiciary Committee Chairman Jerrold Nadler (D-NY) stands on venue reform, although Chairman Nadler’s district includes the Southern District of New York, often a direct beneficiary of the current venue rules. Furthermore, even if the bill passed both the House and Senate, it is unclear whether President Biden would sign the bill into law. After all, President Biden is a former Senator from Delaware, a major beneficiary of the current venue rules, and was a strong proponent of the present venue statute.