Senate Proposal Would Limit Where Companies Can File Bankruptcy

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By Daniel Gill

Bipartisan legislation introduced in the U.S. Senate proposes to rewrite rules on where bankruptcy cases can be filed to prevent large corporations from ‘forum shopping,’ or choosing courts most advantageous to their interests.

The Bankruptcy Venue Reform Act of 2017 ( S. 2282) would hit New York and Delaware hard as venues for big case reorganizations and aims to make the process more accessible to smaller players in large bankruptcies.

The measure was introduced Jan. 8 by John Cornyn (R-Texas) and Sen. Elizabeth Warren (D-Mass), who is a former bankruptcy law scholar.

“This bill is about big cases; that’s who is forum shopping,” Lynn LoPucki told Bloomberg Law.

LoPucki is a bankruptcy scholar at UCLA School of Law and manages a database tracking large publicly traded companies having filed for Chapter 11.

Similar measures were introduced in the Senate in 2003, 2005, and 2011 with no action. There’s no indication how the bill may fare in the Republican controlled Congress or the business-friendly White House.

The proposal aims to dramatically reduce the number of large bankruptcy cases filed in New York and Delaware, the two most common venues for big cases. It seeks to permit filings only where a company has its principal place of business or where its principal assets are located.

Under current laws, a company can also file where it is incorporated, but the legislation proposes to eliminate that avenue.

The measure, if it became law as written, would have a profound impact on practitioners located in New York and Delaware, according to bankruptcy scholars.

When Cornyn introduced a similar measure in 2005, he was strongly opposed by then Democratic Sen. Joe Biden, who vigorously defended his home state of Delaware’s interest in maintaining the status quo, according to a 2008 Wall Street Journal article.

Protecting the Small Players

Proponents say one reason for the bill is to provide better access to the courts for many smaller players in the large public company bankruptcies.

Unable or without the resources to travel far for hearings, smaller creditors, employees, suppliers, and even local taxing authorities are often left without a voice in large cases.

Under the current system, debtors and their advisers can essentially pick and choose where they want to file, LoPucki said.

“The bill would have a dramatically democratic effect on the bankruptcy process,” he said.

Delaware Opposed

Delaware Gov. John Carney (D) and the state’s Democratic congressional delegation, including Sens. Tom Carper and Chris Coons, and Rep. Lisa Blunt Rochester, oppose the measure.

“Denying American businesses the ability to file for bankruptcy in the courts of their choice would not only hurt Delaware’s economy but also hurt businesses of all sizes and the national economy as a whole. This is a misguided policy, and we strongly oppose it,” they said in a joint statement.

Data compiled by LoPucki confirm Delaware’s economy would be hurt by the measure, if it became law. In the last 10 years, 44.5 percent of large business bankruptcies were filed in Wilmington, Del. Out of those 157 cases, no debtor was headquartered in Delaware.

That means that none of the large bankruptcy cases filed in Delaware could be filed there if the bill became law. The court would likely have to reduce its number of judges from six to one, LoPucki said.

New York would also be hit hard. About 20 percent of the big bankruptcy cases filed in the last 10 years were filed in New York. Among those cases, only about 27 percent were companies headquartered there, so the new bill would eliminate nearly 73 percent of its big case load.

Home Court Advantage

Bankruptcy practitioners located in big New York firms would also likely be hurt, LoPucki said. Although they could conceivably go to where the cases were being filed, New York lawyers often get beaten up by local bankruptcy judges, he said. They often have fees denied and greatly prefer to appear in their home courts.

Bruce Markell, a bankruptcy law professor at Northwestern University and a former bankruptcy judge, told Bloomberg Law that he supports the measure.

Under the current system, with most big cases filed in New York and Delaware, the law becomes skewed by being interpreted by a small set of bankruptcy judges and Article III judges who hear bankruptcy cases on appeal, Markell said.

“The system is unintentionally isolating circuits from developing bankruptcy law across the country,” he said.

Cornyn said in a statement that “closing the loophole that allows corporations to ‘forum shop’ for districts sympathetic to their interests will strengthen the integrity of the bankruptcy system and build public confidence.”

LoPucki agrees. He suggested that some courts in big cases make decisions that are designed to please the parties who decide where to file—the debtors, their attorneys, and the debtor-in-possession lenders who will be funding the case. The purpose would be to keep the big cases coming into these courts, whose budgets are determined based on case-load.

The venue reform bill would relieve those courts of the pressure of attracting big cases and would restore system integrity, he said.

In defense of the system as it currently operates, many practitioners have claimed that it makes sense to allow the mega cases to choose between New York or Delaware, as those courts have developed systems and practices to handle the huge work load that comes with such cases. It’s the experience of the courts that makes them attractive as filing venues, they say.

To contact the reporter on this story: Daniel Gill in Washington at dgill@bloomberglaw.com

To contact the editor responsible for this story: Jay Horowitz at jhorowitz@bloomberglaw.com

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