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Does Bankruptcy Have a Venuereal Disease?

posted by Adam Levitin

Yes, apologies about the title. I guess I ought to have known better, but I didn't anticipate what a sore point bankruptcy venue is. My post about Border's inappropriate venue in SDNY has generated some comments, as well as some rather pointed emails to me off-line. The discussion of bankruptcy venue has been heavily shaped by the work of Professor LoPucki, which used some rather pointed language and has made some attorneys (and especially judges) extremely sensitive about any discussion of venue. Whatever one's view of Professor LoPucki's work on venue, however, I think it's important that the bankruptcy community be able to discuss the issue frankly. To that end, I think it's important to recognize a few issues about the venue situation.  

First, let's keep separate the issues of what the law is and what the law should be.  Whatever one thinks the law should be, Border's bankruptcy filing does not comply with the law.  I think that's a problem in and of itself, even if no one is objecting.  

Second, Border's is different than say GM because it didn't bootstrap its way into venue, which is permitted under the statute.  It just disregarded the statute.  (Whatever happened to dismissal or transfer by the Clerk of the Court for arguably ministerial things like venue?)

Third, the fact that no one is objecting doesn't necessarily mean that everything is copacetic.  There might be some parties that don't even know that there is a venue problem or don't recognize the value of a different venue or simply aren't aware of their rights, but who might fare better with a ED Michigan or D. Delaware bankruptcy for Borders.  The whole reason that the judge and UST may raise the venue issue is because they are tasked with protecting the interests of the system, which includes protecting unsophisticated parties.  

But beyond that, even some of the sophisticated big boys might not like SDNY venue, but might not find it worthwhile to raise a challenge.  Consider this scenario.  Let's say that a venue challenge would cost $25,000.  No creditor will bring such a challenge unless it knows it will get at least $25,001 worth of benefit.  This means there could be lots of creditors who would get $24,000 worth of benefit, but none would bring the motion.  Added up, this could be a lot of money.  If these creditors are not adequately represented by the Unsecured Creditors Committee, the motion just might not get brought.  Yes, they could do it as an ad hoc committee, but there are coordination problems (and maybe 2019 disclosures!).   

This death by a thousand cuts problem is a constant issue in consumer finance area--overcharge by a fraction of a penny from everyone and no one will bother complaining, but it adds up to big money.

Similarly, even if a venue motion were NPV positive, a creditor might not be pleased with free-riding by other beneficiaries of a venue motion.  Why not let someone else pay the freight?  This might be a particular problem if the benefit of a different venue is uncertain--for example if EDMI had unsettled law on some point that was clear in SDNY.  There'd be a chance that EDMI would reach the same conclusion, so no benefit, or that it'd adopt a different rule, so there might be a benefit of a change in venue.    

Finally, there are lots of reasons why one might want to file in one district or another. Some of it is simply getting more favorable substantive law (and attorneys' fees are substantive law in bankruptcy). That's just being a good lawyer for one's clients. Some of the choice of forum relates to convenience for the attorneys (and secondarily for their clients). Some of it, for mega-cases relates to the experience of the judges in the district. Some of it relates to the flexibility the judges in the district have in scheduling hearings. Some of it relates to ensuring that a particular judge will hear a case (for whatever reason). Different people might have different views on the merits of these particular grounds for selecting a forum, but I think we end up in unnecessarily polarized discussions if we focus on certain reasons and ignore others. The forum selection decision is complex.  

Bottom line for me on this is that there's a good normative discussion to have about venue, but that's simply irrelevant to Border's.  Venue might not be part of jurisdiction, but it determines what substantive law applies, and is therefore far too important to treat casually as optional.  


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