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How Does the New Federal Venue Law Affect Corporate Bankruptcy?

posted by Melissa Jacoby

On December 7, 2011, President Obama signed the Federal Courts Jurisdiction and Venue Clarification Act of 2011, H.R. 394, P.L. 112-63. The bill does not amend 28 U.S.C. 1408, the primary venue provision for bankruptcy cases in the U.S. Nonetheless, the changes should make us think again about the propriety of place of incorporation as a basis for chapter 11 venue (hat tip to Elizabeth Gibson, who figured this one out right away).

H.R. 394 substantially rewrote 28 U.S.C. 1391, the basic venue provision for federal actions. Section 1391(c) guides where parties "reside" for purposes of interpreting all venue provisions. For corporate (and equivalent) parties, new section 1391(c) divides the residence determination into the party as defendant and the party as plaintiff. If the applicable venue statute permits venue based on the residence of the plaintiff, the residence for a corporation is limited to the "judicial district in which it maintains its principal place of business." It does not extend to other locations in which the corporation would be subject to personal jurisdiction - such as place of incorporation.  

Not too many venue statutes permit venue on the basis of the location of the plaintiff/the party initiating the action (one reason why bankruptcy case venue is such an anomaly). But H.R. 394 carries a message: place of incorporation is not a substantively meaningful location to constitute a corporation's residence when the corporation is the initiator of the federal action.    

As noted, this does not apply directly to section 1408, which does not speak of a plaintiff, and also refers to "domicile" as well as residence. Nonethless, the amendment adds to the case against a debtor's place of incorporation (coupled with affiliate venue) as a theoretically sound basis for administering a business bankruptcy case. For other thoughts on that issue, see my commentary that I have just posted here



I'm afraid that this argument, as elegantly as it reads in English, does not translate into Delawarean. To paraphrase Upton Sinclair: "It is difficult to get a court to understand something, when its caseload depends upon its not understanding it."

Procedurally, how is this issue ever goihg to get to a court that doesn't have a vested interest in the answer being "venue is proper in Delaware"?

If case is filed in Delaware and venue is improper, does anyone think that a motion to transfer venue is going to be granted by the bankruptcy court? Is the denial of a motion to tranfer venue an appealable order as of right? If the appeal has to wait until some kind of final order is entered, does anyone really think that the Third Circuit is going to undo an entire Chapter 11 case for improper venue?

I think that the only way to get the issue heard by a Court of Appeals where there is a chance the the issue will be decided against place of incorporation is for a bankruptcy court outside of the Second or Third Circuit to rule on a motion to transfer venue in a case where the only conceivable basis for venue in that district is the place of incorporation. This ruling needs to come early in the case. When the ruling is appealed, the bankruptcy court certifies the question to its Court of Appeals. Then the Court of Appeals can consider the argument that venue can't be based on place of incorporation without the consideration that it doesn't want to undo a case that is almost over just over venue. If the Court of Appeals agrees, that might be enough to get some Chapter 11 debtors to file in venues other than Delaware. If they won't do that, it at least would create the potential for a circuit split.

One flaw in this is that there may be very few corporations that are not incorporated in Delaware that are also not incorporated where their principal place of business is located.

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