Bankruptcy Venue Reform -- Yes, Again, But Maybe This Is the Time?

As many Credit Slips readers will know, chapter 11 venue reform has been an issue for decades. As corporate filers have flocked to the Southern District of New York and the District of Delaware, the real reason some observers say is that these courts favor corporate managers, dominant secured lenders, bankruptcy attorneys, or a combination of all of them. Regardless of the merits of these claims, it certainly undermines respect for the rule of law when faraway federal courts decide issues affecting local interests. A great example comes from right here in Champaign, Illinois, where local company Hobbico has recently filed chapter 11. The company, a large distributor of radio-control models and other hobby products, has more than $100 million in debt. The company has over 300 employees in the Champaign area who own the company through an employee stock ownership plan. Yet, the company's fortunes are now in the hands of a Delaware bankruptcy court.

A new, bipartisan bill from Senator John Cornyn (R-Tex) and Senator (and former Credit Slips blogger) Elizabeth Warren (D-Mass) would change the bankruptcy venue rules. The Bankruptcy Venue Reform Act (S. 2282) would no longer allow corporations to file in places in their state of incorporation or where their "affiliates" and subsidiaries already have filed. As a practical matter, these current rules allow the largest corporations to file most anywhere in the United States. Under this new bill, corporations would have to file where their principal assets or principal place of business is located. For publicly traded corporations, "principal place of business" would be the corporate headquarters as identified in their most recent SEC filings. By providing a clear place of venue only where the corporation actually conducts most of its business, the bill would end bankruptcy forum shopping.

As I noted at the start, chapter 11 venue reform has been an issue for decades. A search for "venue" on this blog will lead you to many past discussions of chapter 11 venue abuses as well as past attempts at legislative change. Why might this time be different. First, as the years have passed venue abuse has become bolder. Outside of the congressional representatives of the favored judicial districts, all of the senators and representatives should have more reason to support the bill. Second, the bill has started as a bipartisan effort. Third, the Senate now includes one of the leading bankruptcy scholars of her generation who will bring personal expertise on the issue to her colleagues. There is a sense that this may finally be the moment for actual chapter 11 venue reform.

If you agree, I urge you to contact your senators and representatives and ask them to support the Bankruptcy Venue Reform Act (S. 2282). This past Monday, I did a short segment on our local NPR station as part of a series on legal issues from the law faculty at the University of Illinois. Using the Hobbico bankruptcy as a point of departure, I tried to point out that this is yet another of those seemingly endless technical points of law that affects people more than they realize.

Comments

[Knute Rife]

Haven't had a chance to look at this bill because I've been busy looking at Treasury's latest Chapter 14 proposal for TBTFs. Looks like a retread of the 2013 version Lubben justifiably savaged.

[C.E. Petit]

This is perfectly sensible if combined with other streamlining-of-venue issues across the board. It's a problem not just in bankruptcy, but in determining the propriety of diversity jurisdiction, in determining venue in intellectual property matters, and a variety of other contexts.

The simple question is this: Why should an organization be treated as "resident" of more than one location, when an individual is not... and the organization may well be a close hold of a single individual? Traditionally, I think the answer has been "because doing so forces more cases back into state courts," but I'm not sure that's a valid answer (let alone a sound one)...

The real problem is that reforming bankruptcy venue only without paying attention to related venue/jurisdiction issues is going to itself create significant problems, especially if a reference were to be withdrawn. There are significant policy issues that require reeducating people on what "federalism" really means when it comes to courts, instead of relying upon kneejerk ideological predispositions (such as "states good, federal bad").

[Edward Boltz]

The problem is that it also makes it mandatory that courts transfer of venue in consumer cases sua sponte. For many consumers, the district court lines do not match their local geography, with courts in the "correct" district often being substantially farther and more inconvenient than in a neighboring district.

While the UST often takes an absurdly hard line on proper venue, in North Carolina and Alabama the Bankruptcy Administrators take a more laissez-faire approach, leaving it to creditors to raise a venue objection.