For many years in the US, there has been disagreement among lawyers, judges and institutional creditors concerning the ability of parties under current bankruptcy law to cherry pick the court in which to file bankruptcy.
Under current law, a company can file a chapter 11 bankruptcy case either in the place of incorporation or in districts where affiliates have pending bankruptcy cases. This has made jurisdictions like Delaware (a common state of incorporation) a popular place to file. Filers often seek to file bankruptcy cases in jurisdictions (i) where the applicable law may be more favorable; (ii) where judges are perceived to be more user friendly; and/or (iii) where the judges’ approach and rulings are known. This behavior is popularly called "forum shopping" or "venue shopping". In the US, it is not unusual for filers to seek a jurisdiction in a location remote from the actual business operations.
There are practical reasons for distressed companies to forum shop. Businesses may shop for a venue for the sake of swift, efficient resolution: indeed, the judges in Delaware (where more than half of US publicly traded companies are chartered) and in the Southern District of New York (known as the dominant financial center in the US) have a reputation for quickly and efficiently resolving complex bankruptcy cases. In these jurisdictions, the law may also facilitate successful reorganizations – hence, companies like the Los Angeles Dodgers and American Apparel filed bankruptcy not in Los Angeles, where their principal operations resided, but in their state of incorporation, Delaware. Another reason for venue shopping is to dodge the possible consequences of filing locally. Distressed companies may be eager to avoid creditors who may otherwise attend hearings and disrupt the case.
Numerous examples exist of companies domiciled down the street filing bankruptcy thousands of miles away for the above reasons. This behavior is frowned on by many lawyers and judges, as well as businesses that are affected economically by the ability of companies in their home towns to commence bankruptcy cases in districts other than the districts where their hub of operations is located.
Change in the air?
In January this year, Senators John Cornyn (R-TX) and Elizabeth Warren (D-MA) introduced a new bill, the Bankruptcy Venue Reform Act of 2017, which will require corporate debtors to file bankruptcy in the district in which their principal assets or their principal place of business is located. Individual debtors will have to file bankruptcy in the district where their domicile, residence or principal assets are located. If successful, this bill will severely limit the access many companies now enjoy to the popular, business-friendly court systems of Delaware and New York. Most of all, it could mean the end of forum shopping.
Given the bipartisan nature of the bill – it was introduced by both a Republican and Democrat – many believe it has a chance of succeeding where many prior attempts have failed. One of the bill's proponents, Senator Cornyn, when serving as the attorney general of Texas, unsuccessfully attempted to advance such a bill on his own based on the New York bankruptcy case of Texas-based Enron Corp.
The discussion about changing the venue laws has been the subject of numerous panels, conferences and House and Senate debates. Those seeking to change the law feel the current law is deeply flawed and poses serious issues in the legal system. For example, UCLA School of Law Professor, Lynn LoPucki,, who led a study back in the 1980s on large public company bankruptcy filings, says the current law is "feeding a corrupt culture in the bankruptcy courts… that culture is the idea that only the big players – the debtor, the DIP lender, the creditors' committee – are the ones that count. Everybody else is a meddler." He adds that the current law inappropriately "makes judges compete for cases in their courtrooms." Proponents of the current law, in contrast, say that it is beneficial to enable debtors and stakeholders to choose venues based on a court's experience and its track record of handling cases with particular critical issues. Other proponents say the sophistication of experienced judges in districts like Delaware and New York is beneficial to the process, fostering more speedy and successful reorganizations.
In light of the bill, the debate could soon get hotter. As far as legislative action is concerned, so far, almost two months after being introduced, the bill has been read twice and referred to the Senate Committee on the Judiciary.
It remains to be seen where this ends up. In the meantime, any business thinking about the need to file bankruptcy may want to consult counsel and determine if, during its possibly limited period of opportunity, it is necessary to file in a state other than that in which principal operations are conducted.