Leiden Law Blog

U.S Bill to limit venue shopping in bankruptcy cases

Posted on by Bob Wessels in Private Law
U.S Bill to limit venue shopping in bankruptcy cases

In large US bankruptcy cases, for several decades already the majority of publicly traded companies that filed for bankruptcy did so in the bankruptcy courts of the State of Delaware and the Southern District of New York. Over 40 percent of these companies filed in Delaware as their venue of choice. The Southern District of New York is the second busiest district court, handling 20 percent of these bankruptcies. So-called venue options (courts that could handle a case) include the debtor’s place of incorporation, its principal place of business and assets, or where an affiliate of the debtor has already filed a case under Chapter 11 U.S. Bankruptcy Code. Over a similarly lengthy period, this very broad possibility of choice of the own venue has been defended. Main argument: experienced courts are chosen because their expertise makes bankruptcy more predictable, their bankruptcy judges can better handle complicated issues in a big case, with in addition the argument of greater predictability, reducing the costs and the risks and overcoming inevitable delay in bankruptcy filings. Taking a larger view, this way of treating cases helps to save businesses, preserve jobs and reduce creditor losses, so the argument goes. Evidently, the critics argue that this kind of predictablility serves as a shelter for the self-interested motivation of the debtor’s managers (debters-in-possession), lawyers and senior creditors and can influence the debtor’s venue decision to the detriment of smaller creditors.

On 8 January 2018 two US senators (from both the Republicans, John Cornyn, and the Democrats, Elizabeth Warren), introduced the ‘Bankruptcy Venue Reform Act of 2018’. The draft bill only applies to Chapter 11 cases, not to Chapter 15 cases, being those in which foreign insolvency proceedings are requested to be recognised in the USA. The draft bill would require companies to seek bankruptcy protection where they have their principal assets or their principal executive offices and should eliminate the possibility of filing where they are incorporated and restrict their ability to file where an affiliate’s case is pending. The draft bill is meant to reduce ‘… forum shopping and manipulation in the bankruptcy system’ and it ‘… will strengthen the integrity, build public confidence, and ensure fairness in the bankruptcy system.’ The draft bill would also allow employees at bankrupt companies, small business creditors, consumers, retirees and others to participate in cases that will have a tremendous impact on their lives.

The draft bill would in practice effectively limit access to the popular bankruptcy courts in New York and Delaware. Political fencing is on the rise, with arguments such as that denying American businesses the ability to file for bankruptcy in the courts of their choice would not only hurt the economy of Delaware but also that of other States. The US economy, the critics continue, thrives when the bankruptcy system is fair, predictable and efficient. Experienced bankruptcy judges are critical in ensuring that companies can restructure in a way that saves jobs and preserves value under an effective U.S. bankruptcy system. Recent research suggests that the market is better at predicting the outcomes of bankruptcy cases in New York and Delaware. In his paper ‘What Drives Bankruptcy Forum Shopping? Evidence from Market Data’ (November 15, 2017). UC Hastings Research Paper No. 178. Available at SSRN, Jared Ellias did not find evidence supporting the view that those courts are biased in favour of senior creditors.

A new Section 1408 of the United States Code explains that a debtor’s ‘… principal place of business’ should be decisive for a court’s jurisdiction, which is with respect to a person or entity that is subject to the reporting requirements of the Securities Exchange Act, ‘…

the address of the principal executive office of the person or entity as stated in the last annual report filed under that Act prior to the commencement of a case under title 11 by the person or entity, unless another address is shown to be the principal place of business by clear and convincing evidence’. The last requirement is a higher burden of proof on the debtor than the existing norm. The draft bill (S. 2282, Congressional Record – Senate, January 8, 2018) also contains rules to pinpoint certain reference times to assess whether the principle place of business indeed exists as well as certain limitations and rules for providing evidence. As indicated, the draft relates to companies to seek bankruptcy protection where they have their principal assets or their principal executive offices. The draft bill also states that a company’s ‘principal assets’ will not include ‘cash or cash equivalents’. A question then will be what the position is of a European corporate entity, having these excluded assets outside of the USA. Can it be regarded as a ‘debtor’ and be eligible to file for bankruptcy in a US court?

Furthermore, the draft bill also provides that transfer of an entity’s principal place of business or assets for the purpose of establishing venue in a particular district – or for any other purpose up to a year before its bankruptcy filing – will not be taken into account when venue jurisdiction is considered. A new Section 1412 (‘Change of venue’) also proposes that notwithstanding that a case or proceeding under title 11 is filed in the correct division or district, a district court may nevertheless transfer a case or proceeding under title 11 to a district court in another district or division, in the interest of justice or for the convenience of the parties. A similar rule if a case or proceeding under title 11 is filed in the wrong division or district.

It is the U.S. politicians’ move now. During the squabbling, many will remember that similar proposals have failed twice already this century. However, where the initiative is a bipartisan effort, the chances of success may be higher this time.

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