On June 28, 2021, two members of the House of Representatives renewed the 40-plus year old debate about where a company is permitted to file its bankruptcy case by introducing legislation known as the Bankruptcy Venue Reform Act of 2021 (the “Reform Act”).1 This legislation is the latest effort to limit what some decry as a prospective debtor’s ability to “forum shop.” Proponents of such reform argue that a disproportionate number of cases are filed in jurisdictions like New York, Delaware, and Texas based on bankruptcy law’s lenient venue rules. They argue that filing in “magnet jurisdictions” instead of “locally” prevents local creditors such as employees from having a voice in the bankruptcy process. Opponents assert that venue rules do not need to be fixed for a number of reasons, including that many companies have various locations or headquarters in one forum and employees in others (meaning that no jurisdiction is truly “local”), that advances in technology allow remote creditors to meaningfully participate, and that venues outside of the “magnet jurisdictions” are gaining popularity. While always a hot topic in the restructuring world, things seem unlikely to change for the time being.
Background
Venue in bankruptcy cases is governed by 28 U.S.C. § 1408, which allows a debtor to file in any district (1) in which the domicile (i.e., place of incorporation), residence, principal place of business, or principal assets of the debtor have been located for the 180 days prior to filing2 or (2) in which the debtor’s affiliate, general partner, or partnership has a pending case. By providing alternative bases to establish proper venue, the statute allows several possible jurisdictions where a debtor may file for bankruptcy. Additionally, venue in the district where the debtor files is presumed to be proper, and a party challenging venue bears the burden of establishing improper venue by a preponderance of the evidence.3 However, a debtor’s flexibility is not unlimited; a district court may transfer a case to another district in the interest of justice or for the convenience of the parties.4
Reform Efforts
The Reform Act would limit the alternative venue provisions to require that bankruptcy proceedings are adjudicated where the principal place of business or principal assets of the debtor are located. By doing so, it seeks to end “forum shopping” and “strengthen the integrity of, and build public confidence and ensure fairness in, the bankruptcy system.”5 This idea has been the subject of debate for the better half of a century: some practitioners argue that the current law gives a debtor too much flexibility in deciding where to file and thus promotes forum shopping, while others argue that the current law serves a beneficial purpose by allowing a debtor the flexibility to file in a venue that provides the best opportunity to maximize estate value. The sponsors of the Reform Act are clearly in the former camp, asserting that “[j]ustice is best served when corporate bankruptcies are adjudicated locally, with convenient court access for employees, retirees, and local creditors and a judge who knows the affected community.”6 Yet, this argument seemingly fails to consider that most companies may have employees and creditors all over the country, if not all over the world.
Big Picture
Although the Reform Act is a bi-partisan bill, it seems to have little prospect of success. The bill does not yet have a Senate companion and seems unlikely to get out of committee in the House given that the Chair of the Judiciary Committee is Rep. Jerrold Nadler of New York (one of the decried “magnet districts”). Moreover, as the judiciary has adapted to the COVID-19 pandemic by providing for remote access to hearings and other court proceedings, it is increasingly feasible for stakeholders to meaningfully participate in bankruptcy proceedings despite residing in distant locations. Many of these adaptations seem likely to stay, which undercuts some of the driving force behind the Reform Act. Of course, even if the Reform Act was passed by both houses of Congress, it would still need to be signed by the President, who has stymied prior reform efforts during his tenure as a Senator for Delaware (another popular venue for prospective debtors).
If history is any indicator, the Reform Act is merely the latest occurrence of a periodic phenomenon that, like a brood of cicadas (minus the singing, dancing, and mating), will soon return to a state of dormancy. If you have questions about this legislation, or venue in bankruptcy proceedings generally, please don’t hesitate to reach out to John Ashmead (212-574-1366), Robert Gayda (212-574-1490), Catherine LoTempio (212-574-1632), Andrew Matott (212-574-1224), or your primary contact at S&K.
