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Bankruptcy Venue Reform: Are The District of Delaware And The Southern District Of New York At Risk?

How real is the threat to the District of Delaware and the Southern District of New York as the prime venue choices for corporate Chapter 11 bankruptcy cases?  It appears that both are safe, at least for now.

Venue for bankruptcy cases is governed by 28 U.S.C § 1408, which provides that corporations may file in the district (a) in which their “domicile, residence, principal place of business in the United States, or principal assets in the United States” have been located during a majority of the prior 180 days, or (b) in any district where an affiliate, general partner or partnership has filed using any of these provisions. Because many companies are incorporated in Delaware, the District of Delaware has been a prime beneficiary of section 1408 and many of the countries’ largest bankruptcies have historically been filed in Delaware.  Similarly, because many companies have their principal assets in the Southern District of New York, many large cases have been filed there as well.  But what is perhaps most problematic is the use of affiliates, even affiliates which are insignificant in size and in importance, to establish venue in the District of Delaware and the Southern District of New York for the entire corporate enterprise even when the enterprise, as a whole, has only tangential contact with these venues.  Often this appears to be done at the behest of lenders or bankruptcy professionals located in those districts.

Critics have long argued that section 1408 encourages forum shopping, resulting in an unwarranted concentration of large bankruptcy cases in only these two jurisdictions.  Statistics bear out these concerns.  For the year 2017, 10% of all Chapter 11 business filings were made in the District of Delaware and 8% of all Chapter 11 business filings were made in the Southern District of New York.  Taken together, 18% of the Chapter 11 business cases filed last year were filed in these two jurisdictions alone.  Critics complain that this concentration is unfair to those creditors and other parties in interest who are not located in either Delaware or the Southern District of New York, and who therefore must travel, and obtain local counsel, in order to meaningfully participate in the bankruptcy cases.

In January 2018, Senators John Cornyn (R-Tex.) and Elizabeth Warren (D-MA) introduced S. 2282, which was referred to the Senate Judiciary Committee.  Titled the “Bankruptcy Venue Reform Act of 2018”, S. 2282 would modify section 1408 to provide that a corporate debtor could only file a Chapter 11 case in the district where its principal assets or principal place of business in the United States have been located for the 180 days prior to the filing or for a longer portion of the 180-day period than the principal place of business or principal assets in the United States were located in any other district. Additionally, the affiliate rule of obtaining venue would be tightened so that the first filing affiliate must directly or indirectly own, control, be the general partner of or hold 50% or more of the outstanding voting securities of the entity that is the subject of the later filed case.  Moreover, S. 2282 provides that consideration shall not be given, for purposes of venue, to changes in the ownership, control or location of assets made within the year prior to the bankruptcy or to changes made specifically for the purposes of establishing venue.

Not surprisingly, representatives from the affected districts have opposed the bill.  The Governor of Delaware, John Carney (D), Delaware’s two senators, Tom Carper (D) and Chriss Coons (D), and Delaware’s lone Representative Lisa Blunt Rochester (D) issued a statement opposing the bill, arguing that the change in the venue provisions would negatively impact both Delaware’s economy and the national economy as well:

Many American companies, large and small, choose to incorporate in Delaware because of the expertise and experience of our judges, attorneys, and business leaders. Denying American businesses the ability to file for bankruptcy in the courts of their choice would not only hurt Delaware’s economy but also hurt businesses of all sizes and the national economy as a whole. This is a misguided policy, and we strongly oppose it[.] …  Our economy thrives when the bankruptcy system is fair, predictable, and efficient. Experienced bankruptcy judges are critical to ensuring that companies can restructure in a way that saves jobs and preserves value. Scrapping the venue laws that have been in place for decades and replacing them with restrictions flies in the face of well-settled principles of corporate law, threatens jobs, and hurts our economy.

So what are the chances for this venue reform bill to pass.? Not good, at least during this Congressional year.  The bill remains in the Senate Judiciary Committee and there is little indication that it will gain traction in the Committee, much less see a Senate floor vote, during the 115thCongress. Given the rapidly approaching August recess, and then the November midterm elections, it is extremely doubtful that the bill will pass the Senate this year, let alone the House (where it has not even been introduced).  Of course, if the bill is not passed this Congress, it could be re-introduced in the next Congress.  However, given the lack of movement in Committee and the minimal number of co-sponsors, it is highly questionable whether this bill will ultimately garner the necessary support to pass in Committee, the Senate, and ultimately the House.  The wild card may be the post-election constituency of the Senate and House as new members may take some interest in this issue.

© Copyright 2018 Squire Patton Boggs (US) LLP

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About this Author

Mark Salzberg, Restructuring, Insolvency, Bankruptcy, Attorney, Squire Patton Bo
Partner

Mark Salzberg is a partner in Squire Patton Boggs’ Washington, DC office and a member of the firm’s Restructuring & Insolvency practice group. He focuses his practice on bankruptcy litigation, creditors’ rights, debtor reorganizations and complex commercial litigation.

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