Legislation on the reform of bankruptcy sites Back; Previous efforts have been blocked

Here we go – proposed bankruptcy site legislation is back after previous “reform” efforts were unsuccessful. For those seeking legislative action, what are the chances of a site reform today?

The place of bankruptcy business is governed by 28 USC § 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 within the majority of the preceding 180 days, or (b) in any district where an affiliate, general partner or partnership has filed its case. Due to the different location bases, a business may have several choices where to file its Chapter 11 case. For example, if the corporation is incorporated in Delaware, as many corporations are, the Delaware location is allowed even though the company is headquartered in another state and has no connection with or any asset located in Delaware. Alternatively, if the company has an affiliate debtor incorporated or located in a state, the company can file at the location of its subsidiary, even if the subsidiary is insignificant in size or importance. All of this option can lead to ‘forum shopping’, meaning that a business is strategically able to choose where to file for bankruptcy, depending on factors such as favorable case law in the district, particular judges (and sometimes the fact that there is only one judge) in the district or the procedures used in the district for complex cases. These choices can in many cases be dictated by lenders, who view judges or case law in those districts as more favorable to their positions. Often these choices lead to deposits in Delaware, the Southern Districts of New York and Texas, as well as the Eastern District of Virginia, jurisdictions preferred by debtors and lenders, resulting in a concentration of deposits. balance sheet, particularly by large state-owned enterprises, in these jurisdictions.

The ramifications of this shopping forum are significant. For example, many Chapter 11 corporate cases are filed far from the location of the company’s employees and creditors, in jurisdictions where the company has only tangential contact. This can prevent the debtor’s employees and small creditors from having meaningful access to the process. The concentration of large corporate cases in a few select jurisdictions can limit the diversity of judicial opinion by limiting the judges who are called upon to decide complex and emerging legal issues. In addition, creditors sued by debtors, for example for the collection of preferential transfers, have to defend themselves in jurisdictions with which they have little or no connection, forcing them to hire a local lawyer and dramatically increasing defense costs.

However, these concerns may be offset by other factors. For example, many bankruptcy cases are using free online case files, and especially since the onset of COVID-19, are increasingly holding hearings by phone or Zoom. Local creditors can therefore remain actively engaged in a bankruptcy case, regardless of where the case is filed. In addition, critics of the reform argue that the concentration of large bankruptcy cases in certain jurisdictions allows complex issues to be resolved quickly, since judges in those jurisdictions have considerable experience in handling large, complex cases. Finally, it should be noted that although some believe that the integrity of the bankruptcy system is threatened by the current jurisdictional arrangements, an interested party may request a change of jurisdiction in the interests of justice or for the convenience. Parties.

Previous efforts to reform the bankruptcy scene have failed. More recently, in 2018, Senators John Cornyn (R-Tex.) And Elizabeth Warren (D-MA) introduced the “Bankruptcy Venue Reform Act of 2018”. This bill would have required debtor companies to file for bankruptcy in the district in which their principal assets or principal establishment were located. The bill did not receive a vote in either the House or the Senate.

For those who favor site reform, however, hope is eternal. On June 28, 2021, representatives Zoe Lofgren (D-Cal.) And Ken Buck (R-Tex.) Introduced the “Bankruptcy Venue Reform Act of 2021” (HR 4193). Subsequently, on September 23, 2021, Senators Warren and Cornyn introduced the Senate’s substantially identical version of the “Bankruptcy Site Reform Act, 2021.” The new bills would require a debtor to file their case where their head office or major assets are located, severely limit the ability to use affiliates to establish the location, and require a debtor to establish by “clear evidence and convincing ”that the location in the selected jurisdiction is appropriate.

What are the chances of this latest reform of the bankruptcy scene? Unfortunately for reform supporters, the odds seem slim enough for any movement on current bills, and it is likely that the bills will meet strong resistance like previous reform efforts. For example, at this time it is unclear exactly where the chairman of the House Judiciary Committee, Jerrold Nadler (D-NY) on site reform is located, although President Nadler’s district includes the southern district. of New York, often a direct beneficiary of the current site rules. Additionally, even if the bill passed both the House and the Senate, it is unclear whether President Biden would sign the bill. After all, President Biden is a former Delaware senator, one of the primary beneficiaries of the place’s current rules, and was a strong supporter of the place’s current status.

We will keep our readers informed if and when action is taken under the Bankruptcy Premises Reform Act 2021.