On January 8, 2018, Senators John Cornyn (R-TX) and Elizabeth Warren (D-MA) introduced a bill (S. 2282) that would alter where corporate debtors file Chapter 11 bankruptcy cases. A large number of lawyers, judges, and professors throughout the country have actively worked on the issue of venue reform since 2011. The legislation aims to increase some fairness and convenience to those that regularly deal with the corporation such as creditors and even employees.
The bill shifts the distribution of Chapter 11 bankruptcy cases throughout the country’s federal districts. If passed, the resulting revisions to the federal statute affecting venue of bankruptcy cases would eliminate the state of incorporation for commencing a bankruptcy case and require corporate debtors to file in the district where their principal place of business or principal assets are located.
An abundance of both publicly traded companies and private companies have filed Chapter 11 bankruptcy cases in Delaware and New York-based either upon domicile or the claim of some minimal business operations “connected” to both jurisdictions. Recent data indicates that 70% of the public companies that filed Chapter 11 cases in the last five years filed in districts other than where its’ principal place of business or principal assets were located, and 80% of these cases were filed in either Delaware or the Southern District of New York. Is this what Congress intended?
Prior to 1987, corporations filed where the debtor had its principal place of business or principal assets for the preceding six months. Many bankruptcy scholars and professionals believe that Congress did not intend to change this result when it enacted the Bankruptcy Code in 1987.
Nonetheless, since 1987, courts have interpreted the term “domicile” to mean a company’s state of incorporation, thus allowing a corporate debtor to file in a location other than where its principal place of business or principal assets are located. Many have asked whether this result is necessarily fair to creditors, employees, and the local community where the business primarily operates.
The law as it currently stands allows potential corporate debtors to distance themselves from creditors and “forum shop” for jurisdictions that may render the most favorable rulings as to terms regarding the settlement of claims and reorganization of debt payment. Again, is this what Congress intended?
Stay tuned for more on this important bill in future blogs!
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