One benefit of
attending conferences is that sometimes you get something unexpected. That happened at the Commercial Law League’s
New York meeting when the discussion turned to venue. The CLLA has staked out a position in favor
of venue reform. You can read the
testimony of Peter Califano on behalf of the League here. However, the discussion raised the question
of whether more radical reforms are appropriate to address the problem of venue
in cases of national interest.
While the Commercial
Law League represents the interest of creditors in general, it has a special
focus on the rights of smaller unsecured creditors. The fact is that it is more expensive and
more inconvenient for smaller creditors to appear in New York or Delaware. There is also a personal economic interest
for some league lawyers. Speaking only
for myself, I cringe when I see a case with strong Texas ties, such as Enron or
American Airlines, filed on the East Coast.
However, venue abuse cuts both ways.
One of the largest cases to file in Austin recently was based in North
Carolina. Corpus Christi, Texas has
become a magnet for significant cases despite the fact that it is just a small
city on the Texas coast. It is not an
unreasonable proposition to argue that that the venue laws in bankruptcy cases
have become so porous that debtors and their lenders are relatively free to
choose whichever forum they prefer, or, to put it more directly, we have a
system of rampant forum shopping.
However, this discussion
presumes that for each debtor, there is a “right” forum instead of Delaware or
New York. In many cases, there will be
a “right” forum. Enron was a
Houston-based company whose failure had a disproportionate impact upon Texas. It is telling that the criminal trials
arising from Enron all took place in Houston.
(I remember this well because we had to get past all of the TV trucks to
make it to bankruptcy court). However,
where a network of companies has operations in multiple states and the case is
of national importance, there may be more than one “right” forum.
When a company’s case
will impact multiple states, which should get to decide where the case will
come to rest? Once a case has been
filed and hearings have been held, the forces of inertia are likely to keep it
where it landed initially. One
suggestion raised at the Commercial Law League meeting was to treat multi-state
cases similarly to Multi-District Litigation in federal court. Under 28 U.S.C. Sec. 1407, the Judicial
Panel on Multidistrict Litigation has the authority to decide whether to
consolidate cases under MDL and to transfer them for purposes of pretrial
proceedings and discovery. If not
resolved prior to trial, the cases are sent back to the original forum for trial.
Another possibility
would be to take a cue from Chapter 15.
Under chapter 15, courts look for the Center of Main Interest, which
refers to where a company’s main economic activity is. A “main” case filed in another forum can seek
recognition in this country. By
analogy, when a company such as American Airlines filed bankruptcy, there would
be a procedure to determine its Center of Main Interest. Once that was determined, that district
would be the lead district. However,
ancillary proceedings could be opened in other states.
Under either one of
these options, there would be a procedure for judges to determine which
district had the most significant interest in the case rather than allowing the
parties to simply pick a venue. The
Enron case is a good example. It filed
its petition in the Southern District of New York because it had a minor subsidiary
there. Under the procedure described
here, upon filing in New York, there would immediately be a hearing set to
determine where the case would proceed.
It would not be necessary for a party, such as the Texas Attorney
General, to move for transfer of venue and wait for a hearing. Upon a finding that Texas was the Center of
Main Interest, the case would immediately be transferred to Texas or, in the
alternative, and a main proceeding could be established in Texas and an
ancillary proceeding in New York. The
judges in Texas and New York could cooperate to ensure that Texas-centric
issues were decided in Texas and New York-based issues were based in New York.
To facilitate a scheme
such as this, it might be necessary to establish “Super Judges” (who would wear
tights and a cape) in each state or circuit who would be qualified to handle
cases of national importance. In Texas,
Barbara Houser would be a logical candidate.
By creating a “National Case Panel” it would be possible to both ensure
that there was a cadre of qualified judges, but also have judges who would
regularly confer with their brethren in other states and circuits to be prepare
to handle cases with multi-state impact.
Another
thought-provoking issue raised was whether circuit splits were contributing to
forum shopping. It was suggested that Sixth
Circuit precedent is unusually favorable to successor liability claims. With such precedent out there, a company
such as Chrysler or GM might be deterred from filing in the Sixth Circuit. The Ninth Circuit has In re Catapult
Entertainment, Inc., 165 F.3d 747 (9th Cir. 1999), which might deter
companies with intellectual property issues from filing in the Ninth
Circuit.
As noted by Judge Guy
Cole at the NCBJ conference, circuit judges spend most of their time hearing
criminal cases and prisoner appeals, while very little of their time is spent
on bankruptcy. As bankruptcy courts
become our national commerce courts, it might be desirable to have a single
court of appeals with jurisdiction over issues of pure bankruptcy law. For example, patent appeals go before the
Federal Circuit. Is it unreasonable to
suggest that bankruptcy appeals should similarly go to a specialized appellate
court? This would not be workable for
many bankruptcy appeals which depend on the vagaries of state law. However, it might be desirable to create a
panel of circuit judges with expertise in bankruptcy matters to whom important
bankruptcy cases could be referred in order to create a national rule short of
involving the Supreme Court (which only hears a few bankruptcy cases a year).
These thoughts (which
may not reflect the ideas of the original speaker) may be impractical,
unworkable and unrealistic. However, I
think it is worth discussing whether it is time to develop Bankruptcy 3.0 for
cases and issues of national importance.
As a practitioner, I get
frustrated with our current ad hoc
system of venue. Legislation fixing
where to file may not be enough to solve the problem if it is too easy to
bypass the legislative criteria. I
would prefer to see some judicial supervision of where big cases get filed as
opposed to letting big debtors and their banks decide who gets to have all the
fun.
