Thinking Outside of the Box on Venue

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 (9^th 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.