Today I had the opportunity to debate venue reform at the National Conference of Bankruptcy Judges in Chicago. We had two excellent teams of debaters. Arguing for the pro-reform position were Prof. Samir Parikh, retired Bankruptcy Judge Leif Clark and myself. The pro-status quo team consisted of Prof. Douglas Baird, retired Bankruptcy Judge Arthur Gonzalez and Dan DeFranceschi of Richards, Layton & Finger, P.A. Jamie Sprayregen of Kirkland & Ellis moderated the debate. We had a good, vigorous debate. There was at least some agreement that venue for preference actions should be reformed. The debate was sponsored by the Commercial Law League of America.
Here is the opening statement that I gave for the pro-reform side:
Good afternoon, my name is Steve Sather. My colleagues, retired Bankruptcy Judge Leif Clark and Prof. Samir Parikh and I will be arguing that the current bankruptcy venue law, 28 U.S.C. § 1408, should be reformed to prevent forum shopping in Chapter 11 cases.
By forum shopping we mean filing in a venue where the company has little or no physical presence. Examples would include the Los Angeles Dodgers and the Chicago Tribune filing bankruptcy in Delaware.
Forum shopping is allowed by the current law for two main reasons. First, by equating domicile with state of incorporation, the courts have allowed companies to file in jurisdictions that have little to do with their actual business operations. Second, by allowing venue where there is a case concerning an affiliate, venue for an entire corporate group can be based on the locale of a minor subsidiary or even one created for the purpose of obtaining venue.
Forum shopping occurs with great regularity. Prof. Parikh’s study found that 69% of large companies that filed chapter 11 during the Great Recession forum shopped. This is not just happening in Delaware and New York. Pilgrim’s Pride, ASARCO and Crescent Resources are all examples of cases that were forum shopped to my home state of Texas. It is not just happening in large cases either. In a study by the Venue Reform Group, of which I am a member, half of the 559 out of state cases filed in Delaware since 2003 had less than $15 million in assets. The current venue law is so open-ended that it has been referred to as a non-law.
Forum shopping is a problem because it confounds creditor expectations and deters participation by local parties. Think of the City of Detroit case where Judge Steven Rhodes viewed the local community and allotted a full day for local residents to address the court. That could not have happened if the case had been filed in Delaware. When a bank or a trade creditor deals with American Airlines in Fort Worth, they know that they may have to go to Ft. Worth to enforce their debt. However, they do not expect to have to hire local counsel in Delaware to defend a preference action.
Forum shopping also creates the perception that the process is manipulated by insiders and major players to the detriment of small creditors. When Enron filed in New York, it looked like the company was fleeing from its very public problems in Houston. While Houston was good enough for the criminal trials of the Enron executives, the reorganization was held elsewhere. Bankruptcy is big business and when it takes place far away from the home forum, we can expect the public to be skeptical of the process and the results. I don’t blame the lawyers because they are simply taking advantage of the choices given to them under existing law, but the current process feeds the Wall Street vs. Main Street narrative that is dividing our country.
While we acknowledge that there are skilled and hard working judges in New York and Delaware, there are excellent judges all over the country and we see that in cases where forum shopping is not an option such as municipal bankruptcies and the Catholic Diocese cases. Think Steven Rhodes with the City of Detroit or Susan Kelly with the Diocese of Milwaukee.
In our discussion today, we will offer several solutions, including separate venue provisions for individuals and artificial entities, which was the rule immediately prior to enactment of the Code, reforming the affiliate venue rules, creating a national bankruptcy court of appeals and procedural reforms to ensure that venue issues are resolved promptly and efficiently and that forum shopping is deterred.
Note: My original post referred to Dennis DeFranceschi. His name is actually Dan, which I knew. I apologize to both Dan and his parents for trying to rename him.