The bipartisan duo of Sen. John Cornyn from Texas and Sen. Elizabeth Warren from Massachusetts have introduced a new bill tackling bankruptcy venue. The Bankruptcy Venue Reform Act of 2021, which can be found here, is the latest attempt by the Senators to level the bankruptcy playing field. The new bill, which is supported by the Commercial Law League of America and a national network of insolvency professionals, expands upon the Senators prior work.
A Renewed Sense of Purpose
The bill contains a new set of findings and statement of purpose.
(a) FINDINGS.—Congress finds that—
(1) bankruptcy law provides a number of venue options for filing bankruptcy under chapter 11 of title 11, United States Code, including, with respect to the entity filing bankruptcy— (A) any district in which the place of incorporation of the entity is located; (B) any district in which the principal place of business or principal assets of the entity are located; and (C) any district in which an affiliate of the entity has filed a pending case under title 11, United States Code;
(2) the wide range of permissible bankruptcy venue options has led to an increase in companies filing for bankruptcy outside of their home district— the district in which the principal place of business or principal assets of the company is located;
(3) the practice described in paragraph (2) is known as ‘‘forum shopping’’;
(4) forum shopping has resulted in a concentration of bankruptcy cases in a limited number of districts;
(5) forum shopping— (A) prevents small businesses, employees, retirees, creditors, and other important stake holders from fully participating in bankruptcy cases that have tremendous impacts on their lives, communities, and local economies; and (B) deprives district courts of the United States and courts of appeals of the United States of the opportunity to contribute to the development of bankruptcy law in the jurisdictions of those district courts; and
(6) reducing forum shopping in the bankruptcy system will strengthen the integrity of, and build public confidence and ensure fairness in, the bankruptcy system.
(b) PURPOSE.—The purpose of this Act is to prevent the practice of forum shopping in cases filed under chapter 11 of title 11, United States Code.
Cracking Down on State of Incorporation and Affiliate Filing Abuses
The proposed legislation replaces 28 U.S.C. Sec. 1408, the current venue statute, with a revamped section. The proposal creates separate rules for individuals and entities. As with existing law, individuals may file in the district where their domicile, residence or principal assets have been located for the preceding 180 days or the longest part of the preceding 180 days. An entity other than an individual may file in the district where its principal place of business or principal assets have been located for the prior 180 days or the greater part of the preceding 180 days. An entity may also file in the district where an affiliate that owns or controls 50% of the voting stock of the entity or an entity that is its general partner has a pending case, but only if the affiliate filed in a proper district.
The new rules for entities change two provisions of existing law. First, the state of incorporation is eliminated as a permissible venue. Many U.S. corporations are incorporated in Delaware (or more recently in Nevada) but do not have any physical presence there. Second, the ability to file based on an affiliate's filing is greatly limited. In the recent National Rifle Association case, the NRA created a Texas-based subsidiary, caused that entity to file bankruptcy in Texas and then used that filing to bootstrap the NRA's case into Texas. The NRA case was an example of how a company can manufacture venue under existing law. If the Cornyn-Warren bill were passed, affiliate venue could only be used to allow a filing if the parent company had already filed in a permissible venue.
The legislation also adds definitions of principal place of business and principal assets. For a company that files reports with the Securities and Exchange Commission, its principal place of business would be the address contained on its SEC filings absent proof by clear and convincing evidence. The definition of principal assets would exclude cash. In one notorious case, a Russian company transferred funds to the U.S. and then claimed jurisdiction here based on the cash. This legislation would prevent a company from shifting its bank account to the desired forum and then filing based on the transferred cash. There is also a provision which would not allow affiliate filing based on equity ownership if that ownership had changed in the preceding year.
New Transfer Provisions
The proposal also contains new rules for challenging venue. If a motion to dismiss a case based on improper venue or transfer it is filed, the court must rule upon the motion within fourteen days after it is filed. Additionally, the proponent of venue must establish that its venue is proper by clear and convincing evidence. Under existing law, there have been cases where a motion to transfer venue was filed in the first week of a case but the hearing was not held for months by which time the case was far along and transfer would be made more difficult. Additionally, under existing law, substantial deference is granted to the debtor's choice of forum. The requirement to justify a filing choice by clear and convincing evidence turns this existing law on its head.
Easier Access for Governmental Attorneys
Finally, the legislation contains a provision requiring the Supreme Court to prescribe rules allowing governmental attorneys to appear in any bankruptcy court, district court or bankruptcy appellate panel without paying a fee or associating local counsel. This has been a priority of many state attorney general's offices which can be required to appear in cases filed on a national basis.
The Need for the Legislation
According to a press release from Sen. Warren's office, over the past twenty years, 70% of companies with assets over $100 million have filed in a district other than the one where the principal office is located. Sen. Warren stated:
Wealthy corporations should not be able to run across the country to find a favorable court to file bankruptcy. While they manipulate the system to file for bankruptcy wherever they please, affected communities — like workers, creditors, and consumers — lose. This bipartisan bill will prevent big companies from cherry-picking courts that they think will rule in their favor and to crack down on this corporate abuse of our nation's bankruptcy laws.
Sen. Cornyn emphasized the detriment to small businesses.
Corporations seeking courts sympathetic to their interests often ‘forum shop,’ tilting the playing field away from small businesses. I urge my colleagues to support this bipartisan, common-sense solution to close this loophole and help restore public trust in our bankruptcy system.
The two senators have introduced bankruptcy venue legislation together since 2018. Sen. Cornyn was Texas Attorney General when Enron filed bankruptcy in the Southern District of New York based upon a minor affiliate. His office tried unsuccessfully to bring the case back to Texas where the criminal cases of the Enron executives were pending. Before being elected to the Senate, Sen. Warren taught bankruptcy at several law schools, including the University of Texas and Harvard.
The Current Environment
For many years, large cases gravitated to just two districts, the District of Delaware, where many large companies were incorporated, and the Southern District of New York, where many large banks are present. In recent years, the Southern District of Texas and the Eastern District of Virginia have become favored filing sites as well. The Southern District of Texas created a complex case panel consisting of just two judges, Judge Marvin Isgur and Judge David Jones (who I must add are outstanding judges). The Southern District of Texas saw many oil and gas filings, as well as J.C. Penney and Tailored Brands (owner of Men's Wearhouse and Joseph A. Bank). Toys R Us chose the Eastern District of Virginia as the locus for its bankruptcy case.
While the transition from a duopoly to a gang of four has brought large case filings to a larger number of bankruptcy courts, they reinforce that under current law, venue remains largely discretionary for large companies while small companies and individuals do not have this freedom. Outside of big bankruptcy cases, forum shopping is condemned as an abuse. Under today's bankruptcy venue laws, forum shopping for large companies has become an entitlement.
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