News & Events

Coming Soon To a Bankruptcy Court Near You?

Remember Enron – that Texas based company with 7,500 employees in its Houston headquarters and over $60 billion in claimed assets which filed for Chapter 11 bankruptcy protection in . . . New York?  Perhaps you noted where the “Los Angeles” Dodgers organization more recently filed its Chapter 11 reorganization petition . . . some 2800 miles away in Delaware.  How is it, you might ask, that a company like General Motors, with employees, vendors and retirees all over the State of Michigan, can seek Ch. 11 relief in a Manhattan bankruptcy court?

The answer lies in Section 1408 of Title 28 of the United States Code which currently provides many corporations with several options on where to file for Chapter 11 bankruptcy relief.   Specifically, the statute allows corporations to file in 1) the state where it is incorporated; 2) the state where it is headquartered; 3) the state where it has its principal assets; or, 4) a state where a corporate affiliate’s bankruptcy case is already pending.  Its no secret to the corporate and legal communities that Manhattan and Wilmington are business friendly venues which have enacted rules to ease Chapter 11 filings for corporations.  Add to each district a concentration of talented business bankruptcy lawyers, and sophisticated companies would be foolish not to consider either locality for the bankruptcy relief sought.

But is this fair?  Should corporate debtors be permitted to forum shop for a venue with favorable judicial precedent for businesses?  Should large Chapter 11 bankruptcy cases be concentrated in two judicial districts in the North East?  Do stakeholders and other interested parties loose out when their claims are presented and heard in a far-away bankruptcy court?  Should bankruptcy be convenient for large corporations while employees, creditors and the community in which the debtor operates feel removed or out of touch with the reorganization process?

Enter H.R. 2533 – the “Chapter 11 Bankruptcy Venue and Reform Act of 2011” – The Bill which proposes to amend Section 1408 to require corporate debtors to file for Chapter 11 where they have: 1) their principal place of business, or; 2) their principal assets.  The act was introduced in July 2011 by House Judiciary Committee Chairman Lamar Smith, R-Texas, and is co-sponsored by the Judiciary Committee’s ranking Democrat, Rep. John Conyers Jr., D-Mich.  The bill appears to be gaining support and may well be brought up for a vote in the House this Spring.  Proponents of the legislation say it would level the playing field by shifting cases to cities across the country and into the districts where the needs of those most directly affected are not overlooked or ignored, while also reducing the costs of these bankruptcy cases to everyone involved.  Advocates also maintain that the change in the law would result in a transfer of hundreds of millions of dollars in revenues from New York and Delaware based law firms to local and regional bankruptcy practices in other major cities.  Those opposed to the legislation argue that these established venues have developed an efficient process for handling such Chapter 11 bankruptcy cases, giving the debtors the best possible chance at an effective reorganization which, of course, is one of the primary goals of the bankruptcy code.

Stay tuned!

Paul S. Murphy