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Bankruptcy Venue Reform and Upcoming Conference Call to Discuss Proposed Bill

What do the Dodgers, American Apparel, Rubio’s Fish Tacos, California Pizza Kitchen, MGM Studios, and Pacific Sunwear have in common? Each is an iconic Southern California brand. But that’s not all they have in common. According to statistics, over the last 20 years 143 California based companies having over $32 billion in assets, and over 211,000 employees have filed bankruptcy in Delaware alone. These companies are members of a growing list of California companies that strategically elected to file for bankruptcy outside of California. 

Why do California companies, when they file for bankruptcy, file in distant locales like New York, Delaware, Virginia, and Texas? After all, most of the people affected by the bankruptcy case are in California. The reason is that they can under the current bankruptcy venue law. 

Current law allows a company to file a bankruptcy case in any state where it does business, or where it or an affiliate is incorporated. Thus, for purposes of deciding where to file bankruptcy, it did not matter that the Dodgers are in Los Angeles or that MGM is one of the oldest Los Angeles studios. The fact that these companies (or tiny corporate affiliates) filed corporate documents in another state, such as Delaware or New York, allowed them to file for bankruptcy there. 

Corporate debtors select these distant venues for several strategic reasons. The reasons include that the favored courts are known for “predictability,” because there are few judges in these court. These courts are known to have “rocket dockets,” i.e., the judges move the cases very quickly, often giving affected parties limited opportunity to be heard. These courts are also generally receptive to legal arguments of banks and other sophisticated parties who often control the case. 

That companies can file bankruptcy cases in jurisdictions far from their home base is inconsistent with how venue is usually determined. If a business dispute or personal injury case is based on events in California, the lawsuit would be filed in in the California county or district where it all happened. The same should be true for bankruptcy. Since most of the Dodgers’ business was in Los Angeles, the bankruptcy case should have been in Los Angeles. Yet, the Dodgers filed their case in Delaware based on the state of incorporation.

Applying general venue rules in bankruptcy makes sense as a matter of due process.  California bankruptcy judges should have the opportunity to develop the law governing large corporate bankruptcies in California. The citizens of California should benefit from the same ease of access to the courts that the citizens of Delaware and New York enjoy.   

California is not alone in seeing its large companies file for bankruptcy out of state. That is why 163 current and retired bankruptcy judges sent a letter to Congress supporting bankruptcy venue reform. So too have 42 state attorneys general

Last month, at a hearing on third party releases before the Senate Judiciary Subcommittee on Federal Courts, Sen. Blumenthal stated that he was “deeply troubled” by bankruptcy venue shopping, warning: “A lot of the parties are not only skeptical, they are utterly cynical about how this system works, non-lawyers as well as lawyers.” Even the U.S. District Courts, sitting as intermediate appellate courts, are raising red flags, most recently in the Southern District of New York (Purdue Pharma) and Eastern District of Virginia (Ascena). In reversing the bankruptcy court’s confirmation of a plan with broad third-party releases, Judge Novak in the Eastern District of VA made a point to remand the matter to a different bankruptcy court and not the one chosen by the debtors through forum shopping. He went on to state: “the practice of regularly approving third-party releases and the related concerns about forum shopping call into question public confidence in the manner that these cases are being handled by the Bankruptcy Court in the Richmond Division.” (Emphasis added)

A bi-partisan bankruptcy venue reform bill, H.R. 4193, co-sponsored by Zoe Lofgren of California (Democrat) and James Sensenbrenner of Wisconsin (Republican), and Senate Bill Senate S. 2827 sponsored by Senator John Cornyn of Texas, proposes to fix venue laws. The proposed law would require companies to file for bankruptcy in the location of their principal assets or place of business.

It is only a matter of time before the next California company files its bankruptcy case across the country. This is wrong. When filing bankruptcy petitions, businesses should file in their home state. This is a bi-partisan issue that every California congressional representative should support. There is no reason why our citizens should be deprived of due process, why our districts should lose revenues, and why judges on the other side of the country should be deciding the economic fate, indeed the health and welfare, of Californians.

Bankruptcy venue shopping and the need for venue reform have gained national attention and attracted new allies and advocates, including those impacted by recent mass tort cases, who now support our efforts. Please join us on our next national call on Wednesday, May 11th starting at 5:30 p.m. EDT (details below) to learn more about the progress we are making in seeking passage of the Venue Reform Acts of 2021 pending in the House as H.R. 4193 and the Senate as S. 2827 and what you can be doing to support the cause. 

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Categories: Bankruptcy, Venue Reform