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Why Bankruptcy Venue Reform Matters

Current U.S. bankruptcy law gives companies wide discretion to file a bankruptcy in the venue of their choice. A company can file for bankruptcy in any federal district where it has its “domicile, residence, principal place of business in the United States, or principal assets in the United States” or where an affiliate of the company has a pending bankruptcy case. Often a company whose business primarily is in California will file bankruptcy in another state where it might have a small corporate affiliate. These lenient venue selection rules long have allowed bankruptcy courts in a handful of locations (Delaware, New York, Houston, and Richmond) to handle the majority of major business bankruptcy filings. 

Corporate debtors select these distant venues for several strategic reasons, known as “forum shopping.” First, the favored courts are known for “predictability,” because there are few judges in these courts. Second, these courts are known to have “rocket dockets,” i.e., the judges move the cases very quickly. Third, these courts are known to tolerate high attorney billing rates of large law firms. Finally, these courts are generally receptive to legal arguments of banks and other sophisticated parties who often control the case. 

By filing for bankruptcy in faraway states, companies often deprive local employees, suppliers, vendors, local and state governments, and other creditors of meaningful participation in the bankruptcy process.

A distressing result of California companies’ forum shopping, is that out-of-state judges decide how thousands of California creditors, employees, regulators, and customers are treated, when California-based bankruptcy judges may be more concerned with protecting California citizens. It is different for a judge to make a ruling affecting the lives of thousands of people in that judge’s district, than for a judge to abstractly deal with facts occurring hundreds or thousands of miles away.

Prominent examples of forum shopping of Los Angeles-based companies include The Los Angeles Dodgers, American Apparel, Open Road Films, Relativity Media, Woodbridge Group of Companies, and many others. 

Companies filing bankruptcy cases in jurisdictions far from their home base are inconsistent with how a venue is usually determined. If a business dispute or personal injury case is based on events taking place in California, the lawsuit would be required to be filed in the California county or district where it all happened. The same should be true for bankruptcy. If a company’s principal place of business is in Los Angeles, the bankruptcy case should be filed in the bankruptcy courts in Los Angeles.

Applying general venue rules in bankruptcy makes sense as a matter of due process. People who are affected by a business bankruptcy should be able to personally participate in the process – not be forced to pay attorneys to represent their interests far from home. California state and local governments enforcing environmental and employment laws, or collecting revenues, should not be forced to jump through extra hurdles to protect our rights in distant venues. California-based 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, New York, Virginia, and Texas enjoy. 

California is not alone in seeing its large companies file for bankruptcy out of state. Significantly, in a very publicized bankruptcy, Purdue Pharma, headquartered in Connecticut, responsible at least in part for the opioid epidemic, filed for bankruptcy protection across state lines in White Plains, New York for favorable treatment of its shareholders. 

A bi-partisan bankruptcy venue reform bill to fix venue laws, H.R. 4421, co-sponsored by Zoe Lofgren of California (Democrat) and James Sensenbrenner of Wisconsin (Republican) was introduced into the Congress in 2019 but did not proceed to the Senate. 163 current and retired bankruptcy judges and 42 state attorneys general sent a letter to Congress supporting that bill. 

The same bill now styled H.R. 4193 has again been introduced into the House by Zoe Lofgren of California and Ken Buck of Colorado (Republican). The proposed law would require companies to file for bankruptcy in the location of their principal assets or place of business.

While the bi-partisan issue of venue reform has been around for many years, there is a new urgency. While trillions of dollars in government funding and other government support programs have forestalled an avalanche of cases due to the pandemic-induced recession, these programs are coming to an end. There have been massive dislocations in the economy which will ultimately need the assistance of bankruptcy courts to help re-order.

It is only a matter of time before the next California company files its bankruptcy case across the country. 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 in faraway states should be deciding the economic fate, indeed the health and welfare, of citizens of California.

Categories: Venue Reform