Chapter 11 Bankruptcy Venue Reform

This Thursday, the House Judiciary will be holding a hearing on H.R. 2533, which would reform Chapter 11 venue and require corporations (which includes more than true corporations under the Bankruptcy Code) to file in the district in which they are headquartered or in the district in which a controlling affiliate has filed.  So no more bootstrapping of Eastern Airlines, Enron, or GM via tiny affiliates.  And no more Los Angeles Dodgers of Delaware.  

I've submitted a letter in support of the bill to the House.  My previous posts on this topic earned me no love from some former colleagues (some of whom told me as much), and I don't expect this letter (or this blog post) will endear me to them either.  The letter rehearses the problems that stem from forum shopping:  debtors (and DIP lenders) picking and choosing the law they prefer; debtors opting for districts that are more lax in their application of discretionary standards like for cause appointment of trustees; professionals steering cases to districts that will sign off on higher fees, thereby increasing the costs of bankruptcies; the cutting out of local/small creditor constituencies by moving cases to inconvenient fora; and avoidance of labor protests and other informal pressures on courts.  

I continue to be struck by what a weak argument specialization/expertise is for the current system. We've seen courts outside of SDNY/Delaware handle large bankruptcies extremely well, and we've also seen some disasters in those popular filing jurisdictions. Frankly, it's not clear to me how much case outcomes depend on the judge. But be that as it may, expertise is an argument for a single court to handle all large cases, not a pick-your-own-venue system, even if the menu is limited to SDNY and Delaware.  So if it's about expertise, which court is it?  SDNY or Delaware?  It surely can't be the debtor's choice if it's about expertise.   

Also, in drafting this letter, I realized that Chrysler may well have lacked proper venue in SDNY.  IIt's a stretch to claim that Chrysler Realty Co. LLC, a Delaware LLC headquartered in Michigan had its principal assets located in SDNY, when the only SDNY assets scheduled are the realty for Jeep-Chrysler-Dodge of Manhattan and Yonkers Avenue Dodge. By dollar amount these were less than 3% of Chrysler Realty Co., LLC's scheduled assets.  I wonder how many other cases have been filed recently in which there isn't compliance with the venue statute.  (Note that this is not like GM, which bootstrapped its way in to SDNY, which complies with the statute.  That's legal, but it's a bad statute. Borders--also here--and perhaps Chrysler don't even appear to in compliance with the statute.)  

Finally, I'm left pondering where is the UST on this.  Checking on venue seems like it should be a rote part of UST review. If the UST is really concerned about fee levels in bankruptcy, policing Chapter 11 venue is a far better way to deal with it than objecting to fee applications, where the dollars saved are offset by the cost of arguing the objection.  

My former WGM colleagues have a couple of blog posts of their own on HR 2533 (here and here). These posts make the very good point that the local rules for the SDNY and Delaware bankruptcy courts are friendly to out-of-state attorneys (no local counsel required for pro hac vice admission). It's point about telephonic and video hearings really cuts both ways.  But I think it's a stretch to say that because local creditors are get some protection via 503(b)(9) administrative expense claims, 546(c) reclamation claims, 547(c)(2) ordinary course exception to voidable preferences, and 365(d)(4) and 366 protections for landlords and utilities that it's therefore not a problem that venue is being abused.

None of these protections help employees, for example. Admin priority only doesn't apply to prepetition claims.  The ordinary course preference exception is temporally narrow and 546(c) reclamation is not a very powerful tool for most creditors.  But even if these were always meaningful protections for all local creditors, I don't see how that in any way justifies abuse of venue. Is the argument no harm-no foul? If so, none of these provisions mitigates the harm caused by debtors being able to choose venues with easier rejection of CBAs or in which they can funnel more funds to professionals or DIP lenders. The provisions cited on the WGM blog crumbs in comparison to what's at stake with venue.