How Does the New Federal Venue Law Affect Corporate Bankruptcy?

12/23/11

On December 7, 2011, President Obama signed the Federal Courts Jurisdiction and Venue Clarification Act of 2011, H.R. 394, P.L. 112-63. The bill does not amend 28 U.S.C. 1408, the primary venue provision for bankruptcy cases in the U.S. Nonetheless, the changes should make us think again about the propriety of place of incorporation as a basis for chapter 11 venue (hat tip to Elizabeth Gibson, who figured this one out right away).

H.R. 394 substantially rewrote 28 U.S.C. 1391, the basic venue provision for federal actions. Section 1391(c) guides where parties "reside" for purposes of interpreting all venue provisions. For corporate (and equivalent) parties, new section 1391(c) divides the residence determination into the party as defendant and the party as plaintiff. If the applicable venue statute permits venue based on the residence of the plaintiff, the residence for a corporation is limited to the "judicial district in which it maintains its principal place of business." It does not extend to other locations in which the corporation would be subject to personal jurisdiction - such as place of incorporation.  

Not too many venue statutes permit venue on the basis of the location of the plaintiff/the party initiating the action (one reason why bankruptcy case venue is such an anomaly). But H.R. 394 carries a message: place of incorporation is not a substantively meaningful location to constitute a corporation's residence when the corporation is the initiator of the federal action.    

As noted, this does not apply directly to section 1408, which does not speak of a plaintiff, and also refers to "domicile" as well as residence. Nonethless, the amendment adds to the case against a debtor's place of incorporation (coupled with affiliate venue) as a theoretically sound basis for administering a business bankruptcy case. For other thoughts on that issue, see my commentary that I have just posted here

 

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