The Examiners: With Creditors Getting More Aggressive, Controversy W...

Should bankruptcy laws that allow companies broad latitude in selecting a venue be reformed? 

When the ABI Commission to Study the Reform of Chapter 11 declined to make a recommendation on venue selection reform this past December, a number of people were surprised and disappointed. Critics of the rules as currently written have a number of issues with them, but generally they say the rules are too broadly scripted. As a result, debtors “shop” for a venue where case law on issues critical to their reorganization are most favorable.

It’s important to remember that in a restructuring only the debtor has a fiduciary duty to maximize recovery for all stakeholders, whereas individual creditors have a duty only to themselves. It’s therefore reasonable to expect that a debtor will select a venue where case law supports its efforts to achieve a successful reorganization. In fact, you could argue that’s exactly what a debtor should be doing. Of course, there are rules prescribing proper venue that must also be followed. But assuming they are, courts tend to defer to a debtor’s choice of venue and have said as much in high-profile cases like Energy Future Holdings and, most recently, in Caesars.

Creditors do have recourse to contest venue decisions, and they can ask that venue be moved if they feel that the debtor’s choice isn’t convenient or just. Critics will argue that such motions are rarely granted, partly because the burden of proof falls to the party asking for the move (and, again, the rules are broadly written).

Interestingly, in Caesars, creditors took it up a notch by pre-emptively filing an involuntary proceeding in their own venue of choice before the debtor could select its venue, in an attempt to shift that burden of proof to the debtor. Ultimately they were unsuccessful. If they had prevailed, it would almost certainly have had a chilling effect on negotiations with creditors for pre-packaged or pre-arranged restructurings, which tend to be more efficient and less costly than traditional chapter 11 cases.

With no reform on the horizon, and creditors getting more aggressive in promoting their interests, this promises to be a likely area rife with controversy for the foreseeable future.

Lisa Donahue is global leader of the turnaround and restructuring services group at business-advisory firm AlixPartners LLP, and is based in New York. Follow her on Twitter at @LisaJDonahue