The Examiners: Venue Debate is Much Ado About Nothing

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

The sporadic outcry for reform of the bankruptcy venue statute is unwarranted—the existing law provides debtors with appropriate flexibility to reorganize while simultaneously protecting interested parties. In short, the venue debate is much ado about nothing.

“Reformers” contend that permitting a debtor to file a case in either its state of incorporation, principal place of business or location of the filing of an affiliate inappropriately allows a debtor to file where it has the best chance of getting a favorable ruling on a particular issue. Why is this a problem? Aren’t those same incentives at play when parties negotiate what the governing law of a contract should be? If so-called “forum shopping” jeopardizes the fundamental underpinnings of our bankruptcy system, isn’t there a similar level of danger in the very fact that a  single issue could be decided differently depending on which bankruptcy court oversees a case?

There are very good reasons to allow a debtor to file in the state of its incorporation. A company that chooses a particular forum’s law at the outset should be able to choose to have its fate governed by that same forum’s laws when its existence is in jeopardy. Additionally, interested parties know (or can learn) a company’s state of incorporation, so a filing in that arena is within those stakeholders’ contemplation. Requiring (rather than allowing) a corporate debtor to file where its principal place of business is located raises concerns. Many businesses have major operations, employees and stakeholders located across the country or overseas. There could be expensive (and distracting) litigation while parties battle over the location of the principal place of business—likely with the same motivations that are ascribed to so-called “forum-shoppers” in today’s venue debate. Granted, there are undoubtedly businesses for which the principal place of business will be clear, but a rule that only works for some shouldn’t form the basis of federal legislation.

At first blush, restricting a corporate debtor’s ability to file in a venue solely on the basis of a prior filing by such debtor’s affiliate seems to have appeal. However, when one considers the increasingly complex corporate structures underlying businesses that operate nationwide, the impracticality of such a restriction becomes clear. Without being able to avail themselves of the affiliate-filing rule, some companies may have to commence multiple (and potentially dueling) concurrent restructuring proceedings. Far from streamlining the process, creditors could find themselves having to monitor and appear in multiple proceedings to ensure that their interests are appropriately protected.

The bankruptcy code provides for the transfer of venue of a case when the originally selected venue does not serve the interests of justice. Supporters of reform argue that such statutory relief provides insufficient comfort for interested parties because bankruptcy judges infrequently grant motions to transfer venue. However, recent venue-transfer orders belie that position. Furthermore, if judges infrequently grant motions to transfer venue, perhaps that is because only rarely is the originally selected venue not an appropriate forum to adjudicate a company’s reorganization efforts.

There are a few (and in some pundits’ opinions, many) ways in which the bankruptcy code could be amended to better reflect the changing dynamics of corporate restructurings. Diverting legislative, judicial and practitioner focus to changing an already flexible and effective venue statute would truly be a wasted effort in a system that purports to revere efficiency.

Shaunna D. Jones is a partner at Willkie Farr & Gallagher’s business reorganization and restructuring practice. She is based in New York.