Tennessee Lawmaker Sponsors Bankruptcy Reform Act
By It’s common knowledge that New York and Delaware are the preferred choices when big businesses file for bankruptcy - they’ve handled the complex cases and they’re considered “debtor friendly.” I get it, but it still doesn’t seem right that a company gets to file bankruptcy in a district where it has virtually no contacts. The U.S. Code (28 U.S.C. ยง 1408) allows a debtor to file in the district “in which the domicile, residence, principal place of business, or principal assets” of the person or entity have been located for the 180 days before the petition date, or in a district where an “affiliate” has filed. Since 1979, this has made it pretty easy to get into New York or Delaware because so many businesses are incorporated there.
But, if House Representatives Steve Cohen (Tennessee) and Lamar Smith (Texas) have their way, the Chapter 11 Bankruptcy Venue Reform Act of 2011 (H.R. 2533) will limit filings to (1) the principal place of business or principal assets have been located for the year prior to the petition date, or (2) a district where an affiliate files if the affiliate “directly or indirectly owns, controls, or holds with power to vote more than 50 percent of the outstanding voting securities of such corporation.” The bill is aimed at preventing debtors from using a friendly forum where they have no real presence to make creditors’ lives more difficult. This makes sense - the most affected districts should hear the case. This also seems fair to creditors because presumably it would cut down on the significant transaction costs that would be incurred to fight in $600/hour legal markets like Delaware and New York. Assuming districts will be equipped with the personnel and resources to handle a large-scale reorganization, this legislation should be well-received.
No doubt H.R. 2533 will face opposition from big business. Here’s a link to an opposing perspective: http://www.mofo.com/files/Uploads/Images/110722-Forum-Shopping-Chapter-11.pdf.
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