The great debate on the place of bankruptcy
The debate rages on. Currently, a debtor can file a bankruptcy relief claim in any district (1) in which it is incorporated, maintains a residence, has its principal place of business or principal assets, or (2) in which the affiliate, general partner or partnership of the debtor the bankruptcy case is pending. Over the years, some jurisdictions have become preferred for bankruptcy filings due to their procedures or legal precedents perceived as “friends of debtors”. These jurisdictions, for the most part, are Delaware, the Southern District of Texas (where two justices presiding over complex Chapter 11 cases), the Richmond Division of the Eastern District of Virginia, and the Southern District of New York (sometimes known as name of “magnetic districts”).
This means, for example, that a West Virginia coal company could incorporate a subsidiary in the Southern District of New York and place the West Virginia affiliate and coal maker in a Chapter 11 in the Southern District of New York. York. See Regarding Patriot Coal Corp., 482 BR 718 (Bankr. SDNY 2012) where this exact factual pattern occurred, only for the court to grant United Mine Workers of America (UMWA) and the US Trustee’s motion to transfer the location, but rather than to move the case to West Virginia as requested by UMWA, moved the case to St. Louis where the debtors were headquartered and where, according to the court, there was an accessible and convenient transportation hub . The court made this decision under the “interests of justice” provision of Section 1412 against the “convenience of the parties” grounds mainly because UMWA only represented about 42% of the employees, the Unsecured Creditors Committee opposed the petition and the top 12 unsecured creditors were not located in West Virginia.
From time to time, lawmakers seek to push through bankruptcy premise reform, hoping to put an end to what some perceive to be a forum, if not a judge, shopping and the ability to file bankruptcy cases. in jurisdictions remote from the operations of the debtor, its principal place of business and several of its constituents. Congress Relaunches Site Reform – On June 28, 2021, the Bankruptcy Site Reform Act of 2021 (HR 4193), a bipartisan bill was introduced by Democrat Zoe Lofgren and Republican Ken Buck. The bill seeks to require a debtor to disclose the location of its head office or major assets. Like previous site reform efforts, the current belief is that the bill will encounter strong headwinds and may not even come out of committee as the chairman of the judicial committee is Representative Jerrold Nadler of New York (a district of Magnet ) and ultimately any bill coming out would pass through the office of the president, the former Delaware senator and a supporter of the current status of the place as Delaware remains the number one bankruptcy place.
So, with the prospect of a complete rewrite of the status of the place with limiting alternatives of seemingly dubious place, is a compromise on the place of bankruptcy possible? There is some reason to keep “mega cases” in “magnetic districts”. Judges are used to handling these large cases, and some districts even have some judges assigned to complex business reorganizations (see Southern District of Texas). Often, these companies have many locations and employees spread across the country or even around the world. And while not optimal, the advent of remote video hearings stemming from the COVID-19 pandemic could make court hearings more accessible to all interested parties, even those with limited financial resources.
On the other side of the ledger, small business cases tend to have a primary center of operations or manufacturing. The judges of these Districts understand the local economy and the affected community and the place of the debtor in it. Constituents, including employees, vendors, and lenders, tend to be local. And their lawyers of choice also tend to be local (in most cases, to represent a client in Magnet Districts, the client’s lawyer of choice must find a local lawyer in the jurisdiction, which increases expenses).
It seems logical to allow the complex and multi-faceted business that truly has multiple locations and operations to choose a location based on the alternatives under the current status of the location. For these complex business cases, the advantages of filing in a Magnet District may outweigh the perceived disadvantages. But for companies with a head office, location of operations, or location of its assets, a limited location alternative requiring a deposit in that local district also makes sense. For these cases, compromise legislation would necessarily require the elimination of a choice of location based on the state of incorporation or by allowing those applicants to use affiliate rules. Drafting specific legislation can be tricky, but if done with sufficient precision, advocates on both sides of this local argument could declare victory without annihilating the other side – the very definition of compromise. And more importantly, the venue debate may be closed, while the bankruptcy process itself becomes fairer and more equitable for all parties involved.
Copyright © 2021 Nelson Mullins Riley & Scarborough LLPRevue nationale de droit, volume XI, number 235