Under current law, corporations have been able to engage in significant “forum shopping” to file their bankruptcy cases in locations far away from their principal business activities. While this allows the debtor to choose a Bankruptcy Court that it perceives to be more favorable to management, it also has the effect of placing significant burdens on creditors, employees and customers who actually did business with the bankrupt entity back where they were principally located.
On July 14, House Judiciary Chairman Lamar Smith, a Republican from Texas, and John Conyers, Jr., a Democrat from Michigan, introduced the Chapter 11 Bankruptcy Venue Reform Act of 2011 (H.R.2533). The change proposed by the act would require corporations to file their Chapter 11 Bankruptcy Petitions in the judicial district where they have their principal place of business or assets.
This makes sense as a matter of fundamental fairness. If a company is going to avail itself of the protection of the Bankruptcy Code, at a minimum, it should be as convenient as possible for the other stakeholders who will also be required, often against their will, to participate in the bankruptcy process initiated by the debtor. Further, given that at least some of the forum-shopping debtors have chosen to file their reorganization cases in places like New York, the costs of participation in the bankruptcy process may go down significantly.
I would anticipate that the act will face criticism from the Bankruptcy Bar that has benefited from the forum shopping loopholes, but I am hopeful that Congress will act favorably upon the legislation.
Author: Andrew C. Ozete (bio)
Phone: 812.452.3582
email: aozete@bamberger.com
