Now is the time for bankruptcy venue reform

The Boston Herald, Chicago Tribune, Dallas Stars, Los Angeles Dodgers, Nebraska Book Company, Tropicana Las Vegas Casino, and Washington Mutual all proudly bear the name of a city or state where they are based. Yet all filed for Chapter 11 Bankruptcy in Delaware, taking advantage of a loophole in bankruptcy law that allows businesses to flee their home states and have their Chapter 11 cases heard in jurisdictions to which they have no meaningful connection. This frequently-used loophole enables bankrupt businesses to pick the court, the applicable case law, and sometimes even the judge who will hear their Chapter 11 cases. 

This practice, called “venue shopping,” has been deemed “the single most significant source of injustice in chapter 11 bankruptcy cases” by retired bankruptcy Judge Steven Rhodes, who administered the City of Detroit’s bankruptcy. Outside of bankruptcy, plaintiffs and defendants may only sue or be sued in locations based upon strict, constitutionally-based principles of personal jurisdiction. Current bankruptcy law, however, allows medium to large businesses to file their bankruptcy cases basically anywhere in the country.  The Boy Scouts of America, a federally-chartered corporation based in Texas, filed for bankruptcy in Delaware, while the National Rifle Association, a New York corporation with headquarters in Virginia, filed for bankruptcy in Dallas, Texas. 

These “runaway” cases create opportunities for unjust results tucked away from the scrutiny of those most concerned. Big business debtors and their advisors often choose bankruptcy venue far away from headquarters, making it difficult for creditors, employees, retirees, and the home-town media to observe and participate in the case. Venue shopping forces creditors who are sued by debtor companies to defend themselves in a remote forum chosen by the company and without any connection to their dealings with the debtor. Forcing participants to hire local counsel (as required in Delaware) and travel to the remote venues imposes significant costs, often on those who can least afford them, and may preclude them from participating in the bankruptcy. 

Venue shopping enables the owners and managers of bankrupt companies to seek out a friendly landing place, perhaps one where they will be personally protected or where they believe the court will approve large bonuses for the executives who took the company into bankruptcy. Purdue Pharma, the opioid manufacturer with headquarters in Connecticut and principal manufacturing plants in Rhode Island and North Carolina, shopped its chapter 11 bankruptcy into White Plains, N.Y., where the sole presiding judge had ruled in another case in a way that might protect the Sackler family that owns Purdue. 

Venue shopping has caused a concentration of large business bankruptcy cases in a handful of courts perceived of as being management-friendly, despite having little connection with the debtor’s business. The overwhelming concentration of “runaways” is in Delaware, which has little connection with most of the businesses that file there as either the location of their headquarters or principal assets.  At the moment, other favored courts include the Southern District of Texas (Houston) and the Richmond Division of the Eastern District of Virginia, although changing judges and more recent rulings may cause lawyers to pick other locales as time goes by. Some of these filings go beyond picking a district to looking for a specific judge that the debtor’s management would prefer, which they can do where a judicial district or division has only one or two judges.

The judges in the favored districts are capable and honorable public servants, but Congress never intended for only a handful of judges to handle large business cases, and there is no legitimate reason for doing so. Bankruptcy judges throughout the country have the ability to handle all types of cases, including large Chapter 11 reorganizations, because they are appointed based on merit by appellate judges, not politicians, and they are vetted for their knowledge and experience in bankruptcy procedures and the local law applicable to the company’s business and to its customers and suppliers. No person — or corporation — should be allowed to pick the judge in its own case. 

The best way to stop venue shopping is for Congress to amend the bankruptcy venue statute, a no-cost solution. The Bankruptcy Venue Reform Act of 2021 (H.R. 4193), a bipartisan bill introduced by Representatives Zoe Lofgren (D-Calif.) and Ken Buck (R-Colo.) in the House, would close the loophole and stop the manipulation of venue by requiring businesses to file bankruptcy where their headquarters or principal assets are located, resulting in a better distribution of cases around the country. A more even distribution of cases will better utilize existing judicial resources and better ensure that that the tens of millions of Americans who interact with bankruptcy courts have confidence in the system that decides their financial futures. Public confidence in the bankruptcy system depends on eliminating this dangerous practice and Congress enacting this reform.

Joan Feeney and Steven Rhodes are former bankruptcy judges; Adam Levitin and Jay Westbrook are law professors who teach bankruptcy at Georgetown University and The University of Texas at Austin, respectively.