Bankruptcy for Banks: A Tribute (and Little Plea) to Jay Westbrook
by | posted in: Bankruptcy Administration and Jurisdiction, Bankruptcy Reform, Financial Firms and Safe Harbors, Legislation | 0

By David A. Skeel, Jr. (University of Pennsylvania Law School)

Over the past several years, Congress has considered various versions of a legislative reform that would amend the Bankruptcy Code to facilitate the prompt reorganization of systemically important financial institutions (“SIFIs”). The reform would adapt the “Single Point of Entry” strategy devised for use under Title II of the Dodd Frank Act to bankruptcy. In each context, the assets, short term liabilities, and secured debt of the troubled SIFI would be transferred to a newly created bridge institution, leaving behind its stock and long-term debt. The newly recapitalized bridge institution would be fully solvent, and could contribute liquidity to the troubled subsidiaries as necessary. Although the bankruptcy for banks legislation appears to have strong support in Congress, its reception among bankruptcy scholars has been mixed.

In this short essay, I take the opportunity of a celebration of the work and influence of Jay Westbrook to explore his and his fellow critics’ opposition to bankruptcy for banks. I begin the essay by surveying Jay’s wide-ranging contributions to bankruptcy scholarship. Jay’s functional analysis has had a profound effect on scholars’ understanding of key issues in domestic bankruptcy law, and Jay has been the leading scholarly figure on cross-border insolvency. After surveying Jay’s influence, I turn to the topic at hand: bankruptcy for banks. Jay has been a strong critic of the proposed reforms, arguing among other things that financial institutions need to be resolved by regulators and an administrative process, not bankruptcy. After addressing these and other objections, I ask Jay if he might reconsider his opposition if the legislation were amended to respond to several of his primary concerns.

The essay is available here.

Proposed Bill: Bankruptcy Venue Reform Act of 2018
by | posted in: Bankruptcy Reform, Legislation | 0

Earlier this month, Senators John Cornyn, R-TX, and Elizabeth Warren, D-MA, introduced the Bankruptcy Venue Reform Act of 2018. With the aim of “prevent[ing] big companies from cherry-picking courts that they think will rule in their favor and to crack down on this corporate abuse of our nation’s bankruptcy laws,” the Act would amend §1408 of the Bankruptcy Act to require debtors to file in the district “in which the principal assets or principal place of business” are located. It would also bar debtors from tag-along filings in jurisdictions where their affiliates have ongoing bankruptcy proceedings unless that affiliate “owns, controls, is the general partner, or holds 50 percent or more of the outstanding voting securities” of the debtor. In short, the proposed Act would eliminate the domicile venue option and the affiliate option that allows larger parent companies to file in the same venue as a smaller subsidiary.

Significantly, the Act would oust Delaware from its position of bankruptcy venue of choice for the many businesses that do not operate in Delaware but are domiciled in Delaware by virtue of having incorporated there. The bankruptcy court in Delaware is the venue now chosen by many public firms that file to reorganize in chapter 11.

In response to the bill’s introduction, Delaware’s Governor and congressional delegation issued a joint statement:

Many American companies, large and small, choose to incorporate in Delaware because of the expertise and experience of our judges, attorneys, and business leaders. Denying American businesses the ability to file for bankruptcy in the courts of their choice would not only hurt Delaware’s economy but also hurt businesses of all sizes and the national economy as a whole. This is a misguided policy, and we strongly oppose it.

Senator Coons later published an additional statement emphasizing that the “Cornyn-Warren bill is bad for businesses everywhere, but it would be a disaster for Delaware.”

Bankruptcy venue reform was proposed, but not passed, in 2005 (S.314) and again in 2011 (H.R.2533). In seeking to remove the domicile and affiliate bankruptcy venue options, the Cornyn-Warren bill most closely mirrors the 2011 bill, H.R.2533, which Professor David Skeel has stated “would [have] overturn[ed] a long history of bankruptcy practice; it would undermine the effectiveness of our corporate bankruptcy system; it would increase the administrative costs of the system; and it would not help the very parties the proposal is ostensibly designed to help.”

If passed, the Act would require a major change in bankruptcy strategy for many businesses, but it remains to be seen whether the Act will gain traction in Congress.

(By Harold King, Harvard Law School, J.D. 2019.)