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.)