The COVID pandemic put unprecedented pressure on all economies around the world. Many predicted that this economic dislocation would lead to an unprecedented number of corporate bankruptcies. This did not happen. The American government and other governments responded with extraordinary measures. While these measures allowed companies to ride out the worst of the pandemic, they did have consequences. Many large companies were left with unprecedentedly large amounts of debt on their balance sheets.
Perhaps a robust economy will allow companies to grow their way out from under their debt burden. But perhaps not. To prepare for the possible future increase in large companies filing for bankruptcy, Congress should act now to build up a bankruptcy infrastructure sufficient to handle an influx in cases. Specifically, Congress should require that every circuit create a “business bankruptcy panel” designed to administer the Chapter 11 filing of large companies. As is well-known, three bankruptcy districts currently serve as dominant venues for large cases – the District of Delaware, the Southern District of New York and the Southern District of Texas. It is by no means clear that these three courts could handle a significant increase in caseloads. Creating expertise across the country would help prepare the system for any future rise in cases. A secondary benefit of this reform is that it may also ameliorate some of the concerns that have been raised over the years by the dominance of a small number of venues for large corporate cases.
By Anthony J. Casey (Professor, The University of Chicago Law School) and Joshua Macey (Assistant Professor, The University of Chicago Law School)
The United States Bankruptcy Code gives debtors wide discretion to reorganize in the venue of their choice. These lenient venue selection rules long have allowed bankruptcy courts in the District of Delaware and the Southern District of New York to dominate the market for large Chapter 11 cases, though recently the Southern District of Texas has also begun to attract a large number of cases.
This state of affairs has produced a vigorous debate. Critics of liberal venue rules charge that bankruptcy districts are engaged in a “race to the bottom” as judges compete for blockbuster cases. Others counter that competition for cases improves efficiency and predictability as judges develop expertise in overseeing large Chapter 11 cases.
This Article cautions that developments in foreign jurisdictions may limit the effectiveness of these venue reform proposals. In recent years, foreign jurisdictions have emerged as convenient forums for distressed debtors. For instance, in many cases, the English scheme of arrangement now represents a viable alternative to the American bankruptcy system, and over the past decade, a number of companies have chosen to use an English scheme of arrangement to restructure their debt instead of chapter 11, with the first United States-headquartered business doing so in 2019. Other jurisdictions have also sought to entice foreign debtors, with insolvency specialists speculating that Singapore, in particular, could become a restructuring hub.
Because American bankruptcy courts freely recognize foreign insolvency proceedings, firms that are directed to file in less favored districts may instead choose to reorganize in a foreign jurisdiction. In this environment, attempts to limit venue selection within the United States will have the opposite of their intended effect, replacing domestic venue shopping with even worse global forum shopping. By ignoring the availability of global forums, current venue reform proposals could, perversely, drive opportunistic debtors and creditors to restructure in foreign jurisdictions.
To address this, we argue that, rather than limit domestic venue choice, lawmakers should: (1) support the development of ex ante commitment to mechanisms for choosing venue and forum; and (2) whenever possible, resolve inconsistencies in substantive law across venues and forums. These are general principles of reform, and the implementation will depend on context. For example, commitment mechanisms look different for venue than they do for forum. But, if designed properly, these measures can reduce the costs of venue and forum shopping without giving up the benefits that come from allowing some choice of venue and forum.
It is worth noting that the merits of our proposal are independent of one’s view on the current state of venue shopping. If venue shopping is a real problem, the principles we introduce address that problem. If venue shopping is not a problem, the principles do no harm and even expand the choice set for debtors. Similarly, while the principles address the problem of global forum shopping, the benefits with regard to venue shopping exist with or without global forums. The same cannot be said of the status quo or the reforms currently being considered.
Although the Boy Scouts of America (BSA) is headquartered in Texas, it filed for chapter 11 in Delaware in February. That was permissible under existing bankruptcy venue rules because the BSA had created an affiliate in Delaware seventh months earlier. Unsettled by this apparent forum shopping, the Attorneys General of 40 states, the District of Columbia, and Puerto Rico sent a letter to Congress expressing their support for H.R. 4421, the Bankruptcy Venue Reform Act of 2019. It would have prevented the BSA’s conduct. Ten state Attorneys General did not sign the letter: New York, Delaware, Connecticut, Florida, Kansas, New Jersey, North Carolina, Montana, Virginia, and Wyoming.
Under the Act, a corporation could only establish venue in three places. First, the district where its “principal assets” were located for the 180 days before filing. Second, the district where it maintains its “Principal Place of Business.” Third, and only for controlled subsidiaries, any district where a case concerning an entity controlling 50 percent or more of its voting stock is pending. Changes of control or in the Principal Place of Business in the year before filing or conducted “for the purpose of establishing venue” would be disregarded. Corporations could thus no longer manufacture venue in a preferred jurisdiction by simply creating an affiliate there.
H.R. 4421 would also require the Supreme Court to promulgate rules allowing “any attorney representing a governmental unit” to appear in any chapter 11 proceeding without paying a fee or hiring local counsel. This provision likely factored heavily into the Attorneys General’s support for the Act. Their support letter emphasizes that the resulting rule would help them enforcers consumer protection and environmental laws by reducing the costs of defending their states’ interests in chapter 11 cases filed in distant jurisdictions.
The letter offered two reasons why corporations should not be able to manufacture venue in districts with seemingly favorable judges just by creating an affiliate there. First, it is costly for creditors (particularly small creditors) because they must either travel long distances or forgo face-to-face participation as well as hire local counsel in expensive legal markets. Second, it may cause the public to perceive the bankruptcy system as unfairly advantaging large corporations. H.R. 4421 would solve these problems by “ensur[ing] that bankruptcies are filed in jurisdictions where debtors have the closest connections and filings will have the largest impacts.” The letter notes the Southern District of New York and the District of Delaware as two currently attractive districts. But the Attorneys General argue that other district and bankruptcy judges have similar expertise.
Academics largely agree that 28 U.S.C. § 1408’s permissive venue rules encourage competition among bankruptcy courts to attract high profile cases, but opinion is split on whether this competition improves or degrades bankruptcy law.
Lynn LoPucki and William Whitford argue that venue choice degrades bankruptcy law by pressuring judges to exercise their discretion to favor debtors and their attorneys because these are the actors who usually choose where to file. They suggest, for example, that bankruptcy judges of the Southern District of New York misuse discretion by freely granting extensions of the 120-day exclusivity period during which only the debtor may propose a reorganization plan. Debtors can then agree to move toward confirmation of a plan in exchange for concessions from creditors.
David Skeel, on the other hand, argues that at least one of the venue choices that the proposed Bankruptcy Reform Act would eliminate—the district where the entity is incorporated—improves bankruptcy law by encouraging states to compete for incorporation fees by offering increasingly efficient bankruptcy rules in the multiple areas where federal bankruptcy law defers to state law.
On April 29, 163 current and retired bankruptcy judges sent a letter to members of the House Committee on the Judiciary expressing support for H.R. 4421’s proposed reforms. The letter stresses the preference for eliminating state of incorporation as a basis for venue.
By Benjamin Charles Iverson (Brigham Young University), Joshua Madsen (University of Minnesota, Twin Cities, Carlson School of Management), Wei Wang (Queen’s School of Business), and Qiping Xu (University of Notre Dame, Department of Finance).
Prior studies document the influence of bankruptcy judges’ discretion on restructuring outcomes, yet we know little about how judicial experience affects the bankruptcy process. We study how the accumulation of job-specific human capital influences judges’ efficiency in handling large corporate bankruptcy filings, using 1,310 Chapter 11 filings by large U.S. public firms overseen by 309 unique bankruptcy judges in 75 bankruptcy courts between 1980 and 2012.
Using random assignment of judges to cases for empirical identification, we show that cases assigned to a judge with twice as much time on the bench realize a 5.5% decrease in time spent in reorganization. This reduced time in court translates into savings of approximately $2 million in legal fees alone for a typical case in our sample. Judges’ time on the bench is associated with higher probability of emergence but not higher recidivism. The combined evidence suggests that more experienced judges are overall more efficient. We also find that it takes up to four years for a new judge to become efficient and that judges who see a higher volume of business filings and a greater diversity of cases by size and industry early in their tenure become efficient faster than those who don’t. We find little evidence that judges’ general experience and personal attributes consistently affect case outcomes.
Our analyses highlight a potential benefit of allowing firms to file in courts with more experienced judges. Restricting this flexibility (e.g., through the proposed Bankruptcy Venue Reform Act of 2017) may impose a cost on firms by forcing them to file in courts with less experienced judges.
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.