Business bankruptcy venue reform bill stirs controversy

Due to its status as the country’s financial center, New York is home to many corporate headquarters. The tiny state of Delaware likewise boasts an outsize number of corporate residents because its laws favor businesses that use the corporate form of organization. Both states also attract a disproportionate number of business bankruptcy filings — and the lawyers who must appear in court to represent their clients. Thus, a bill recently introduced into the United States Senate by New York Senator Elizabeth Warren and Texas Senator John Cornyn is stirring intense controversy.

The dispute involves choosing the federal court in which to file a bankruptcy petition. The law currently specifies the appropriate venue as the state in which a corporation’s domicile, residence, principal place of business or principal assets are located. For large corporations with multiple business locations, this law offers a large number of venue choices for a bankruptcy petition. Corporations not surprisingly choose the venue which will give them perceived advantages in procedural and substantive corporate law. Corporations may also choose a venue that will impose burdensome travel requirements on its creditors or employees worried about their pensions.

The bill proposed by Senators Warren and Cornyn would require corporate debtors to file a bankruptcy petition in a state where their corporate headquarters are located or where most of their assets are located. The bill is intended to limit the choice of venues available to corporate debtors. The sponsors claim that the bill would prevent “forum shopping” while allowing employees, retirees and creditors to more easily participate in the bankruptcy process. Not surprisingly, Delaware’s Congressional representative has criticized the bill as unnecessary and misguided.

While the bill appears to mostly affect large, multi-state corporations, smaller entities who do business with large corporations may find the bill to their liking in the event of bankruptcy. The expense of appearing in a bankruptcy proceeding could be significantly reduced if the bankruptcy venue were closer to home than Wilmington, Delaware or the Southern District of New York.

Source: delawareonline, “U.S. senators take aim at Delaware’s bankruptcy advantage,” Scott Goss, Jan. 9, 2018