Bankruptcy Venue Reform

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Late last year, I co-authored an article in the Los Angeles Daily Journal with fellow bankruptcy attorneys Elissa Miller and Zev Schectman on the need for bankruptcy venue reform. Even though we have not seen the onslaught of bankruptcy filings as a result of the COVID-19 pandemic, the essence of that article still holds true: almost all of the major bankruptcy filings over the course of the last two years have been filed in a handful of courts: White Plains - New York, Delaware, Eastern District of Virginia, and the Southern District of Texas.

Current law allows a company to file a bankruptcy case in any state where it does business, or where it or an affiliate is incorporated. Corporate debtors select these select venues for several strategic reasons, known as “forum shopping.” First, the favored courts are known for “predictability,” because there are few judges in these courts. Second, these courts are known to have “rocket dockets,” i.e., the judges move the cases very quickly, often giving affected parties limited opportunity to be heard. Third, these courts are known to tolerate high attorney billing rates of large law firms, even when most creditors receive minimal returns. Finally, these courts are generally receptive to legal arguments of banks and other sophisticated parties who often control the case. Little opportunity and voice are given to employees and local business creditors who cannot easily appear in a case and afford counsel, thousands of miles away. The process is particularly helpful for companies and their lenders looking to exit bankruptcy quickly. 

Those companies can file bankruptcy cases in jurisdictions far from their home base is inconsistent with how the venue is usually determined. If a business dispute or personal injury case is based on events in California, the lawsuit would be filed in the California county or district where it all happened.  The same should be true for bankruptcy. 

Applying general venue rules in bankruptcy makes sense as a matter of due process. People who are affected by a business bankruptcy should be able to personally participate in the process – not be forced to pay attorneys to represent their interests far from home. 

Many will argue that only certain judges and only certain practitioners are capable of handling the larger cases. However, there is little evidence of this. Certainly in complex civil litigation handled in federal courts all around the country, we have not heard that only certain federal courts are capable of handling complex litigation cases.

The above however is not to say that it is not incumbent on the bench in the various federal judicial districts to organize their rules and conduct their cases in a way that gives the bar confidence that complex bankruptcy cases can be handled efficiently and predictably.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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