Last month, the Supreme Court took a long step toward allowing plaintiffs to mount nationwide class actions in state court only in states where the defendants are incorporated or headquartered, or maintain their principal assets. Will Bristol-Myers Squibb v. Superior Court of California, 16-466, 2017 BL 208398, 85 U.S.L.W. 4400 (Sup. Ct. June 19, 2017), prompt courts to revisit rulings under the bankruptcy venue statute that allow companies to reorganize in Delaware or New York regardless of where they are located?
The answer is: By emphasizing the due process rights of defendants, Bristol-Myers could be read to imply that courts should assign more significance to the interests of creditors and employees in making bankruptcy venue decisions.
Bankruptcy Venue Standards
The bankruptcy venue statute, 28 U.S.C. § 1408, allows companies to file chapter 11 petitions in the states where they are incorporated or have a principal place of business, or where their principal assets are located. Since many of the country’s larger companies are incorporated in Delaware or New York, those states are proper venues, even if the debtor has virtually no operations there.
There is another loophole: the affiliate venue provision in subsection 1408(2). As happened with Eastern Airlines, a large company with an inconsequential affiliate can file in New York or Delaware if that affiliate is incorporated in one of those states or has its principal assets there, even if the parent might not otherwise be eligible for venue in those favored jurisdictions.
If venue is proper under the generous bankruptcy venue rules, a court will change venue under 28 U.S.C. § 1412 “in the interest of justice or for the convenience of the parties.” Assuming venue was proper in the first place, courts are generally prone to allow the case to proceed in the district chosen by the debtor and preferred by the major institutional lenders. The preferences of ordinary trade creditors and employees usually do not carry the day on a change of venue motion.
Bristol-Myers and Class Actions
In Bristol-Myers, the plaintiffs tried using a notion of jurisdiction that could be called the class action cousin of expansive bankruptcy venue. They sued a huge pharmaceutical company in California, alleging harmful effects from a blockbuster drug that was generating billions a year in sales throughout the U.S.
Among the 600 plaintiffs, only 86 were California residents. The remainder were from 33 other states.
In the 8/1 opinion for the majority on June 19, Justice Samuel A. Alito Jr. said that the pharmaceutical defendant was incorporated in Delaware, had its head office in New York, and had substantial operations in New York and New Jersey. In California, the company had about 400 employees and five research facilities. The drug was neither developed nor manufactured in California; the marketing, manufacturing and regulatory approval for the drug were managed in New York or New Jersey.
In view of the Supreme Court’s decision in Daimler AG v. Bauman, 571 U.S. 134 S. Ct. 746, 187 L. Ed. 2d 624, 82 U.S.L.W. 4043 (2014), the California Supreme Court concluded that the state trial court did not have general jurisdiction over the manufacturer. However, the state’s high court did find specific jurisdiction. The Supreme Court granted certiorari to decide whether the exercise of specific jurisdiction violated the Due Process Clause of the Fourteenth Amendment.
Justice Alito explained the differences between general and specific jurisdiction. General jurisdiction arises where the defendant is “at home,” for instance, in the state of incorporation. As Justice Alito said, a state court with general jurisdiction can “hear any claim against that defendant, even if all the incidents underlying the claim occurred in a different state.”
“Specific jurisdiction is very different,” he said. To exercise specific jurisdiction within the bounds of the Constitution, the suit must “‘aris[e] out of or relat[e] to the defendant’s contacts with the forum.’” Quoting another high court precedent, he said that specific jurisdiction is limited to “‘issues deriving from, or connected with, the very controversy that establishes jurisdiction.’”
Justice Alito said there was no specific jurisdiction within constitutional boundaries for the non-California residents, because they did not claim to have suffered harm in that state and all of the conduct giving rise to their claims arose in other states.
Justice Alito made several observations that might be relevant in the bankruptcy context. It is often argued that bankruptcy venue far from a company’s employees and the bulk of its trade creditors puts a burden on them and makes participation difficult or expensive. In the context of class actions, Justice Alito that the “the ‘primary concern’ is the ‘burden on the defendant.’” He also alluded to “practical problems resulting from litigating in that forum.”
On a topic that is arguably less significant in federal courts, he mentioned the “coercive power of a state that may have little legitimate interest in the claims in question.”
At the end of his opinion, Justice Alito cited the defendant’s admission that all of the plaintiffs could have sued together in either New York or Delaware.
Of ominous significance for bankruptcy cases and class actions alike, he said the opinion leaves “open the question of whether the Fifth Amendment imposes the same restrictions on the exercise of personal jurisdiction by a federal court.”
The sole dissenter, Justice Sonia Sotomayor, summarized the majority opinion as meaning that “a corporation that engages in a nationwide course of conduct cannot be held accountable in a state by a group of injured people unless all of those people were injured in the forum state.” She said, “there is nothing unfair about subjecting a massive corporation to suit in a state for a nationwide course of conduct that injures both forum residents and nonresidents alike.”
She interpreted the opinion to mean that the Court has barred “nationwide class actions in any state other than those in which a defendant is ‘essentially at home.’”
In substance, the majority and the dissent focused on fairness, although the majority focused on fairness to the defendant while Justice Sotomayor focused on fairness to the injured plaintiffs.
Implications of Bristol-Myers in Bankruptcy
Does Bristol-Myers mean anything about bankruptcy venue? Facially, the opinion means nothing at all.
Bristol-Myers deals with constitutional limitations on state courts’ exercise of jurisdiction. In that sense, Bristol-Myers is irrelevant because bankruptcy courts clearly have subject matter jurisdiction, and, within the limits of Stern v. Marshall, its predecessors and progeny, bankruptcy courts exercise personal or in rem jurisdiction over the debtor, its assets and its creditors. Furthermore, most courts have upheld venue in the popular districts despite a debtor’s lack of connections with those forums, as long as venue is technically proper.
Bristol-Myers, however, focused on fairness to the defendants as a matter of constitutional law. If that is the test, the identity of the defendant is not so clear in bankruptcy. Are creditors the defendants in bankruptcy? Or is the debtor more akin to the defendant? Or does Bristol-Myers imply there must be fairness to both creditors and debtors?
Bankruptcy venue has not been thought to raise questions of due process. In light of Bristol-Myers, should courts consider whether a distant bankruptcy venue impinges the due process rights of a debtor’s employees and creditors? What about the rights of institutional lenders with the most dollars at risk?
It seem clear that the bankruptcy venue statute does not raise a due process violation on its face. If there is a conflict with the Constitution, it would arise “as applied.” In venue decisions, though, courts already weigh the interests of distant creditors and employees, but perhaps not with the weight required if there were constitutional issues afoot.
If Bristol-Myers means anything in the bankruptcy context, it may mean that bankruptcy courts should give more weight to the interests of creditors and employees when deciding venue disputes. Bristol-Myers could therefore mean that a debtor’s choice of venue may not be as broad as it seems on the face of the statute.
If the Supreme Court drops the other shoe and someday rules that the Fifth Amendment imposes the same restrictions in federal court, the direct implications for bankruptcy will be unavoidable. If class actions in federal court are limited to states of incorporation, principal office or principal assets, using a subsidiary as a venue hook for the entire enterprise may no longer be available if Bristol-Myers is expanded to cover federal courts. And if there are constitutional considerations beyond the language of the venue statutes, courts may begin forcing companies to reorganize closer to home.
Although broad bankruptcy venue has been criticized for decades, Congress has not been moved to amend that statute. Congressional acquiescence will not matter, however, if constitutional issues are at the forefront.