On June 28, 2021, a bipartisan bill was presented in the U.S. House of Representatives to amend 28 U.S.C. § 1408, the bankruptcy venue statute. The Bankruptcy Venue Reform Act of 2021, H.R. 4193, begins by finding that the “wide range of permissible bankruptcy venue options” currently in the Bankruptcy Code “has led to an increase in companies filing for bankruptcy outside of their home States,” meaning “the district in which the principal place of business or principal assets of the company is located.” Currently, a corporate debtor may file bankruptcy (1) in the entity’s state of incorporation, (2) where the entity’s principal place of business or principal assets are located, or (3) any district in which an affiliate of the entity has already filed a pending bankruptcy.
In practice, sophisticated corporate debtors have used the third venue option to their advantage by either maintaining an entity in a favorable district or by creating a new entity immediately prior to filing. In addition, attempts to transfer venue, although sometimes successful, can be costly. For example, in In re Patriot Coal Corp., 482 B.R. 718 (Bankr. S.D.N.Y. 2012), the bankruptcy court found that the debtors had not acted in bad faith in creating new entities on the eve of filing to manufacture proper venue, but still transferred the case in the interest of justice. More recently, the National Rifle Association of America was found to have filed its petition in bad faith and was dismissed from bankruptcy. See In re NRA of Am., 628 B.R. 262 (Bankr. N.D. Tex. 2021). There, the court held that the NRA had filed in Texas to gain a litigation and regulatory advantage over the New York Attorney General, who was investigating the NRA prior to bankruptcy. But many times, the debtor’s choice of venue goes unchallenged or is found to be appropriate under the statute.
This has resulted in a concentration of large bankruptcy filings in either the District of Delaware or the Southern District of New York, regardless of where those debtors are incorporated or primarily operate their businesses. It should be noted, however, that in the last several years, the Southern District of Texas has seen an explosion of commercial bankruptcies, with more filings in 2020 than in the Southern District of New York. While this is undoubtedly a good thing as far as bankruptcy venue reformers are concerned, adding a third bankruptcy hotspot does not fix the problem entirely.
Many commentators, including Representatives Zoe Lofgren (D-Calif.) and Ken Buck (R-Colo.), who introduced the Bankruptcy Venue Reform Act of 2021, have found that this practice is in effect forum-shopping, which prevents smaller creditors from participating in faraway bankruptcies and deprives other courts from developing bankruptcy law in their districts. Similar legislation has been introduced every year for the past several years without success. Past proponents of these bills include Sens. Elizabeth Warren and John Cornyn. There are several groups in support of venue reform, notably including a large majority of state attorneys general and more than 100 past and present bankruptcy judges.
To limit forum-shopping, the amended statute would alter the affiliate exception to bankruptcy venue so that corporate debtors could only file for bankruptcy in the same venue as an affiliate if the “affiliate … directly or indirectly owns, controls, or holds 50 percent or more of the outstanding voting securities of, or is the general partner of,” the proposed debtor. The amendment would further limit forum-shopping by giving “no effect” to any transfers in ownership or transfer of the principal place of business of an entity in the year preceding filing or which was done for the purpose of establishing venue.
Whether this proposal will go any further than the past bills related to bankruptcy venue remains to be seen. President Biden has shown support for bankruptcy reform in general but no specific support for venue reform, which has caused some commentators to note that President Biden’s home state of Delaware is a beneficiary of the current venue system.