Restructuring

Contributed by Victoria Vron
Venue in chapter 11 cases has always been a controversial topic.  Parties who are dissatisfied with the outcome of chapter 11 cases sometimes blame the venue rules.  Currently, 28 U.S.C. § 1408 provides that a debtor may commence a chapter 11 case in a district (i) in which such debtor is domiciled, resides, has a principal place of business in the United States, or has principal assets in the United States, within 180 days immediately preceding the commencement of the chapter 11 case (or for the longer portion of such 180 days than the domicile, residence, or principal place of business or assets in any another district); or (ii) in which there is another chapter 11 case pending of such debtor’s affiliate, general partner or partnership.  Accordingly, it is possible for debtors to commence their chapter 11 cases in districts other than where their main places of business or principal assets are located.  Moreover, the venue rules allow enterprises with complex corporate structures to file for chapter 11 together in the same jurisdiction and have their cases administered jointly.  For a variety of reasons, the most significant of which is the courts’ expertise in presiding over large chapter 11 cases, many large chapter 11 cases traditionally have been filed in the bankruptcy courts in New York and Delaware.
On July 14, 2011, House Judiciary Committee Chairman Lamar Smith (R-Texas) and Ranking Member John Conyers, Jr. (D-Michigan) introduced the Chapter 11 Bankruptcy Venue Reform Act of 2011 (H.R. 2533) to prevent what they consider to be “forum shopping” in chapter 11 cases.  The proposed legislation modifies section 1408 by limiting venue to: (i) the location of the debtor’s principal place of business or principal assets in the United States during the 1 year immediately preceding the commencement of the chapter 11 case (or the longer portion of such 1 year period than any other district in which the debtor had such place of business or assets); and (ii) the district in which an affiliate of the debtor that owns, controls, or holds with power to vote, more than 50 percent of the outstanding voting securities of such debtor has its chapter 11 case pending.  If this legislation becomes law, debtors will no longer be able to commence their chapter 11 cases in their place of incorporation or in a jurisdiction in which they have non-principal assets, nor will they be able to rely on an affiliate in establishing the desired venue.
As reflected by the press release issued by the House Committee on the Judiciary, the genesis behind the new legislation appears to be Representatives Smith’s and Conyers’ frustration that certain mega-cases were filed in the Southern District of New York, a venue they believe is “management-friendly,” even though most of those debtors’ creditors and employees were located elsewhere.  The Representatives believe that allowing corporations to file for chapter 11 far away from home leaves their employees and creditors and other stakeholders “without a voice in the negotiations.”  The proposed legislation, they argue, would level the playing field between employees and management.
The Representatives’ premise that stakeholders cannot effectively participate in negotiations when debtors file for chapter 11 away from “home” is flawed.  Although filing chapter 11 cases away from “home” may make it more difficult for individual employees and creditors to attend court hearings in person, most courts now allow for telephonic court appearances.  In addition, individual employees and creditors very rarely actually participate in plan negotiations even when debtors commence their chapter 11 cases at “home.”  Moreover, large debtors often have employees and creditors who are located in multiple jurisdictions around the country, thus making it impossible to commence a chapter 11 cases in a jurisdiction where all of the debtor’s creditors and employees are located.  Finally, the Bankruptcy Code already provides a level playing field by allowing for the appointment of official committees in chapter 11 cases, such as creditors’ committees and equity committees, whose duty is to represent unsecured creditors and equity holders, respectively.  Such committees are represented by competent counsel who are more than capable of representing the interests of their constituents, regardless of which jurisdiction the chapter 11 cases are pending in.  The Bankruptcy Code also provides numerous protections for employees, such as limitations on certain types of management compensation and specific requirements for modification of collective bargaining agreements and retiree benefits.
Much more can be said both in support and in opposition to the proposed legislation, and we will touch upon those arguments in future posts as we bring you updates on the status of this legislation.