On September 23, 2021, United States Senators Elizabeth Warren (D-Mass.) and John Cornyn (R-Texas) introduced the Bankruptcy Venue Reform Act of 2021 (the “Venue Reform Act”), which would tighten the Bankruptcy Code’s venue rules for corporate debtors. A corporate filer would be limited to the district containing its principal place of business or the district where its principal assets have been located for the preceding 180 days. For a public company, the location listed in its SEC filings would be its presumptive principal place of business. The Venue Reform Act is intended to eliminate forum shopping by corporate debtors seeking to file their chapter 11 cases in traditionally debtor-friendly courts.
This blog post describes some of the main changes that would go into effect if the Venue Reform Act were approved. The full text of the proposed Venue Reform Act may be found here: https://www.warren.senate.gov/imo/media/doc/SIL21A87.pdf.
The Venue Reform Act indicates that “the wide range of permissible bankruptcy venue options has led to an increase in companies filing for bankruptcy outside of their home district—the district in which the principal place of business or principal assets of the company is located . . . .” The bill calls this practice “forum shopping,” and opines that it has resulted in “a concentration of bankruptcy cases in a limited number of districts . . . .” The bill states that forum shopping prevents some stakeholders from “fully participating in bankruptcy cases that have tremendous impacts on their lives, communities, and local economies.” Finally, the bill forecasts that “reducing forum shopping in the bankruptcy system will strengthen the integrity of, and build public confidence and ensure fairness in, the bankruptcy system.”
The Current Venue Laws
Current law regarding venue—28 U.S.C. § 1408—gives a debtor flexibility in deciding where to file because a case may be commenced in the district “in which the domicile, residence, principal place of business in the United States, or principal assets in the United States, of the person or entity that is the subject of such case have been located” for the 180 days before the commencement of the case or for a longer portion of the 180-day period than in any other district. A corporation’s “domicile” is its state of incorporation. In re EB Capital Mgmt. LLC, No. 11–12646 (MG), 2011 WL 2838115 at *3 (Bankr. S.D.N.Y. July 14, 2011). Potential debtors may also file in a district in which an existing case is pending under title 11 “concerning such person’s affiliate, general partner, or partnership.”
Change of venue—governed by 28 U.S.C. § 1412—is permissive, rather than mandatory: “[a] district court may transfer a case or proceeding under title 11 to a district court for another district, in the interest of justice or for the convenience of the parties.”
The Venue Reform Act’s Proposed Changes
The Venue Reform Act would define “principal place of business” for public companies. Under the Act, unless a public company can show otherwise by clear and convincing evidence, “the term ‘principal place of business’… means the address of the principal executive office of the entity as stated in the last annual report filed under that Act before the commencement of a case under title 11 of which the entity is the subject.”
The Venue Reform Act would set separate venue rules for individual debtors and corporate debtors. For individual debtors, the existing venue rules would remain in place. Corporate debtors, however, would be limited to the district in which their “principal place of business or principal assets” have been located for the 180 days before its bankruptcy.
The Venue Reform Act would also curtail the use of affiliate filing to confer venue. One strategy used by debtors to establish venue in a debtor-friendly jurisdiction is to file a subsidiary or affiliate case in the desired jurisdiction where venue is proper, and then file the other debtors as “related cases” – even if those filings would not be proper under the venue rules. Under the Venue Reform Act, a “related case” filing could only be commenced in the district in which an affiliated debtor case is pending if that 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 entity that is the subject of the later filed case,” and only if the pending case was properly filed in that district.
In addition, the Venue Reform Act would limit the effect of a change in ownership or control of an entity or its affiliate, a transfer of the principal place of business or principal assets in the United States, or a merger of dissolution of a corporate entity for purposes of the sections relating to corporate debtors. Under the Venue Reform Act, “no effect [would be] given to a change in the ownership or control of an entity that is the subject of the case, or of an affiliate of the entity, or to a transfer of the principal place of business or principal assets in the United States, or to the merger, dissolution, spinoff, or divisive merger of an entity that is the subject of the case, or of an affiliate of the entity, to another district” if such action takes place within 1 year before the date on which the case is commenced, or otherwise if it takes places “for the purpose, in whole or in part, of establishing venue.”
Finally, the Venue Reform Act would mandate that if a case is filed in the wrong district, the district court shall either immediately dismiss the case or, if it is in the interest of justice, immediately transfer the case or proceeding to any district court in which the case could have been brought.
Under current law, the venue analysis is relatively simple. If the Venue Reform Act passes, corporate debtors and the professionals that represent them will have to analyze their choice of venue for each case. Herrick will continue to monitor this legislation.