Support for Venue Reform Grows Following Judiciary Hearing

The bipartisan nature of H.R. 2533, the Chapter 11 Bankruptcy Venue Reform Act, was on display during a hearing on the bill in the House Judiciary Committee.  Lawmakers from both sides of the aisle asked a small group of witnesses an array of questions, and regarded the arguments against the bill, proved by lone dissenting witness Professor David Skeel of the University of Pennsylvania Law School, with a great deal of skepticism.

Held in the Committee’s Subcommittee on Commercial and Administrative Law, chaired by Rep. Howard Coble (R-NC), the hearing offered the bill’s sponsors and supporters to lay out their qualms with current bankruptcy venue statutes, which allow debtors a strikingly broad array of choices of where to bring their case.  “These rules allow a large Chapter 11 debtor to choose their venue…This leads to some strange results,” said Coble in his opening statement.  “The Los Angeles Dodgers, an entity with Los Angeles in its very name, filed in Delaware.”

Coble mentioned a complaint that would arise again and again in the hearing, noting that the leeway that Chapter 11 debtors have in where they file their bankruptcy case often comes at the expense of smaller creditors.  “Small creditors must defend preference claims filed in a remote jurisdiction,” he said.  “[They’re] sometimes left in the dust.”

Judiciary Committee Chairman Lamar Smith (R-TX), one of the bill’s original sponsors, noted in his opening statement that H.R. 2533 would not only correct provisions that disenfranchise smaller creditors, but also restore the Constitution’s original intent for the nation’s Bankruptcy laws.  “The current Chapter 11 venue rules allow many corporations to forum shop for a venue with favorable judicial precedent for the business.  For example, a nationwide retailer may prefer to file in Delaware because of the Third Circuit’s well-known rulings on the treatment of unpaid rent in bankruptcy.  At the same time, a business with many unionized employees can avoid filing in Delaware to avoid Third Circuit precedent on collective bargaining rights in bankruptcy,” said Smith.  “The Constitution instructs Congress to enact uniform bankruptcy laws.  While courts of appeal are permitted to interpret Bankruptcy Code provisions differently, Chapter 11 debtors should not be able to leave their home districts and shop for a forum whose judicial precedent on bankruptcy law they happen to prefer.”

Three of the four witnesses agreed with the Chairman, and supported the bill, namely Peter Califano, partner with Cooper, White & Cooper who testified on behalf of the Commercial Law League of America (CLLA), Hon. Frank Bailey, chief judge of the Bankruptcy Court for the District of Massachusetts, and Professor Melissa Jacoby, of the University of North Carolina School of Law. 

“The consequences of corporate bankruptcy are most profound in the communities where the debtors’ principal assets are located,” said Califano.  “If bankruptcies are filed in remote districts, the parties with the most familiarity with the debtor’s operations might be cut off in the process.”  Bailey and Jacoby agreed with Califano, with Bailey noting that “the current venue statute undermines confidence in the bankruptcy system,” and Jacoby observing that “the current laws really do risk being perceived as being procedurally unfair.”

Subcommittee Ranking Member Rep. Steve Cohen (D-TN) added that the current venue rules ultimately harm “small creditors, employees and other affected stakeholders,” and that “this bill [H.R. 2533], that’s bipartisan, offers what we think are common sense changes to bankruptcy venue statutes.”

NACM has publically voiced its support for H.R. 2533, and has long advocated for sensible changes to the Code’s rules governing where a debtor may file.

Jacob Barron, CICP, NACM staff writer