A Call for Bankruptcy Venue Reform

Posted on: November 12th, 2021 by Michael A. Morris, ABLS Blog Contributor

In February of 2021, Belk, a North Carolina department-store chain, filed for Chapter 11 bankruptcy in the United States Bankruptcy Court of the Southern District of Texas. After the large retail company with over 90,000 creditors filed on the evening of February 23rd, their plan was confirmed and consummated by the end of the next day. The U.S. Trustee, the Department of Justice’s bankruptcy watchdog, was quick to object to the plan’s confirmation with the understandable concern that about 90,000 creditors would be swindled of their Due Process rights by not being notified prior to plan confirmation. The bankruptcy court appeared to think little of these concerns and granted a toothless 35-day objection period. It was clear to the parties involved that the case was over upon consummation, and Belk’s bankruptcy would sweep through the court before most of their creditors could even blink. Through the rapid administration of this case, the court ignored basic elements of bankruptcy rules and procedure, and the rights of creditors were relegated to an afterthought.

Unfortunately, Belk’s bankruptcy is not unlike other Chapter 11 cases. Many courts have been willing to bend the Bankruptcy Code in large Chapter 11s to the whims of the debtors’ executives, debtors’ counsel, and debtor-in-possession lenders who often finance the bankruptcy. These judges have engaged in this Bankruptcy Code puppeteering to compete for large Chapter 11 cases to be filed in their court, and because of flexible bankruptcy venue laws, debtors can easily flock to the courts where the judges will be the most pliable.

A Case Study

VeraSun (Midwest to Delaware, 2008)
Ascena Retail (New Jersey to Virginia, 2020)
Belk (North Carolina to Texas, 2021)

Consider how Belk, a North Carolina company, was able to file in the Southern District of Texas.

The current bankruptcy venue statute, 28 U.S.C. § 1408 allows a debtor to file in the district “in which the domicile, residence, principal place of business in the United States, or principle assets in the United States” of the debtor are located. However, the debtor cannot just move from one district to another and file immediately; the statute requires the debtor to be eligible for over 180 days in the district. The issue is that the statute has a built-in exception that allows large companies to file virtually anywhere. Section 1408(2) allows the debtor to file anywhere “in which there is a pending [bankruptcy] case … concerning such [debtor’s] affiliate.”

This is how Belk made it to the Southern District of Texas. Belk had subsidiaries file in the Southern District of Texas, and the affiliates’ bankruptcies acted as a venue “hook” to allow Belk to file in the Southern District of Texas. Concerningly, the court did not even appear to accurately apply the existing venue statute, because Belk never showed that any of these affiliates were eligible in the Southern District of Texas either. Regardless, the result was a bankruptcy case that did not belong in the Southern District of Texas being administered expeditiously by a judge who chose to abdicate his duties of enforcing the bankruptcy code in exchange for bolstering the court’s reputation as a Chapter 11 destination.

Incentives for Shady Venue Practices

Under the current bankruptcy venue statute, two incentives combine for disastrous results. First, debtors and their case managers are incentivized with their broad discretion to maneuver Chapter 11 cases to the judges that will bend to their will. Second, some judges are incentivized to either violate the law or manipulate it to attract glamorous Chapter 11 cases. These incentives have produced a competition over what court or judge can give results most favorable to bankruptcy case placers (most often debtor’s attorneys and financiers for bankruptcy debtors). Currently, five bankruptcy courts that hear more than 90% of the bankruptcy cases in the United States – Houston, Delaware, White Plains, Richmond, and New York. This is enormous control in the hands of very few judges. Even worse, large companies and their attorneys are sometimes able to choose the specific judge that will administer the case by manipulating local bankruptcy court rules.

The Argument for Reform

The solution is bankruptcy venue reform. On June 28, 2021, H.R. 4193, the Bankruptcy Venue Reform Act of 2021, was introduced in the House as a bipartisan solution, and a substantively identical reform act was introduced in the Senate as S.2827 on September 23, 2021. The Act limits the ability of large companies to forum shop by requiring that the debtor file where its headquarters or principal assets are located. Moreover, it puts the burden on the debtor to show by “clear and convincing” evidence that the venue selected is proper under the act. This would prevent large companies from filing wherever they please and thus would eliminate incentives for bankruptcy judges to cow tow to the demands of large corporations and their financiers. 

It is easy to see why state attorneys general as well as bankruptcy professionals and scholars are calling for venue reform but make no mistake, this issue has broad ramifications. Look no further than Purdue Pharma’s Chapter 11 bankruptcy.

Purdue Pharma, though based in Connecticut, was able to pick the court and even the judge for its bankruptcy. Exploiting the flexibility of the current venue statute, Purdue Pharma was able to file in the Southern District of New York. Even worse, Purdue was able to select their judge by using a local rule that made Judge Robert Drain the only possible bankruptcy judge for the case. This was exactly as Purdue Pharma’s owners had planned. Purdue Pharma and its owners, the Sackler family, had been implicated in the opioid crisis. Judge Drain approved a plan that shielded the Sackler family from liability in future opioid-related cases even though none of the Sacklers had personally filed for bankruptcy. In response to Judge Drain’s questionable decisions, Connecticut’s Attorney General, William Tong, said “[the Sacklers] should not be able to manipulate bankruptcy laws to evade justice and protect their blood money.” Essentially, Judge Drain, through bankruptcy, eliminated the rights of opioid victims to recover potentially billions of dollars in damages.

Contact your Elected Officials!

In sum, bankruptcy venue reform promotes not only the rule of law and integrity of the bankruptcy system, but also the rights of individuals over the power of large corporations. Contact your Senator or Representative and urge them to protect your rights by supporting bankruptcy venue reform.

 Sources:

Lynn M. LoPucki, Chapter 11’s Descent into Lawlessness, American Bankruptcy Law Journal (forthcoming, June 2022).

https://www.restructuring-globalview.com/2021/10/bankruptcy-venue-reform-what-are-the-odds-this-time/https://www.forbes.com/sites/graisondangor/2021/09/01/judge-approves-purdue-pharma-settlement-that-shields-sacklers-from-being-sued/?sh=4aed29760c87

https://www.forbes.com/sites/graisondangor/2021/09/01/judge-approves-purdue-pharma-settlement-that-shields-sacklers-from-being-sued/?sh=4aed29760c87

Categories: Legislation Venue

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