Bankruptcy Venue Reform Bill Needs Amending

Navigating the Venue Reform Debate: A Comprehensive Look at Bankruptcy Challenges and Proposed Solutions"

The ongoing debate surrounding venue reform in bankruptcy cases has once again come to the forefront, spurred by the anticipated influx of bankruptcy filings in the aftermath of the COVID-19 pandemic. Recent high-profile Chapter 11 cases, including those of Purdue Pharma LP, Mallinckrodt, Boy Scouts of America, USA Gymnastics, Neiman Marcus Group, J.C. Penney Co. Inc., J. Crew Group Inc., Brooks Brothers, Century 21, and Modell's Sporting Goods, have reignited discussions on the need for reform in the bankruptcy venue landscape.

The Magnet Districts Predicament

Most notably, a significant proportion of these cases, and many large business bankruptcy cases in general, have been concentrated in what are colloquially known as "magnet bankruptcy districts": the District of Delaware, the Southern District of New York, the Eastern District of Virginia, and the Southern District of Texas. The concentration of cases in these districts has raised concerns about forum shopping and the potential for debtors to strategically choose venues to their advantage.

Spotlight on Recent Controversies

The controversial case of Purdue Pharma, filed in White Plains, New York, has drawn particular attention, prompting members of Congress to call for investigations into the venue selection. This has fueled discussions around the Bankruptcy Venue Reform Act, a bipartisan initiative introduced by Rep. Zoe Lofgren and Rep. Ken Buck, aimed at limiting debtors to filing only in locations where their headquarters or principal assets are situated.

Critique of the Proposed Legislation

While the act has gained traction, it faces criticism for potentially oversimplifying the complexities of large corporate structures, the ability of parties to seek venue changes, and the unique nature of bankruptcy cases. Critics argue that the proposed legislation may not adequately address the multifaceted challenges inherent in the bankruptcy process.

The Bankruptcy Venue Reform Act of 2021

Introduced on June 28, the act proposes a significant shift in venue selection, advocating that a debtor initiates bankruptcy proceedings exclusively in the jurisdiction where its headquarters or principal assets are located. This departure from the existing statute, which allows venue based on the debtor's domicile or state of incorporation, has sparked considerable debate.

Perspectives on Venue Reform

In support of the act, retired bankruptcy judges Joan Feeney and Steven Rhodes, along with professors Jay Westbrook and Adam Levitin, contend that current venue rules enable companies to selectively choose courts, case law, and even judges, creating opportunities for unjust outcomes shielded from scrutiny. They argue for a more transparent system where debtors file in locations closely tied to their operations.

Challenges and Counterarguments

Critics challenge the proposed reform, citing existing provisions that allow large creditors, such as unions and creditors' committees, to request venue changes. Moreover, they argue that the complexity of corporate structures and the global nature of many companies make the selection of a singular venue challenging.

Seeking a Compromise

Recognizing the need for a middle ground, a proposed compromise suggests specific criteria for venue determination in certain cases. These include considerations such as the location of single-asset real estate cases, instances involving collective bargaining agreements, and situations where the debtor has recently emerged from a Chapter 11 case.

A Balanced Approach to Venue Reform

While the venue reform debate continues, it is crucial to acknowledge the multifaceted nature of the issue. The proposed compromise aims to strike a balance, addressing concerns raised by both proponents and opponents of the reform. As discussions unfold, finding common ground is essential to ensure a fair and effective bankruptcy system that considers the diverse challenges posed by varying corporate structures and industries.