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VENUE IN BANKRUPTCY: To Change or Not to Change

Introduction

This article will discuss venue provisions in bankruptcy, as well as possible changes to venue rules.  Specifically, this article will address the ability of a corporate debtor to file bankruptcy in a venue where it is incorporated or where its affiliate is located, even if the company has no physical presence in that venue; and, whether such venue rules should be changed.

Venue of Bankruptcy Cases

            Venue of bankruptcy cases is governed by the Judiciary Act, which states in pertinent part that “a case under title 11 [the Bankruptcy Code] may be commenced in the district court for 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 one hundred and eighty days immediately preceding such commencement, or for a longer portion of such one-hundred-and-eighty-day period than the domicile, residence, or principal place of business, in the United States, or principal assets in the United States, of such person were located in any other district; or
  • in which there is pending a case under title 11 concerning such person’s affiliate, general partner, or partnership.”[1]

Person is defined in the Bankruptcy Code to include a corporation.[2]  As to a corporation, domicile is generally understood to mean state of incorporation.  Thus, under subsection (1) of 28 U.S.C. § 1408, a corporate debtor may file a bankruptcy petition in the place where it is incorporated, where it has its principal place of business or its principal assets.

In practice, this means that many large United States companies, which are often incorporated in Delaware, but have no facilities, operations or assets in Delaware, may file for bankruptcy in Delaware.

Under subsection (2) of 28 U.S.C. § 1408, a corporation may also file a bankruptcy petition in the district where an affiliate has filed for bankruptcy.  Thus, a corporation that is not incorporated in a particular state, and does not have either its principal place of business or its principal assets in that state, may nonetheless file for bankruptcy in a state where one of its affiliates files for bankruptcy.

In practice, often times the affiliate will have been recently incorporated in the state where it files for bankruptcy, solely for the purpose of manufacturing venue to file a petition for its parent company in that district.  Usually, the affiliate’s bankruptcy petition is filed immediately prior to the parent company filing its own bankruptcy petition in that same district.  The parent company’s bankruptcy case will invariably then be administratively consolidated with the affiliate’s bankruptcy case and the cases will be administered together.

Venue of Adversary Proceedings

            As to adversary proceedings, which are lawsuits brought in the context of a bankruptcy case, such as a preference proceeding, venue is governed by 28 U.S.C. § 1409(a), which states in pertinent part that “a proceeding arising under title 11 [the Bankruptcy Code] or arising in or related to a case under title 11 may be commenced in the district court in which such case is pending.”[3]

            Thus, once a bankruptcy petition or case is filed in a particular district, a proceeding that could only be brought in the context of that bankruptcy case, such as a preference proceeding, can be brought in the same district where the underlying bankruptcy case is pending, with some limited exceptions regarding small value claims, etc.

Venue of Cases Ancillary to Foreign Proceedings

As to a case ancillary to a foreign proceeding, “a case under chapter 15 of title 11 [the Bankruptcy Code] may be commenced in the district court of the United States for the district—

  • in which the debtor has its principal place of business or principal assets in the United States;
  • if the debtor does not have a place of business or assets in the United States, in which there is pending against the debtor an action or proceeding in a Federal or State court; or
  • in a case other than those specified in paragraph (1) or (2), in which venue will be consistent with the interests of justice and the convenience of the parties, having regard to the relief sought by the foreign representative.”[4]

Chapter 15 cases are usually brought to protect a foreign country company’s assets in the United States, such as the Hanjin Shipping Co., Ltd. Chapter 15 case brought in the District of New Jersey, ancillary to the foreign main proceeding previously filed in Seoul, South Korea, where Hanjin was based.

In practice, a foreign country corporation may file a Chapter 15 ancillary proceeding in a United States federal district where it has minimal assets, such as a bank account, or in a district where it has paid a retainer to an attorney for the sole purpose of filing the Chapter 15 case or ancillary proceeding.

Change of Venue in Bankruptcy

“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.”[5]

Thus, bankruptcy venue may be changed if a bankruptcy case is filed in a district where it does not really belong, because it would make it too hard for employees or small creditors to appear and be adequately represented and heard in the case.  For example, the first Winn-Dixie Stores bankruptcy case was originally filed in the Southern District of New York, where one of its affiliates was incorporated, but was transferred to Jacksonville, Florida, where the company was based, upon motion of a relatively small creditor.  The Southern District of New York bankruptcy court held that the case should be transferred to the Middle District of Florida in the interest of justice and for the convenience of the parties.  The New York bankruptcy court also found that venue had been “manufactured” in New York, because the attorneys who filed the bankruptcy cases had only recently incorporated the affiliate in New York, solely for the purpose of establishing venue in New York to file for bankruptcy.[6]

Possible Changes in Bankruptcy Venue Rules

            Recently, Senators Elizabeth Warren (D-Mass.) and John Cornyn (R-Texas) introduced the Bankruptcy Venue Reform Act of 2018 (S. 2282), which would require corporate debtors to file for bankruptcy in the district in which their principal assets or principal place of business is located, regardless of place of incorporation.  The bill would eliminate a corporate debtor’s ability to file for bankruptcy in its state of incorporation, such as Delaware, if the state of incorporation is neither the debtor’s principal place of business nor the site of its principal assets.

In addition, the bill would eliminate the affiliate rule of 28 U.S.C. § 1408(2), which allows corporate debtors to file for bankruptcy in any district where an affiliate has a pending bankruptcy case.  Further, the bill would require bankruptcy judges to make a decision on a venue transfer request within fourteen days of the objecting party’s request, which would eliminate long and often expensive litigation over venue, which is sometimes prohibitive for small creditors or employees who would otherwise seek to change venue “in the interest of justice or for the convenience of the parties” under 28 U.S.C. § 1412.

The bill was referred to the Senate Judiciary Committee on January 8, 2018.  It will be considered by the Committee before possibly being sent to the House or the Senate as a whole.  The bill has already met stiff opposition from the Delaware Congressional delegation, like similar bills introduced in the past.  It is unclear whether the Bankruptcy Venue Reform Act of 2018 will even make it out of the Senate Judiciary Committee, let alone ever be signed into law.

Conclusion

            The current version of the bankruptcy venue statute contained in the Judiciary Act has allowed large corporations to evade creditors and employees by allowing the companies to file for bankruptcy in often distant locales far from the companies’ operations where it is prohibitively expensive for small creditors and individual employees to meaningful participate in the process.

            If enacted, the Bankruptcy Venue Reform Act would make it easier for small creditors and employees to have a say in some corporate debtors’ bankruptcy cases and allow them to better protect their rights and claims.  Although there might be difficulties with some bankruptcy courts that are ill-equipped to handle mega cases, there are procedures available in bankruptcy to lessen the impact of such problems.  Overall, limiting venue where a corporation can file for bankruptcy to the site of its principal place of business or principal assets, which is usually the location of its corporate headquarters or main operations, would make it easier for under-represented parties to meaningfully participate in bankruptcy proceedings that can have an often direct and important impact and effect on their lives and livelihoods.

 

Endnotes

 

[1] 28 U.S.C. § 1408.

[2] 11 U.S.C. § 101(41).

[3] 28 U.S.C. § 1409(a).

[4] 28 U.S.C. § 1410.

[5] 28 U.S.C. § 1412.

[6] Southeastern Grocers LLC, the parent company of Winn-Dixie Stores, recently filed for bankruptcy in the District of Delaware, where the company is incorporated, marking Winn-Dixie’s third foray into bankruptcy since 2005.  The company is still based in Jacksonville, Florida.

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