Bankruptcy Shopping: Domestic Venue Races and Global Forum Wars

• Publication year: 2021

Bankruptcy Shopping: Domestic Venue Races and Global Forum Wars

Anthony J. Casey

Joshua C. Macey

BANKRUPTCY SHOPPING: DOMESTIC VENUE RACES AND GLOBAL FORUM WARS

Anthony J. Casey^* Joshua C. Macey^**

Abstract

This Article proposes reforms to bankruptcy law's venue rules. These reforms would expand venue choice, reduce opportunistic venue shopping, and account for the rise of global forum shopping. To date, the leading proposals to reform venue selection rules for bankruptcy cases have ignored simpler alternatives that can reduce opportunistic misbehavior while preserving beneficial choice. Moreover, those proposals have focused exclusively on restricting a debtor's choice among venues within the United States while ignoring the increasing availability and convenience of foreign courts as forums for distressed corporate debtors seeking to initiate insolvency proceedings. In this way, the proposals on the table run the risk of failing at their primary goal and at the same time exacerbating international forum shopping and escalating a global forum war.

To remedy this, we suggest alternative reforms that account for the availability of foreign forums, reduce opportunities for harmful venue shopping, and preserve the benefits of choice. Rather than restrict a debtor's ability to select a domestic venue, reforms should (1) allow firms to make an ex ante commitment to a procedure for choosing a bankruptcy district, and (2) resolve inconsistencies in substantive bankruptcy law across venues and forums. These reforms would retain beneficial choice while reducing opportunistic shopping of both domestic venues and foreign forums. The precommitment mechanism we propose is preferable to existing proposals even for parties that cannot shop globally, but the availability of foreign forums makes the case even stronger.

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Introduction.............................................................................................465

I. Bankruptcy Venue Shopping.......................................................470

A. History of Bankruptcy Venue Shopping.................................... 470
B. A Judicial Race—To the Bottom or to the Top?....................... 471
C. Debtor's Choice......................................................................... 474

1. Debtor's Choice: The Good Choice.................................... 474
2. Debtor's Choice: The Neutral Story.................................... 475
3. Debtor's Choice: The Bad Story......................................... 477
4. Debtor's Choice: The Worst Story...................................... 478
5. Debtor's Choice: The Inefficient Bundling Story................ 481

II. Chapter 15 and Cross-Border Insolvency...............................482

A. Chapter 15 Recognition of Cross-Border Insolvency Proceedings .............................................................................. 482
B. Establishing Jurisdiction in the Foreign Forum....................... 486
C. The Attractiveness of Foreign Forums ..................................... 487
D. Forum Reform .......................................................................... 491

III. The Interaction Between Global Forum Shopping, Domestic Venue Shopping, and Current Reform Proposals...................493

IV. Alternative Reforms for Bankruptcy Venue and Forum Shopping...........................................................................................496

A. Amend Substantive Bankruptcy Law......................................... 496
B. Precommitment to a Choice Mechanism................................... 498
C. Similar Reforms for Global Forum Shopping ........................... 501

1. Precommitment.................................................................... 501
2. Amend Substantive Bankruptcy Law ................................... 503

Conclusion.................................................................................................506

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Introduction

The United States Bankruptcy Code gives debtors wide discretion to reorganize in the venue of their choice.¹ These lenient venue selection rules long have allowed bankruptcy courts in the District of Delaware and the Southern District of New York to dominate the market for large chapter 11 cases.² Recently the Southern District of Texas has also begun to attract a large number of cases, putting it on equal footing with Delaware and the Southern District of New York.³

This state of affairs has produced a vigorous debate. On the one side are critics of liberal venue rules who charge that bankruptcy districts are engaged in a "race to the bottom" as judges compete for blockbuster chapter 11 cases to the detriment of local interests, small creditors, and noncontractual claimants.⁴ Professor Lynn LoPucki, for example, has said that the ability of debtor firms to so freely choose a venue "undermines the integrity of the bankruptcy system."⁵ Similarly, a prominent bankruptcy attorney asserted that "the effort to find debtor-friendly courts . . . demean[ed] the entire [bankruptcy] system by suggesting that bankruptcy courts are for sale."⁶ For years, the perceptions that

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debtors are abusing the Code's venue selection rules have fueled calls to prevent, or at least curtail, bankruptcy venue⁷ shopping.⁸

On the other side are those who counter that competition for cases improves efficiency and predictability as judges develop expertise in overseeing large chapter 11 cases.⁹ The National Conference of Bankruptcy Judges responded directly to LoPucki's critique, writing in a 2018 white paper that it "strongly rejects any suggestions by Professor LoPucki that any bankruptcy judges make rulings for reasons other than that which is supported by fact and law."¹⁰ And Judge Drain, who sits in the popular White Plains division in the Southern District of New York, has said that the idea that "judges slant their rulings in order to lure future cases to their courts is an offensive fantasy."¹¹

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Recently, this debate has taken on practical importance. In the past three years, Congress has introduced multiple bills that would amend the Code to require that a debtor file in the district in which its "principal assets or principal place of business" is located.¹² These amendments would prevent debtors from choosing venue based on their state of incorporation and would eliminate other opportunities for debtors to opt into the venue of their choice. Though these proposals have yet to receive a majority in either the House or Senate, they have attracted bipartisan support,¹³ and President Biden has signaled that he is sympathetic to bankruptcy venue reform.¹⁴

Proposals to eliminate venue shopping, if successful, would effect a sea change in American bankruptcy practice. Instead of being concentrated in New York, Delaware, and Texas, large corporate reorganizations would be distributed more evenly across the country. Districts would become responsible for overseeing corporate reorganizations involving locally headquartered debtors regardless of whether the local bankruptcy judge has experience managing large dollar cases, and even if the jurisdiction has not developed procedures for quickly providing emergency relief.¹⁵

Rather than take sides in the conventional debate about whether venue shopping is good or bad, this Article suggests reform principles that should appeal to those on both sides. Reforms that retain the benefits of choice while reducing the opportunities for harmful shopping should be favored regardless of one's view about whether venue shopping is a large problem, a small problem, or no problem at all. Our proposed reforms would do exactly that. Moreover, they address a problem that has largely been ignored in the conventional debate: the rise of global forum shopping as an alternative for debtors seeking to initiate insolvency proceedings.

With regard to global forum shopping, this Article cautions that developments in foreign jurisdictions may limit the effectiveness of these venue

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reform proposals. Although chapter 11 is often regarded as the gold standard for corporate reorganizations, in recent years, foreign jurisdictions have emerged as convenient forums for distressed debtors.¹⁶ For instance, in many cases, the English scheme of arrangement now represents a viable alternative to the American bankruptcy system, and over the past decade, a number of companies have chosen to use an English scheme of arrangement to restructure their debt instead of chapter 11, with the first United States-headquartered business doing so in 2019.¹⁷ Other jurisdictions have also sought to entice foreign debtors, with insolvency specialists speculating that Singapore, in particular, could become "an international centre for debt restructuring."¹⁸

Because American bankruptcy courts freely recognize foreign insolvency proceedings,¹⁹ firms that are directed to file in less favored districts may instead choose to reorganize in a foreign jurisdiction. In this environment, attempts to limit venue selection within the United States will have the opposite of their intended effect, replacing domestic venue shopping with even worse instances of global forum shopping.

By ignoring the availability of foreign forums, current venue reform proposals could, perversely, drive opportunistic debtors and creditors to restructure in foreign jurisdictions like England, Singapore, Mexico, and the Netherlands, undermining the purpose of proposed reforms and diminishing America's influence on corporate bankruptcy law in general. Any solution targeted at reducing opportunistic venue shopping must, therefore, also consider opportunistic forum shopping and treat the questions cohesively.²⁰

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To address this, we argue that, rather than limit domestic venue choice, lawmakers should (1) support the development of ex ante commitment to mechanisms for choosing venue and forum; and (2) whenever possible, resolve...