NCBJ Special Committee on Venue: Report on Proposal for Revision of the Venue Statute in Commercial Bankruptcy Cases.

Date22 December 2019
AuthorMichael, Terrence L.

Special Committee Members:

Hon. Terrence L. Michael, (Chair) United States Bankruptcy Court for the Northern District of Oklahoma

Hon. Nancy V. Alquist United States Bankruptcy Court for the District of Maryland

Hon. Daniel P. Collins United States Bankruptcy Court for the District of Arizona

Hon. Dennis R. Dow United States Bankruptcy Court for the Western District of Missouri

Hon. Joan N. Feeney United States Bankruptcy Court for the District of Massachusetts

Hon. Frank J. Santoro United States Bankruptcy Court for the Eastern District of Virginia

Hon. Mary F. Walrath

United States Bankruptcy Court for the District of Delaware

  1. INTRODUCTION II. STATEMENT OF THE ISSUE III. THE HISTORY OF BANKRUPTCY VENUE STATUTES AND A SUMMARY OF CASE LAW A. History B. Case Law 1. Corporations a. Principal Place of Business b. Principal Assets c. Domicile d. Affiliates Under 28 U.S.C.[section] 1408(2) e. Change of Venue i. Statutory Considerations ii. Burden of Proof iii. Timing iv. Dismissal or Transfer of Filing in a Proper District v. Interest of Justice vi. Convenience of Parties vii. Improper Venue Selected IV. AN ANALYSIS OF THE REASONS TO CHANGE THE CURRENT VENUE LAWS A. Synopsis of Position B. Background of the Venue Problem 1. Historical Background 2. Evolution of the Venue Problem C. Venue Reform will Promote the Integrity of and Public Confidence in the Bankruptcy System and the Federal Judiciary D. The Concentration of Large Chapter 11 Cases in Two Jurisdictions Inhibits the Development of Uniform, National Bankruptcy Law on Legal Issues Arising in Complex Business Cases E. Venue Reform Will Further the Intent of Congress in Establishing a Nationwide Bankruptcy System F. Venue Reform Will Promote Access to Justice for Creditors and Interested Parties in Large Chapter 11 Cases. G. The Concentration of Chapter 11 Cases in Two Districts Leads to an Inefficient Use of Judicial Resources H. Venue Reform and the Reduction in the Concentration of Large Chapter 11 Cases in Two Districts May Reduce Administrative Expenses and Parties' Costs of Participation in the Chapter 11 Process I. Venue Reform is in the Interests of Local Economies and Bankruptcy Professionals J. Summation of Part IV Argument V. AN ANALYSIS OF THE REASONS TO MAINTAIN THE CURRENT VENUE LAWS A. Synopsis of Position B. Use of Venue Options C. Venue Choice Is Based on Laudable Goals 1. Predictability 2. Developed Case Law 3. Judges' Experience 4. Speed 5. Cost D. Eliminating Venue Choices Will Not Benefit Creditors 1. Eliminates Efficiencies 2. No Demonstrated Benefit to Small Stakeholders a. Small Stakeholders' Interests Are Protected b. Stakeholders Can Participate c. Adversary Proceedings Are Different 3. Added Costs a. Litigation over Choice of Venue b. Inability to Jointly Administer Cases 4. There Is Already a Remedy 5. Venue Restriction Denies Other Parties Choices E. Venue Debate May Largely Be Driven by Attorneys F. Response to Arguments in Part IV 1. Comments on Specific Arguments in Part IV 2. Unfounded Ad Hominem Attacks on Judges G. Summation of Part V Argument VI. CONCLUSION I. INTRODUCTION

    The National Conference of Bankruptcy Judges ("NCBJ") is a voluntary association of United States Bankruptcy Judges, comprised of approximately 82% of the nation's active and recalled bankruptcy judges. (1) The purpose of the NCBJ is:

    To provide continuing legal education to judges, lawyers, and other involved professionals, to promote cooperation among bankruptcy judges, to secure a greater degree of quality and uniformity in the administration of the Bankruptcy system and to improve the administration of bankruptcy law in the United States. (2) In early 2018, bipartisan legislation to revise the venue provisions for the filing of bankruptcy cases was introduced by Senators John Cornyn (R-Texas) and Elizabeth Warren (D-Mass.). Under the "Bankruptcy Venue Reform Act of 2018," S. 2282, the existing bankruptcy law pertaining to venue for filing cases would change in two principal ways.

    First, the bill would require an entity to file bankruptcy in the venue in which the entity's headquarters or principal assets are located. The bill would eliminate the provisions in existing law that also permit entities to file bankruptcy where the business is incorporated, regardless of the location of its place of business or assets.

    Second, in the case of a group of entities wishing to file multiple bankruptcy cases in a single venue, the bill would allow the affiliate group to file all cases in the venue proper for the parent. The bill would eliminate the current ability of a group of entities to file their bankruptcies in the place of incorporation of any affiliate.

    This Committee was tasked by the NCBJ Board with producing a paper presenting the current arguments, literature, and other source material pertinent to the venue issue, that would serve as a resource to NCBJ members and other interested stakeholders. The Committee was instructed that it should not articulate recommendations with respect to the complex issues presented but should leave those conclusions or recommendations to the individual reader.

    Whether one is a proponent of venue change or a proponent of the status quo, there is little debate that the existing venue law has resulted in a concentration of filing of large entity bankruptcy cases (primarily chapter 11 reorganizations) in the bankruptcy courts for the District of Delaware and the Southern District of New York (the "magnet courts"). Most of the arguments about venue change focus on whether the concentrated filings in these two magnet courts is a bad outcome or an appropriate one. One side views the legislation as positive and much needed "reform," while the other side sees it as the unnecessary "restriction of venue choices" that should remain available to debtors and creditors. These positions are explored, respectively, in Part IV and Part V of this paper.

    The Committee hopes that this paper will contribute to a greater understanding of the issues raised in the current discussion on bankruptcy venue and forum selection.

  2. STATEMENT OF THE ISSUE

    From the outset, defining the issue itself has proven to be a difficult task. While the issue of venue impacts all chapter 11 cases, the ongoing debate centers primarily around venue selection in large chapter 11 cases. No one disputes that venue selection in these large cases is consistent with existing law. The concern underlying criticisms of the current system is more subjective or normative. Critics are concerned not that the law is being disregarded, but rather that it is being exploited by certain actors in the system.

    This paper highlights concerns regarding the impact of the venue selection issue on some of the primary pillars of the American legal system. Equal access to justice, the independence of the judiciary, the public perception of the integrity of the judicial system, and the efficacy of the adversary system are each implicated in a direct and palpable way in this discussion.

    As this thoughtful debate continues, bankruptcy judges must remain mindful of their special status in the American system of government and their accepted limits of both power and influence on matters of policy that the Constitution plainly submits ultimately to the province of Congress. The role of federal judicial officers demands that judges tread with great care and caution in debated policy matters which some might honestly believe transcends the legitimate interest of the judiciary in providing information to Congress as to how potential legislation may affect the administration of justice in the courts.

    However, bankruptcy judges can and should engage in dialogue and action that advances the overarching debate on venue selection in view of the NCBJ's purpose of promoting cooperation among bankruptcy judges and its goal of improving the administration of bankruptcy law in the United States.

  3. THE HISTORY OF BANKRUPTCY VENUE STATUTES AND

    A SUMMARY OF CASE LAW

    1. History

      A review of the history of venue statutes reveals little controversy on the issue. The first comprehensive law dealing with bankruptcy cases was the Bankruptcy Act of 1898 (the "Bankruptcy Act"). (3) Section 2 of the Bankruptcy Act governed both the jurisdiction and the venue of bankruptcy cases.

      [T]he courts of bankruptcy as hereinbefore defined, viz, the district courts of the United States in several States, the supreme court of the District of Columbia, the district courts of the several Territories, and the United States courts in the Indian Territory and the District of Alaska, are hereby made courts of bankruptcy, and are hereby invested, within their respective territorial limits as now established, or as they may be hereafter changed, with such jurisdiction at law and in equity as will enable them to exercise original jurisdiction in bankruptcy proceedings, in vacation in chambers and during their respective terms, as they are now or may be hereafter held, to (1) adjudge persons bankrupt who have had their principal place of business, resided, or had their domicile within their respective territorial jurisdictions for the preceding six months, or the greater portion thereof, or who do not have their principal place of business, reside, or have their domicile within the United States, but have property within their jurisdictions, or who have been adjudged bankrupts by the courts of competent jurisdiction without the United States and have property within their jurisdictions .... (4) The term "domicile" was undefined in the Bankruptcy Act as enacted in 1898. At least one court facing the issue noted its belief that the state of incorporation was the domicile of that corporation. (5) In another decision, a court found that the state of incorporation was the domicile of the corporation because the laws of the state of incorporation (Missouri) required all corporations organized under Missouri law "to have and keep a...

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