the Boston HeraldAnd Chicago TribuneAnd Dallas starsAnd Los Angeles DodgersAnd Nebraska Book CompanyAnd Tropicana Casino Las Vegas, And Washington Mutual All of them proudly bear the name of the city or state in which they reside. However, all of them have filed for Chapter 11 bankruptcy in Delaware, taking advantage of a loophole in the bankruptcy law that allows companies to flee their home countries and hear Chapter 11 cases in jurisdictions with which they have no connection. This frequently used loophole enables bankrupt companies to choose the court, applicable case law, and sometimes even the judge who will hear Chapter 11 cases.
This practice, called “place shopping”, has been considered “The single most significant source of injustice in Chapter 11 bankruptcy cases“By retired Bankruptcy Judge Stephen Rhodes, who administered the City of Detroit’s bankruptcy. Outside of bankruptcy, plaintiffs and defendants may only sue or be sued in locations based on the stringent, Constitution-based principles of personal jurisdiction.” Current Bankruptcy LawHowever, medium and big companies are allowed to file bankruptcy claims basically anywhere in the country. The Boy Scouts of America, a federally registered company based in Texas, has filed for bankruptcy in Delaware., while the The National Rifle Association, a New York company headquartered in Virginia, has filed for bankruptcy in Dallas, Texas..
These “uncivilized” issues create opportunities for unfair outcomes beyond the scrutiny of the people who concern most. Large corporate debtors and their advisors often choose the location of bankruptcy away from the headquarters, making it firm for creditors, employees, retirees and the local media to monitor and participate in the case. Place shopping forces creditors sued by the debtor companies to protect themselves in a secluded forum chosen by the company and without any connection to their dealings with the debtor. Forcing participants to appoint a local advisor (As required in Delaware) and travel to secluded places impose lofty costs, often on those fewest competent to afford them, and may forbid them from participating in bankruptcy.
Place shopping enables owners and directors of bankrupt companies to seek out a friendly landing, perhaps one where they have personal protection or where they believe the court will approve big bonuses for the executives who have driven the company into bankruptcy. Purdue Pharma, the opioid manufacturer with Headquarters in Connecticut And Major manufacturing plants in Rhode Island And North Carolina, shopping for Chapter 11 bankruptcy in White Plains, New York, where The only judge in another case ruled in a way that might protect the Sackler family that owns Purdue.
Somewhere shopping has centralized big corporate bankruptcy cases in a few courts that are seen as friendly to management, despite not being related to the debtor’s company. The massive concentration of “runaways” is concentrated in Delaware, which has little connection to most businesses that offer there either as the location of their headquarters or their principal assets.. Currently, other preferred courts include the Southern District of Texas (Houston) and the Richmond Division in the Eastern District of Virginia, although a change of judges and more recent rulings may cause attorneys to choose other locations over time. Some of these filings go beyond county picking to a search for a specific judge favored by the debtor’s administration, which they can do in the event that there is one or two judges in a district or judicial division.
Judges in preferred circuits are capable and honorable public servants, but Congress was not intended by only a handful of judges to deal with big business cases, and there is no legitimate reason to do so. Bankruptcy judges across the country have the power to handle all kinds of cases, including major Chapter 11 reorganizations, because they Appointed on merit by appellate judges, not politicians, and they are screened for their knowledge and experience in bankruptcy proceedings and the local law applicable to the business of the company, its customers, and its suppliers. No person – or company – should be allowed to choose a judge in their own case.
The best way to quit place shopping is for Congress to amend the Place of Bankruptcy Act, a no-cost solution. the The Bankruptcy Reform Act of 2021 (HR 4193)A bipartisan bill Introduced by Representatives Zoe Lofgren (D-CA) and Ken Buck (R-Colorado) into the House, will close the loophole and quit venue manipulation by requiring companies to declare bankruptcy where their headquarters or principal assets are located, resulting in a better distribution of cases across the country. A fairer distribution of cases would better use existing judicial resources and better ensure that the tens of millions of Americans dealing with bankruptcy courts trust the system to decide their financial coming. Public confidence in the bankruptcy system depends on eliminating this perilous practice and Congress enacting this reform.
Joan Finney and Stephen Rhodes are previous bankruptcy judges. Adam Levitin and Jay Westbrook are law professors who study bankruptcy at Georgetown University and the University of Texas at Austin, respectively.