Volume 14; Issue 37

September 14, 2011

The House Judiciary Committee's Subcommittee on Courts, Commercial and Administrative Law held a hearing last week on legislation sponsored by U.S. Rep. Lamar Smith, R-Tex., to require companies to file for bankruptcy in their respective home states rather than use a preferred venue, such as the bankruptcy courts in Delaware or Manhattan.

The "Chapter 11 Bankruptcy Venue Reform Act of 2011" prohibits large parent corporations from leaving their headquarters and "following tiny well-placed subsidiaries into a preferred venue," according to a statement by Smith on the subcommittee's website. It does provide for a small subsidiary to follow its parent company into the parent company's venue, however. "This bill improves the fairness of the bankruptcy system for all stakeholders in a Chapter 11 case," the statement said.

The hearing was sparsely attended, even by members of the subcommittee, according to The Wall Street Journal blog "Bankruptcy Beat," and struggled to get enough members of Congress to have a quorum.

Testifying before the subcommittee hearing, University of Pennsylvania Law School corporate law professor David A. Skeel criticized the proposal, according to the blog, and called the change "an enormous but well-intentioned mistake." The blog reported that Skeel said concerns over creditor protections were overblown and that judges in the Manhattan and Delaware bankruptcy courts have expertise that makes the process efficient.

"Most small creditors don't want to be active in a case," he said. "It takes time and often money."

Among the other witnesses at the hearing were Peter C. Califano of Cooper White & Cooper, on behalf of the Commercial Law League of America; Chief Judge Frank J. Bailey of the U.S. Bankruptcy Court for the District of Massachusetts; and Melissa Jacoby, a professor with the University of North Carolina School of Law.

In an interview with The Wall Street Journal blog, U.S. Rep. John Carney, D-Del., said he attended the hearing because he was concerned for his district, where hundreds of legal professionals are based. Defending forum shopping, he said: "From a business perspective, companies are choosing the court that they want to use to get restructured and running again," said Carney, adding that creditors already have a voice through a committee that typically forms to represent their interest. "This is the venue of choice for corporate America."