U.S. Senators Elizabeth Warren (D-Mass.) and John Cornyn (R-Texas) introduced a bill earlier this month that would make it harder for companies to file for bankruptcy outside of their home states.
The Bankruptcy Venue Reform Act takes aim at the practice of “forum shopping,” in which companies seek out states with the most favorable laws. The bill requires corporate debtors to “file where their principal assets or principal place of business in the United State is located.”
“Closing the loophole that allows corporations to ‘forum shop’ for districts sympathetic to their interests will strengthen the integrity of the bankruptcy system and build public confidence,” said Sen. Cornyn. “I urge my colleagues to support this bipartisan, common-sense solution to ensure equal access to the courts in bankruptcy proceedings.”
In Delaware, opposition to the reforms has been bipartisan as well, including both political leaders and local experts. Gov. John Carney and Senators Chris Coons and Tom Carper joined Delaware’s congressional delegation in roundly condemning the bill for its potential harm to the state economy.
“Many American companies, large and small, choose to incorporate in Delaware because of the expertise and experience of our judges, attorneys, and business leaders,” Gov. Carney said. “Denying American businesses the ability to file for bankruptcy in the courts of their choice would not only hurt Delaware’s economy but also hurt businesses of all sizes and the national economy as a whole.”
With two-thirds of the Fortune 500 incorporated in Delaware, the state draws bankruptcy filings from across the country. Delaware Bankruptcy Court saw 682 chapter 11 filings in 2017. That’s 10 percent of the nationwide total.
Delaware courts have handled the bankruptcy cases of companies based all over the country, from Optima Specialty Steel in Miami to American Apparel in Los Angeles.
Ted Gavin, managing partner of Wilmington-based bankruptcy consulting firm Gavin/Solmonese, said the current system works fine.
“Forcing companies to file in districts where the case law goes against their interests will cost jobs and destroy value,” he said. “It will force complex cases onto Courts that lack the infrastructure to handle them, thus putting a financial strain on the Federal Judiciary.”
University of Pennsylvania law professor David Skeel argued in his testimony to the U.S. House of Representatives that venue reform could hurt the bankruptcy system as a whole.
“It [venue reform] would overturn a long history of bankruptcy practice; it would undermine the effectiveness of our corporate bankruptcy system; it would increase the administrative costs of the system; and it would not help the very parties the proposal is ostensibly designed to help,” Skeel said.