Objections to Changing Bankruptcy Forum Rules Meritless

Objections to Changing Bankruptcy Forum Rules Meritless

As reported in the Wall Street Journal's Bankruptcy Blogs, the House Judiciary Committee heard from various judges, lawyers and academics on bankruptcy forum rules.

Right now, a corporation can choose where to file a bankruptcy case based on its place of incorporation or its primary place of business. Companies can also, as demonstrated by General Motors, file for bankruptcy where an affiliate is situated (General Motors, a company incorporated in Delaware with a primary place of business in Michigan filed in the S.D.N.Y. because a New York affiliate filed first which allowed the rest of the corporation to piggy-back into that forum).

It's time for this practice to stop. Forum shopping is not allowed in our District Courts yet a practice in Bankruptcy Courts that certainly smells like forum shopping is permitted.

I know the reasoning that is bandied about to justify this practice.   Supporters say, as  University of Pennsylvania Law School professor David Skeel did at the hearing, that objections concerning creditor protections are overblown because most creditors won't participate and that judges in Delaware and S.D.N.Y. are better suited to handle the corporate cases because they have the experience and expertise that makes the process efficient.

I cannot understand how this reasoning justifies the continuation a forum shopping-like process and hinders creditors from protecting their rights.  Creditors have done business with a company for years in their home state but then are forced to enforce their rights against a company when it does bankrupt in either Delaware or in Manhattan?!?  If the case is filed in Delaware, a creditor is forced to get local counsel to appear in front of the Delaware court so that usually means retaining two sets of lawyers.  New York bankruptcy courts are not as strict but does a creditor want to pay the travel costs for its lawyers to fly to New York?  Of course most creditors don't participate when they are forced to pay two sets of counsel.

Second, if only two districts are getting the vast majority of major cases, they are naturally going to be the best equipped courts to handle those cases.  Who would you expect to be the better brain surgeon- a brain surgeon who has performed 500 procedures or an emergency room doctor who has performed 2?   Does your answer change if both doctors have performed 500 surgeries?

The elephant in the room that no one mentioned is that the two courts that get all the major cases are also the two courts that are commonly considered the ones that pay lawyers' bills without blinking and give debtors the most leeway.

Time to change things. Give the 95 other bankruptcy court districts a chance to start handling major corporate bankruptcies and I bet those courts become better equipped at the big case.  After all, highly qualified federal judges sit at every court and the District Courts, Court of Appeals, and Supreme Court are all  prepared to handle appeals.   I'd also bet you'd see more creditors enforcing their rights in their home courts.

Read more articles about consumer debt by Ted Connolly, co-author of The Road Out of Debt

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