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Delaware’s distinction as U.S. bankruptcy capital in jeopardy

Proposed law prevents court-shopping and forces companies to reorganize at home

Wayne Campbell’s sardonic excitement just waned even more. Delaware’s possible greatest claim to fame could be going the way of the dodo if leaders of the House Judiciary Committee have their way.

In what seems to be an exceedingly rare act of bipartisanship these days, Rep. Lamar Smith, R-Texas, and Rep. John Conyers, D-Mich., the committee’s chairman and ranking Democratic member, respectively, in July introduced a bill (H.R. 2533) intended to change bankruptcy venue rules by limiting where businesses can file for bankruptcy protection.

“Venue shopping for sympathetic courts has become an all-too-common practice for large companies filing for bankruptcy,” Rep. Smith said in a statement. “Unfortunately, it significantly disadvantages displaced employees, creditors and shareholders who should be able to participate in the reorganization negotiations. This legislation reforms the chapter 11 venue rules to prevent corporations from fleeing to friendly jurisdictions for bankruptcy, while leaving employees, creditors and other stakeholders without a voice in the negotiations.”

The current laws allow corporations to file for chapter 11 bankruptcy in three places:

  • The district where the entity is incorporated
  • The judicial district where company’s principal assets reside
  • The judicial district in which the corporate headquarters is located

However, there is an ancillary provision that permits parent companies to file their cases in the same district where an affiliate’s case already is pending, which is the tactic by which corporations can venue shop.

“This long overdue legislation will help level the playing field between employees and management in corporate chapter 11 bankruptcy cases and restore fairness,” Rep. Conyers said in a statement. “This bill will limit bankruptcy filing venue options to where the principal place of business or assets of the debtor are located, which typically will be where most of the debtor’s employees are located. As a result, employees will now have a greater ability to protect their interests and to make their concerns known to the bankruptcy court without having to be forced to do so in distant venues.”

The House Judiciary Committee heard testimony on the possible benefits and detractors of the bill earlier this month. The bill is still in the second stage of the legislative process, and if it survives the committee reporting process, it will be held up for consideration by the complete House of Representatives.

For a more in-depth look at reaction to the bill and its potential effects, read Bloomberg.

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