Statement of Judiciary Committee Chairman Lamar Smith Subcommittee on Courts, Commercial and Administrative Law Hearing on H.R. 2533, the "Chapter 11 Bankruptcy Venue Reform Act of 2011"

Statement of Judiciary Committee Chairman Lamar Smith
Subcommittee on Courts, Commercial and Administrative Law
Hearing on H.R. 2533, the “Chapter 11 Bankruptcy Venue Reform Act of 2011”

Chairman Smith: Before its demise, Enron was a Texas-based company with 7,500 employees at its Houston headquarters and over $60 billion in claimed assets.  But in December 2001, Enron filed for chapter 11 bankruptcy protection in a Manhattan courthouse 1,500 miles from Texas. How was this possible?

Unlike venue rules for other types of cases, chapter 11 bankruptcy venue rules give many corporations several choices of where to reorganize.  A corporation can file in the state where it is incorporated, where it has its principal assets, or where it is headquartered.  For many companies, this rule alone provides three different venue choices.

But many corporations have even more choices of venue.  A corporation can also file a chapter 11 case in a venue where its corporate affiliate’s case is already pending. 

Using this rule, Enron’s bankruptcy lawyers first filed the bankruptcy of a small New York subsidiary with 57 employees in the Southern District of New York.  Moments later, because this affiliate’s case was now pending, the Houston-based parent company bootstrapped its massive bankruptcy case into a Manhattan bankruptcy court.

The current chapter 11 venue rules allow many corporations to forum shop for a venue with favorable judicial precedent for the business.  For example, a nationwide retailer may prefer to file in Delaware because of the Third Circuit’s well-known rulings on the treatment of unpaid rent in bankruptcy.  At the same time, a business with many unionized employees can avoid filing in Delaware to avoid Third Circuit precedent on collective bargaining rights in bankruptcy.

The Constitution instructs Congress to enact uniform bankruptcy laws.  While courts of appeal are permitted to interpret Bankruptcy Code provisions differently, chapter 11 debtors should not be able to leave their home districts and shop for a forum whose judicial precedent on bankruptcy law they happen to prefer.

In recent years, a majority of large companies have chosen to file their chapter 11 cases in the Southern District of New York and in Delaware. 

Like umpires in baseball, bankruptcy judges should be neutral referees in chapter 11 cases.  The practice of forum shopping is predicated upon an assumption that some judges are “fairer” than others.  Regardless of where a company reorganizes, a judge should call balls and strikes the same way.

I believe our national bankruptcy system suffers when chapter 11 bankruptcy cases are concentrated in just two judicial districts on the east coast.  When a large chapter 11 case travels across the country to be heard in a far-away bankruptcy court, many of the business’s stakeholders lose out.  Employees, creditors, and the community in which the business operates feel out of touch with the reorganization process.  Interested parties frequently have to travel long distances to present evidence to support their claims. 

In July, I introduced H.R. 2533, the Chapter 11 Bankruptcy Venue Reform Act of 2011, to reform the chapter 11 venue rules so that corporate debtors must reorganize in their home court.  I am pleased to be joined in that effort by Ranking Member Conyers and the Chairman and Ranking Member of this Subcommittee.

The bill requires corporate debtors to file for chapter 11 where they have their principal place of business or principal assets.  It also prohibits large parent corporations like Enron from leaving their headquarters and following tiny, well-placed subsidiaries into a preferred venue.  The bill still allows subsidiaries to follow a parent firm into a venue, thus preserving the efficiencies that flow from joint administration of related debtors’ cases.

This bill improves the fairness of the bankruptcy system for all stakeholders in a chapter 11 case.