No Time for Bankruptcy Venue Hypocrisy

There may be merit to Sen. Cornyn's bill, but not in his rhetoric, driven, as the facts show, by a desire to increase his home state's market share in the competition for big bankruptcy reorganizations.

Federal bankruptcy law is theoretically uniform around the country. What varies, of course, is who administers the law. Just as baseball pitchers have quirks, so do judges, regardless of their location. Effective baseball managers and hitters work around pitchers' quirks, just as lawyers do with judges. Choosing a particular venue within the established available rules, though, is proper. Effective litigators always consider legal venue options. Not to do so would be malpractice. Sen. Cornyn's bill would amend 28 U.S.C. ' 1408 (the bankruptcy venue provision of the Judiciary Code) to require a corporation to file a bankruptcy petition in the venue of its principal place of business or its principal assets. No longer would a company's state of incorporation (eg, Delaware) or its affiliate's location be a proper basis for venue.

The recent Winn Dixie Stores scandal is an example of how some companies have abused the existing venue provision. According to The Wall Street Journal, March 31, 2005, the Florida-based Winn Dixie organization “quickly set up a subsidiary in New York. Just 12 days later [it] filed” a Chapter 11 petition in Manhattan, but the “subsidiary ha[d] no office in New York.” (At press time, Winn Dixie agreed to transfer the case back to Florida in response to a creditor's transfer motion).

Sen. Cornyn's bill is not the first attempt to reform bankruptcy venue rules. The National Bankruptcy Review Commission recommended a similar change in 1997, citing valid concerns (eg, creditor convenience), but the recommendation failed in Congress. LoPucki L: Courting Failure: How Competition for Big Cases Is Corrupting the Bankruptcy Courts, pp. 16-17 (The University of Michigan Press 2005). In 2002, Sen. Richard Durbin (D-IL) and Rep. William Delahunt (D-MA) introduced another ill-fated bill to reform bankruptcy venue rules. Scinta C: New U.S. Senate Bill Targets Venue-Shopping in Chapter 11 Cases, Daily Bankruptcy Review, Feb. 10, 2005, p. 9.

'Coryn's Crusade'

Sen. Cornyn's moral crusade, in our view, is contrived, hiding a more cynical objective: enhancing his constituents' financial interests. The Senator's attempt to disguise a valid legislative debate as a moral issue is political grandstanding.

The Senator apparently first encountered the Code's venue provision during his term as Texas Attorney General from 1999 through 2002. When Enron filed its 2001 Chapter 11 petition in New York, then-Attorney General Cornyn unsuccessfully “tried to steer th[e] case toward federal court in Houston,” where it was headquartered. According to the Senator, his experience with Enron “opened [his] eyes to a very real abuse in our current bankruptcy system and the need to end the current practice of judge shopping.” Id. Cornyn's moral justifications for his bill mask a less heroic objective, however: protecting Texas's market share in the contest for big reorganizations, and making sure that another Enron does not get away. A city's lawyers, accountants, financial advisers and hotels profit when a large company seeks refuge in the local bankruptcy court.

Texas

The Texas legal community, in fact, was working to position itself as a player in the competition for large bankruptcy cases prior to Enron's filing its reorganization petition in New York. In 2000, lawyers and judges in the Southern District of Texas (ie, Houston) formed the “Advisory Committee on Chapter 11 Issues” to make the courts' administration of complex Chapter 11 cases “more responsive, more predictable, and more accessible.” Houston, We Know We Have a Problem (But We're Working on It!), Bankruptcy Court Decisions News and Comment, Feb. 8, 2000. It came up with uniform procedures that eliminated limits on professional fees. At the luncheon to unveil the new rules to the Houston bar, then-Judge William R. Greendyke proclaimed, “The war on fees is over.” The Northern District of Texas (ie, Dallas) soon followed suit with similar “reforms.” New Procedures Bring Home Northern and Southern Texas Debtors, Bankruptcy Court Decisions News and Comment, Dec. 18, 2003.

Ex-Judge Greendyke, now practicing law in Houston, supports Sen. Cornyn's bill. In a letter to Cornyn, Greendyke wrote: “[T]his migration of large cases [from Texas] … represents a fundamental flaw in the perceived and actual fairness of the bankruptcy system.” Cornyn Files Bill to End Bankruptcy Forum Shopping, The Texas Lawyer, Feb. 16, 2005.

Sen. Cornyn cites WorldCom, Enron, Polaroid and Kmart as examples of the troubling “migration.” But he fails to mention the forum shoppers that chose Texas as the venue for their reorganizations after Texas courts got religion. For example, Mirant Corporation, an Atlanta-based company incorporated in Delaware, filed its 2003 Chapter 11 petition in the Northern District of Texas. Avado Brands, Inc., incorporated and headquartered in Georgia, also filed in the Northern District of Texas in 2004. Logix Communications Enterprises Inc., incorporated and headquartered in Oklahoma; Pentacon, Inc., incorporated in Delaware and headquartered in California; and Erly Industries Inc.. incorporated and headquartered in California, also went to debtor-friendly Texas for Chapter 11 relief.

Sen. Cornyn asserts that his bill “is good government … good for the economy … [and] good for consumers.” It certainly may be good for Texas's market share in the competition for large reorganization cases. But the Senator's characterization of venue legislation as a moral rather than a policy issue detracts from fair debate. Bankruptcy venue reform should be discussed with hard facts, not innuendo. The halls of Congress already have more than enough hypocrisy.

“Politics: A strife of interests masquerading as a contest of principles. The conduct of public affairs for private advantage.” Ambrose Bierce, The Devil's Dictionary (1911).

Senator John Cornyn of Texas introduced the “Fairness in Bankruptcy Litigation Act of 2005″ (S. 314) on Feb. 8, calling it the “end to judge shopping …” According to the Senator, “[F]orum shopping is wrong. It distorts and corrupts our justice system.” Bankruptcy Reform: Hearing on S. 256 and S. 314 Before Sen. Judiciary Comm., 2005 Legis. (Feb. 10, 2005).

Change of Venue

There may be merit to Sen. Cornyn's bill, but not in his rhetoric, driven, as the facts show, by a desire to increase his home state's market share in the competition for big bankruptcy reorganizations.

Federal bankruptcy law is theoretically uniform around the country. What varies, of course, is who administers the law. Just as baseball pitchers have quirks, so do judges, regardless of their location. Effective baseball managers and hitters work around pitchers' quirks, just as lawyers do with judges. Choosing a particular venue within the established available rules, though, is proper. Effective litigators always consider legal venue options. Not to do so would be malpractice. Sen. Cornyn's bill would amend 28 U.S.C. ' 1408 (the bankruptcy venue provision of the Judiciary Code) to require a corporation to file a bankruptcy petition in the venue of its principal place of business or its principal assets. No longer would a company's state of incorporation (eg, Delaware) or its affiliate's location be a proper basis for venue.

The recent Winn Dixie Stores scandal is an example of how some companies have abused the existing venue provision. According to The Wall Street Journal, March 31, 2005, the Florida-based Winn Dixie organization “quickly set up a subsidiary in New York. Just 12 days later [it] filed” a Chapter 11 petition in Manhattan, but the “subsidiary ha[d] no office in New York.” (At press time, Winn Dixie agreed to transfer the case back to Florida in response to a creditor's transfer motion).

Sen. Cornyn's bill is not the first attempt to reform bankruptcy venue rules. The National Bankruptcy Review Commission recommended a similar change in 1997, citing valid concerns (eg, creditor convenience), but the recommendation failed in Congress. LoPucki L: Courting Failure: How Competition for Big Cases Is Corrupting the Bankruptcy Courts, pp. 16-17 (The University of Michigan Press 2005). In 2002, Sen. Richard Durbin (D-IL) and Rep. William Delahunt (D-MA) introduced another ill-fated bill to reform bankruptcy venue rules. Scinta C: New U.S. Senate Bill Targets Venue-Shopping in Chapter 11 Cases, Daily Bankruptcy Review, Feb. 10, 2005, p. 9.

'Coryn's Crusade'

Sen. Cornyn's moral crusade, in our view, is contrived, hiding a more cynical objective: enhancing his constituents' financial interests. The Senator's attempt to disguise a valid legislative debate as a moral issue is political grandstanding.

The Senator apparently first encountered the Code's venue provision during his term as Texas Attorney General from 1999 through 2002. When Enron filed its 2001 Chapter 11 petition in New York, then-Attorney General Cornyn unsuccessfully “tried to steer th[e] case toward federal court in Houston,” where it was headquartered. According to the Senator, his experience with Enron “opened [his] eyes to a very real abuse in our current bankruptcy system and the need to end the current practice of judge shopping.” Id. Cornyn's moral justifications for his bill mask a less heroic objective, however: protecting Texas's market share in the contest for big reorganizations, and making sure that another Enron does not get away. A city's lawyers, accountants, financial advisers and hotels profit when a large company seeks refuge in the local bankruptcy court.

Texas

The Texas legal community, in fact, was working to position itself as a player in the competition for large bankruptcy cases prior to Enron's filing its reorganization petition in New York. In 2000, lawyers and judges in the Southern District of Texas (ie, Houston) formed the “Advisory Committee on Chapter 11 Issues” to make the courts' administration of complex Chapter 11 cases “more responsive, more predictable, and more accessible.” Houston, We Know We Have a Problem (But We're Working on It!), Bankruptcy Court Decisions News and Comment, Feb. 8, 2000. It came up with uniform procedures that eliminated limits on professional fees. At the luncheon to unveil the new rules to the Houston bar, then-Judge William R. Greendyke proclaimed, “The war on fees is over.” The Northern District of Texas (ie, Dallas) soon followed suit with similar “reforms.” New Procedures Bring Home Northern and Southern Texas Debtors, Bankruptcy Court Decisions News and Comment, Dec. 18, 2003.

Ex-Judge Greendyke, now practicing law in Houston, supports Sen. Cornyn's bill. In a letter to Cornyn, Greendyke wrote: “[T]his migration of large cases [from Texas] … represents a fundamental flaw in the perceived and actual fairness of the bankruptcy system.” Cornyn Files Bill to End Bankruptcy Forum Shopping, The Texas Lawyer, Feb. 16, 2005.

Sen. Cornyn cites WorldCom, Enron, Polaroid and Kmart as examples of the troubling “migration.” But he fails to mention the forum shoppers that chose Texas as the venue for their reorganizations after Texas courts got religion. For example, Mirant Corporation, an Atlanta-based company incorporated in Delaware, filed its 2003 Chapter 11 petition in the Northern District of Texas. Avado Brands, Inc., incorporated and headquartered in Georgia, also filed in the Northern District of Texas in 2004. Logix Communications Enterprises Inc., incorporated and headquartered in Oklahoma; Pentacon, Inc., incorporated in Delaware and headquartered in California; and Erly Industries Inc.. incorporated and headquartered in California, also went to debtor-friendly Texas for Chapter 11 relief.

Sen. Cornyn asserts that his bill “is good government … good for the economy … [and] good for consumers.” It certainly may be good for Texas's market share in the competition for large reorganization cases. But the Senator's characterization of venue legislation as a moral rather than a policy issue detracts from fair debate. Bankruptcy venue reform should be discussed with hard facts, not innuendo. The halls of Congress already have more than enough hypocrisy.