Venue Reform in Corporate Bankruptcies

Q: You take the position that venue reform is unnecessary. Are there protections in place for employees and creditors under the current regime that mitigate the concerns of venue reform proponents?

Bob Gayda: Yes, I do think that current bankruptcy law and practice provides opportunity for motivated constituents to participate in the bankruptcy process. The Bankruptcy Code itself provides for the formation of statutory committees to protect creditor rights — official committees of unsecured creditors are charged with a fiduciary duty to maximize value for such creditors and are open to participation, and in certain cases committees are formed to protect equity holders. The Code also provides creditors with the right to seek the appointment of an examiner to investigate a company's prepetition actions, which can be a very powerful tool. Moreover, it has become common practice for creditor constituencies to form "ad hoc" creditor groups to advance their own interests. These groups exist in almost every large bankruptcy filing today, and often retain sophisticated counsel to represent them. While these groups bear their own costs of case participation (as opposed to official committees, the costs of which are borne by the bankruptcy estate), members of a group are able to defray most of these costs by sharing the burden with the other members. These are just a few examples of protections that exist irrespective of jurisdiction. And if these are not sufficient, and a creditor feels that it is prejudiced by a particular venue, the creditor can move the court to transfer the case.  Such motions have been successful in the past in large cases — Winn-Dixie and Patriot Coal are two examples – and provide an adequate remedy if a debtor is truly "forum shopping." Reform proponents seemingly ignore this possibility.

Q: Does the proposed venue reform potentially harm prospective debtors and undermine the policy considerations supporting bankruptcy law?

Bob Gayda: There are certain circumstances where limiting a debtor's right to select an appropriate forum can be harmful to the prospects for reorganization. One of the underlying goals of the bankruptcy process is to rehabilitate a struggling company so that it can continue as a going concern, which clearly benefits all parties. Greater flexibility in forum selection promotes this goal — if a prospective debtor that is a participant in a particular industry wants to seek the expertise of bankruptcy judges with great experience with those cases, the law should facilitate that ability, not restrict it. Moreover, I don't think this causes creditors any great harm. Generally speaking, prospective debtors are seeking the forum that allows them the best chance of reorganization, not the forum that allows them to disadvantage creditors the most. With this in view, it makes sense to allow debtors the freedom to choose to file where they want. As we discussed, creditors can move the court to transfer venue if it is inappropriate so they have some protection. Bankruptcy will always be about striking a balance between the rights of debtors and creditors. In this instance, policy seems better served by allowing debtors greater flexibility.

Q: Have technological improvements made it easier for all bankruptcy case constituents to participate in the process? 

Bob Gayda: This is an important point that cuts against arguments for reform. It is as easy as it has ever been to participate in a bankruptcy case remotely. Courts have been utilizing technology to make court appearances easier — telephonic or video court appearances are often available at nominal costs. Additionally, access to court dockets is readily available. Almost every large corporate filing has a claims agent, and almost universally provides a website where creditors can access the docket for free with little trouble.

Q: A nearly identical measure failed to pass last year in the Senate. Do you think a bill like this could eventually be signed into law?

Bob Gayda: This topic seems to come up every several years, and was last discussed in connection with the Bankruptcy Reform Act of 2017 (interestingly, that bill co-sponsored by former Democratic presidential candidate Sen. Elizabeth Warren). Each time, similar issues are highlighted. Most of these have been mooted by the evolution of bankruptcy practice and advances in technology, or were never real concerns in the first place. Based on this, it seems unlikely that this change will be adopted, although given the volatile political climate it is difficult to say that with any certainty.