New Senate bill would force bankruptcy filings closer to home

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United States Sens. Elizabeth Warren (D-Mass.) and John Cornyn (R-Tex.) introduced a new bill on Monday that would force companies to file for bankruptcy protection in the state where they are headquartered or hold most of their assets. If signed into law, the bill would reverse long-standing laws that allow companies to file in any jurisdiction where they are incorporated or have their principal place of business. The bill will face stiff opposition from lawmakers in Delaware and New York because the bankruptcy courts in those states would likely lose thousands of cases annually filed by companies that are incorporated, but not headquartered, in those states. For example, had this bill been enacted prior to the General Motors and Chrysler bankruptcies, GM and Chrysler would likely have filed in the Eastern District of Michigan, rather than the Southern District of New York. 

Warren and Cornyn argue that their bill would prevent businesses from “forum shopping” and would allow employees, retirees, and creditors to more fully participate in the bankruptcy process.

Delaware and the Southern District of New York have long been the preferred forums for large Chapter 11 cases. Since 2008, approximately 65 percent of all bankruptcy filings of publicly traded companies were filed in Delaware or the Southern District of New York. Those jurisdictions are known for having judges with extensive experience handling complex Chapter 11 cases who follow well-established case law that oftentimes favors businesses.

For obvious reasons, Delaware’s governor and congressional delegation have voiced strong opposition to the proposed law. They issued a joint statement maintaining that the new bill “is a misguided policy” and that denying companies “the ability to file for bankruptcy in the courts of their choice would not only hurt Delaware’s economy but also hurt businesses of all sizes and the national economy as a whole.” 

It is too early to tell whether the bipartisan Senate bill will receive the broad support necessary to pass through Congress. However, if the bill gains steam and appears headed for approval, expect a flurry of bankruptcy filings in Delaware and the Southern District of New York just prior to the new law going effective.

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