Current US bankruptcy law gives businesses broad discretion to file for bankruptcy wherever they choose. A company may file for bankruptcy in any Federal District where it has its “domicile, residence, principal place of business in the United States or principal assets in the United States” or where a subsidiary of the company has a bankruptcy case in progress. Often times, a business that operates primarily in California will go bankrupt in another state where it may have a small affiliate. These lenient location selection rules have long enabled bankruptcy courts in a few locations (Delaware, New York, Houston and Richmond) to process the majority of large corporate bankruptcy filings.
Debtor companies choose these remote locations for several strategic reasons, known as “forum shopping”. First, privileged courts are known for their “predictability”, as there are few judges in these courts. Second, these courts are notorious for having “rocket cases”, meaning that judges move cases forward very quickly. Third, these courts are known to tolerate the high billing rates of lawyers in large law firms. Finally, these courts are generally receptive to legal arguments from banks and other sophisticated parties who often control the case.
By filing for bankruptcy in distant states, companies often deprive local employees, suppliers, vendors, local and state governments, and other creditors of meaningful participation in the bankruptcy process.
A distressing result of buying from California business forums is that out-of-state judges decide how thousands of California creditors, employees, regulators and clients are treated, while judges California-based bankruptcy cases may be more concerned with protecting California citizens. It is different for a judge to render a decision affecting the lives of thousands of people in that judge’s district than for a judge to deal abstractly with facts occurring hundreds or thousands of miles away.
Some prominent examples of Los Angeles-based business forum shopping include The Los Angeles Dodgers, American Apparel, Open Road Films, Relativity Media, Woodbridge Group of Companies, and many more.
Businesses that file bankruptcy cases in jurisdictions far from their homes are not the way a place is usually determined. If a business dispute or personal injury case is based on events in California, the lawsuit should be filed in the county or district of California where it all occurred. The same should be true for bankruptcy. If the primary establishment of a business is in Los Angeles, the bankruptcy case must be filed with the Los Angeles bankruptcy courts.
The application of the general rules of jurisdiction in bankruptcy makes sense in the context of due process. People affected by corporate bankruptcy should be able to participate personally in the process – not be forced to pay lawyers to represent their interests away from home. California state and local governments enforcing environmental and employment laws, or collecting revenue, should not be forced to jump additional hurdles to protect our rights in remote locations. California-based bankruptcy judges should have the opportunity to develop the law governing large corporate bankruptcies in California. Citizens of California should have the same ease of access to the courts as citizens of Delaware, New York, Virginia, and Texas.
California is not alone in seeing its large corporations file for bankruptcy out of state. Significantly, in a high-profile bankruptcy, Connecticut-headquartered Purdue Pharma, responsible at least in part for the opioid epidemic, filed for bankruptcy across state lines. to White Plains, New York, for favorable treatment of its shareholders.
A bipartisan bankruptcy site reform bill to correct site laws, HR 4421, co-sponsored by Zoe Lofgren of California (Democrat) and James Sensenbrenner of Wisconsin (Republican) was introduced to Congress in 2019, but was not submitted to the Senate. 163 current and retired bankruptcy judges and 42 state attorneys general have sent a letter to Congress supporting the bill.
The same bill now referred to as HR 4193 was again introduced in the House by Zoe Lofgren of California and Ken Buck of Colorado (Republican). The proposed law would require companies to file for bankruptcy at the location of their main assets or where they do business.
While the bipartisan issue of site reform has been around for many years, there is a new urgency. While trillions of dollars in government funding and other government support programs have averted an avalanche of cases due to the pandemic-induced recession, these programs are coming to an end. There have been massive upheavals in the economy that will ultimately need the help of bankruptcy courts to help restore order.
It’s only a matter of time before the next California company files for bankruptcy across the country. This is a bipartisan issue that every representative in California Congress should support. There is no reason why our citizens should be deprived of due process, why our districts should lose income and why the judges in distant states should decide the economic fate, even health and welfare, citizens of California.