Chapter 11 Venue: Why Big Cases Land Where They Do

When a large company files Chapter 11, it usually has more than one court it can file in, and the choice of where to file is often derisively called forum shopping. Some of it may, in fact, be. But choosing a venue is also one of the real decisions in restructuring a company, because the court you pick decides which law governs the case and how quickly you can get in front of a judge.

The Law Depends on Where You File

Bankruptcy courts are bound by the precedent of the circuit courts above them, and the circuits do not always agree. The Second Circuit and the Third Circuit have long read the Bankruptcy Code differently on when a debtor can reject a union collective bargaining agreement. So if you are filing a manufacturing company with a big union workforce, and you could file in either New York or Delaware, you are going to think very hard about those two options.

Chrysler was a Michigan company, and it filed in New York. There is a reason for that. There was better law there for what the debtor wished to accomplish.

Circuit law is one tool in the toolbox of restructuring a company. Somebody has to make the decision, and it should be made on purpose.

How a Company Gets to Choose

The venue rules are broad. A company can file where it is incorporated, where its principal place of business or principal assets are, or anywhere an affiliate already has a case pending. That last one does a lot of the work. File a subsidiary first in the district you want, and the parent and every other affiliate follow it in. Enron filed in New York in 2001 because a commodities subsidiary based there went first. Chrysler got to New York through an affiliate too.

Some companies go further. They form an affiliate in a district with a light docket, then file there a couple of weeks later, because they know they will get the judge’s attention and a hearing when they need one. I understand why. When you are trying to save jobs and preserve value, the court’s ability to deal with your issues is an important part of the decision.

How Houston Became a Destination

Enron is one of the cases that started the current fight over venue. Current Senator John Cornyn was Attorney General of Texas at the time, and he was offended that a Houston company would file in New York. He argued the case belonged in Houston, and he lost that argument. As a senator he made it a cause, introducing legislation in 2005 that would have made companies file where their principal place of business is rather than wherever an affiliate happens to be. Bills along those lines have been introduced again and again since. None have passed. Venue has not changed.

It gets described as a war between the Southern District of Texas and Delaware. It is really more of a fight among law firms, and a lot of them were unhappy that the big cases were not coming to Texas.

Then Houston became a destination. Starting in 2016, the bankruptcy court there created a complex case panel comprised of two judges, each of whom came to the bench from large-firm bankruptcy practice. The Debtor’s lawyer designates the case as complex when it is filed, and it goes to one of the two. In 2018, a general order put complex cases from every division in the district on a single consolidated docket in front of that panel. A company filing a large case in the Southern District of Texas knew it would draw one of two judges, and knew exactly who they were. That solved a perceived problem of judicial inconsistency and opened the floodgates.

There is an account that circulates in the profession about how that happened. The story, perhaps apocryphal, is that a large national firm, frustrated with how judges in Delaware were treating it, went to the Houston court and said it would bring its complex cases to Texas if it could be sure of drawing one of the panel judges. I have heard the story, and I will call it what it is – a rumor. What is on the record is the order, and where the cases went afterward.

When Texas got complicated, a lot of that business moved to New Jersey.

Who Is Really Arguing About Venue

Cornyn and the Texas Bar’s argument about Enron was ostensibly about employees. The company was headquartered in Texas, it had a lot of employees there, and a case should be filed close to the employees, because they are the ones most hurt.

The problem is the numbers. Enron had around 20,000 employees, and roughly 7,000 of them were in Houston. Most of the people that argument was supposed to protect were somewhere else. And now that remote appearances are routine, anybody can take part in a case from anywhere.

So take the employee argument away and look at what is left. Most of the fight over venue is about which lawyers get the big cases, and the fees that come with them. That is a legitimate thing for lawyers to care about. It is not the same thing as caring about employees or the actual interests of the Debtors and stakeholders.

Is some of it venue shopping? Sure. But venue options should be considered with intent – it is an important aspect of a Chapter 11 case, and pretending otherwise does not help the company, its employees, or its creditors.

About the Author

Ted Gavin is the Managing Director and Founding Partner of Gavin/Solmonese. He served as President of the American Bankruptcy Institute from 2018 to 2019. During his presidency, he formed the ABI Task Force on Veterans and Service Members Affairs, which drove the legislative effort behind the HAVEN Act of 2019. He is a Certified Turnaround Professional and Certified Professional Mediator, and has served as a plan administrator, fiduciary, expert witness, and restructuring advisor in numerous large and complex bankruptcy cases, including the largest retail liquidation in American history.