Restructuring

Co-Authored by Debra A. Dandeneau and Victoria Vron.
Several weeks ago we told you about the new venue legislation (H.R. 2533) proposed by Representatives Smith and Conyers in Congress.  As predicted, it did not take long for the restructuring community to start criticizing the proposed legislation.  Last week, the Committee on Bankruptcy and Corporate Reorganization of the Association of the Bar of the City of New York registered its opposition to the proposed legislation.  The Committee blasted the legislation as being unnecessary and for being predicated on the unsubstantiated belief that the current venue rules are flawed and lead to abuse, improper forum shopping and the compromise of the independence of the nation’s bankruptcy judges.  As the Committee points out, even if the current venue rules were to result in improper forum shopping, courts already have a mechanism in 28 U.S.C. § 1412 to transfer venue to another jurisdiction if they determine that venue was initially chosen in an improper manner or that the existing forum is inconvenient for the relevant parties.  The Committee also pointed out that commencing a chapter 11 case in a jurisdiction where the debtor’s employees are located is not only impractical in large chapter 11 cases as employees tend to be located all over the United States, but also not necessarily value accretive to employees or creditors.  As is common in large chapter 11 cases, employees’ rights to uninterrupted payment of employee claims is typically preserved through “first-day” relief.  In addition, where employees’ and retirees’ rights are affected, the Bankruptcy Code provides for the appointment of representatives who have the means to employ law firms anywhere in the country.
On another note, Representatives Smith and Conyers have sent a letter to their colleagues in Congress seeking support for the new legislation.  In the letter, the Representatives share some additional justifications for arguing that many of the stakeholders lose out when a large chapter 11 case is heard in what they characterize as a “remote” venue.  Among the most egregious of the unfounded statements made in their letter is that “[l]ocal trade creditors that have shipped goods to the debtor frequently cannot afford to pay expensive New York or Delaware legal fees to pursue their claims and so are forced into long-distance settlements for cents on the dollar.”  This statement belies the reality of commerce, claim litigation in large chapter 11 cases, and the significant protections that already exist for a debtor’s trade creditors.
First, how many vendors of a company truly are located close to the company’s headquarters, particularly for a national or multinational corporation?  Large manufacturing companies, to the extent they exist in the United States, often have manufacturing plants dispersed throughout the country and internationally.  They likewise often source raw materials and finished products from vendors in low cost foreign countries more often than from dispersed national sources.  Which vendors are the “local” vendors of such an enterprise?  What about a nationwide retailer?  If “local” vendors are the touchstone, where should Borders have commenced its chapter 11 cases?  If a retailer has a separate corporation holding the leasehold interest for each store location, should each one be forced to file in the particular jurisdiction in which its store is located?  That sounds like a field day for lawyers, not a cost savings mechanism.  And don’t forget about airlines – should their venue choice be limited to the most significant hub?
Second, because courts in New York and Delaware are experienced in dealing with cases involving massive amounts of claims, they have developed procedures to accommodate claimants.  Significantly, local rules of the bankruptcy courts in New York and Delaware allow out of state attorneys to appear pro hac vice in chapter 11 cases to represent creditors in claim litigation, without the requirement to hire any local counsel.   Indeed, it is typical for dozens of out of state attorneys to appear pro hac vice in large chapter 11 cases representing trade creditors. Also, most trade claims, if disputed, are resolved through negotiations, which nowadays are typically conducted telephonically or by e-mail.  Accordingly, even where a trade creditor does not hire counsel but negotiates the claim itself, venue of the case and the location of debtor’s counsel should not impact the outcome of claim negotiations and allowance.
Most importantly, though, the statement ignores that Congress already has added special protections for trade creditors under the Bankruptcy Code.  Many of the changes made in BAPCPA favor trade creditors, have significantly affected debtors’ reorganization efforts, and have resulted in a loss of value for other constituencies (including employees who have lost their jobs following the liquidation of such debtors).  For example, section 503(b)(9) of the Bankruptcy Code gives vendors of goods an administrative expense priority for the value of goods that the debtor receives within 20 days before its bankruptcy filing, section 547(c)(2) of the Bankruptcy Code strengthens the ordinary course of business defense to preference actions, and section 546(c) of the Bankruptcy Code lengthens the period for vendors to assert reclamation claims.  Add to that the restrictions on a debtor’s time to assume or reject its unexpired real property leases under section 365(d)(4) of the Bankruptcy Code and the special treatment for utilities under section 366 of the Bankruptcy Code.  All of these provisions reflect the greater protections that have already been extended to vendors and landlords, none of which are affected by venue choices.
It is therefore apparent that “local” trade creditors already are protected by both the process and the law.  Accordingly, the reliance by Representatives Smith and Conyers on “local” trade creditors is nothing more than a populist attempt to support ill-conceived legislation through misconceptions instead of facts.