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.
Sec. 1412. Change of venue
A district court may transfer a case or proceeding under title 11 to a district court for another district, in the interest of justice or for the convenience of the parties.
Sec. 503. Allowance of administrative expenses
. . . (b) After notice and a hearing, there shall be allowed administrative expenses, other than claims allowed under section 502(f) of this title, including –
. . . (9) the value of any goods received by the debtor within 20 days before the date of commencement of a case under this title in which the goods have been sold to the debtor in the ordinary course of such debtor's business.
Sec. 547. Preferences
. . . (c) The trustee may not avoid under this section a transfer –
(A) made in the ordinary course of business or financial affairs of the debtor and the transferee; or
(B) made according to ordinary business terms;
Sec. 546. Limitations on avoiding powers
(c)(1) Except as provided in subsection (d) of this section and in section 507(c), and subject to the prior rights of a holder of a security interest in such goods or the proceeds thereof, the rights and powers of the trustee under sections 544(a), 545, 547, and 549 are subject to the right of a seller of goods that has sold goods to the debtor, in the ordinary course of such seller's business, to reclaim such goods if the debtor has received such goods while insolvent, within 45 days before the date of the commencement of a case under this title, but such seller may not reclaim such goods unless such seller demands in writing reclamation of such goods –
(B) not later than 20 days after the date of commencement of the case, if the 45-day period expires after the commencement of the case.
Sec. 365. Executory contracts and unexpired leases
. . . (d)(4)(A) Subject to subparagraph (B), an unexpired lease of nonresidential real property under which the debtor is the lessee shall be deemed rejected, and the trustee shall immediately surrender that nonresidential real property to the lessor, if the trustee does not assume or reject the unexpired lease by the earlier of –
(i) the date that is 120 days after the date of the order for relief; or
(ii) the date of the entry of an order confirming a plan.
(B)(i) The court may extend the period determined under subparagraph (A), prior to the expiration of the 120-day period, for 90 days on the motion of the trustee or lessor for cause.
(ii) If the court grants an extension under clause (i), the court may grant a subsequent extension only upon prior written consent of the lessor in each instance.
Sec. 366. Utility service
(a) Except as provided in subsections (b) and (c) of this section, a utility may not alter, refuse, or discontinue service to, or discriminate against, the trustee or the debtor solely on the basis of the commencement of a case under this title or that a debt owed by the debtor to such utility for service rendered before the order for relief was not paid when due.
(b) Such utility may alter, refuse, or discontinue service if neither the trustee nor the debtor, within 20 days after the date of the order for relief, furnishes adequate assurance of payment, in the form of a deposit or other security, for service after such date. On request of a party in interest and after notice and a hearing, the court may order reasonable modification of the amount of the deposit or other security necessary to provide adequate assurance of payment.
(c)(1)(A) For purposes of this subsection, the term "assurance of payment" means—
(i) a cash deposit;
(ii) a letter of credit;
(iii) a certificate of deposit;
(iv) a surety bond;
(v) a prepayment of utility consumption; or
(vi) another form of security that is mutually agreed on
between the utility and the debtor or the trustee.
(B) For purposes of this subsection an administrative expense priority shall not constitute an assurance of payment.
(2) Subject to paragraphs (3) and (4), with respect to a case filed under chapter 11, a utility referred to in subsection (a) may alter, refuse, or discontinue utility service, if during the 30-day period beginning on the date of the filing of the petition, the utility does not receive from the debtor or the trustee adequate assurance of payment for utility service that is satisfactory to the utility.
(3)(A) On request of a party in interest and after notice and a hearing, the court may order modification of the amount of an assurance of payment under paragraph (2).
(B) In making a determination under this paragraph whether an assurance of payment is adequate, the court may not consider—
(i) the absence of security before the date of the filing of the petition;
(ii) the payment by the debtor of charges for utility service in a timely manner before the date of the filing of the petition; or
(iii) the availability of an administrative expense priority.
(4) Notwithstanding any other provision of law, with respect to a case subject to this subsection, a utility may recover or set off against a security deposit provided to the utility by the debtor before the date of the filing of the petition without notice or order of the court.
