What do the Dodgers, American Apparel, Rubio’s Fish Tacos, California Pizza Kitchen, MGM Studios and Pacific Sunwear have in common? Each is an iconic Southern California brand. But that’s not all they have in common. According to statistics, over the past 20 years, 143 California-based companies with over $32 billion in assets and over 211,000 employees have filed for bankruptcy in Delaware alone. These companies are part of a growing list of California companies that have strategically chosen to file for bankruptcy outside of California.
Why do California companies, when they file for bankruptcy, do so in distant places like New York, Delaware, Virginia and Texas? After all, most of those affected by the bankruptcy case are in California. The reason is that they can under current bankruptcy law.
Current law allows a company to file for bankruptcy in any state where it does business or in which it or an affiliate is incorporated. So when deciding where to file for bankruptcy, it didn’t matter whether the Dodgers were in Los Angeles or whether MGM was one of the oldest studios in Los Angeles. The fact that these companies (or tiny affiliates) filed corporate documents in another state, such as Delaware or New York, allowed them to file for bankruptcy there.
Corporate debtors choose these remote locations for several strategic reasons. Reasons include that privileged courts are known for their “predictability”, as there are few judges in these courts. These courts are known to have “rocket roles”, meaning that judges process cases very quickly, often giving the parties involved a limited opportunity to be heard. These courts are also generally receptive to legal arguments from banks and other sophisticated parties who often control the case.
The fact that businesses can file for bankruptcy in jurisdictions far from their home is inconsistent with how location is generally determined. If a commercial dispute or personal injury case is based on events in California, the lawsuit would be filed in the county or district of California where it all happened. The same should be true for bankruptcy. Since most of the Dodgers’ business was in Los Angeles, the bankruptcy filing should have taken place in Los Angeles. Still, the Dodgers filed their case in Delaware based on the state of the constitution.
The application of the general rules of venue in bankruptcy makes sense from a due process perspective. California bankruptcy judges should be given the opportunity to develop the law governing large business bankruptcies in California. Citizens of California should enjoy the same ease of access to courts as citizens of Delaware and New York.
California isn’t alone in seeing its major corporations file for out-of-state bankruptcy. That is why 163 current and retired bankruptcy judges sent a letter to Congress supporting bankruptcy venue reform. So also have 42 state attorneys general.
Last month, during a hearing on third-party releases before the Senate Judiciary Subcommittee on Federal Courts, Senator Blumenthal said he was “deeply disturbed” by bankruptcy site shopping, warning: “A lot of parties are not just skeptical, they’re completely cynical about how this system works, non-lawyers and lawyers alike. Even U.S. district courts, sitting as intermediate appellate courts, are raising red flags, most recently in the Southern District of New York (Purdue Pharma) and Eastern District of Virginia (scene). In reversing the bankruptcy court‘s confirmation of a plan with broad third-party waivers, VA Eastern District Judge Novak insisted on moving the case to another bankruptcy court and not the one chosen by the debtors through the shopping forum. He went on to say, “the practice of regularly approving third-party releases and forum shopping concerns call into question the public’s confidence in the way these cases are handled by the Richmond Division Bankruptcy Court. (Emphasis added)
A bipartisan bankruptcy venue reform bill, HR 4193, co-sponsored by Zoe Lofgren of California (Democrat) and James Sensenbrenner of Wisconsin (Republican), and Senate bill, S. 2827, sponsored by Senator John Cornyn of Texas, proposes to correct premise laws. The proposed law would require companies to file for bankruptcy at the location of their principal assets or place of business.
It’s only a matter of time before the next California company files for bankruptcy across the country. It’s wrong. When filing bankruptcy petitions, businesses must file in their home state. This is a bipartisan issue that every California congressman should support. There is no reason for our citizens to be deprived of due process, for our districts to lose revenue, and for judges on the other side of the country to decide the economic fate or even health and welfare. Californians.
Bankruptcy site shopping and the need for site reform have captured national attention and brought in new allies and advocates, including those impacted by recent mass liability cases, who now support our efforts. Please join us on our next national call on Wednesday May 11and from 5:30 p.m. EDT (details below) to learn more about the progress we’re making in seeking passage of the Venue Reform Acts of 2021 pending in the House as HR 4193 and in the Senate as S. 2827 and what you can do to support the cause.