Forum Selection v. Forum Shopping: The Proposed “Bankruptcy Venue Reform Act of 2019”

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The ancient Forum in Rome (photo by Marilyn Swanson)

By: Donald L Swanson

A bankruptcy bill on venue reform is sitting in Congress right now. The bill is H.R. 4421 – 116th Congress (2019-2020) and is titled, “Bankruptcy Venue Reform Act of 2019.” It aims to eradicate “forum shopping” abuses by eliminating forum selection options altogether.

Opposed

Hopefully, this bill goes nowhere and dies out. Here’s why:

  • in attempting to eradicate forum shopping abuses, the bill abolishes legitimate choices that debtors should be allowed to make.

Current Reality

In the world of business bankruptcy, debtors often consist of multiple affiliated entities, incorporated in various states, with physical locations in multiple bankruptcy districts. Bankruptcy venue can be proper for such debtors, under existing law, in a variety of bankruptcy districts. And debtor gets to choose.

Reasonable Choices

Debtors’ lawyers ought to be able to make venue choices for such debtors.

I remember, many years ago, filing and prosecuting a bankruptcy case in a far-away district. In that case, every ruling the Judge made and every judicial inaction struck me as communicating this sentiment: “Don’t be filing a case like this in my Court!” And so, I never filed a case there again . . . of any type . . . ever. If no alternative venue existed, I declined the case.

Making such a venue choice is not only reasonable and proper—it is essential for an appropriately zealous representation.

An Analogy

Consider this analogy:

  • Patient has a serious and unusual illness. Choices for treatment include a doctors’ office in Patient’s home town that has limited experience with Patient’s illness, or a similar group in another town that has extensive experience with Plaintiff’s illness.
  • Additionally, Patient’s prior experiences in the local doctors’ office have engendered a lack of confidence in their capabilities and a dissatisfaction with their bedside manner. By contrast, Patient’s prior experiences with the group in the other town have instilled a sense of confidence and satisfaction.

So . . . would anyone suggest that Patient should be required, by law, to use the local doctors’ office, instead of the group in another town? Of course not!

The Upshot

Venue reform should focus on preventing abuses, not on impairing proper conduct.

The term “forum shopping” is a pejorative: it expresses contempt or disapproval. But many forum selection decisions are entirely proper—and a far cry from either abusive or inappropriate.

When does a debtor’s forum choice go too far?  I don’t know the answer. But here’s a definitive opinion:

  • Concerns about forum selection abuses (i.e., “forum shopping”) ought to focus on preventing just that—abusive conduct; and
  • Attempts to address abuse concerns should never impair or impede the legitimate forum selection choices that attorneys should be entitled to make.

Here’s what happens way too easily and often in rule-making: abuse-prevention efforts morph into an intrusive impact on legitimate practices.

And, I fear, that’s exactly what the proposed “Bankruptcy Venue Reform Act of 2019” would accomplish: an intrusive impact on legitimate practices.

THE BILL

What follows is a summary of language in the bill.

–Findings

“Congress finds that—“

(1) bankruptcy law provides a number of venue options, including (A) place of incorporation, (B) where principal place of business or principal assets are located, and (C) where an affiliate of the entity has filed;

(2) current venue law has led to an increase in “forum shopping,” which has resulted in a concentration of bankruptcy cases in a limited number of districts;

(3) forum shopping, (A) prevents small businesses, employees, retirees, creditors, and other important stakeholders from fully participating in bankruptcy cases that have tremendous impacts on their lives, communities, and local economies; and (B) deprives other districts of the opportunity to contribute to the development of bankruptcy law; and

(4) reducing forum shopping will improve the bankruptcy system.

–Purpose

“The purpose of this Act is to prevent the practice of forum shopping in cases filed under chapter 11 of title 11, United States Code.”

–Essence

The guts and essence of the bill are the following provisions:

“a case under title 11 may be commenced only in the district”—

(1) where an individual debtor has a domicile, residence, or principal assets;
(2) where an entity debtor has its principal place of business or principal assets; or
(3) where a bankruptcy case is properly pending for an affiliate, (i) with at least a 50 % ownership or control of debtor, or (ii) that is debtor’s general partner.

A change in ownership or control shall have “no effect” on venue, if the change occurs, (A) within 1 year before the bankruptcy filing, or (B) “for the purpose of establishing venue.”

The debtor “shall bear the burden of establishing by clear and convincing evidence that venue is proper.”

In all events, one court can transfer venue to another court, (1) in the interest of justice, or (2) for the convenience of the parties.

If a case is filed in an improper court, that court shall, (1) immediately dismiss it, or (2) immediately transfer it to a proper court.

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