Under current law, a corporate debtor may have a choice of “venues” (places to file): its state of incorporation, its principal place of business, the place where its principal assets are located, or a district in which an affiliate’s bankruptcy is pending. For a small business incorporated and operating in one location, all of these potential choices may point to the same place. However, a large company with subsidiary or parent companies throughout the country may be able to choose among a number of places in which to file.
Depending on the case, the flexibility in venue choices can either help or hinder the administration of a bankruptcy case. Some members of Congress have concluded that venue choices should be limited, and have proposed to eliminate the state of incorporation as an option, and to make it harder to move the principal assets or place of business just before filing. In addition, the proposal (the complete text is available here) limits “affiliate” venue such that a subsidiary can file in the district of its parent’s bankruptcy case, but the parent cannot file in the district of the subsidiary’s bankruptcy case.
News reports have focused on the effect of this provision on Delaware, where large numbers of corporations can file for bankruptcy because they are incorporated there. The proposal would force more bankruptcy filings into the states and districts where those corporations actually operate or maintain the principal assets.
The limit on affiliate venue, however, would also have a practical effect. A corporation may prefer not to file for bankruptcy, but to attempt a workout with its creditors. If creditors then file an involuntary bankruptcy petition against a subsidiary, the parent corporation may choose to file in the same place and move to consolidate the proceedings. The proposed rule would eliminate this option. The parent may still be able to have the proceedings consolidated, by asking the court to transfer venue of the subsidiary’s case. The parent could also simply ignore the venue rules, file in the subsidiary’s district, and then seek to consolidate and transfer the cases together. However, while venue can be waived, ignoring venue requirements is not now encouraged and could be meet further resistance under the revised statute.
If you are considering requesting Chapter 11 bankruptcy protection, you should consult with an attorney familiar with Chapter 11 bankruptcies to discuss your options. For a free consultation, call (480) 719-1152.