Chapter 11 Bankruptcy Venue Reform Gains Momentum

This week, Wilbraham-based Friendly’s Ice Cream Corporation announced that it would close 63 locations as it seeks to reorganize under Chapter 11 bankruptcy protection.  Friendly’s has a long history in Massachusetts, starting with its founding in Springfield in 1935.  Despite its local roots, Friendly’s joins a growing list of Massachusetts companies – including Polaroid and Evergreen Solar – who have filed for bankruptcy protection in Delaware.

Once upon a time companies were required to file for bankruptcy where their corporate headquarters or corporate assets were located.  Then Congress expanded those choices to also include where the company is incorporated or the place a corporate affiliate has previously filed.  While the expanded statute gives courts the power, on request, to overrule venue choice if it is inconvenient or unfair, an employee trying to save her job or pension is ultimately unlikely to petition the courts.

Since 2005, federal legislation to curb venue shopping has been filed and H.R. 2533, The Chapter 11 Bankruptcy Venue Reform Act of 2011 was introduced again this session.  The bill would require corporations to file for bankruptcy protection in the judicial district where they have their principal place of business.

Supporters of the bill say that companies should be forced to reorganize close to home, so that local employees and creditors can more easily participate in the bankruptcy process.

Opponents have pointed to the fact that anyone can file a motion for change of venue.  In reality, doing so is not only inconvenient but expensive.  In previous sessions, a notable opponent was former Delaware Senator Joe Biden.  This session, the Bar of the City of New York has opposed the bill.  Both Delaware and the Southern District of New York seem to enjoy a monopoly on these types of cases.  It is said that an overwhelming majority of these cases are filed in those two districts.

Early indications suggest that this legislation may actually have the momentum to pass this session.  In September, the House Subcommittee on Courts, Commercial and Administrative Law held a hearing on the bill.  Among those who testified was Chief Judge Frank J. Bailey of the United States Bankruptcy Court for the District of Massachusetts.  Chief Judge Bailey testified on his own behalf, travelling to Washington D.C. at his own expense, and pointed to the serious unintended consequences of the current law.

The BBA is reviewing this legislation.  The Bankruptcy Section has already voted to support the legislation and it should be on the BBA Council’s agenda next month.

By filing hundreds or thousands of miles away from their headquarters, companies disenfranchise employees, marginalize pensioners and disregard stakeholders who have invested heavily in the corporation.

Big corporations like Friendly’s really are part of their local communities – they employ residents, contribute to the local economy and pay taxes to local governments.  Communities, like Wilbraham, take pride in their association with and commitment to their businesses.  Bankruptcy venue shopping is not just a loophole – it violates a community’s trust.

-Kathleen Joyce

Government Relations Director

Boston Bar Association

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