U.S. GOVERNMENT PRINTING OFFICE

WASHINGTON : 

For sale by the Superintendent of Documents, U.S. Government Printing Office

Internet: bookstore.gpo.gov Phone: toll free (866) 512–1800; DC area (202) 512–1800

Fax: (202) 512–2104 Mail: Stop IDCC, Washington, DC 20402–0001

68–185 PDF 2012

CHAPTER 11 BANKRUPTCY VENUE REFORM ACT 

OF 2011 

HEARING 

BEFORE THE

SUBCOMMITTEE ON COURTS, COMMERCIAL 

AND ADMINISTRATIVE LAW 

OF THE

COMMITTEE ON THE JUDICIARY 

HOUSE OF REPRESENTATIVES 

ONE HUNDRED TWELFTH CONGRESS 

FIRST SESSION 

ON

H.R. 2533 

SEPTEMBER 8, 2011 

Serial No. 112–88 

Printed for the use of the Committee on the Judiciary 

( 

Available via the World Wide Web: http://judiciary.house.gov 

(II) 

COMMITTEE ON THE JUDICIARY 

LAMAR SMITH, Texas, Chairman 

F. JAMES SENSENBRENNER, JR., 

Wisconsin 

HOWARD COBLE, North Carolina 

ELTON GALLEGLY, California 

BOB GOODLATTE, Virginia 

DANIEL E. LUNGREN, California 

STEVE CHABOT, Ohio 

DARRELL E. ISSA, California 

MIKE PENCE, Indiana 

J. RANDY FORBES, Virginia 

STEVE KING, Iowa 

TRENT FRANKS, Arizona 

LOUIE GOHMERT, Texas 

JIM JORDAN, Ohio 

TED POE, Texas 

JASON CHAFFETZ, Utah 

TIM GRIFFIN, Arkansas 

TOM MARINO, Pennsylvania 

TREY GOWDY, South Carolina 

DENNIS ROSS, Florida 

SANDY ADAMS, Florida 

BEN QUAYLE, Arizona 

[Vacant] 

JOHN CONYERS, JR., Michigan 

HOWARD L. BERMAN, California 

JERROLD NADLER, New York 

ROBERT C. ‘‘BOBBY’’ SCOTT, Virginia 

MELVIN L. WATT, North Carolina 

ZOE LOFGREN, California 

SHEILA JACKSON LEE, Texas 

MAXINE WATERS, California 

STEVE COHEN, Tennessee 

HENRY C. ‘‘HANK’’ JOHNSON, JR., 

Georgia 

PEDRO R. PIERLUISI, Puerto Rico 

MIKE QUIGLEY, Illinois 

JUDY CHU, California 

TED DEUTCH, Florida 

LINDA T. SA ́ NCHEZ, California 

DEBBIE WASSERMAN SCHULTZ, Florida 

SEAN MCLAUGHLIN, Majority Chief of Staff and General Counsel 

PERRY APELBAUM, Minority Staff Director and Chief Counsel 

SUBCOMMITTEE ON COURTS, COMMERCIAL AND ADMINISTRATIVE LAW

HOWARD COBLE, North Carolina, Chairman 

TREY GOWDY, South Carolina, Vice-Chairman 

ELTON GALLEGLY, California 

TRENT FRANKS, Arizona 

DENNIS ROSS, Florida 

[Vacant] 

STEVE COHEN, Tennessee 

HENRY C. ‘‘HANK’’ JOHNSON, JR., 

Georgia 

MELVIN L. WATT, North Carolina 

[Vacant] 

DANIEL FLORES, Chief Counsel 

JAMES PARK, Minority Counsel 

(III) 

C O N T E N T S 

SEPTEMBER 8, 2011 

Page 

THE BILL 

H.R. 2533, the ‘‘Chapter 11 Bankruptcy Venue Reform Act of 2011’’ ................. 3 

OPENING STATEMENTS 

The Honorable Howard Coble, a Representative in Congress from the State 

of North Carolina, and Chairman, Subcommittee on Courts, Commercial 

and Administrative Law ...................................................................................... 1 

The Honorable Lamar Smith, a Representative in Congress from the State 

of Texas, and Chairman, Committee on the Judiciary ..................................... 6 

The Honorable Trey Gowdy, a Representative in Congress from the State 

of North Carolina, and Vice-Chairman, Subcommittee on Courts, Commercial and Administrative Law ............................................................................... 7 

WITNESSES 

Peter C. Califano, Partner, Cooper White & Cooper, San Francisco, CA, 

on behalf of the Commercial Law League of America 

Oral Testimony ..................................................................................................... 9 

Prepared Statement ............................................................................................. 11 

David A. Skeel, Jr., Professor of Law, University of Pennsylvania Law School, 

Philadelphia, PA 

Oral Testimony ..................................................................................................... 21 

Prepared Statement ............................................................................................. 23 

The Honorable Frank J. Bailey, Chief Judge, Bankruptcy Court for the District of Massachusetts, Boston, MA 

Oral Testimony ..................................................................................................... 30 

Prepared Statement ............................................................................................. 32 

Melissa B. Jacoby, Professor of Law, University of North Carolina School 

of Law, Chapel Hill, NC 

Oral Testimony ..................................................................................................... 56 

Prepared Statement ............................................................................................. 59 

APPENDIX 

MATERIAL SUBMITTED FOR THE HEARING RECORD

Prepared Statement of the Honorable Lamar Smith, a Representative in 

Congress from the State of Texas, and Chairman, Committee on the Judiciary ......................................................................................................................... 75

Prepared Statement of the Honorable John Conyers, Jr., a Representative 

in Congress from the State of Michigan, and Ranking Member, Committee 

on the Judiciary ................................................................................................... 76 

Prepared Statement of the Honorable Steve Cohen, a Representative in Congress from the State of Tennessee, and Ranking Member, Subcommittee 

on Courts, Commercial and Administrative Law .............................................. 78 

American Bankruptcy Institute (ABI) article titled ‘‘Bringing Chapter 11 

Cases Back Home and Reforming the Dodd-Frank OLA’’ ................................ 83 

Letter from the National Association of Credit Management (NACM) .............. 84 

Letter from the Commercial Law League of America (CLLA) ............................. 86 

Letter from the Georgetown University Law Center ............................................ 89 

(1) 

CHAPTER 11 BANKRUPTCY VENUE REFORM 

ACT OF 2011 

THURSDAY, SEPTEMBER 8, 2011 

HOUSE OF REPRESENTATIVES,

SUBCOMMITTEE ON COURTS, 

COMMERCIAL AND ADMINISTRATIVE LAW, 

COMMITTEE ON THE JUDICIARY, 

Washington, DC. 

The Subcommittee met, pursuant to call, at 10:09 a.m., in room 

2141, Rayburn Office Building, the Honorable Howard Coble 

(Chairman of the Subcommittee) presiding. 

Present: Representatives Coble, Smith, Gowdy, Cohen, and Conyers. 

Also present: Representative Carney. 

Staff present: (Majority) Daniel Flores, Subcommittee Chief 

Counsel; Travis Norton, Counsel; Johnny Mautz, Counsel; Allison 

Rose, Professional Staff Member; Ashley Lewis, Clerk; Joanne Moy, 

Intern; and (Minority) James Park, Subcommittee Chief Counsel. 

Mr. COBLE. Ladies and gentlemen, the Subcommittee will come 

to order. We are awaiting Mr. Cohen’s presence. He is on his way, 

so we will get started. 

Good to have you all with us today. 

Over the past 3 decades, the bankruptcy system has witnessed 

the concentration of large Chapter 11 reorganization cases in the 

two so-called magnet districts, Delaware and the Southern District 

of New York. Many debtors have filed there, including those with 

little or no tangible connection to those respective districts. 

For example, in the last 10 years nine large North Carolinabased companies filed for bankruptcy protection in either Manhattan or Wilmington, Delaware. R.H. Donnelly Corporation, based in 

Cary, had 3,800 employees and over $12 billion in claimed assets 

at the time it filed. In 2001, Greensboro-based Burlington Industries, which had almost 14,000 employees on the petition date, also 

filed in Delaware. The same was true of Pillowtex which was based 

in Kannapolis, North Carolina. 

This concentration of cases in two districts is made possible by 

section 1408 of title 28 of the United States Code. That section permits the debtor to file a Chapter 11 case where it is incorporated, 

where it has its principal assets, or where it has its headquarters. 

In addition, a corporation can also file where there is a pending 

Chapter 11 case concerning its affiliate. This means that no matter 

how large the parent company’s headquarters are or where it is loVerDate Aug 31 2005 17:12 Apr 18, 2012 Jkt 000000 PO 00000 Frm 00005 Fmt 6633 Sfmt 6601 H:\WORK\COURTS\090811\68185.000 HJUD1 PsN: 68185
2 

cated, the parent can bootstrap the entire corporate family into the 

venue of a very small affiliate. 

These rules allow a large Chapter 11 debtor to forum shop for 

a district it perceives as most friendly to its ultimate goal. This 

leads to some strange results, as you all know. Recently the Los 

Angeles Dodgers, an entity with ‘‘Los Angeles’’ in its very name, 

filed for bankruptcy in Delaware, approximately 3,000 miles from 

the closest California bankruptcy court. 

When a large Chapter 11 case is filed far from the debtor’s principal place of business, many stockholders in the company lose a 

meaningful opportunity to make their views known to the bankruptcy court. Small creditors must defend preference claims filed in 

a remote jurisdiction. Employees, not unlike those at Burlington 

Industries, must travel long distances to present evidence of any 

claims they may have. New York and Wilmington may be convenient for the big financial folks, but small business creditors oftentimes are left in the dust when a reorganization takes place in a 

faraway district. 

H.R. 2533 addresses these inequities by eliminating the place of 

incorporation as a district in which a debtor can file its Chapter 11 

case and doing away with the pending affiliate rule by which many 

companies bootstrap their way into a New York or Delaware courtroom. 

Under the bill, the efficiencies of the Chapter 11 bankruptcy filing are not disturbed. An affiliate can still join its parent company’s case, but a parent company can no longer game the system 

by bootstrapping its way into a more favorable district on the heels 

of its much smaller affiliate. 

I look forward to hearing from our distinguished panel of witnesses today about how the bill would affect corporations, courts, 

creditors, employees, and bankruptcy practice as a whole. 

We are pleased as well to welcome the Chairman of the full Committee, but before I do that, Chairman Smith, we are pleased to 

have Congressman Carney, a Representative from Delaware, who 

will sit in on the hearing. Mr. Carney, however, is not a Member 

of the Subcommittee, so he will not be recognized for questioning. 

Mr. Carney, good to have you with us. 

Mr. CARNEY. Thank you very much. 

[The bill, H.R. 2533, follows:] 

3 


HR2533-1.eps
4 


HR2533-2.eps
5 


HR2533-3.eps
6 

Mr. COBLE. I am now pleased to recognize the distinguished gentleman from Texas, Lamar Smith, who chairs the House Judiciary 

Committee, for his opening statement. 

Mr. SMITH. Thank you, Mr. Chairman. 

Before its demise, Enron was a Texas-based company with 7,500 

employees at its Houston headquarters and over $60 billion in 

claimed assets. But in December 2001, Enron filed for Chapter 11 

bankruptcy protection in a Manhattan courthouse, 1,500 miles 

away from Texas. How was this possible? 

Unlike venue rules for other types of cases, Chapter 11 bankruptcy venue rules give many corporations several choices of where 

to reorganize. A corporation can file in the State where it is incorporated, where it has its principal assets, or where it is 

headquartered. For many companies, this rule alone provides three 

different venue choices. 

But many corporations have even more choices of venue. A corporation can also file a Chapter 11 case in a venue where its corporate affiliate’s case is already pending. 

Using this rule, Enron’s bankruptcy lawyers first filed the bankruptcy of a small New York subsidiary with only 57 employees in 

the Southern District of New York. Moments later, because this affiliate’s case was now pending, the Houston-based parent company 

bootstrapped its massive bankruptcy case into a Manhattan bankruptcy court. 

The current Chapter 11 venue rules allow many corporations to 

forum shop for a venue with favorable judicial precedent for the 

business. For example, a nationwide retailer may prefer to file in 

Delaware because of the Third Circuit’s well-known rulings on the 

treatment of unpaid rent in bankruptcy. At the same time, a business with many unionized employees can avoid filing in Delaware 

to avoid Third Circuit precedent on collective bargaining rights in 

bankruptcy. 

The Constitution instructs Congress to enact uniform bankruptcy 

laws. While courts of appeal are permitted to interpret Bankruptcy 

Code provisions differently, Chapter 11 debtors should not be able 

to leave their home districts and shop for a forum whose judicial 

precedent on bankruptcy law they happen to prefer. 

In recent years, a majority of large companies have chosen to file 

their Chapter 11 cases in the Southern District of New York and 

in Delaware. 

Like umpires in baseball, bankruptcy judges should be neutral 

referees in Chapter 11 cases. The practice of forum shopping is 

predicated upon an assumption that some judges are fairer than 

others. Regardless of where a company reorganizes, a judge should 

call balls and strikes the same way. 

I believe our national bankruptcy system suffers when Chapter 

11 bankruptcy cases are concentrated in just two judicial districts 

on the East Coast. When a large Chapter 11 case travels across the 

country to be heard in a faraway bankruptcy court, many of the 

business’ stakeholders lose out. Employees, creditors, and the community in which the business operates feel out of touch with the 

reorganization process. Interested parties frequently have to travel 

long distances to present evidence to support their claims. 

7 

In July, I introduced H.R. 2533, the Chapter 11 Bankruptcy 

Venue Reform Act of 2011, to reform the Chapter 11 venue rules 

so that corporate debtors must reorganize in their home court. I am 

pleased to be joined in that effort by Ranking Member Conyers and 

the Chairman and Ranking Member of this Subcommittee. 

The bill requires corporate debtors to file for Chapter 11 where 

they have their principal place of business or principal assets. It 

also prohibits large parent companies like Enron from leaving their 

headquarters and following tiny, well-placed subsidiaries into a 

preferred venue. The bill still allows subsidiaries to follow a parent 

firm into a venue, thus preserving the efficiencies that flow from 

joint administration of related debtors’ cases. 

This bill improves the fairness of the bankruptcy system for all 

stakeholders in a Chapter 11 case. 

I thank the witnesses for coming today and look forward to hearing from them. And, Mr. Chairman, let me thank you for having 

this hearing as well. 

I yield back. 

Mr. COBLE. I thank you, Chairman Smith. 

And we have been joined by the distinguished gentleman from 

South Carolina. Mr. Gowdy, good to have you with us today. 

Mr. GOWDY. Thank you, Mr. Chairman. 

Mr. COBLE. Folks, what I think I am going to do is go ahead and 

recognize the witnesses, and then we will delay your statements 

pending the arrival of Mr. Cohen. Let me introduce our distinguished guests and witnesses today. 

Mr. Peter Califano is a bankruptcy attorney at Cooper White & 

Cooper in San Francisco where he chairs the bankruptcy and creditors’ rights groups. He has represented numerous creditor interests 

in a variety of bankruptcy venues during his career. Today he is 

testifying on behalf of the Commercial Law League of America, an 

organization of attorneys and other experts engaged in the field of 

commercial law. 

Mr. Califano received his law degree from Santa Clara University School of Law and his undergraduate degree from the State 

University of New York at Buffalo, where it gets cold in the wintertime I have been told, Mr. Califano. 

Mr. David Skeel is the S. Samuel Arsht Professor of Corporate 

Law at the University of Pennsylvania School of Law. He is widely 

regarded as an expert in bankruptcy law and has authored numerous books and articles, including publications on the Dodd-Frank 

Wall Street Reform Act and the automobile bankruptcies. He frequently appears in major media outlets to discuss bankruptcy and 

corporate law. 

Professor Skeel earned his law degree at the University of Virginia and his undergraduate degree, I am pleased to say, from the 

University of North Carolina. Of course, I am subjectively involved 

with that State. 

Judge Frank Bailey is the Chief Judge of the Bankruptcy Court 

for the District of Massachusetts. After a long and distinguished 

career as a litigation and bankruptcy attorney in Boston, he was 

appointed Bankruptcy Judge in January 2009 and Chief Judge of 

the district in December 2010. Judge Bailey is active in public interest law organizations and the National Conference of BankVerDate Aug 31 2005 17:12 Apr 18, 2012 Jkt 000000 PO 00000 Frm 00011 Fmt 6633 Sfmt 6601 H:\WORK\COURTS\090811\68185.000 HJUD1 PsN: 68185
8 

ruptcy Judges. He also teaches courses in bankruptcy law at the 

New England School of Law. 

Judge Bailey earned his law degree at Suffolk University in Boston and his undergraduate degree from Georgetown. 

Finally, our fourth witness is Professor Melissa Jacoby. She is 

the Graham Kenan Professor of Law at the University of North 

Carolina School of Law in Chapel Hill where her teaching and research take multi-disciplinary approaches to exploring bankruptcy, 

debtor, creditor, and commercial law issues. She is a conferee to 

the National Bankruptcy Conference and has provided helpful advice to Committee staff during the drafting of the bill we are considering today. I wish to thank her for her assistance today and extend to her a special welcome as well to being affiliated with my 

alma mater. Although you are a transplanted Tar Heel, Professor, 

we will accept you nonetheless. 

But it is good to have all four of you with us, and I think in the 

interest of courtesy to Mr. Cohen, I know he would want to be here 

before we commence your statements. So if you all would just stand 

easy for the moment and we will proceed imminently. Thank you. 

[Pause.] 

Mr. Gowdy, do you have any comment to make since we are dead 

in the water here? 

Mr. GOWDY. Just how delighted I am to be back, Mr. Chairman, 

and how much I am looking forward to hearing from our distinguished panel witnesses. 

Mr. COBLE. I thank the gentleman from South Carolina. [Pause.] 

Mr. SMITH. Mr. Chairman? 

Mr. COBLE. Yes, Chairman? 

Mr. SMITH. While we are here and have the time, I might take 

the opportunity to point out something of perhaps historical interest to those in the room. And that is, if you look over on the wall 

to our left, to your right, you will see a crack extending horizontally 

across almost the entire length of the room. That is a result of the 

earthquake that occurred in D.C. a week or so ago. 

Let me say that while the Judiciary Committee’s wall has 

cracked, our resolve to pass good legislation has not. [Laughter.] 

This is the first time I have seen it under lights, and it is frankly 

more severe than it appeared to be when I saw it in a dark room. 

But that earthquake did have consequences, and the Committee 

room on the other side of this wall, Government Reform, has I 

think even more extensive cracks as well. And there may be one 

other Committee room that suffered some damage as well. 

But as long as we had the time, Chairman, I thought I would 

pass that out, and I will yield back. 

Mr. COBLE. I thank you for that. I am pleased to know that it 

was not caused by one of the irate Members of the Subcommittee. 

That is interesting to know. Only kidding, of course. [Pause.] 

We will come back to order, folks. I think Mr. Cohen is on his 

way. 

Why don’t we start with you, Mr. Califano, and then when Mr. 

Cohen gets here, he will make his opening statement. 

Folks, if you will confine your statement to 5 minutes. There is 

an amber light that will appear after the green light vanishes. 

9 

That warns you that you have a minute to play with. So if you 

could wrap up on or about 5 minutes, we would appreciate that. 

So, Mr. Califano, why don’t you start us off? You are recognized 

for 5 minutes. 

TESTIMONY OF PETER C. CALIFANO, PARTNER, COOPER 

WHITE & COOPER, SAN FRANCISCO, CA, ON BEHALF OF THE 

COMMERCIAL LAW LEAGUE OF AMERICA 

Mr. CALIFANO. Good morning and thank you for inviting me to 

testify as a witness before the Subcommittee. My name is Peter 

Califano. I am an attorney and a partner at the law firm of Cooper 

White & Cooper in San Francisco, California and chair of the 

Bankruptcy Section of the Commercial Law League of America. 

The CLLA is the Nation’s oldest organization of attorneys and 

other experts in the field of commercial law, bankruptcy, and reorganization. The Bankruptcy Section of the CLLA consists of over 

500 professionals, including bankruptcy lawyers, trustees, law professors, and bankruptcy judges. The CLLA members tend to be involved in smaller and mid-sized bankruptcy cases. We tend to represent main street interests as opposed to the mega-cases of Wall 

Street. 

The CLLA supports the proposed Chapter 11 Bankruptcy Venue 

Reform Act of 2011, introduced by Representatives Smith and Conyers. H.R. 2533 attempts to rebalance the interests of all parties 

in bankruptcy by making sure that the bankruptcy process remains 

within the communities that have the most significant vested interest in the outcome. This is accomplished by determining where a 

bankruptcy case may be filed. The CLLA strongly believes that 

when these businesses fail and need rehabilitation in bankruptcy, 

the local bankruptcy courts are the best positioned to oversee the 

process. Let me explain why. 

First, the consequences of corporate bankruptcy are most profound in the communities where the debtor’s principal place of 

business or assets are located. Not only are jobs involved, but they 

may affect other matters such as hospitals, the closing of plants, 

and waste removal. 

Second, if bankruptcies are filed in remote districts, the parties 

with the most familiarity with the debtor’s operations and who 

have an important stake in the case’s outcome might be cut off or 

minimized in the process. Employees, small creditors, and retirees 

will suffer. Let me illustrate by discussing three cases. 

The first case is called Integrated Telecom Express. This bankruptcy involves a highly solvent California equipment manufacturer and was filed primarily to reduce the landlord’s claim by $20 

million as permitted by the Bankruptcy Code. The case was filed 

in Delaware because the State permits this type of bankruptcy filing. The landlord resisted and finally prevailed on appeal to the 

Third Circuit. Had the landlord lacked the resources to persevere 

in Delaware, the dispute would have ended earlier in the debtor’s 

favor. 

Now, let us compare this with another landlord situation. In the 

Perkins & Marie Callender’s case, this is a company that is 

headquartered in Memphis, which is in Mr. Cohen’s district. The 

bankruptcy was filed in Delaware. The commencement of the 

10 

case—the debtor filed a motion to reject various real property 

leases back to the petition date and, in effect, eliminate any basis 

to claim administrative rent. The debtor was also allowed to leave 

its personal property at the premises. One of the landlords was a 

retiree who did not have the resources to resist the motion. The 

outcome of the motion probably cost the individual landlord retiree 

about $4,000 or $5,000. 

Now, let me give you an example of a local case that is successful 

or was successful, the Pacific Gas and Electric Company case. This 

bankruptcy was the largest utility bankruptcy case ever to be filed. 

It had $35 billion in assets and approximately 20,000 employees. 

The case was commenced in the Northern District of California. 

Immediately local builders and lawyers formed an informal group 

to negotiate and litigate with the debtor over the assumption of 

highly regulated and specialized agreements for extending power 

into new subdivisions. The group was successful in achieving an 

early resolution for the home builders. 

There are many examples of this kind of thing in this case. 

Please note that this case was with the Honorable Dennis 

Montali resulting in a confirmed plan and a successfully reorganized debtor. This confirms that there are other courts around the 

country who have the skill and ability to handle a mega bankruptcy case. The point of these examples are that creditors can get 

left behind when bankruptcy cases are filed in remote courts, and 

these cases lose important local input. 

In conclusion, H.R. 2533 remedies the overly permissive venue 

provisions for corporate bankruptcies resulting in bringing back 

bankruptcy cases to communities most affected by the outcome. 

[The prepared statement of Mr. Califano follows:] 

11 


PCC-1.eps
12 


PCC-2.eps
13 


PCC-3.eps
14 


PCC-4.eps
15 


PCC-5.eps
16 


PCC-6.eps
17 


PCC-7.eps
18 


PCC-8.eps
19 

Mr. COBLE. Thank you, Mr. Califano. 

Professor Skeel, before we recognize you, I want to recognize the 

distinguished gentleman from Tennessee, Mr. Cohen, who is the 

Ranking Member of the Subcommittee, for his opening statement. 

Mr. COHEN. Thank you, Mr. Coble. I appreciate your courtesy, 

and I apologize for being late. I appreciate each of the witnesses’ 

being here and contributing on this important subject. 


PCC-9.eps
20 

This bill, which is bipartisan—it has got the sponsorship of the 

Chairs and Ranking Members of both the full Committee and the 

Subcommittee—the Chapter 11 Bankruptcy Venue Reform Act of 

2011, offers what we think are common sense changes to the bankruptcy venue statute. And that is the main reason why I am an 

original cosponsor. 

There are other issues with venue that concern me. In Memphis, 

we are a border community and have cases in Mississippi and Arkansas that we feel should be filed in the Memphis courts as well. 

But this is a different issue. 

And under 2533, a corporate debtor would be permitted to file its 

case only in the district that encompasses its principal place of 

business or where its principal assets are located for the year preceding commencement of the bankruptcy case or for the longer portion of such year. Such debtor may also file in a district where the 

bankruptcy case of a parent company or other controlling affiliate 

is pending. Under our current law, a corporate debtor may file a 

bankruptcy case in one of a number of venues. In addition to its 

principal place of business or the place where its principal assets 

are located, a debtor may file its case in the district encompassing 

its place of incorporation, oftentimes the Blue Hen State of Delaware, or a district where an affiliate case is pending. Unfortunately, the availability of the latter two options has led to a vast 

majority of large Chapter 11 cases being filed in one of only two 

bankruptcy courts—one of those, of course, is the Blue Hen court— 

even when these venues are not convenient or fair for most of the 

stakeholders involved in these cases. Even though all of us want 

to go see where DuPont is headquartered, it is not necessarily the 

best site for most people. 

Such a result threatens to undermine the purpose of having 

venue rules in the first place, which is to ensure that legal right 

rules and rights be adjudicated in the places most convenient and 

fair for all the parties in a case. I think a convenient forum is one 

of the first things you learn about in law school and the need for 

that. In a Chapter 11 bankruptcy context, filing a case in a venue 

where a debtor has no substantial ties harms small creditors, employees, and other affected stakeholders who lack the resources of 

larger creditors and corporate debtors to assert or protect their interest in these distant forums. 

Our witnesses will go into greater detail as to why venue matters 

a great deal in Chapter 11 cases—Mr. Califano has done so, mentioned Perkins—and why the changes that H.R. 2533 proposes are 

necessary. We will also hear from our learned witness from the 

Keystone State and why he opposes the bill. 

I applaud Chairman Smith and Ranking Member Conyers for 

their leadership on this issue. I also thank Chairman Coble for 

holding this hearing. It is a delight to work with Chairman Coble 

and am fortunate to be able to do so. 

And I would like to recognize Mr. Carney of Delaware, who is on 

the dais, who is a Blue Hen and wants everybody to go to Delaware 

as often as possible, even when it is inconvenient. I hope that we 

can have a fruitful discussion and continue the prosperity of the 

State of Delaware but not at the inconvenience of thousands and 

21 

thousands and thousands of people that aren’t in Mr. Carney’s district. 

With that, I yield back the remainder of my time. 

Mr. COBLE. Thank you, Mr. Cohen. 

Professor Skeel, I am not trying to impose pressure upon you, 

but I will remind you that Mr. Califano complied with the 5-minute 

rule. 

TESTIMONY OF DAVID A. SKEEL, JR., PROFESSOR OF LAW, 

UNIVERSITY OF PENNSYLVANIA LAW SCHOOL, PHILADELPHIA, PA 

Mr. SKEEL. I was very impressed. 

Mr. COBLE. But you will not be keel-hauled if you fail to do that. 

Mr. SKEEL. It is a tough standard to live up to. 

Mr. COBLE. Goods to have you with us, sir. You are recognized, 

Professor. 

Mr. SKEEL. Thank you for the opportunity to testify. It is a great 

honor to appear before y’all today. That ‘‘y’all’’ is just to show there 

is still some Tar Heel in me, in fact, still a lot of Tarheel in me. 

The objective of the proposed reform is to make it harder for 

companies to file for bankruptcy in Delaware or New York. In my 

view, as you all know, the reform would be an enormous mistake, 

well-intentioned but a mistake. 

In my remarks, I will focus very briefly on three issues: the historical context; the remarkable effectiveness of Delaware and New 

York; and finally, the question of convenience for small creditors. 

First, the history. The history is a little bit complicated but the 

bottom line of the history is there is a longstanding tradition that 

a company should be permitted to file for bankruptcy or to reorganize in its State of incorporation. This rule is closely linked to the 

longstanding belief that corporations should generally be regulated 

by the States, not by Congress. The traditional right for a corporation to file for bankruptcy in its State of incorporation needs to be 

seen in this context, the context of how the rest of corporate law 

works. Removing this right would flip the traditional understanding of corporate regulation on its head. 

The second issue is the claim that the current venue rule has led 

to a so-called ‘‘race to the bottom.’’ The leading academic advocate 

for reform, Lynn LoPucki of UCLA, has argued that Delaware and 

New York attract cases by, among other things, paying high fees 

to bankruptcy lawyers, permitting the debtor’s managers to keep 

their jobs, and simply rubber-stamping the company’s proposed reorganization plan or asset sale. Professor LoPucki accuses the 

bankruptcy judges in Delaware and New York and other judges 

that have adopted similar practices of being corrupt. I believe that 

the allegations of corruption are unfounded and deeply unfair. 

In my own work, I have tried to investigate some of Professor 

LoPucki’s claims. What a co-author and I found is that Delaware 

cases turn out to be much quicker than cases in other districts and 

that the best predictor of whether a company will file for bankruptcy in Delaware, as opposed to its local court, is how experienced the local court is. If the local court is inexperienced, the company is much more likely to file in Delaware; if the local court is 

22 

more experienced, the company is much less likely to file for bankruptcy in Delaware. 

New York has developed the administrative capacity and expertise to handle the very largest cases, the cases that are seen as too 

big for Delaware or other districts. The idea that it makes sense 

to have courts with special expertise dealing with particularly complex cases is widespread in American law. The new Dodd-Frank 

Act resolution rules, to give just one example of this, is based on 

precisely this principle, that we ought to put in a specialized court 

cases that are very large and very complicated. 

The final issue is convenience for small creditors. Critics of Delaware and New York argue that it is much harder to attend a hearing in Delaware or New York than it would be to attend hearings 

in the company’s principal place of business. In reality, the vast 

majority of Chapter 11 cases—and this is about 90 percent. My 

math isn’t great but I don’t think this is too far off—are filed in 

the district where the company has its principal place of business. 

And even with the largest cases, only half of them, end up in Delaware or New York. And these cases, whatever you think of convenience, you are going to get that convenience. The headquarters, 

principal place of business, and State of incorporation are all going 

to be in one State—in one district. 

Many of the debtors that do file for bankruptcy in Delaware or 

New York are far-flung companies for which there is no single location that would be convenient for most of the creditors. 

It is also important, it seems to me, to be realistic about the extent to which small creditors really want to participate in these big 

bankruptcy cases. Most small creditors don’t want to be actively involved. It takes time and often money. And those who do are often 

very frustrated that there isn’t more they can do, even if they can 

appear in court, to affect the outcome as an individual creditor. 

I do think that convenience is very important, but I think there 

are much better ways to deal with the convenience concern. Video 

and telephone hearings have become much more common than they 

were in the past, and they are going to continue to become more 

common. 

I also think there are some creative things we could do to facilitate participation. Elizabeth Warren, when she was head of the 

TARP Committee, held a series of hearings in the locations where 

a lot of affected workers live, in their hometowns, in their home 

areas. I think you could do something like that in Chapter 11. You 

could require that a debtor in a case that is far-flung have periodic 

forums in the local State where local creditors have a chance to be 

informed and to raise their issues. 

What I don’t think we ought to be doing is changing the venue 

rules. What that would do, in my view and from the work that I 

have done, is undermine a system that works remarkably well. 

There are some problems with the bankruptcy system, it seems to 

me, and I think we should be dealing with them. There are problems like the fact that derivatives aren’t regulated in bankruptcy. 

Venue reform doesn’t seem to me to be one of those problems. 

[The prepared statement of Mr. Skeel follows:] 

23 


Skeel-1.eps
24 


Skeel-2.eps
25 


Skeel-3.eps
26 


Skeel-4.eps
27 


Skeel-5.eps
28 


Skeel-6.eps
29 

Mr. COBLE. Thank you, Professor. 

Judge Bailey? 


Skeel-7.eps
30 

TESTIMONY OF THE HONORABLE FRANK J. BAILEY, CHIEF 

JUDGE, BANKRUPTCY COURT FOR THE DISTRICT OF MASSACHUSETTS, BOSTON, MA 

Judge BAILEY. All right, Mr. Coble, I guess the time pressure is 

off now. [Laughter.] 

I am used to setting time limits these days, and I am not very 

good at keeping at them but I am going to do my best. 

Mr. Chairman, Members of the Subcommittee, thank you very 

much for the opportunity to be here today and to talk with you 

about H.R. 2533. I first want to make the point clear that I am 

here on my own behalf. I am not here for the Judicial Conference 

of the United States or the Administrative Office of the United 

States Courts. 

I would like to make three points, and they line up very nicely 

with what I think Professor Skeel has just previously stated in his 

statement. And I would like to start actually with a quote from 

Professor Skeel’s article in 1998, 1 Del. L. Rev. It starts on page 

1 where he said: There was and there continue to be a populist and 

progressive disdain for charter competition since it appears to benefit out-of-state interests at the expense of employees and the communities in which those businesses operate. I think that he has 

really put his finger on the point that I want to start with, and 

that is the current venue statute undermines confidence in the 

bankruptcy system. 

Communities identify strongly with their corporate citizens. 

Many people, of course, work in the community for those corporate 

citizens. Often we are talking about the ‘‘nerve center’’ of those corporate citizens that sit in your districts. I have used the examples 

of Coca-Cola in Atlanta, FedEx in Memphis, Gillette in Boston. 

Even the Tampa Bay Bucs in Tampa-St. Pete now becomes relevant because the Los Angeles Dodgers have filed in a so-called 

magnet court. I could use the examples of Enron in Houston, GM 

in Detroit, and indeed, I could use the example of Lehman Brothers 

in New York City. 

For iconic companies such as these to file a bankruptcy petition 

in a magnet court rather than in the place where they are fully 

identified as corporate citizens and where they did business for 

many years in many instances undermines confidence in the process. 

In my statement that I filed with the Committee, I use the example of Polaroid and Evergreen Solar, both Massachusetts companies 

that filed at a magnet court rather than in the District of Massachusetts. In fact, the numbers are somewhat astounding, and we 

will put a slide up to demonstrate this. 

In fact, since 2000, over 30 public companies, large, medium, 

small cap companies, have filed far from Massachusetts even 

though those companies were all headquartered in the Commonwealth of Massachusetts. They collectively represented over 30,000 

jobs and had assets of nearly $10 billion. That is all since the year 

2000. 

Let us consider Evergreen Solar, take a closer look at that entity, 

and we will have a slide on that as well. That company was developing alternative energy technologies. I apologize, Mr. Coble, for 

that business. But that company received the highest financial inVerDate Aug 31 2005 17:12 Apr 18, 2012 Jkt 000000 PO 00000 Frm 00034 Fmt 6633 Sfmt 6601 H:\WORK\COURTS\090811\68185.000 HJUD1 PsN: 68185
31 

centives from the Commonwealth of Massachusetts that any company had ever received. Its nerve center was in Marlboro, Massachusetts. Last month, that company filed its Chapter 11 petition in 

a magnet district, the place of its incorporation, but a place with 

which it had, to my knowledge, no business ties whatsoever. 

Those opposed to the amendments ask why does all of this matter. Sort of so what. The bankruptcy system is working well, Professor Skeel tells us. Well, as a judge that sits on consumer cases 

as well as business cases, both large and small, I can tell you that 

it matters a great deal. In both consumer cases and in business 

cases, I regularly have employees, small vendor creditors, retirees, 

former employees who attend hearings in my courtroom. They can 

generally take public transportation to my courtroom, and I give 

them the chance to say their piece. And I frequently have to deliver 

bad news to them, sometimes life-changing bad news to them. And 

I have found that they can accept that bad news. They are not 

happy about it, but they can accept that bad news if they understand from whence it is being delivered by a local judge in a Federal system that has placed that local judge in the Boston courthouse where I sit. They may not be happy, but ultimately I believe 

they are satisfied with the system that Congress has created for 

them when they have that opportunity. 

My second point is that the transfer of venue statute is simply 

not effective. It is enormously expensive for a party to mount a 

challenge to venue. The debtor has chosen that location and will always fight back hard. 

My third point and last point is there are talented and sophisticated judges in other districts. We should be using them. In Massachusetts and all over the country, we have accomplished and sophisticated judges capable of handling their fair share of large, 

complex business cases. We put a slide up. The slide will speak for 

itself. These judges are no slackers. In fact, they include the incoming President of the National Conference of Bankruptcy Judges, my 

colleague, Judge Joan Feeney. The past presidents of that august 

organization in just the last few years have come from Texas, Nevada, Ohio, and Oregon. The way our judicial system is supposed 

to work is to rely on the creativity and innovation of judges from 

around the country in handling these large company cases. Right 

now, the concentration of cases in the magnet districts, I am afraid, 

restricts that innovation. 

Thank you very much. 

[The prepared statement of Judge Bailey follows:] 

32 


FJB-1.eps
33 


FJB-2.eps
34 


FJB-3.eps
35 


FJB-4.eps
36 


FJB-5.eps
37 


FJB-6.eps
38 


FJB-7.eps
39 


FJB-8.eps
40 


FJB-9.eps
41 


FJB-10.eps
42 


FJB-11.eps
43 


FJB-12.eps
44 


FJB-13.eps
45 


FJB-14.eps
46 


FJB-15.eps
47 


FJB-16.eps
48 


FJB-17.eps
49 


FJB-18.eps
50 


FJB-19.eps
51 


FJB-20.eps
52 


FJB-21.eps
53 

ATTACHMENT 


FJB-22.eps
54 


FJB-23.eps
55 


FJB-24.eps
56 

Mr. COBLE. Thank you, Your Honor. 

Professor Jacoby? 

TESTIMONY OF MELISSA B. JACOBY, PROFESSOR OF LAW, UNIVERSITY OF NORTH CAROLINA SCHOOL OF LAW, CHAPEL 

HILL, NC 

Ms. JACOBY. Thank you for including me today in this hearing. 


FJB-25.eps
57 

I would also like to clarify I am speaking entirely for myself 

today as a teacher and scholar of bankruptcy and commercial law 

and not on behalf of any group as well. 

So I would like to make three brief points, and I am going to 

frame the issue a little bit differently. 

First, I think we need to look at the current laws in the context 

of Federal venue principles overall, and in that context, they are 

not justified. 

Second, the justifications for the current system really aren’t empirically supported, at least at the current time. 

And third, there is a perception of procedural unfairness that 

really is unfitting for a public court system, and that is an independent reason to consider this bill. 

So point one: the current laws aren’t principled. I think we have 

to evaluate bankruptcy venue laws by reference to other Federal 

venue laws. Bankruptcy has the anomaly: the focus on the preferences and convenience of the filer of the action rather than the 

many, many stakeholders who were affected by that case. It is really the inverse of most other Federal venue principles and rules. 

And it is one thing to base venue on the residence or domicile of 

someone being dragged into a case. It is quite another when that 

is the party bringing the case. 

There really is no analog that I can find to affiliate venue rules 

in the other Federal venue principles. That is really something 

quite unique to bankruptcy. And because bankruptcy filers are absolved of establishing personal jurisdiction, venue is it. Venue is 

the only protection against inconvenience that the basic rules of the 

structure of the system are providing. So I do think that it is an 

anomaly—the current law—and that is a justification for considering this change. 

The second point is that the justifications often heard are just 

not persuasive. Some justify the departure by saying bankruptcy is 

exceptional. It is different. It involves more parties. It is more complicated. But there are other Federal actions that raise exactly 

those same concerns. So there is the Judicial Panel on Multi-District Litigation that assigns consolidated cases to certain districts. 

They don’t consider place of incorporation of the corporate defendant. They might consider the headquarters. They consider a variety 

of other factors, including expertise. But place of incorporation is 

not among them. 

Some justify the current rules based on place of incorporation 

having a strong tie to bankruptcy and the relationship between corporate law and bankruptcy law. And I agree that bankruptcy 

courts need to respect State law, including State corporate law, but 

I am not sure that ties Delaware any more to these cases than the 

employment law, the tax law, the environmental laws of other jurisdictions. And outside of bankruptcy, when corporations get sued 

in Delaware, it is not unheard of for them to complain that it is 

inconvenient, that all of their resources are somewhere else, that 

their management is across the country. So I think that the relationship is attenuated. 

Some justify the current system by results. They say we are better off with the status quo. We have an excellent system. I do think 

that the courts in New York and Delaware are doing a great job. 

58 

We do not have evidence that we are better off with the system 

that we have as opposed to a system where the cases went elsewhere. 

Some do argue that senior lenders help select the forum. It is not 

just management. And I completely agree with that. But the senior 

lenders need not and do not have their interests aligned with the 

other creditors and stakeholders. Bankruptcy is very much about 

creditor versus creditor. It is not just a debtor versus creditor problem. So I understand that Members of Congress can’t assure their 

constituents to just trust the system far away. 

Some justify the system based on the possibility of requesting 

transfer and technology. We have already heard some responses to 

that. Absent support from the most powerful creditors in a case, 

transfer is not happening in the large cases, and we have known 

that really for at least 20 years. Technology is helpful but not 

seamless, and I am open to thinking about better ways to use it. 

It doesn’t balance the playing field. 

And finally, some justify with fears that judges will handle the 

cases less well than judges in magnet courts. And I do think that 

that is unfounded. Even if it were true, I think there are ways that 

we could structure the system to overcome that concern. 

So my last point is that the current laws really do risk being perceived as procedurally unfair. There are decades of social science 

research that examine how parties evaluate the fairness of courts. 

Process matters and it shapes the view of the outcome. Someone 

may have a view that the outcome was better or worse for them 

based on whether they could see a court’s effort to be fair. And 

when people see cases moving to magnet districts, they don’t have 

a way to really verify that. And group representation, as we know 

from class actions and other contexts, is not the sole answer to protecting individual rights. We really need to think about whether 

people’s rights individually are protected and if they perceive that 

fairness to be there. And it also puts more pressure on Congress 

to adopt more special interest exceptions to rules when they don’t 

know what is going on. 

So I see two options, to wrap this up. There is this kind of legislation, which I think is reasonable and moderate and very much 

able to be supported. We could quibble about the affiliate venue 

rule, and I am sure we will have time to talk about that. 

Or we could rethink the assignment of large bankruptcy cases 

more structurally. There are many ways that Article III judges 

could assign the biggest cases to certain bankruptcy judges. We 

have lots of models we could choose from in the existing system. 

But I have confidence that the professionals and the judges in the 

existing system are well able to adapt to this kind of change. It has 

been that way before and it can be that way again. 

Thank you very much for this opportunity. 

[The prepared statement of Ms. Jacoby follows:] 

59 


MBJ-1.eps
60 


MBJ-2.eps
61 


MBJ-3.eps
62 


MBJ-4.eps
63 


MBJ-5.eps
64 


MBJ-6.eps
65 


MBJ-7.eps
66 


MBJ-8.eps
67 


MBJ-9.eps
68 

Mr. COBLE. Thank you, Professor Jacoby. Good to have you with 

us. 

We have been joined by the distinguished gentleman from Michigan, Mr. Conyers. Good to have you with us, John. 

Folks, we try to apply the 5-minute rule to ourselves as well. So 

if you all could keep your responses terse, we would appreciate 

that. 


MBJ-10.eps
69 

I recognize myself for 5 minutes. 

Professor Jacoby, I think you have already answered it, but I 

want it for the record. How do you respond to Professor Skeel’s argument that Delaware and New York bankruptcy courts are more 

expert at handling large cases? 

Ms. JACOBY. Well, I think we would want to unpack that argument, and this is something that I have been trying to think a lot 

about. Certainly there are some judges empirically who have had 

more experience with big cases than judges in other districts. There 

are also relatively new judges in New York and Delaware who, 

again, may be doing a great job but they do not all come from the 

same level of experience. 

When we take apart the pieces of what is desired in a judge, we 

want fairness and competence and accessibility and speed. I think 

those are things that both the judiciary is well equipped to handle 

and that also can be adapted and come up with new innovations. 

I can understand why parties want to hire very experienced lawyers, but I think that expertise—we have to be careful with how 

we make that argument. We have no evidence that things are 

going better in these two districts than other places. 

Mr. COBLE. Thank you, Professor. 

Mr. Califano, do you believe that bankruptcy case law in Delaware and New York is shaped by the fact that they are so-called 

magnet districts for large Chapter 11 cases? And if so, how? 

Mr. CALIFANO. Well, the Commercial Law League doesn’t really 

have a position on this, but I can respond personally. The Delaware 

courts are obviously very, very busy, and they have constructed 

rules and procedures to handle large cases. I believe that probably 

case law does follow this development, and I believe that, therefore, 

the large cases do instruct the case law in Delaware. So my answer 

would be yes. 

Mr. COBLE. I thank you, sir. 

Professor Skeel, H.R. 2533 removes the place of incorporation as 

a venue option and also does away with the pending affiliate rule 

currently found in section 1408, paragraph 2. Some of your academic work suggests you believe that the pending affiliate rule 

leads to more pernicious forum shopping than the place of incorporation rule. Is this accurate? 

Mr. SKEEL. First of all, I am very flattered that you have read 

some of my other work and others have as well. 

I do think that the affiliate rule is more debatable than the place 

of incorporation rule. From my perspective, eliminating place of incorporation as a venue location would be just a huge, huge mistake. 

I am troubled by some of the filings in New York where there 

is no real nexus at all. So I would be comfortable with a much more 

carefully crafted venue rule that said something along the lines of 

there needs to be some real presence in a venue before you can file 

there. But I generally think that the New York courts have done 

a good job. 

One thing we have not talked about yet. We have talked about 

expertise of the particular judges. They also have administrative 

capacity and administrative expertise that, at least at this point, 

other courts don’t have. 

70 

So the short answer is I think there is more room for improvement on the affiliate side. I wouldn’t just get rid of the affiliate 

rule, but I would be comfortable with something that said there 

needs be some presence of the company in the district before you 

go there. 

Mr. COBLE. I thank you, sir. 

Judge Bailey, I think you also answered this, but I want to put 

this question to you. Opponents of the bill before us, 2533, assert 

that the bankruptcy judges in Delaware and New York have more 

expertise than judges in other districts and are, therefore, better 

equipped to administer particularly large Chapter 11 cases. What 

say you to that? 

Judge BAILEY. Mr. Chairman, when I gave my opening remarks, 

I put up a slide that showed the experience of Massachusetts. 

There are five judges in the Commonwealth of Massachusetts in 

the District of Massachusetts, and two of us, by the way, have been 

on the bench for 3 or fewer years. But the other—when you include 

all five, there are 60 years of experience on the bench in the District of Massachusetts. So I would entrust any bankruptcy case 

that is filed in America with any of the judges that sit on our court. 

And I have the highest regard for my colleagues in Delaware and 

in the Southern District of New York, but not at the expense of 

having cases filed there that cause a lack of confidence in that 

forum selection. I don’t believe Congress intended to create a national bankruptcy court through this venue statute for big cases, 

but that seems to be what has happened. 

Mr. COBLE. I see my red light has just illuminated. So I will recognize the distinguished gentleman from Tennessee, Mr. Cohen, for 

5 minutes. 

Mr. COHEN. Thank you, Mr. Coble. 

Mr. Skeel, I haven’t read—is it Ms. LoPucki from UCLA? 

Mr. SKEEL. Yes. 

Mr. COHEN. I haven’t read her remarks. Did she actually say 

that the judges are corrupt? 

Mr. SKEEL. She is a he. 

Mr. COHEN. He. 

Mr. SKEEL. And he does, and he said it over and over again. A 

number of us have—Professor Jacoby and I have been at conferences where we have said, Lynn, you don’t really mean corrupt, 

do you? And he says, yes, I do. I believe the system is corrupt and 

the judges are corrupt. He says it in his book. 

Mr. COHEN. He didn’t say it was a Ponzi scheme or anything like 

that, did he? [Laughter.] 

Mr. SKEEL. If you googled his name and put ‘‘Ponzi scheme’’ 

there, I wouldn’t be surprised if he called it a Ponzi scheme too. 

He has called it a lot very negative things, but most consistently 

‘‘corrupt.’’ He uses the word ‘‘corrupt’’ over and over. 

Mr. COHEN. Let me ask each of the panelists to edify me a little 

bit. A lot of these cases are brought in the State of Delaware because apparently a lot of corporations decide to incorporate in Delaware. When they incorporate in Delaware—and I will start with 

Mr. Califano and work our way to the right—what does a corporation have to have and normally have in Delaware once they incorporate? Do they have to have like 80 employees there or their 

71 

president and their vice president and their board meetings, or can 

they just kind of incorporate there and go back to wherever they 

want to be like FedEx and do that stuff in Memphis and just whatever? 

Mr. CALIFANO. Mr. Cohen, I think all you have to do is pay an 

annual fee and you are good to go. 

Mr. COHEN. That is it. They don’t have to have a post office box? 

Do they have to have that? 

Mr. CALIFANO. Maybe to start to get the incorporation started 

but very little else. 

Mr. COHEN. That is it. 

Judge Bailey, you next, I guess. I am going to come back to you, 

sir. Is that accurate? I mean, that is all you have to have? 

Judge BAILEY. I think it is. Really the sum and substance of it, 

to my understanding, is that by incorporating in Delaware, that 

the corporation will have adopted the Delaware law certainly for 

corporate governance purposes, but there is no requirement that it 

have any actually business in Delaware. 

Mr. COHEN. And Judge Bailey, is there anything special about 

corporate law that makes it attractive to the corporation? 

Judge BAILEY. In Delaware? 

Mr. COHEN. Yes. 

Judge BAILEY. I am sure some of the academics can expound on 

this. I did serve on a couple of public company boards. They were 

actually incorporated in Maryland. And I know that the gifted corporate lawyers that set up these organizations certainly had in 

mind the rules that apply in those States. And Delaware has been 

an attractive location for incorporation. The rules are well-honed 

and certainly are predictable. It is not to say that other jurisdictions do not have similarly predictable laws. 

Mr. COHEN. Professor Jacoby, are you in agreement on the fact 

that you really have to have limited connections to Delaware after 

you incorporate there or even when you do? 

Ms. JACOBY. Yes. 

Mr. COHEN. And what is the beauty of Delaware for all these corporations? Why do they all want to come there and be in Mr. Carney’s district? 

Ms. JACOBY. Well, I have actually been informed on those issues 

a lot by Professor Skeel’s work who really does study a lot of Delaware corporate law. Many of the similar arguments have been 

made about the genius of corporate law and the benefits that it 

provides in terms of predictability. But again, we have to think 

about it only being a slice of really the law that governs what companies do. It is really about management and shareholders and the 

law that governs then. It really doesn’t relate to any of the other 

issues that come up in a bankruptcy case. 

Mr. COHEN. And in bankruptcy cases, you have got not just the 

corporation, but you have also got consumers, and Delaware has 

nothing unique for them. Does it? 

Ms. JACOBY. No. 

Mr. COHEN. No. 

Professor Skeel, do you have any thoughts about Delaware? I 

mean, what is special about the reason that they should be filing 

these cases in Delaware? Just because they have got a post office 

72 

box and incorporate there because of the beauty of the corporate 

law, it was not bankruptcy law. So why should that continue to be 

the forum that people are allowed to choose? 

Mr. SKEEL. Well, as Professor Jacoby said, a lot of the arguments 

about Delaware and corporate law translate into the bankruptcy 

context. ?n corporate law, there is a debate very much like the one 

we are having about whether it is a good thing that all these companies incorporate in Delaware or not, and there are two sides of 

it. The ‘‘populists,’’ to use the term that Judge Bailey quoted from 

me, worry about it. Folks who are more market-oriented tend to 

think Delaware does a good job. 

The one thing everybody agrees on is the quality of the Delaware 

judges and the Delaware courts and their precedent base and the 

court system. Both sides of the debate agree that the expertise of 

the judges and the way they handle cases is a good reason to incorporate in Delaware. 

Mr. COHEN. My red light has come up as well. I think it is working on some kind of speed, but that is neither here nor there. 

[Laughter.] 

Mr. COBLE. And I thank the gentleman. 

The Chair recognizes the distinguished gentleman from South 

Carolina for 5 minutes. Mr. Gowdy? 

Mr. GOWDY. Thank you, Mr. Chairman. 

Professor Skeel, do former partners in IP firms make better magistrate judges? 

Mr. SKEEL. This sounds like a trick—I know where there is an 

IP expert who is on the Delaware Chancery Court. I assumed you 

were alluding to that. 

Mr. GOWDY. No. You assume motives that don’t exist. [Laughter.] 

I am just asking whether or not people who have a background 

in IP make better magistrate judges given the fact that they preside over patent cases. 

Mr. SKEEL. Yes. If they are presiding over patent cases, absolutely. 

Mr. GOWDY. So you would necessarily agree that prosecutors 

make better judges in criminal cases. 

Mr. SKEEL. I wouldn’t want to make a blanket statement like 

that, but I would certainly say that prosecutors have relevant expertise and that would be helpful in their—— 

Mr. GOWDY. Are you advocating that sophisticated title 21 drug 

conspiracies only be handled or presided over by Article III judges 

who have prosecutorial backgrounds? 

Mr. SKEEL. Absolutely not, and that is why I said having a prosecutorial background would be very helpful in handling those 

cases. When I was clerking for a judge, we got a couple of those 

cases. They were extraordinarily complicated. I don’t think you 

have to have that background to handle the cases, but it certainly 

helps. If I were the judge, I would rather have it than not have it. 

Mr. GOWDY. Can academics ever make good judges? 

Mr. SKEEL. A few of them make good judges and a few of them 

even make good Supreme Court Justices. 

Mr. GOWDY. Can you name for me judges who are currently 

doing bankruptcy work that you think are too inexperienced or 

have no business doing it? 

73 

Mr. SKEEL. As I have said in my written remarks, I think the 

bankruptcy judiciary is terrific, and that is one of the reasons that 

I—— 

Mr. GOWDY. I thought part of your argument was that there was 

certain acumen in Delaware and New York that shouldn’t be wasted and that there are other judges who are inexperienced and 

unknowledgeable in the ways of bankruptcy. Did I misunderstand 

that? 

Mr. SKEEL. I didn’t say any of that. I said that in the big cases, 

the best predictor of whether people take their case to Delaware as 

opposed to a different district is relative number of—relative expertise based on number of Chapter 11 cases handled, which is not 

saying anything about experience, number of years of practice or 

any of those things. 

Mr. GOWDY. So you have never said that Delaware bankruptcy 

judges have more experience and expertise. 

Mr. SKEEL. I have said they are experienced and the courts have 

a lot of expertise, yes. 

Mr. GOWDY. Your Honor, can you give us the benefit of your vetting process so we may know how bankruptcy judges are selected? 

Judge BAILEY. Yes. Bankruptcy judges are Article I judges and 

are selected by—first, there is generally a merit selection panel. In 

our circuit, that panel is organized by the First Circuit and includes representatives of the consumer bankruptcy bar, the business bankruptcy bar, and also lawyers who have no involvement 

and non-lawyers who have no involvement in the bankruptcy process because what they are trying to identify at the merit selection 

panel stage, I believe, are individuals who have the judgment, the 

demeanor, and certainly the intelligence to sit on these complicated 

cases. And then after that process, the merit selection panel makes 

a recommendation to the circuit, in our case the First Circuit, who 

then selects the judge for appointment. 

Mr. GOWDY. So if there are issues with experience or expertise, 

all that can be vetted in the screening process. In fact, it is vetted 

in the screening process. Right? 

Judge BAILEY. And it most certainly is. 

Mr. GOWDY. Professor Jacoby, can you cite us an example in the 

remaining amount of time I have? I was going to yield some time 

to Mr. Cohen since he is very knowledgeable on this. But in the 

remaining time I have, can you cite an example where maybe the 

current venue rules are being gamed? 

Ms. JACOBY. Gamed as—well, the way I see the system is that 

it currently permits a very wide latitude, and this would alter what 

those options are. We have also seen situations that have been 

identified where debtors seem to have no proper venue, but because 

it is waivable and no one raises it in a case, that a case may be 

in New York without anyone being able to point to why. 

Mr. GOWDY. Well, maybe bankruptcy attorneys are different, but 

usually you pick a venue not based on the experience and expertise 

of the judge, but whether or not you think you will get a more favorable outcome. It might be that bankruptcy attorneys are just 

different and they are more interested in fairness than winning, 

but they would be unique among attorneys if that is what they 

were motivated by. 

74 

I would yield back to the Chairman. 

Mr. COBLE. I thank the gentleman from South Carolina. 

I want to thank the witnesses for your testimony today. You all 

have contributed very favorably to this issue. 

Without objection, all Members will have 5 legislative days to 

submit to the Chair additional written questions for the witnesses 

which we will forward and ask the witnesses to respond as promptly as they can so that their answers may be made a part of the 

record. 

Without objection, all Members will have 5 legislative days to 

submit any additional materials for inclusion in the record. 

Again, we thank the witnesses for your attendance today, and 

this hearing stands adjourned. 

[Whereupon, at 11:13 a.m., the Subcommittee was adjourned.] 

(75) 

A P P E N D I X 

MATERIAL SUBMITTED FOR THE HEARING RECORD

Prepared Statement of the Honorable Lamar Smith, a Representative in 

Congress from the State of Texas, and Chairman, Committee on the Judiciary 

Before its demise, Enron was a Texas-based company with 7,500 employees at its 

Houston headquarters and over $60 billion in claimed assets. But in December 

2001, Enron filed for chapter 11 bankruptcy protection in a Manhattan courthouse 

1,500 miles from Texas. How was this possible? 

Unlike venue rules for other types of cases, chapter 11 bankruptcy venue rules 

give many corporations several choices of where to reorganize. A corporation can file 

in the state where it is incorporated, where it has its principal assets, or where it 

is headquartered. For many companies, this rule alone provides three different 

venue choices. 

But many corporations have even more choices of venue. A corporation can also 

file a chapter 11 case in a venue where its corporate affiliate’s case is already pending. 

Using this rule, Enron’s bankruptcy lawyers first filed the bankruptcy of a small 

New York subsidiary with 57 employees in the Southern District of New York. Moments later, because this affiliate’s case was now pending, the Houston-based parent 

company bootstrapped its massive bankruptcy case into a Manhattan bankruptcy 

court. 

The current chapter 11 venue rules allow many corporations to forum shop for 

a venue with favorable judicial precedent for the business. For example, a nationwide retailer may prefer to file in Delaware because of the Third Circuit’s wellknown rulings on the treatment of unpaid rent in bankruptcy. At the same time, 

a business with many unionized employees can avoid filing in Delaware to avoid 

Third Circuit precedent on collective bargaining rights in bankruptcy. 

The Constitution instructs Congress to enact uniform bankruptcy laws. While 

courts of appeal are permitted to interpret Bankruptcy Code provisions differently, 

chapter 11 debtors should not be able to leave their home districts and shop for a 

forum whose judicial precedent on bankruptcy law they happen to prefer. 

In recent years, a majority of large companies have chosen to file their chapter 

11 cases in the Southern District of New York and in Delaware. 

Like umpires in baseball, bankruptcy judges should be neutral referees in chapter 

11 cases. The practice of forum shopping is predicated upon an assumption that 

some judges are ‘‘fairer’’ than others. Regardless of where a company reorganizes, 

a judge should call balls and strikes the same way. 

I believe our national bankruptcy system suffers when chapter 11 bankruptcy 

cases are concentrated in just two judicial districts on the east coast. When a large 

chapter 11 case travels across the country to be heard in a far-away bankruptcy 

76 

court, many of the business’s stakeholders lose out. Employees, creditors, and the 

community in which the business operates feel out of touch with the reorganization 

process. Interested parties frequently have to travel long distances to present evidence to support their claims. 

In July, I introduced H.R. 2533, the Chapter 11 Bankruptcy Venue Reform Act 

of 2011, to reform the chapter 11 venue rules so that corporate debtors must reorganize in their home court. I am pleased to be joined in that effort by Ranking Member Conyers and the Chairman and Ranking Member of this Subcommittee. 

The bill requires corporate debtors to file for chapter 11 where they have their 

principal place of business or principal assets. It also prohibits large parent corporations like Enron from leaving their headquarters and following tiny, well-placed subsidiaries into a preferred venue. The bill still allows subsidiaries to follow a parent 

firm into a venue, thus preserving the efficiencies that flow from joint administration of related debtors’ cases. 

This bill improves the fairness of the bankruptcy system for all stakeholders in 

a chapter 11 case. 

I thank the witnesses for coming today and look forward to hearing from them. 

f 

Prepared Statement of the Honorable John Conyers, Jr., a Representative 

in Congress from the State of Michigan, and Ranking Member, Committee on the Judiciary 

Today’s hearing focuses on H.R. 2533, the ‘‘Chapter 11 Bankruptcy Venue Reform 

Act of 2011,’’ which I support for several reasons. 

To begin with, this bill will help level the playing field between creditors and business debtors that seek bankruptcy relief under Chapter 11. 

Under current law, a business can file for Chapter 11 bankruptcy relief in the district where the debtor’s incorporated, or where its principal place of business or 

principal assets are located. 

In addition, a business may file its Chapter 11 case in a district where an affiliate 

of the business is already pending. 

This explains how corporations headquartered in Michigan—like General Motors 

and Chrysler, from my hometown of Detroit, could file their Chapter 11 cases in 

New York in 2009. 

By choosing to file for Chapter 11 in a distant venue such as New York, a business—with its principal assets and most of its creditors and employees located in 

Michigan or California for example—makes it much more difficult for these creditors, particularly smaller creditors and workers, to participate in the case and defend their claims. 

These creditors are forced to retain counsel in the distant venue and, if they want 

to physically appear, incur travel costs. In effect, they have to pay more to collect 

on their claims. 

As a result, the ability of these small creditors and workers to influence the bankruptcy proceedings is greatly diminished. And, by choosing a distant forum, a company can reduce local press coverage of the case. 

Another concern is the potential under existing law for forum-shopping and manipulation which can undermine the fundamental purpose of having venue rules. 

These rules are intended to ensure that cases are filed where the locus of rights 

can be most fairly adjudicated. 

As I previously noted, a business can file a Chapter 11 case in a district where 

an affiliate of the business has a bankruptcy case already pending. 

Thus, this would allow, for example, a lumber company in Maine—that employs 

hundreds of local unionized workers and owes money to numerous local suppliers— 

77 

to file its bankruptcy case in any district where an affiliate of that company has 

already filed a bankruptcy case. 

This effectively permits management of a company—which is most likely to blame 

for the company’s financial distress—to pick and choose the venue with the case law 

most friendly to management through this affiliate venue filing option. 

Particularly in cases where collective bargaining agreements may need to be rejected under the Bankruptcy Code, a jurisdiction espousing a pro-management, antiunion perspective would likely be very attractive to a company’s management. 

A final concern I have about the current law is that it creates the potential to 

undermine the fairness—whether real or perceived—of the bankruptcy system and 

those charged with the administration of these cases. 

In an effort to attract larger cases, a bankruptcy court may be less aggressive in 

pursuing conflicts of interest or in second-guessing fee applications by practitioners. 

In addition, some have expressed concern that Chapter 11 cases in these districts 

may have a higher failure rate because of less demanding requirements for confirmation. 

While the bankruptcy courts in New York and Delaware are without doubt highly 

respected, their counterparts in the rest of Nation are equally capable of handling 

large cases competently. 

In light of these concerns, various academics as well as the National Bankruptcy 

Review Commission have expressed support for narrowing venue choices for large 

business debtors. 

Accordingly, I look forward to hearing from our witnesses about the current law 

with respect to where Chapter 11 cases may be filed and whether H.R. 2533 is an 

adequate response. 

f 

78 


68185A-1.eps
79 


68185A-2.eps
80 


68185A-3.eps
81 


68185A-4.eps
82 

f 


68185A-5.eps
83 

f 


68185B.eps
84 


68185C-1.eps
85 

f 


68185C-2.eps
86 


68185D-1.eps
87 


68185D-2.eps
88 

f 


68185D-3.eps
89 


68185E-1.eps
90 


68185E-2.eps
91 


68185E-3.eps
92 


68185E-4.eps
93 


68185E-5.eps
94 

Æ 


68185E-6.eps