Lawmakers Debate Bankruptcy Forum-Shopping
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Lawmakers Debate Bankruptcy "Forum Shopping"

September 20, 2011


A subcommittee in the House of Representatives recently heard arguments concerning the issue of what's known as "forum shopping" in corporate bankruptcy cases. The issue at hand, according to the Wall Street Journal, is whether corporate entities should be permitted to continue choosing the jurisdiction in which they file for bankruptcy protection.

Current law permits businesses to file for bankruptcy more or less anywhere they do business (for example, Borders, a Michigan-based company, filed its bankruptcy case in Manhattan, as did Texas' Enron). Right now, the vast majority of big business bankruptcy cases are heard in courts in Delaware and New York, largely because these two courts have the most experience at handling such cases.

But House lawmakers worry that "forum shopping" might give certain creditors (including employees, retirees, and other small creditors) less than a fair shot at recovering the money a bankrupt company might owe them. Supporters of the current law, though, suggest otherwise.

If businesses were required to file for bankruptcy protection closer to their headquarters, or where they held the most assets (as potential changes to the law might require), that could mean that more big bankruptcy cases would be handled in inexperienced courts.

Large business bankruptcy cases can be complex; the argument for allowing New York and Delaware courts to continue hearing such cases insists that these courts have the most experience and thus conduct such cases more efficiently than other bankruptcy lawyers and courts could. Inefficiencies in the bankruptcy process would likely translate to more legal fees and therefore less of a company’s money going to creditors.

And even if other jurisdictions handle large bankruptcies efficiently, defenders of the current law argue, costs would likely increase for attorneys who would have to travel from their offices in New York and Delaware (where most bankruptcy lawyers experienced in big-business cases work) to wherever a case was being tried.

The proposal is still in its early stages and it is unclear at this point whether Congress will show enough interest in the matter to move forward with legislation. At the meeting held last week, the subcommittee reportedly had to delay proceedings until enough legislators to create a quorum arrived.

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