Bankruptcy Reform Bill Could Keep Businesses in State for Legal Proceedings

Local bankruptcy lawyers are adamant that Colorado’s court system is comparable to those in Delaware and New York

A vast majority of bankruptcy filings are done in Delaware and New York, but a bill in Congress might change that. 

A 2015 report from the Government Accountability Office found that, since 2009, 61 percent of Chapter 11 bankruptcy cases were filed in the District of Delaware and the Southern District of New York. According to popular opinion within the corporate community, those places have a more streamlined system and are more fair to business owners. The Bankruptcy Venue Reform Act in Congress, however, would limit businesses to venues where they actually do business. 

The bill aims to keep bankruptcy filings within the state a business keeps its headquarters or most of its principal assets. There is also an “affiliate rule” that the bill is reforming. The current law states that companies can file for bankruptcy wherever a loosely affiliated company is incorporated. However, the reformed rule would demand that the affiliate must own 50 percent or more of the bankrupt company for bankruptcy proceedings to be held in the affiliate’s state. 

Last week, the Colorado Bar Association issued a resolution in support of the bill and called on Colorado senators and representatives to vote in its favor .

Similar bills to the Bankruptcy Venue Reform Act have been proposed before in 2005 and 2011. This time, however, the bill has bipartisan support through sponsors Sens. John Cornyn (R-Texas) and Elizabeth Warren (D-Massachusetts). 

The bill also has backing from other state bars, as well. Those in California, Florida, Minnesota, South Carolina, Indiana and Texas have issued similar resolutions to the CBA’s.

Typically, corporations “forum shop” in order to determine where to incorporate. Delaware and New York are popular locations because their laws and regulations are more favorable to companies and their owners. 

The CBA resolution urges Congress to adopt the rule in order to give employees, retirees and creditors an easier path to participation and to develop case law in Colorado. “It’s exceedingly difficult for working individuals to travel thousands of miles to go to a bankruptcy court hearing in Delaware or New York,” said Ted Hartl, a partner at Ballard Spahr who specializes in bankruptcy law.

By keeping bankruptcy filings within the state that a company is primarily doing business, the barrier of participating in bankruptcy hearings is lower. Instead of having to fly across the country, many of those affected could drive to hearings. 

Having a more accessible court for the bankruptcy cases that will affect one’s life has a more abstract benefit as well, according to the resolution. The CBA states that the integrity, public confidence and fairness of the bankruptcy system will all be helped.

Hartl says the CBA is backing the bill because it has flagged bankruptcy as an important issue for the state. “Over the last 13 or 14 years there’s been a number of Colorado companies with billions of dollars in assets and hundreds of thousands of creditors that have gone to file on the east coast,” said Hartl. 

According to the CBA resolution, “Since 2004, at least 32 Colorado companies with combined assets exceeding $7 billion and over 120,000 creditors and 31,000 employees filed for bankruptcy protection in Delaware or New York.”

“There is no doubt it would have an impact on Delaware and the Southern District of New York if filings were to move elsewhere, but there’s an impact now on everyone else,” said Matthew Faga, whose practice is partly in bankruptcy and insolvency law at Markus Williams Young & Zimmerman.

The way things are now, out-of-state courts are making decisions regarding law that the courts are showing they are not well versed in. An account from Faga gave details on how a Texas court and a New York court had opposite rulings on one case.

The CBA resolution mentions that the concentration of bankruptcy cases limits the role of local courts in developing bankruptcy law within their jurisdictions. Faga said, “It makes a lot of sense for Colorado bankruptcy judges to be interpreting Colorado law and not to have outside jurisdictions interpreting local laws. Over a long period of time, that could impact businesses here.”

— Connor Craven

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