A bill introduced in the U.S Senate would limit the options corporations have when deciding where to file bankruptcy. Among other things, it would move many cases out of the U.S Bankruptcy Court in Delaware—one of the busiest is the country.
More than one million business entities are incorporated in Delaware, including about two-thirds of the Fortune 500.
Dan DeFranceschi is a Delaware lawyer specializing in bankruptcy law. He says for decades the state’s bankruptcy court has often been the preferred venue for many of these companies to file for protection under chapter 11.
“Due to the significant expertise and efficiency of the bankruptcy court and a long track record of successful reorganization cases in Delaware,” said DeFranceschi.
But the Bankruptcy Venue Reform Act, sponsored by U.S. Sens. John Cornyn, R-Texas, and Elizabeth Warren, D-Massachusetts, could drastically change that. The bill proposes eliminating “state of incorporation” as a basis for deciding which venue to hold corporate bankruptcy cases—the very rule many Delaware corporations cite to use the state’s bankruptcy court.
Defranceschi says this bill would greatly affect the amount of cases filed in Delaware’s bankruptcy court, and would be a blow to Delaware’s economy.
“With bankruptcy cases there are not only attorneys, but there’s also hotels, there’s restaurants, there’s copy services, delivery services. There’s all the ancillary personnel that go along with a bankruptcy case—all of whom would be significantly impacted,” said DeFranceschi.
By eliminating “state of incorporation,” the bill would require judges to determine the venue for bankruptcy hearings based on the location of a company’s headquarters, or the majority of its assets. DeFranceschi says with larger companies this can be a complicated process.
Delaware’s Congressional delegation and Gov. John Carney issued a joint statement opposing the bill, calling it a “misguided policy.”
“Many American companies, large and small, choose to incorporate in Delaware because of the expertise and experience of our judges, attorneys, and business leaders. Denying American businesses the ability to file for bankruptcy in the courts of their choice would not only hurt Delaware’s economy but also hurt businesses of all sizes and the national economy as a whole," read the statement.
Sen. John Cornyn (R-Texas) said in a statement the bill would close the loophole allowing corporations to ‘forum shop’ for districts sympathetic to their interests.