Statements on Introduced Bills and Joint Resolutions

STATEMENTS ON INTRODUCED BILLS AND JOINT RESOLUTIONS -- (Senate - February 08, 2005)

Mr. CORNYN. Mr. President, I rise today to introduce the Fairness in Bankruptcy Litigation Act of 2005.

This legislation will provide much-needed protection-for consumers, creditors, workers, pensioners, shareholders, and small businesses-by reforming the rules governing venue in bankruptcy cases to combat forum shopping.

Quite simply, my bill will prevent corporate debtors from moving their bankruptcy cases thousands of miles away from the communities and their workers who have the most at stake. And it will prevent bankrupt corporations from effectively selecting the judge in their own cases-because picking the judge isn't far off from picking the verdict.

This Act is a positive step for fairness, responsibility, and justice. It implements a major recommendation from the October 1997 National Bankruptcy Review Commission report, and earned the support of prominent bankruptcy law professors and practitioners nationwide. The bill is also supported by Texas Attorney General Greg Abbott ® and former Massachusetts Attorney General Scott Harshbarger (D); Brady C. Williamson, who served as chairman of the National Bankruptcy Review Commission; and major national bankruptcy organizations like the National Association of Credit Management and the Commercial Law League of America.

With the introduction of this Act, this body will now have an opportunity to consider this growing crisis, which effects so many consumers and workers, just as we are about to examine the issue of comprehensive bankruptcy reform.

Sadly, our current bankruptcy venue law has become a target for enormous abuse. It's a problem that is well documented by academics, most recently in a comprehensive book published just last week by UCLA Law Professor Lynn M. LoPucki, as well as by Harvard Law Professor Elizabeth Warren, who served as the reporter for the National Bankruptcy Review Commission, and Professor Jay L. Westbrook of the University of Texas Law School.

I have personal experience with the worst kind of forum shopping. During my service to the State of Texas as Attorney General, I argued that the Enron Federal bankruptcy court proceedings should be litigated in Houston. That seemed like the common sense argument, of course-after all, Houston was where the majority of employees and others who were victimized by that corporate scandal called home.

Yet that's not where the case ended up. Instead, Enron was able to exploit a key loophole in bankruptcy law to maneuver their proceedings as far away from Houston as possible. They ended up in their desired forum in New York. See In re Enron Corp., 274 B.R. 327 (S.D.N.Y. Bankr. 2002).

Enron used the place of incorporation of one of its small subsidiaries in order to file a bankruptcy claim in New York, and then used that smaller claim as the basis for shifting all of its much larger bankruptcy proceedings into that same court. The company had 7,500 employees in the Houston headquarters, but they filed for bankruptcy in New York, where Enron had only 57 employees.

This kind of blatant forum shopping makes a mockery of our laws. The common-sense legislation that I've introduced today will combat such egregious forum shopping by requiring that corporate debtors file where their principal place of business or principal assets are located, rather than their state of incorporation, and forbidding parent companies from manipulating the venue by filing first through a subsidiary.

Bankruptcy venue abuse is not just bad for our legal system; it hurts America's consumers, creditors, workers, pensioners, shareholders, and small businesses. Under current law, corporate debtors effectively get to pick the court in which they will file for bankruptcy. As a result, creditors can be forced to litigate far away from the real-world location, where costs and inconveniences associated with travel are prohibitive.

This troubling loophole also serves to unfairly enable corporate debtors to evade their financial commitments. It badly disables consumers, creditors, workers, pensioners, shareholders, and small businesses from pursuing and receiving reasonable compensation from bankruptcy proceedings.

Current law allows debtors to forum shop and thereby to pick jurisdictions likely to rule in their favor. If debtors get to pick the jurisdiction, then bankruptcy judges have a disturbing incentive to compete with other bankruptcy courts for major bankruptcy cases, by tilting their rulings in favor of corporate debtors and their attorneys.

The examples are numerous. Here are three of the most prominent incidents: Polaroid. In October 2001, Boston-based Polaroid filed for bankruptcy in Delaware, listing assets at $1.9 billion. Polaroid's top executives claimed that the company was a "melting ice cube," and arranged a hasty sale for $465 million to a single bidder. The court refused to hear testimony as to the true value of the company and closed the sale in only 70 days. The top executives went to work for the new buyer and received millions of dollars in stock. Meanwhile, disabled employees had their health-care coverage canceled. The so-called "melting ice cube" became profitable the day after the sale became final.

K-Mart. In January 2002, failed top executives delivered Michigan-based K-Mart to the bankruptcy court in Chicago, which reportedly had been actively soliciting large corporate debtors to file there. With a workforce of 225,000, K-Mart had more employees than any company that had ever filed bankrupt nationwide. The Chicago judge let the failed executives take tens of millions of dollars in bonuses, perks, and loan forgiveness. Bankruptcy lawyers also profited, pocketing nearly $140 million in legal fees. But some 43,000 creditors received only about ten cents on the dollar.

Worldcom. Worldcom perpetrated one of the biggest accounting frauds in history, inflating its income by $9 billion. Although based in Mississippi, Worldcom followed Enron into the New York bankruptcy court, where its managers received the same lenient treatment. No trustee was appointed; indeed, five months after the case was filed, the directors in office when the fraud occurred still constituted a majority of the board. They chose their own successors. A Top Worldcom executive used money taken from the company to build an exempt Texas homestead, and Worldcom took no action. That executive then used the homestead to buy his way out of his problems with the SEC. Meanwhile, creditors-mostly bondholders-lost $20 billion.

This is not the first time we have addressed this important issue. The House Judiciary Subcommittee on Commercial and Administrative Law held a hearing on July 21, 2004, entitled "Administration of Large Business Bankruptcy Reorganizations: Has Competition for Big Cases Corrupted the Bankruptcy System?," and Congressman BRAD SHERMAN (D-CA) has previously led efforts to champion bankruptcy venue reform in the House. During the 107th Congress, Senator DURBIN introduced S. 2798, the Employee Abuse Prevention Act of 2002, joined by Senators KENNEDY, KERRY, LEAHY, and ROCKEFELLER, while Congressman WILLIAM D. DELAHUNT (D-MA) introduced the same bill in the House; section 205 of that legislation would have reformed bankruptcy venue law.

I believe we must take steps to respond to this important problem. The American people deserve better from our legal system. All bankruptcy cases deserve to be handled fairly and justly, and no corporate debtor should be allowed to escape responsibility by fleeing to another venue. It is high time that we take up this much-needed reform.

I ask unanimous consent that letters of support be printed in the RECORD.

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