Court Forum Shopping by Corporate Debtors Harms Consumers, Creditors, Shareholders, Cornyn Says

COURT FORUM SHOPPING BY CORPORATE DEBTORS HARMS CONSUMERS, CREDITORS, SHAREHOLDERS, CORNYN SAYS

Reform legislation would end practice of forum-shopping, protect small businesses, employees

Tuesday, February 8, 2005

WASHINGTON -When Enron filed for bankruptcy, it did so in New York , where it had only 57 employees, rather than in Houston -home to 7,500 employees. Despite concerns raised by major creditors, the case stayed in New York . The company's creditors will likely receive 20 cents on the dollar-shareholders are likely to fare worse, if they receive anything at all-while court-approved fees for Enron's lawyers, accountants and advisers are expected to exceed $1 billion. Their case is not unusual, and forum shopping by corporate debtors is a regular occurrence, often to the detriment of employees and shareholders.

In order to reform the system that allowed Enron's forum-shopping, U.S. Sen. John Cornyn, a member of the Senate Judiciary and Small Business committees, introduced the Fairness in Bankruptcy Litigation Act of 2005 Tuesday. The Act helps protect consumers, creditors, small businesses, and others affected by bankruptcy cases through reforming the rules governing where bankruptcy cases are heard. The legislation combats forum shopping by corporate debtors, and would prevent bankruptcy cases from moving thousands of miles away from the communities and their workers who have the most at stake.

"This legislation will prevent bankrupt corporations from effectively selecting the judge in their own case. A necessary step because picking the judge isn't far off from picking the verdict," Cornyn said. "The current loophole unfairly enables corporate debtors to evade their financial commitments, and badly disables consumers, creditors, employees, pensioners, shareholders and small businesses from pursuing and receiving reasonable compensation from bankruptcy proceedings."

Sen. Cornyn's legislation would combat forum shopping in bankruptcy cases 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 venue by filing first through a subsidiary.

Sen. Cornyn's legislation implements a major recommendation from the October 1997 National Bankruptcy Review Commission report. The bill is also supported by bankruptcy law professors and practitioners nationwide, as well as by Texas Attorney General Greg Abbott (R) 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.

Abuses of the current bankruptcy venue law have been well documented by bankruptcy practitioners and academics - most recently in a comprehensive book published just last week by UCLA Law Professor Lynn M. LoPucki, entitled Courting Failure: How Competition for Big Cases is Corrupting the Bankruptcy Courts, as well as by Harvard Law Professor Elizabeth Warren , who served as the reporter for the National Bankruptcy Review Commission.

Cornyn has long been concerned about bankruptcy venue abuse. As Attorney General of Texas, Cornyn argued that the Enron federal bankruptcy court proceedings should be litigated in Houston , home to most of the employees and others who were victimized by the corporate scandal. [See In re Enron Corp., 274 B.R. 327 (S.D.N.Y. Bankr. 2002)]. Notwithstanding Cornyn's efforts, however, Enron was able to exploit a key loophole in current law to maneuver its bankruptcy proceedings far away from Houston and instead to its desired forum in New York . Specifically, 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.

"We must take steps to respond to this important problem, the American people deserve better from our legal system," Cornyn said. "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."

Senator Cornyn's legislation opens a new chapter in the struggle to reform the bankruptcy venue rules. The House Judiciary Subcommittee on Commercial and Administrative Law held a hearing on this very issue 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) led an effort to combat bankruptcy court forum shopping the previous year (H. Amdt. 9 to H.R. 975). During the 107th Congress, Sen. Richard Durbin (D-Ill.) introduced S. 2798, the Employee Abuse Prevention Act of 2002, joined by Sens. 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 the bankruptcy venue law. Senator Cornyn's bill is the first known stand-alone legislation to specifically target the problem of bankruptcy forum shopping.

Sen. Cornyn served previously as Texas Attorney General, Texas Supreme Court Justice, and Bexar County District Judge.

http://cornyn.senate.gov/record.cfm?id=232700