Bill Aims to Make Bankrupt Companies File for Protection Closer to Home

Senate lawmakers have introduced a bill that would force struggling companies to file for bankruptcy protection in a courtroom close to their headquarters, closing a controversial loophole that has enabled the country's biggest restructurings to unfold in New York and Delaware.

On Monday, Sens. John Cornyn (R., Texas) and Elizabeth Warren (D., Mass.) said in a joint statement that the bill is meant to allow workers at bankrupt companies, small businesses, retirees and others to "participate in cases that will have tremendous impacts on their lives."

The bill, if passed, would mark one of the biggest shifts in corporate bankruptcy history, sending cases to courts across the country. Mr. Cornyn said the measure "will strengthen the integrity of the bankruptcy system and build public confidence."

Ms. Warren added that the bill would "prevent big companies from cherry-picking courts that they think will rule in their favor and to crack down on this corporate abuse of our nation's bankruptcy laws."

"Workers, creditors, and consumers lose when corporations manipulate the system to file for bankruptcy wherever they please," she said in the statement.

Specifically, the bill removes the language loophole that allows companies to file for bankruptcy protection where they are incorporated or where they operate much-smaller affiliates. The law would instead require corporations to file in a court near their principal place of business.

For years, the existing rule has put nearly all of the headline-grabbing bankruptcy work in Manhattan, the epicenter of the bankruptcy bar, and in Delaware, where many U.S. businesses are incorporated. Delaware Gov. John Carney, while serving in the House of Representatives, once called his state the "venue of choice for Corporate America."

Academics, legal professionals and some judges have criticized the ability of companies to pick where they file, framing it as an access-to-justice issue. Banning that selection, called forum shopping, would give a louder voice to lower-profile stakeholders in bankruptcy cases, including employees, businesses owed small sums of money and retirees.

The issue of where a bankruptcy case unfolds has also previously rattled lawmakers, such as when auto makers General Motors and Chrysler filed for bankruptcy in Manhattan in 2009 and the Los Angeles Dodgers in Delaware in 2011.

Critics of the current system say forum shopping is so accepted that companies barely bother to justify where they choose to seek protection from creditors. Borders Group Inc., of Ann Arbor, Mich., filed for chapter 11 protection in 2011 in Manhattan because of the handful of bookstores it operated there.

Supporters of the existing rule argue that the experienced judges in these two venues can better handle complicated issues in a big bankruptcy case.

Earlier efforts to close the loophole failed, including ones that took place when Sen. Joseph Biden (D., Del.) was in office and before he became vice president.

The bill faces opposition from Gov. Carney and Delaware's three federal lawmakers, who said in a joint-statement that more than two-thirds of U.S. businesses in the Fortune 500 incorporate in Delaware to gain access to "Delaware's world-class bench and bar with exceptional expertise in corporate legal issues, including bankruptcy."

"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," the four Delaware representatives said in the statement. "Our economy thrives when the bankruptcy system is fair, predictable, and efficient. Experienced bankruptcy judges are critical to ensuring that companies can restructure in a way that saves jobs and preserves value."

Write to Katy Stech Ferek at katherine.stech@wsj.com

(END) Dow Jones Newswires

January 08, 2018 15:57 ET (20:57 GMT)