Wednesday, December 20, 2017
Christmas Shopping Season Curtailed? - Bankruptcy Venue Shopping, That Is!
Under current law, a business has options concerning where it can file bankruptcy. Those places include the state in which the business is organized, the location where the business has significant business assets or conducts business, or (in certain situations) where the parent company or affiliate has filed bankruptcy. That can create a tough situation for a farmer that has a claim against the bankrupt company if they have to travel far from their farming operation to participate in the bankruptcy. An example of this was the VeraSun bankruptcy that impacted farmers across parts of the Midwest and the Great Plains a few years ago.
Now, according to Bloomberg News and the Wall Street Journal, it looks like legislation will be introduced into the Congress that would change where a bankrupt company can file bankruptcy. See, e.g., https://www.wsj.com/articles/lawmakers-to-propose-making-bankrupt-companies-file-for-protection-close-to-home-1513644954?reflink=djemBankruptcyPro&tpl=db; This is known as “venue” and the bill is known as the “Bankruptcy Venue Reform Act of 2017.” If introduced this week, the bill may be tucked into the Omnibus spending bill that the Congress will vote on late this week. It’s a big deal for farmers, employees, retirees of bankrupt debtors (and other creditors).
Bankruptcy venue reform – today’s blog post topic.
Why Tightening Venue Matters
Several prominent bankruptcy cases filed in recent years illustrate why modifying existing venue rules matters.
VeraSun Energy Corporation (VeraSun). In early November 2008, Sioux Falls-based VeraSun and twenty-four of its subsidiaries filed for Chapter 11 bankruptcy protection to enhance liquidity while it reorganized. VeraSun got in financial trouble when it bought corn contracts at a high price and then corn prices dropped by about 50 percent before the specified delivery date in the contracts. VeraSun had failed to protect itself on the board of trade. That big price drop caused VeraSun to lose hundreds of millions of dollars. Of course, VeraSun was using the contract to hedge against corn prices going up and the farmer sellers were using them to hedge against a price decline. The corn farmers guessed right and the contracts worked to their advantage. However, VeraSun’s bankruptcy meant that VeraSun could force farmer sellers to hold their grain in a dropping market since it was not required to assume or reject the contracts until its plan of reorganization was to be heard several months down the line. If the contracting farmer sold his corn to minimize his loss, and the price of corn increased so that it made economic sense for VeraSun to enforce the purchase contract, the farmer would be forced to make up the difference. Many farmers sought to have the bankruptcy court force VeraSun to make decisions regarding assuming or rejecting the out-of-the money corn contracts quickly, so they would not be faced with a problem if the market rebounded. The bankruptcy court in Delaware was not willing to force VeraSun to act on a plant-by-plant basis, opting instead to allow each individual farmer to hire counsel in Delaware to press his case involving his contracts. This was cost prohibitive. There were over 6,000 midwestern farmers affected by this bankruptcy.
Later in the case, lawyers from Delaware and New York sent threatening letters to the farmers who had been paid for their corn promptly in accordance with state grain elevator laws demanding that they repay all sums they had been paid within 90 days of the case filing claiming that they were preferential transfers. The farmers organized, and defensive letters were sent back to the threatening lawyers who then opted to not file the threatened preference lawsuits. If the case had been filed in the Midwest, it would have been more likely that lawyers familiar with agricultural law would not have sent the preference demand letters because they would have known the prompt payment requirements of state grain elevator laws and would have recognized that these payments were in the ordinary course of business of both VeraSun and the farmers it paid.
In addition, farmers who were unpaid when the bankruptcy was filed became creditors in the VeraSun bankruptcy and had to file claims and participate in the bankruptcy process to have any hope of getting paid. Those farmers were scattered across the Midwest and Great Plains where Verasun had ethanol and biodiesel plants. None of them were located in Delaware, where VeraSun filed its bankruptcy petition.
Why did Verasun file bankruptcy in Delaware when it didn’t have any ethanol plants located in Delaware and wasn’t headquarted there? Because the an affiliated company organized in Delaware filed Chapter 11 filed bankruptcy in Delaware. Because of that, all of the affiliated companies could also file in Delaware under the applicable venue rule of the Bankruptcy Code. That meant that farmers with claims against VeraSun had to participate in Delaware bankruptcy proceedings rather than in the jurisdiction where the contracts were to be performed. That’s a frustrating, and expensive, proposition for farmers. Ultimately, VeraSun ended up selling seven of the plants to Valero Energy Corporation, and the rest to other companies in 2009.
A short video about the VeraSun bankruptcy effects on farmers, as told by an Iowa farmer, can be found at: https://www.youtube.com/watch?v=7GdifLvuRdw
Peregrine Financial Group, Inc. (PFG). PFG was an Iowa-based financial firm that was shut down in 2012 after it was put under investigation for a $200 million shortfall in customer funds. PFG’s Peregrine’s chief executive office was arrested and charged with making false statements to the Commodity Futures Trading Commission (CFTC). At the time of PFG filed Chapter 7 it had over $500 million in assets and over $100 million in liabilities. PFG filed bankruptcy in Illinois even though it was headquartered in Iowa. Similar to the VeraSun bankruptcy, many Midwest farmers were impacted by PFG’s bankruptcy.
Solyndra, LLC. The solar-panel maker Soyndra, LLC, filed Chapter 11 in 2011 in Delaware. Solyndra had received $535 million in federal financing (under the Obama Administration’s “stimulus” program) and a $25.1 million tax break from the State of California. Upon filing, the California-based company suspended its manufacturing operations and laid-off approximately 1,100 employees triggering both Federal and California Worker Adjustment and Retraining Notification Act issues. The employees affected by the mass layoffs resided in California. By filing in Delaware, Solyndra made it more expensive and burdensome for the laid-off employees to pursue their claims. The result for the employees was an out-of-court settlement of only $3.5 million (less 33% for their attorneys' contingent fee) on their claim of $15 million. One can only imagine the result if the case had been filed in California and the employees had easy access to the court deciding their fates.
Winn-Dixie Stores, Inc. (WD). WD was a supermarket chain headquartered in Florida. In April 2004, Winn-Dixie announced the closure of 156 stores, including all 111 stores located in the Midwest. On early 2005, WD filed Chapter 11 bankruptcy. To establish venue in technical compliance with the statute, the WD formed a new entity in New York shortly before the Chapter 11 filing and admitted it did so to establish venue. The bankruptcy court stated that the current statute contains a loophole allowing companies to file in venues that are not proper even if they have literally complied with the statute. The court transferred the case to Florida, with the judge stating, “…simply because I don’t believe it just to exploit the loophole in the statute to obtain venue here.” In re Winn-Dixie Stores, Inc., Case No. 05-11063 (RDD) (Bankr. S.D.N.Y. April 12, 2005) Hearing Transcript at 167.
In re Houghton Mifflin-Harcourt Publishing Co. (HM). HM was a publishing company that filed its case in the Southern District of New York in 2012. The United States Trustee filed a Motion to Change Venue. Unlike the court in WD that transferred venue, the bankruptcy court in HM found there was no statutory basis for venue in the Southern District of New York, but chose to defer transfer of venue until after confirmation of the plan. The court even chided the United States Trustee for filing the Motion to Change Venue. In re Houghton Mifflin Harcourt Publishing Co., Case No. 12‐12171 (RFG), Decision on U.S. Trustee Motion to Transfer Venue of these Cases, (June 22, 2012, Bankr. SDNY).
Boston Herald. Last week, provided another example of forum shopping at the expense of retirees, employees and the local community. The Boston Herald (Herald), a local Boston, MA, newspaper announced plans to sell the newspaper to GateHouse Media after filing Chapter 11 bankruptcy in Delaware. The only connection that the Herald has to Delaware is that its holding company is incorporated in Delaware. Eighteen of its 30 largest creditors reside in Massachusetts or New Hampshire and most are individual retirees.
Changing Venue as an Option?
The WD bankruptcy judge’s transfer of the case is a rarity. Very few cases are ever transferred. Indeed, some venue-change proceedings have turned into costly extended proceedings with evidentiary trials and extensive briefing. For instance, the Patriot Coal Corporation (a St. Louis-based spin-off of Peabody Energy Corporation) filed Chapter 11 bankruptcy in 2015. On a motion to transfer venue from the Southern District of New York, the bankruptcy court took four months to issue a 61-page decision based on facts that were largely uncontested and involved the manipulation of current venue law. Venue was determined to be in the Southern District of New York. Based on a review of the interim fee applications filed in the Patriot Coal case, it can be estimated that the debtor spent approximately $2 million and the creditors spent an additional $1 million to litigate the venue challenge. The court’s opinion “demonstrates the near impossibility of having venue transferred away from New York.” See Bill Rochelle, Patriot Shows Futility of Moving Cases from NY, Bloomberg (11/29/12).
In In re Enron Corp., 274 B.R. 327 (Bankr. S.D. N.Y. 2002), the court stressed the importance of case administration, and noted the “learning curve” the court acquired in the first month of the case in denying a motion to change venue filed shortly after the filing of the case. Enron and other cases such as In re Jitney Jungle, Case No. 99‐3602 (Bankr. D. Del.) and the WD case mentioned above demonstrate that by the time courts consider venue transfer motions, most of the important first day or “second day” motions relating to debtor-in-possession financing, sale procedures, break-up fees and the like would have already been entered and have become final. The reorganization case would have progressed forward so far and taken such a direction that it bears the indelible imprint of the first court. Such was the case with Jitney Jungle. By the time this case was transferred to New Orleans there was little that the New Orleans bankruptcy judge said that he could do because of the actions taken or orders previously entered in Delaware. Similarly, in Winn-Dixie, by the time the Florida judge received the case, so much of substance had already been ordered in the case that there was little the Florida judge could do but administer the orders of the prior judge.
Bankruptcy Venue Reform Act of 2017
The goal of the legislation is to drastically reduce the ability of companies to forum shop bankruptcies by denying access to justice for creditors of companies that choose to file their bankruptcies primarily in the Southern District of New York and Delaware. The legislation does this will by eliminating place of incorporation as a proper venue as well as eliminating the affiliate rule allowing the companies to file a Delaware affiliate first in Delaware, then file the rest of the cases in Delaware. Under the bill, venue is appropriate only in the district court for the district where an individual debtor is domiciled, resides, or where their principal assets have been located for the 180-day period immediately preceding the bankruptcy petition, or for a longer portion of the 180-day period than the domicile, residence or principal asset were located anywhere else. The same 180-day rule applies to a business debtor, but in terms of the debtor’s principal place of business rather than residence or domicile.
Venue is also proper in jurisdictions where there is already a pending bankruptcy case concerning an affiliate that directly or indirectly owns, controls, is the general partner, or holds 50 percent or more of the outstanding voting securities, of the person or entity that is the subject of the later-filed case if the pending case was properly filed in that district. The bill also says that changes of ownership or control of a person or entity or assets or principal place of business within a year before bankruptcy filing that is done with the purpose of establishing venue are to be ignored. A court could still transfer a case in the interest of justice or for the convenience of the parties.
Currently, bankruptcies can be filed in several places, including the state of organization of the company, the district where a company has significant business assets or conducts business, or in the district where a parent or an affiliate has filed bankruptcy. The proposed legislation will make it difficult for bankruptcies to be filed remotely from the company’s assets or headquarters. The idea is to increase fair access to justice for the parties affected by a bankruptcy. The bill is a big deal for bankruptcy reform and fairness to creditors. While similar legislation was introduced in 2011, it was opposed by the Obama Administration. Individuals and businesses interested in the matter should contract their Congressional Representatives and Senators immediately and request Senators to Co-sponsor the bill and ask their Representatives to support it.