    [House Hearing, 112 Congress]
    [From the U.S. Government Publishing Office]

                 CHAPTER 11 BANKRUPTCY VENUE REFORM ACT OF 2011

    =======================================================================

                                    HEARING

                                   BEFORE THE

                       SUBCOMMITTEE ON COURTS, COMMERCIAL

                             AND ADMINISTRATIVE LAW

                                     OF THE

                           COMMITTEE ON THE JUDICIARY

                            HOUSE OF REPRESENTATIVES

                          ONE HUNDRED TWELFTH CONGRESS

                                 FIRST SESSION

                                       ON

                                   H.R. 2533

                                   __________

                               SEPTEMBER 8, 2011

                                   __________

                               Serial No. 112-88

                                   __________

             Printed for the use of the Committee on the Judiciary

          Available via the World Wide Web: http://judiciary.house.gov

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                           COMMITTEE ON THE JUDICIARY

                          LAMAR SMITH, Texas, Chairman
    F. JAMES SENSENBRENNER, Jr.,         JOHN CONYERS, Jr., Michigan
        Wisconsin                        HOWARD L. BERMAN, California
    HOWARD COBLE, North Carolina         JERROLD NADLER, New York
    ELTON GALLEGLY, California           ROBERT C. ``BOBBY'' SCOTT,
    BOB GOODLATTE, Virginia                  Virginia
    DANIEL E. LUNGREN, California        MELVIN L. WATT, North Carolina
    STEVE CHABOT, Ohio                   ZOE LOFGREN, California
    DARRELL E. ISSA, California          SHEILA JACKSON LEE, Texas
    MIKE PENCE, Indiana                  MAXINE WATERS, California
    J. RANDY FORBES, Virginia            STEVE COHEN, Tennessee
    STEVE KING, Iowa                     HENRY C. ``HANK'' JOHNSON, Jr.,
    TRENT FRANKS, Arizona                  Georgia
    LOUIE GOHMERT, Texas                 PEDRO R. PIERLUISI, Puerto Rico
    JIM JORDAN, Ohio                     MIKE QUIGLEY, Illinois
    TED POE, Texas                       JUDY CHU, California
    JASON CHAFFETZ, Utah                 TED DEUTCH, Florida
    TIM GRIFFIN, Arkansas                LINDA T. SANCHEZ, California
    TOM MARINO, Pennsylvania             DEBBIE WASSERMAN SCHULTZ, Florida
    TREY GOWDY, South Carolina
    DENNIS ROSS, Florida
    SANDY ADAMS, Florida
    BEN QUAYLE, Arizona
    [Vacant]

          Sean McLaughlin, Majority Chief of Staff and General Counsel
           Perry Apelbaum, Minority Staff Director and Chief Counsel
                                     ------

           Subcommittee on Courts, Commercial and Administrative Law

                     HOWARD COBLE, North Carolina, Chairman

                   TREY GOWDY, South Carolina, Vice-Chairman

    ELTON GALLEGLY, California           STEVE COHEN, Tennessee
    TRENT FRANKS, Arizona                HENRY C. ``HANK'' JOHNSON, Jr.,
    DENNIS ROSS, Florida                   Georgia
    [Vacant]                             MELVIN L. WATT, North Carolina
                                         [Vacant]

                          Daniel Flores, Chief Counsel

                          James Park, Minority Counsel

                                C O N T E N T S

                                  ----------

                               SEPTEMBER 8, 2011

                                                                       Page

                                    THE BILL

    H.R. 2533, the ``Chapter 11 Bankruptcy Venue Reform Act of 2011''     3

                               OPENING STATEMENTS

    The Honorable Howard Coble, a Representative in Congress from the
      State of North Carolina, and Chairman, Subcommittee on Courts,
      Commercial and Administrative Law..............................     1
    The Honorable Lamar Smith, a Representative in Congress from the
      State of Texas, and Chairman, Committee on the Judiciary.......     6
    The Honorable Trey Gowdy, a Representative in Congress from the
      State of North Carolina, and Vice-Chairman, Subcommittee on
      Courts, Commercial and Administrative Law......................     7

                                   WITNESSES

    Peter C. Califano, Partner, Cooper White & Cooper, San Francisco,
      CA, on behalf of the Commercial Law League of America
      Oral Testimony.................................................     9
      Prepared Statement.............................................    11
    David A. Skeel, Jr., Professor of Law, University of Pennsylvania
      Law School, Philadelphia, PA
      Oral Testimony.................................................    21
      Prepared Statement.............................................    23
    The Honorable Frank J. Bailey, Chief Judge, Bankruptcy Court for
      the District of Massachusetts, Boston, MA
      Oral Testimony.................................................    30
      Prepared Statement.............................................    32
    Melissa B. Jacoby, Professor of Law, University of North Carolina
      School of Law, Chapel Hill, NC
      Oral Testimony.................................................    56
      Prepared Statement.............................................    59

                                    APPENDIX
                   Material Submitted for the Hearing Record

    Prepared Statement of the Honorable Lamar Smith, a Representative
      in Congress from the State of Texas, and Chairman, Committee on
      the Judiciary..................................................    75
    Prepared Statement of the Honorable John Conyers, Jr., a
      Representative in Congress from the State of Michigan, and
      Ranking Member, Committee on the Judiciary.....................    76
    Prepared Statement of the Honorable Steve Cohen, a Representative
      in Congress from the State of Tennessee, and Ranking Member,
      Subcommittee on Courts, Commercial and Administrative Law......    78
    American Bankruptcy Institute (ABI) article titled ``Bringing
      Chapter 11 Cases Back Home and Reforming the Dodd-Frank OLA''..    83
    Letter from the National Association of Credit Management (NACM).    84
    Letter from the Commercial Law League of America (CLLA)..........    86
    Letter from the Georgetown University Law Center.................    89

                 CHAPTER 11 BANKRUPTCY VENUE REFORM ACT OF 2011

                                  ----------

                          THURSDAY, SEPTEMBER 8, 2011

                  House of Representatives,
                        Subcommittee on Courts,
                     Commercial and Administrative Law,
                                    Committee on the Judiciary,
                                                        Washington, DC.

        The Subcommittee met, pursuant to call, at 10:09 a.m., in
    room 2141, Rayburn Office Building, the Honorable Howard Coble
    (Chairman of the Subcommittee) presiding.
        Present: Representatives Coble, Smith, Gowdy, Cohen, and
    Conyers.
        Also present: Representative Carney.
        Staff present: (Majority) Daniel Flores, Subcommittee Chief
    Counsel; Travis Norton, Counsel; Johnny Mautz, Counsel; Allison
    Rose, Professional Staff Member; Ashley Lewis, Clerk; Joanne
    Moy, Intern; and (Minority) James Park, Subcommittee Chief
    Counsel.
        Mr. Coble. Ladies and gentlemen, the Subcommittee will come
    to order. We are awaiting Mr. Cohen's presence. He is on his
    way, so we will get started.
        Good to have you all with us today.
        Over the past 3 decades, the bankruptcy system has
    witnessed the concentration of large Chapter 11 reorganization
    cases in the two so-called magnet districts, Delaware and the
    Southern District of New York. Many debtors have filed there,
    including those with little or no tangible connection to those
    respective districts.
        For example, in the last 10 years nine large North
    Carolina-based companies filed for bankruptcy protection in
    either Manhattan or Wilmington, Delaware. R.H. Donnelly
    Corporation, based in Cary, had 3,800 employees and over $12
    billion in claimed assets at the time it filed. In 2001,
    Greensboro-based Burlington Industries, which had almost 14,000
    employees on the petition date, also filed in Delaware. The
    same was true of Pillowtex which was based in Kannapolis, North
    Carolina.
        This concentration of cases in two districts is made
    possible by section 1408 of title 28 of the United States Code.
    That section permits the debtor to file a Chapter 11 case where
    it is incorporated, where it has its principal assets, or where
    it has its headquarters.
        In addition, a corporation can also file where there is a
    pending Chapter 11 case concerning its affiliate. This means
    that no matter how large the parent company's headquarters are
    or where it is located, the parent can bootstrap the entire
    corporate family into the venue of a very small affiliate.
        These rules allow a large Chapter 11 debtor to forum shop
    for a district it perceives as most friendly to its ultimate
    goal. This leads to some strange results, as you all know.
    Recently the Los Angeles Dodgers, an entity with ``Los
    Angeles'' in its very name, filed for bankruptcy in Delaware,
    approximately 3,000 miles from the closest California
    bankruptcy court.
        When a large Chapter 11 case is filed far from the debtor's
    principal place of business, many stockholders in the company
    lose a meaningful opportunity to make their views known to the
    bankruptcy court. Small creditors must defend preference claims
    filed in a remote jurisdiction. Employees, not unlike those at
    Burlington Industries, must travel long distances to present
    evidence of any claims they may have. New York and Wilmington
    may be convenient for the big financial folks, but small
    business creditors oftentimes are left in the dust when a
    reorganization takes place in a faraway district.
        H.R. 2533 addresses these inequities by eliminating the
    place of incorporation as a district in which a debtor can file
    its Chapter 11 case and doing away with the pending affiliate
    rule by which many companies bootstrap their way into a New
    York or Delaware courtroom.
        Under the bill, the efficiencies of the Chapter 11
    bankruptcy filing are not disturbed. An affiliate can still
    join its parent company's case, but a parent company can no
    longer game the system by bootstrapping its way into a more
    favorable district on the heels of its much smaller affiliate.
        I look forward to hearing from our distinguished panel of
    witnesses today about how the bill would affect corporations,
    courts, creditors, employees, and bankruptcy practice as a
    whole.
        We are pleased as well to welcome the Chairman of the full
    Committee, but before I do that, Chairman Smith, we are pleased
    to have Congressman Carney, a Representative from Delaware, who
    will sit in on the hearing. Mr. Carney, however, is not a
    Member of the Subcommittee, so he will not be recognized for
    questioning. Mr. Carney, good to have you with us.
        Mr. Carney. Thank you very much.
        [The bill, H.R. 2533, follows:]

                                   __________
        Mr. Coble. I am now pleased to recognize the distinguished
    gentleman from Texas, Lamar Smith, who chairs the House
    Judiciary Committee, for his opening statement.
        Mr. Smith. Thank you, Mr. Chairman.
        Before its demise, Enron was a Texas-based company with
    7,500 employees at its Houston headquarters and over $60
    billion in claimed assets. But in December 2001, Enron filed
    for Chapter 11 bankruptcy protection in a Manhattan courthouse,
    1,500 miles away from Texas. How was this possible?
        Unlike venue rules for other types of cases, Chapter 11
    bankruptcy venue rules give many corporations several choices
    of where to reorganize. A corporation can file in the State
    where it is incorporated, where it has its principal assets, or
    where it is headquartered. For many companies, this rule alone
    provides three different venue choices.
        But many corporations have even more choices of venue. A
    corporation can also file a Chapter 11 case in a venue where
    its corporate affiliate's case is already pending.
        Using this rule, Enron's bankruptcy lawyers first filed the
    bankruptcy of a small New York subsidiary with only 57
    employees in the Southern District of New York. Moments later,
    because this affiliate's case was now pending, the Houston-
    based parent company bootstrapped its massive bankruptcy case
    into a Manhattan bankruptcy court.
        The current Chapter 11 venue rules allow many corporations
    to forum shop for a venue with favorable judicial precedent for
    the business. For example, a nationwide retailer may prefer to
    file in Delaware because of the Third Circuit's well-known
    rulings on the treatment of unpaid rent in bankruptcy. At the
    same time, a business with many unionized employees can avoid
    filing in Delaware to avoid Third Circuit precedent on
    collective bargaining rights in bankruptcy.
        The Constitution instructs Congress to enact uniform
    bankruptcy laws. While courts of appeal are permitted to
    interpret Bankruptcy Code provisions differently, Chapter 11
    debtors should not be able to leave their home districts and
    shop for a forum whose judicial precedent on bankruptcy law
    they happen to prefer.
        In recent years, a majority of large companies have chosen
    to file their Chapter 11 cases in the Southern District of New
    York and in Delaware.
        Like umpires in baseball, bankruptcy judges should be
    neutral referees in Chapter 11 cases. The practice of forum
    shopping is predicated upon an assumption that some judges are
    fairer than others. Regardless of where a company reorganizes,
    a judge should call balls and strikes the same way.
        I believe our national bankruptcy system suffers when
    Chapter 11 bankruptcy cases are concentrated in just two
    judicial districts on the East Coast. When a large Chapter 11
    case travels across the country to be heard in a faraway
    bankruptcy court, many of the business' stakeholders lose out.
    Employees, creditors, and the community in which the business
    operates feel out of touch with the reorganization process.
    Interested parties frequently have to travel long distances to
    present evidence to support their claims.
        In July, I introduced H.R. 2533, the Chapter 11 Bankruptcy
    Venue Reform Act of 2011, to reform the Chapter 11 venue rules
    so that corporate debtors must reorganize in their home court.
    I am pleased to be joined in that effort by Ranking Member
    Conyers and the Chairman and Ranking Member of this
    Subcommittee.
        The bill requires corporate debtors to file for Chapter 11
    where they have their principal place of business or principal
    assets. It also prohibits large parent companies like Enron
    from leaving their headquarters and following tiny, well-placed
    subsidiaries into a preferred venue. The bill still allows
    subsidiaries to follow a parent firm into a venue, thus
    preserving the efficiencies that flow from joint administration
    of related debtors' cases.
        This bill improves the fairness of the bankruptcy system
    for all stakeholders in a Chapter 11 case.
        I thank the witnesses for coming today and look forward to
    hearing from them. And, Mr. Chairman, let me thank you for
    having this hearing as well.
        I yield back.
        Mr. Coble. I thank you, Chairman Smith.
        And we have been joined by the distinguished gentleman from
    South Carolina. Mr. Gowdy, good to have you with us today.
        Mr. Gowdy. Thank you, Mr. Chairman.
        Mr. Coble. Folks, what I think I am going to do is go ahead
    and recognize the witnesses, and then we will delay your
    statements pending the arrival of Mr. Cohen. Let me introduce
    our distinguished guests and witnesses today.
        Mr. Peter Califano is a bankruptcy attorney at Cooper White
    & Cooper in San Francisco where he chairs the bankruptcy and
    creditors' rights groups. He has represented numerous creditor
    interests in a variety of bankruptcy venues during his career.
    Today he is testifying on behalf of the Commercial Law League
    of America, an organization of attorneys and other experts
    engaged in the field of commercial law.
        Mr. Califano received his law degree from Santa Clara
    University School of Law and his undergraduate degree from the
    State University of New York at Buffalo, where it gets cold in
    the wintertime I have been told, Mr. Califano.
        Mr. David Skeel is the S. Samuel Arsht Professor of
    Corporate Law at the University of Pennsylvania School of Law.
    He is widely regarded as an expert in bankruptcy law and has
    authored numerous books and articles, including publications on
    the Dodd-Frank Wall Street Reform Act and the automobile
    bankruptcies. He frequently appears in major media outlets to
    discuss bankruptcy and corporate law.
        Professor Skeel earned his law degree at the University of
    Virginia and his undergraduate degree, I am pleased to say,
    from the University of North Carolina. Of course, I am
    subjectively involved with that State.
        Judge Frank Bailey is the Chief Judge of the Bankruptcy
    Court for the District of Massachusetts. After a long and
    distinguished career as a litigation and bankruptcy attorney in
    Boston, he was appointed Bankruptcy Judge in January 2009 and
    Chief Judge of the district in December 2010. Judge Bailey is
    active in public interest law organizations and the National
    Conference of Bankruptcy Judges. He also teaches courses in
    bankruptcy law at the New England School of Law.
        Judge Bailey earned his law degree at Suffolk University in
    Boston and his undergraduate degree from Georgetown.
        Finally, our fourth witness is Professor Melissa Jacoby.
    She is the Graham Kenan Professor of Law at the University of
    North Carolina School of Law in Chapel Hill where her teaching
    and research take multi-disciplinary approaches to exploring
    bankruptcy, debtor, creditor, and commercial law issues. She is
    a conferee to the National Bankruptcy Conference and has
    provided helpful advice to Committee staff during the drafting
    of the bill we are considering today. I wish to thank her for
    her assistance today and extend to her a special welcome as
    well to being affiliated with my alma mater. Although you are a
    transplanted Tar Heel, Professor, we will accept you
    nonetheless.
        But it is good to have all four of you with us, and I think
    in the interest of courtesy to Mr. Cohen, I know he would want
    to be here before we commence your statements. So if you all
    would just stand easy for the moment and we will proceed
    imminently. Thank you. [Pause.]
        Mr. Gowdy, do you have any comment to make since we are
    dead in the water here?
        Mr. Gowdy. Just how delighted I am to be back, Mr.
    Chairman, and how much I am looking forward to hearing from our
    distinguished panel witnesses.
        Mr. Coble. I thank the gentleman from South Carolina.
    [Pause.]
        Mr. Smith. Mr. Chairman?
        Mr. Coble. Yes, Chairman?
        Mr. Smith. While we are here and have the time, I might
    take the opportunity to point out something of perhaps
    historical interest to those in the room. And that is, if you
    look over on the wall to our left, to your right, you will see
    a crack extending horizontally across almost the entire length
    of the room. That is a result of the earthquake that occurred
    in D.C. a week or so ago.
        Let me say that while the Judiciary Committee's wall has
    cracked, our resolve to pass good legislation has not.
    [Laughter.]
        This is the first time I have seen it under lights, and it
    is frankly more severe than it appeared to be when I saw it in
    a dark room. But that earthquake did have consequences, and the
    Committee room on the other side of this wall, Government
    Reform, has I think even more extensive cracks as well. And
    there may be one other Committee room that suffered some damage
    as well.
        But as long as we had the time, Chairman, I thought I would
    pass that out, and I will yield back.
        Mr. Coble. I thank you for that. I am pleased to know that
    it was not caused by one of the irate Members of the
    Subcommittee. That is interesting to know. Only kidding, of
    course. [Pause.]
        We will come back to order, folks. I think Mr. Cohen is on
    his way.
        Why don't we start with you, Mr. Califano, and then when
    Mr. Cohen gets here, he will make his opening statement.
        Folks, if you will confine your statement to 5 minutes.
    There is an amber light that will appear after the green light
    vanishes. That warns you that you have a minute to play with.
    So if you could wrap up on or about 5 minutes, we would
    appreciate that.
        So, Mr. Califano, why don't you start us off? You are
    recognized for 5 minutes.

    TESTIMONY OF PETER C. CALIFANO, PARTNER, COOPER WHITE & COOPER,
     SAN FRANCISCO, CA, ON BEHALF OF THE COMMERCIAL LAW LEAGUE OF
                                AMERICA

        Mr. Califano. Good morning and thank you for inviting me to
    testify as a witness before the Subcommittee. My name is Peter
    Califano. I am an attorney and a partner at the law firm of
    Cooper White & Cooper in San Francisco, California and chair of
    the Bankruptcy Section of the Commercial Law League of America.
        The CLLA is the Nation's oldest organization of attorneys
    and other experts in the field of commercial law, bankruptcy,
    and reorganization. The Bankruptcy Section of the CLLA consists
    of over 500 professionals, including bankruptcy lawyers,
    trustees, law professors, and bankruptcy judges. The CLLA
    members tend to be involved in smaller and mid-sized bankruptcy
    cases. We tend to represent main street interests as opposed to
    the mega-cases of Wall Street.
        The CLLA supports the proposed Chapter 11 Bankruptcy Venue
    Reform Act of 2011, introduced by Representatives Smith and
    Conyers. H.R. 2533 attempts to rebalance the interests of all
    parties in bankruptcy by making sure that the bankruptcy
    process remains within the communities that have the most
    significant vested interest in the outcome. This is
    accomplished by determining where a bankruptcy case may be
    filed. The CLLA strongly believes that when these businesses
    fail and need rehabilitation in bankruptcy, the local
    bankruptcy courts are the best positioned to oversee the
    process. Let me explain why.
        First, the consequences of corporate bankruptcy are most
    profound in the communities where the debtor's principal place
    of business or assets are located. Not only are jobs involved,
    but they may affect other matters such as hospitals, the
    closing of plants, and waste removal.
        Second, if bankruptcies are filed in remote districts, the
    parties with the most familiarity with the debtor's operations
    and who have an important stake in the case's outcome might be
    cut off or minimized in the process. Employees, small
    creditors, and retirees will suffer. Let me illustrate by
    discussing three cases.
        The first case is called Integrated Telecom Express. This
    bankruptcy involves a highly solvent California equipment
    manufacturer and was filed primarily to reduce the landlord's
    claim by $20 million as permitted by the Bankruptcy Code. The
    case was filed in Delaware because the State permits this type
    of bankruptcy filing. The landlord resisted and finally
    prevailed on appeal to the Third Circuit. Had the landlord
    lacked the resources to persevere in Delaware, the dispute
    would have ended earlier in the debtor's favor.
        Now, let us compare this with another landlord situation.
    In the Perkins & Marie Callender's case, this is a company that
    is headquartered in Memphis, which is in Mr. Cohen's district.
    The bankruptcy was filed in Delaware. The commencement of the
    case--the debtor filed a motion to reject various real property
    leases back to the petition date and, in effect, eliminate any
    basis to claim administrative rent. The debtor was also allowed
    to leave its personal property at the premises. One of the
    landlords was a retiree who did not have the resources to
    resist the motion. The outcome of the motion probably cost the
    individual landlord retiree about $4,000 or $5,000.
        Now, let me give you an example of a local case that is
    successful or was successful, the Pacific Gas and Electric
    Company case. This bankruptcy was the largest utility
    bankruptcy case ever to be filed. It had $35 billion in assets
    and approximately 20,000 employees. The case was commenced in
    the Northern District of California. Immediately local builders
    and lawyers formed an informal group to negotiate and litigate
    with the debtor over the assumption of highly regulated and
    specialized agreements for extending power into new
    subdivisions. The group was successful in achieving an early
    resolution for the home builders.
        There are many examples of this kind of thing in this case.
        Please note that this case was with the Honorable Dennis
    Montali resulting in a confirmed plan and a successfully
    reorganized debtor. This confirms that there are other courts
    around the country who have the skill and ability to handle a
    mega bankruptcy case. The point of these examples are that
    creditors can get left behind when bankruptcy cases are filed
    in remote courts, and these cases lose important local input.
        In conclusion, H.R. 2533 remedies the overly permissive
    venue provisions for corporate bankruptcies resulting in
    bringing back bankruptcy cases to communities most affected by
    the outcome.
        [The prepared statement of Mr. Califano follows:]

                                   __________

        Mr. Coble. Thank you, Mr. Califano.
        Professor Skeel, before we recognize you, I want to
    recognize the distinguished gentleman from Tennessee, Mr.
    Cohen, who is the Ranking Member of the Subcommittee, for his
    opening statement.
        Mr. Cohen. Thank you, Mr. Coble. I appreciate your
    courtesy, and I apologize for being late. I appreciate each of
    the witnesses' being here and contributing on this important
    subject.
        This bill, which is bipartisan--it has got the sponsorship
    of the Chairs and Ranking Members of both the full Committee
    and the Subcommittee--the Chapter 11 Bankruptcy Venue Reform
    Act of 2011, offers what we think are common sense changes to
    the bankruptcy venue statute. And that is the main reason why I
    am an original cosponsor.
        There are other issues with venue that concern me. In
    Memphis, we are a border community and have cases in
    Mississippi and Arkansas that we feel should be filed in the
    Memphis courts as well. But this is a different issue.
        And under 2533, a corporate debtor would be permitted to
    file its case only in the district that encompasses its
    principal place of business or where its principal assets are
    located for the year preceding commencement of the bankruptcy
    case or for the longer portion of such year. Such debtor may
    also file in a district where the bankruptcy case of a parent
    company or other controlling affiliate is pending. Under our
    current law, a corporate debtor may file a bankruptcy case in
    one of a number of venues. In addition to its principal place
    of business or the place where its principal assets are
    located, a debtor may file its case in the district
    encompassing its place of incorporation, oftentimes the Blue
    Hen State of Delaware, or a district where an affiliate case is
    pending. Unfortunately, the availability of the latter two
    options has led to a vast majority of large Chapter 11 cases
    being filed in one of only two bankruptcy courts--one of those,
    of course, is the Blue Hen court--even when these venues are
    not convenient or fair for most of the stakeholders involved in
    these cases. Even though all of us want to go see where DuPont
    is headquartered, it is not necessarily the best site for most
    people.
        Such a result threatens to undermine the purpose of having
    venue rules in the first place, which is to ensure that legal
    right rules and rights be adjudicated in the places most
    convenient and fair for all the parties in a case. I think a
    convenient forum is one of the first things you learn about in
    law school and the need for that. In a Chapter 11 bankruptcy
    context, filing a case in a venue where a debtor has no
    substantial ties harms small creditors, employees, and other
    affected stakeholders who lack the resources of larger
    creditors and corporate debtors to assert or protect their
    interest in these distant forums.
        Our witnesses will go into greater detail as to why venue
    matters a great deal in Chapter 11 cases--Mr. Califano has done
    so, mentioned Perkins--and why the changes that H.R. 2533
    proposes are necessary. We will also hear from our learned
    witness from the Keystone State and why he opposes the bill.
        I applaud Chairman Smith and Ranking Member Conyers for
    their leadership on this issue. I also thank Chairman Coble for
    holding this hearing. It is a delight to work with Chairman
    Coble and am fortunate to be able to do so.
        And I would like to recognize Mr. Carney of Delaware, who
    is on the dais, who is a Blue Hen and wants everybody to go to
    Delaware as often as possible, even when it is inconvenient. I
    hope that we can have a fruitful discussion and continue the
    prosperity of the State of Delaware but not at the
    inconvenience of thousands and thousands and thousands of
    people that aren't in Mr. Carney's district.
        With that, I yield back the remainder of my time.
        Mr. Coble. Thank you, Mr. Cohen.
        Professor Skeel, I am not trying to impose pressure upon
    you, but I will remind you that Mr. Califano complied with the
    5-minute rule.

    TESTIMONY OF DAVID A. SKEEL, JR., PROFESSOR OF LAW, UNIVERSITY
              OF PENNSYLVANIA LAW SCHOOL, PHILADELPHIA, PA

        Mr. Skeel. I was very impressed.
        Mr. Coble. But you will not be keel-hauled if you fail to
    do that.
        Mr. Skeel. It is a tough standard to live up to.
        Mr. Coble. Goods to have you with us, sir. You are
    recognized, Professor.
        Mr. Skeel. Thank you for the opportunity to testify. It is
    a great honor to appear before y'all today. That ``y'all'' is
    just to show there is still some Tar Heel in me, in fact, still
    a lot of Tarheel in me.
        The objective of the proposed reform is to make it harder
    for companies to file for bankruptcy in Delaware or New York.
    In my view, as you all know, the reform would be an enormous
    mistake, well-intentioned but a mistake.
        In my remarks, I will focus very briefly on three issues:
    the historical context; the remarkable effectiveness of
    Delaware and New York; and finally, the question of convenience
    for small creditors.
        First, the history. The history is a little bit complicated
    but the bottom line of the history is there is a longstanding
    tradition that a company should be permitted to file for
    bankruptcy or to reorganize in its State of incorporation. This
    rule is closely linked to the longstanding belief that
    corporations should generally be regulated by the States, not
    by Congress. The traditional right for a corporation to file
    for bankruptcy in its State of incorporation needs to be seen
    in this context, the context of how the rest of corporate law
    works. Removing this right would flip the traditional
    understanding of corporate regulation on its head.
        The second issue is the claim that the current venue rule
    has led to a so-called ``race to the bottom.'' The leading
    academic advocate for reform, Lynn LoPucki of UCLA, has argued
    that Delaware and New York attract cases by, among other
    things, paying high fees to bankruptcy lawyers, permitting the
    debtor's managers to keep their jobs, and simply rubber-
    stamping the company's proposed reorganization plan or asset
    sale. Professor LoPucki accuses the bankruptcy judges in
    Delaware and New York and other judges that have adopted
    similar practices of being corrupt. I believe that the
    allegations of corruption are unfounded and deeply unfair.
        In my own work, I have tried to investigate some of
    Professor LoPucki's claims. What a co-author and I found is
    that Delaware cases turn out to be much quicker than cases in
    other districts and that the best predictor of whether a
    company will file for bankruptcy in Delaware, as opposed to its
    local court, is how experienced the local court is. If the
    local court is inexperienced, the company is much more likely
    to file in Delaware; if the local court is more experienced,
    the company is much less likely to file for bankruptcy in
    Delaware.
        New York has developed the administrative capacity and
    expertise to handle the very largest cases, the cases that are
    seen as too big for Delaware or other districts. The idea that
    it makes sense to have courts with special expertise dealing
    with particularly complex cases is widespread in American law.
    The new Dodd-Frank Act resolution rules, to give just one
    example of this, is based on precisely this principle, that we
    ought to put in a specialized court cases that are very large
    and very complicated.
        The final issue is convenience for small creditors. Critics
    of Delaware and New York argue that it is much harder to attend
    a hearing in Delaware or New York than it would be to attend
    hearings in the company's principal place of business. In
    reality, the vast majority of Chapter 11 cases--and this is
    about 90 percent. My math isn't great but I don't think this is
    too far off--are filed in the district where the company has
    its principal place of business. And even with the largest
    cases, only half of them, end up in Delaware or New York. And
    these cases, whatever you think of convenience, you are going
    to get that convenience. The headquarters, principal place of
    business, and State of incorporation are all going to be in one
    State--in one district.
        Many of the debtors that do file for bankruptcy in Delaware
    or New York are far-flung companies for which there is no
    single location that would be convenient for most of the
    creditors.
        It is also important, it seems to me, to be realistic about
    the extent to which small creditors really want to participate
    in these big bankruptcy cases. Most small creditors don't want
    to be actively involved. It takes time and often money. And
    those who do are often very frustrated that there isn't more
    they can do, even if they can appear in court, to affect the
    outcome as an individual creditor.
        I do think that convenience is very important, but I think
    there are much better ways to deal with the convenience
    concern. Video and telephone hearings have become much more
    common than they were in the past, and they are going to
    continue to become more common.
        I also think there are some creative things we could do to
    facilitate participation. Elizabeth Warren, when she was head
    of the TARP Committee, held a series of hearings in the
    locations where a lot of affected workers live, in their
    hometowns, in their home areas. I think you could do something
    like that in Chapter 11. You could require that a debtor in a
    case that is far-flung have periodic forums in the local State
    where local creditors have a chance to be informed and to raise
    their issues.
        What I don't think we ought to be doing is changing the
    venue rules. What that would do, in my view and from the work
    that I have done, is undermine a system that works remarkably
    well. There are some problems with the bankruptcy system, it
    seems to me, and I think we should be dealing with them. There
    are problems like the fact that derivatives aren't regulated in
    bankruptcy. Venue reform doesn't seem to me to be one of those
    problems.
        [The prepared statement of Mr. Skeel follows:]

                                   __________

        Mr. Coble. Thank you, Professor.
        Judge Bailey?

       TESTIMONY OF THE HONORABLE FRANK J. BAILEY, CHIEF JUDGE,
     BANKRUPTCY COURT FOR THE DISTRICT OF MASSACHUSETTS, BOSTON, MA

        Judge Bailey. All right, Mr. Coble, I guess the time
    pressure is off now. [Laughter.]
        I am used to setting time limits these days, and I am not
    very good at keeping at them but I am going to do my best.
        Mr. Chairman, Members of the Subcommittee, thank you very
    much for the opportunity to be here today and to talk with you
    about H.R. 2533. I first want to make the point clear that I am
    here on my own behalf. I am not here for the Judicial
    Conference of the United States or the Administrative Office of
    the United States Courts.
        I would like to make three points, and they line up very
    nicely with what I think Professor Skeel has just previously
    stated in his statement. And I would like to start actually
    with a quote from Professor Skeel's article in 1998, 1 Del. L.
    Rev. It starts on page 1 where he said: There was and there
    continue to be a populist and progressive disdain for charter
    competition since it appears to benefit out-of-state interests
    at the expense of employees and the communities in which those
    businesses operate. I think that he has really put his finger
    on the point that I want to start with, and that is the current
    venue statute undermines confidence in the bankruptcy system.
        Communities identify strongly with their corporate
    citizens. Many people, of course, work in the community for
    those corporate citizens. Often we are talking about the
    ``nerve center'' of those corporate citizens that sit in your
    districts. I have used the examples of Coca-Cola in Atlanta,
    FedEx in Memphis, Gillette in Boston. Even the Tampa Bay Bucs
    in Tampa-St. Pete now becomes relevant because the Los Angeles
    Dodgers have filed in a so-called magnet court. I could use the
    examples of Enron in Houston, GM in Detroit, and indeed, I
    could use the example of Lehman Brothers in New York City.
        For iconic companies such as these to file a bankruptcy
    petition in a magnet court rather than in the place where they
    are fully identified as corporate citizens and where they did
    business for many years in many instances undermines confidence
    in the process.
        In my statement that I filed with the Committee, I use the
    example of Polaroid and Evergreen Solar, both Massachusetts
    companies that filed at a magnet court rather than in the
    District of Massachusetts. In fact, the numbers are somewhat
    astounding, and we will put a slide up to demonstrate this.
        In fact, since 2000, over 30 public companies, large,
    medium, small cap companies, have filed far from Massachusetts
    even though those companies were all headquartered in the
    Commonwealth of Massachusetts. They collectively represented
    over 30,000 jobs and had assets of nearly $10 billion. That is
    all since the year 2000.
        Let us consider Evergreen Solar, take a closer look at that
    entity, and we will have a slide on that as well. That company
    was developing alternative energy technologies. I apologize,
    Mr. Coble, for that business. But that company received the
    highest financial incentives from the Commonwealth of
    Massachusetts that any company had ever received. Its nerve
    center was in Marlboro, Massachusetts. Last month, that company
    filed its Chapter 11 petition in a magnet district, the place
    of its incorporation, but a place with which it had, to my
    knowledge, no business ties whatsoever.
        Those opposed to the amendments ask why does all of this
    matter. Sort of so what. The bankruptcy system is working well,
    Professor Skeel tells us. Well, as a judge that sits on
    consumer cases as well as business cases, both large and small,
    I can tell you that it matters a great deal. In both consumer
    cases and in business cases, I regularly have employees, small
    vendor creditors, retirees, former employees who attend
    hearings in my courtroom. They can generally take public
    transportation to my courtroom, and I give them the chance to
    say their piece. And I frequently have to deliver bad news to
    them, sometimes life-changing bad news to them. And I have
    found that they can accept that bad news. They are not happy
    about it, but they can accept that bad news if they understand
    from whence it is being delivered by a local judge in a Federal
    system that has placed that local judge in the Boston
    courthouse where I sit. They may not be happy, but ultimately I
    believe they are satisfied with the system that Congress has
    created for them when they have that opportunity.
        My second point is that the transfer of venue statute is
    simply not effective. It is enormously expensive for a party to
    mount a challenge to venue. The debtor has chosen that location
    and will always fight back hard.
        My third point and last point is there are talented and
    sophisticated judges in other districts. We should be using
    them. In Massachusetts and all over the country, we have
    accomplished and sophisticated judges capable of handling their
    fair share of large, complex business cases. We put a slide up.
    The slide will speak for itself. These judges are no slackers.
    In fact, they include the incoming President of the National
    Conference of Bankruptcy Judges, my colleague, Judge Joan
    Feeney. The past presidents of that august organization in just
    the last few years have come from Texas, Nevada, Ohio, and
    Oregon. The way our judicial system is supposed to work is to
    rely on the creativity and innovation of judges from around the
    country in handling these large company cases. Right now, the
    concentration of cases in the magnet districts, I am afraid,
    restricts that innovation.
        Thank you very much.
        [The prepared statement of Judge Bailey follows:]

                                   ATTACHMENT

                                   __________

        Mr. Coble. Thank you, Your Honor.
        Professor Jacoby?

    TESTIMONY OF MELISSA B. JACOBY, PROFESSOR OF LAW, UNIVERSITY OF
             NORTH CAROLINA SCHOOL OF LAW, CHAPEL HILL, NC

        Ms. Jacoby. Thank you for including me today in this
    hearing.
        I would also like to clarify I am speaking entirely for
    myself today as a teacher and scholar of bankruptcy and
    commercial law and not on behalf of any group as well.
        So I would like to make three brief points, and I am going
    to frame the issue a little bit differently.
        First, I think we need to look at the current laws in the
    context of Federal venue principles overall, and in that
    context, they are not justified.
        Second, the justifications for the current system really
    aren't empirically supported, at least at the current time.
        And third, there is a perception of procedural unfairness
    that really is unfitting for a public court system, and that is
    an independent reason to consider this bill.
        So point one: the current laws aren't principled. I think
    we have to evaluate bankruptcy venue laws by reference to other
    Federal venue laws. Bankruptcy has the anomaly: the focus on
    the preferences and convenience of the filer of the action
    rather than the many, many stakeholders who were affected by
    that case. It is really the inverse of most other Federal venue
    principles and rules. And it is one thing to base venue on the
    residence or domicile of someone being dragged into a case. It
    is quite another when that is the party bringing the case.
        There really is no analog that I can find to affiliate
    venue rules in the other Federal venue principles. That is
    really something quite unique to bankruptcy. And because
    bankruptcy filers are absolved of establishing personal
    jurisdiction, venue is it. Venue is the only protection against
    inconvenience that the basic rules of the structure of the
    system are providing. So I do think that it is an anomaly--the
    current law--and that is a justification for considering this
    change.
        The second point is that the justifications often heard are
    just not persuasive. Some justify the departure by saying
    bankruptcy is exceptional. It is different. It involves more
    parties. It is more complicated. But there are other Federal
    actions that raise exactly those same concerns. So there is the
    Judicial Panel on Multi-District Litigation that assigns
    consolidated cases to certain districts. They don't consider
    place of incorporation of the corporate defendant. They might
    consider the headquarters. They consider a variety of other
    factors, including expertise. But place of incorporation is not
    among them.
        Some justify the current rules based on place of
    incorporation having a strong tie to bankruptcy and the
    relationship between corporate law and bankruptcy law. And I
    agree that bankruptcy courts need to respect State law,
    including State corporate law, but I am not sure that ties
    Delaware any more to these cases than the employment law, the
    tax law, the environmental laws of other jurisdictions. And
    outside of bankruptcy, when corporations get sued in Delaware,
    it is not unheard of for them to complain that it is
    inconvenient, that all of their resources are somewhere else,
    that their management is across the country. So I think that
    the relationship is attenuated.
        Some justify the current system by results. They say we are
    better off with the status quo. We have an excellent system. I
    do think that the courts in New York and Delaware are doing a
    great job. We do not have evidence that we are better off with
    the system that we have as opposed to a system where the cases
    went elsewhere.
        Some do argue that senior lenders help select the forum. It
    is not just management. And I completely agree with that. But
    the senior lenders need not and do not have their interests
    aligned with the other creditors and stakeholders. Bankruptcy
    is very much about creditor versus creditor. It is not just a
    debtor versus creditor problem. So I understand that Members of
    Congress can't assure their constituents to just trust the
    system far away.
        Some justify the system based on the possibility of
    requesting transfer and technology. We have already heard some
    responses to that. Absent support from the most powerful
    creditors in a case, transfer is not happening in the large
    cases, and we have known that really for at least 20 years.
    Technology is helpful but not seamless, and I am open to
    thinking about better ways to use it. It doesn't balance the
    playing field.
        And finally, some justify with fears that judges will
    handle the cases less well than judges in magnet courts. And I
    do think that that is unfounded. Even if it were true, I think
    there are ways that we could structure the system to overcome
    that concern.
        So my last point is that the current laws really do risk
    being perceived as procedurally unfair. There are decades of
    social science research that examine how parties evaluate the
    fairness of courts. Process matters and it shapes the view of
    the outcome. Someone may have a view that the outcome was
    better or worse for them based on whether they could see a
    court's effort to be fair. And when people see cases moving to
    magnet districts, they don't have a way to really verify that.
    And group representation, as we know from class actions and
    other contexts, is not the sole answer to protecting individual
    rights. We really need to think about whether people's rights
    individually are protected and if they perceive that fairness
    to be there. And it also puts more pressure on Congress to
    adopt more special interest exceptions to rules when they don't
    know what is going on.
        So I see two options, to wrap this up. There is this kind
    of legislation, which I think is reasonable and moderate and
    very much able to be supported. We could quibble about the
    affiliate venue rule, and I am sure we will have time to talk
    about that.
        Or we could rethink the assignment of large bankruptcy
    cases more structurally. There are many ways that Article III
    judges could assign the biggest cases to certain bankruptcy
    judges. We have lots of models we could choose from in the
    existing system. But I have confidence that the professionals
    and the judges in the existing system are well able to adapt to
    this kind of change. It has been that way before and it can be
    that way again.
        Thank you very much for this opportunity.
        [The prepared statement of Ms. Jacoby follows:]

                                   __________

        Mr. Coble. Thank you, Professor Jacoby. Good to have you
    with us.
        We have been joined by the distinguished gentleman from
    Michigan, Mr. Conyers. Good to have you with us, John.
        Folks, we try to apply the 5-minute rule to ourselves as
    well. So if you all could keep your responses terse, we would
    appreciate that.
        I recognize myself for 5 minutes.
        Professor Jacoby, I think you have already answered it, but
    I want it for the record. How do you respond to Professor
    Skeel's argument that Delaware and New York bankruptcy courts
    are more expert at handling large cases?
        Ms. Jacoby. Well, I think we would want to unpack that
    argument, and this is something that I have been trying to
    think a lot about. Certainly there are some judges empirically
    who have had more experience with big cases than judges in
    other districts. There are also relatively new judges in New
    York and Delaware who, again, may be doing a great job but they
    do not all come from the same level of experience.
        When we take apart the pieces of what is desired in a
    judge, we want fairness and competence and accessibility and
    speed. I think those are things that both the judiciary is well
    equipped to handle and that also can be adapted and come up
    with new innovations.
        I can understand why parties want to hire very experienced
    lawyers, but I think that expertise--we have to be careful with
    how we make that argument. We have no evidence that things are
    going better in these two districts than other places.
        Mr. Coble. Thank you, Professor.
        Mr. Califano, do you believe that bankruptcy case law in
    Delaware and New York is shaped by the fact that they are so-
    called magnet districts for large Chapter 11 cases? And if so,
    how?
        Mr. Califano. Well, the Commercial Law League doesn't
    really have a position on this, but I can respond personally.
    The Delaware courts are obviously very, very busy, and they
    have constructed rules and procedures to handle large cases. I
    believe that probably case law does follow this development,
    and I believe that, therefore, the large cases do instruct the
    case law in Delaware. So my answer would be yes.
        Mr. Coble. I thank you, sir.
        Professor Skeel, H.R. 2533 removes the place of
    incorporation as a venue option and also does away with the
    pending affiliate rule currently found in section 1408,
    paragraph 2. Some of your academic work suggests you believe
    that the pending affiliate rule leads to more pernicious forum
    shopping than the place of incorporation rule. Is this
    accurate?
        Mr. Skeel. First of all, I am very flattered that you have
    read some of my other work and others have as well.
        I do think that the affiliate rule is more debatable than
    the place of incorporation rule. From my perspective,
    eliminating place of incorporation as a venue location would be
    just a huge, huge mistake.
        I am troubled by some of the filings in New York where
    there is no real nexus at all. So I would be comfortable with a
    much more carefully crafted venue rule that said something
    along the lines of there needs to be some real presence in a
    venue before you can file there. But I generally think that the
    New York courts have done a good job.
        One thing we have not talked about yet. We have talked
    about expertise of the particular judges. They also have
    administrative capacity and administrative expertise that, at
    least at this point, other courts don't have.
        So the short answer is I think there is more room for
    improvement on the affiliate side. I wouldn't just get rid of
    the affiliate rule, but I would be comfortable with something
    that said there needs be some presence of the company in the
    district before you go there.
        Mr. Coble. I thank you, sir.
        Judge Bailey, I think you also answered this, but I want to
    put this question to you. Opponents of the bill before us,
    2533, assert that the bankruptcy judges in Delaware and New
    York have more expertise than judges in other districts and
    are, therefore, better equipped to administer particularly
    large Chapter 11 cases. What say you to that?
        Judge Bailey. Mr. Chairman, when I gave my opening remarks,
    I put up a slide that showed the experience of Massachusetts.
    There are five judges in the Commonwealth of Massachusetts in
    the District of Massachusetts, and two of us, by the way, have
    been on the bench for 3 or fewer years. But the other--when you
    include all five, there are 60 years of experience on the bench
    in the District of Massachusetts. So I would entrust any
    bankruptcy case that is filed in America with any of the judges
    that sit on our court. And I have the highest regard for my
    colleagues in Delaware and in the Southern District of New
    York, but not at the expense of having cases filed there that
    cause a lack of confidence in that forum selection. I don't
    believe Congress intended to create a national bankruptcy court
    through this venue statute for big cases, but that seems to be
    what has happened.
        Mr. Coble. I see my red light has just illuminated. So I
    will recognize the distinguished gentleman from Tennessee, Mr.
    Cohen, for 5 minutes.
        Mr. Cohen. Thank you, Mr. Coble.
        Mr. Skeel, I haven't read--is it Ms. LoPucki from UCLA?
        Mr. Skeel. Yes.
        Mr. Cohen. I haven't read her remarks. Did she actually say
    that the judges are corrupt?
        Mr. Skeel. She is a he.
        Mr. Cohen. He.
        Mr. Skeel. And he does, and he said it over and over again.
    A number of us have--Professor Jacoby and I have been at
    conferences where we have said, Lynn, you don't really mean
    corrupt, do you? And he says, yes, I do. I believe the system
    is corrupt and the judges are corrupt. He says it in his book.
        Mr. Cohen. He didn't say it was a Ponzi scheme or anything
    like that, did he? [Laughter.]
        Mr. Skeel. If you googled his name and put ``Ponzi scheme''
    there, I wouldn't be surprised if he called it a Ponzi scheme
    too. He has called it a lot very negative things, but most
    consistently ``corrupt.'' He uses the word ``corrupt'' over and
    over.
        Mr. Cohen. Let me ask each of the panelists to edify me a
    little bit. A lot of these cases are brought in the State of
    Delaware because apparently a lot of corporations decide to
    incorporate in Delaware. When they incorporate in Delaware--and
    I will start with Mr. Califano and work our way to the right--
    what does a corporation have to have and normally have in
    Delaware once they incorporate? Do they have to have like 80
    employees there or their president and their vice president and
    their board meetings, or can they just kind of incorporate
    there and go back to wherever they want to be like FedEx and do
    that stuff in Memphis and just whatever?
        Mr. Califano. Mr. Cohen, I think all you have to do is pay
    an annual fee and you are good to go.
        Mr. Cohen. That is it. They don't have to have a post
    office box? Do they have to have that?
        Mr. Califano. Maybe to start to get the incorporation
    started but very little else.
        Mr. Cohen. That is it.
        Judge Bailey, you next, I guess. I am going to come back to
    you, sir. Is that accurate? I mean, that is all you have to
    have?
        Judge Bailey. I think it is. Really the sum and substance
    of it, to my understanding, is that by incorporating in
    Delaware, that the corporation will have adopted the Delaware
    law certainly for corporate governance purposes, but there is
    no requirement that it have any actually business in Delaware.
        Mr. Cohen. And Judge Bailey, is there anything special
    about corporate law that makes it attractive to the
    corporation?
        Judge Bailey. In Delaware?
        Mr. Cohen. Yes.
        Judge Bailey. I am sure some of the academics can expound
    on this. I did serve on a couple of public company boards. They
    were actually incorporated in Maryland. And I know that the
    gifted corporate lawyers that set up these organizations
    certainly had in mind the rules that apply in those States. And
    Delaware has been an attractive location for incorporation. The
    rules are well-honed and certainly are predictable. It is not
    to say that other jurisdictions do not have similarly
    predictable laws.
        Mr. Cohen. Professor Jacoby, are you in agreement on the
    fact that you really have to have limited connections to
    Delaware after you incorporate there or even when you do?
        Ms. Jacoby. Yes.
        Mr. Cohen. And what is the beauty of Delaware for all these
    corporations? Why do they all want to come there and be in Mr.
    Carney's district?
        Ms. Jacoby. Well, I have actually been informed on those
    issues a lot by Professor Skeel's work who really does study a
    lot of Delaware corporate law. Many of the similar arguments
    have been made about the genius of corporate law and the
    benefits that it provides in terms of predictability. But
    again, we have to think about it only being a slice of really
    the law that governs what companies do. It is really about
    management and shareholders and the law that governs then. It
    really doesn't relate to any of the other issues that come up
    in a bankruptcy case.
        Mr. Cohen. And in bankruptcy cases, you have got not just
    the corporation, but you have also got consumers, and Delaware
    has nothing unique for them. Does it?
        Ms. Jacoby. No.
        Mr. Cohen. No.
        Professor Skeel, do you have any thoughts about Delaware? I
    mean, what is special about the reason that they should be
    filing these cases in Delaware? Just because they have got a
    post office box and incorporate there because of the beauty of
    the corporate law, it was not bankruptcy law. So why should
    that continue to be the forum that people are allowed to
    choose?
        Mr. Skeel. Well, as Professor Jacoby said, a lot of the
    arguments about Delaware and corporate law translate into the
    bankruptcy context. ?n corporate law, there is a debate very
    much like the one we are having about whether it is a good
    thing that all these companies incorporate in Delaware or not,
    and there are two sides of it. The ``populists,'' to use the
    term that Judge Bailey quoted from me, worry about it. Folks
    who are more market-oriented tend to think Delaware does a good
    job.
        The one thing everybody agrees on is the quality of the
    Delaware judges and the Delaware courts and their precedent
    base and the court system. Both sides of the debate agree that
    the expertise of the judges and the way they handle cases is a
    good reason to incorporate in Delaware.
        Mr. Cohen. My red light has come up as well. I think it is
    working on some kind of speed, but that is neither here nor
    there. [Laughter.]
        Mr. Coble. And I thank the gentleman.
        The Chair recognizes the distinguished gentleman from South
    Carolina for 5 minutes. Mr. Gowdy?
        Mr. Gowdy. Thank you, Mr. Chairman.
        Professor Skeel, do former partners in IP firms make better
    magistrate judges?
        Mr. Skeel. This sounds like a trick--I know where there is
    an IP expert who is on the Delaware Chancery Court. I assumed
    you were alluding to that.
        Mr. Gowdy. No. You assume motives that don't exist.
    [Laughter.]
        I am just asking whether or not people who have a
    background in IP make better magistrate judges given the fact
    that they preside over patent cases.
        Mr. Skeel. Yes. If they are presiding over patent cases,
    absolutely.
        Mr. Gowdy. So you would necessarily agree that prosecutors
    make better judges in criminal cases.
        Mr. Skeel. I wouldn't want to make a blanket statement like
    that, but I would certainly say that prosecutors have relevant
    expertise and that would be helpful in their----
        Mr. Gowdy. Are you advocating that sophisticated title 21
    drug conspiracies only be handled or presided over by Article
    III judges who have prosecutorial backgrounds?
        Mr. Skeel. Absolutely not, and that is why I said having a
    prosecutorial background would be very helpful in handling
    those cases. When I was clerking for a judge, we got a couple
    of those cases. They were extraordinarily complicated. I don't
    think you have to have that background to handle the cases, but
    it certainly helps. If I were the judge, I would rather have it
    than not have it.
        Mr. Gowdy. Can academics ever make good judges?
        Mr. Skeel. A few of them make good judges and a few of them
    even make good Supreme Court Justices.
        Mr. Gowdy. Can you name for me judges who are currently
    doing bankruptcy work that you think are too inexperienced or
    have no business doing it?
        Mr. Skeel. As I have said in my written remarks, I think
    the bankruptcy judiciary is terrific, and that is one of the
    reasons that I----
        Mr. Gowdy. I thought part of your argument was that there
    was certain acumen in Delaware and New York that shouldn't be
    wasted and that there are other judges who are inexperienced
    and unknowledgeable in the ways of bankruptcy. Did I
    misunderstand that?
        Mr. Skeel. I didn't say any of that. I said that in the big
    cases, the best predictor of whether people take their case to
    Delaware as opposed to a different district is relative number
    of--relative expertise based on number of Chapter 11 cases
    handled, which is not saying anything about experience, number
    of years of practice or any of those things.
        Mr. Gowdy. So you have never said that Delaware bankruptcy
    judges have more experience and expertise.
        Mr. Skeel. I have said they are experienced and the courts
    have a lot of expertise, yes.
        Mr. Gowdy. Your Honor, can you give us the benefit of your
    vetting process so we may know how bankruptcy judges are
    selected?
        Judge Bailey. Yes. Bankruptcy judges are Article I judges
    and are selected by--first, there is generally a merit
    selection panel. In our circuit, that panel is organized by the
    First Circuit and includes representatives of the consumer
    bankruptcy bar, the business bankruptcy bar, and also lawyers
    who have no involvement and non-lawyers who have no involvement
    in the bankruptcy process because what they are trying to
    identify at the merit selection panel stage, I believe, are
    individuals who have the judgment, the demeanor, and certainly
    the intelligence to sit on these complicated cases. And then
    after that process, the merit selection panel makes a
    recommendation to the circuit, in our case the First Circuit,
    who then selects the judge for appointment.
        Mr. Gowdy. So if there are issues with experience or
    expertise, all that can be vetted in the screening process. In
    fact, it is vetted in the screening process. Right?
        Judge Bailey. And it most certainly is.
        Mr. Gowdy. Professor Jacoby, can you cite us an example in
    the remaining amount of time I have? I was going to yield some
    time to Mr. Cohen since he is very knowledgeable on this. But
    in the remaining time I have, can you cite an example where
    maybe the current venue rules are being gamed?
        Ms. Jacoby. Gamed as--well, the way I see the system is
    that it currently permits a very wide latitude, and this would
    alter what those options are. We have also seen situations that
    have been identified where debtors seem to have no proper
    venue, but because it is waivable and no one raises it in a
    case, that a case may be in New York without anyone being able
    to point to why.
        Mr. Gowdy. Well, maybe bankruptcy attorneys are different,
    but usually you pick a venue not based on the experience and
    expertise of the judge, but whether or not you think you will
    get a more favorable outcome. It might be that bankruptcy
    attorneys are just different and they are more interested in
    fairness than winning, but they would be unique among attorneys
    if that is what they were motivated by.
        I would yield back to the Chairman.
        Mr. Coble. I thank the gentleman from South Carolina.
        I want to thank the witnesses for your testimony today. You
    all have contributed very favorably to this issue.
        Without objection, all Members will have 5 legislative days
    to submit to the Chair additional written questions for the
    witnesses which we will forward and ask the witnesses to
    respond as promptly as they can so that their answers may be
    made a part of the record.
        Without objection, all Members will have 5 legislative days
    to submit any additional materials for inclusion in the record.
        Again, we thank the witnesses for your attendance today,
    and this hearing stands adjourned.
        [Whereupon, at 11:13 a.m., the Subcommittee was adjourned.]
                                A P P E N D I X

                                  ----------

                   Material Submitted for the Hearing Record

     Prepared Statement of the Honorable Lamar Smith, a Representative in
       Congress from the State of Texas, and Chairman, Committee on the
                                   Judiciary
        Before its demise, Enron was a Texas-based company with
    7,500 employees at its Houston headquarters and over $60
    billion in claimed assets. But in December 2001, Enron filed
    for chapter 11 bankruptcy protection in a Manhattan courthouse
    1,500 miles from Texas. How was this possible?
        Unlike venue rules for other types of cases, chapter 11
    bankruptcy venue rules give many corporations several choices
    of where to reorganize. A corporation can file in the state
    where it is incorporated, where it has its principal assets, or
    where it is headquartered. For many companies, this rule alone
    provides three different venue choices.
        But many corporations have even more choices of venue. A
    corporation can also file a chapter 11 case in a venue where
    its corporate affiliate's case is already pending.
        Using this rule, Enron's bankruptcy lawyers first filed the
    bankruptcy of a small New York subsidiary with 57 employees in
    the Southern District of New York. Moments later, because this
    affiliate's case was now pending, the Houston-based parent
    company bootstrapped its massive bankruptcy case into a
    Manhattan bankruptcy court.
        The current chapter 11 venue rules allow many corporations
    to forum shop for a venue with favorable judicial precedent for
    the business. For example, a nationwide retailer may prefer to
    file in Delaware because of the Third Circuit's well-known
    rulings on the treatment of unpaid rent in bankruptcy. At the
    same time, a business with many unionized employees can avoid
    filing in Delaware to avoid Third Circuit precedent on
    collective bargaining rights in bankruptcy.
        The Constitution instructs Congress to enact uniform
    bankruptcy laws. While courts of appeal are permitted to
    interpret Bankruptcy Code provisions differently, chapter 11
    debtors should not be able to leave their home districts and
    shop for a forum whose judicial precedent on bankruptcy law
    they happen to prefer.
        In recent years, a majority of large companies have chosen
    to file their chapter 11 cases in the Southern District of New
    York and in Delaware.
        Like umpires in baseball, bankruptcy judges should be
    neutral referees in chapter 11 cases. The practice of forum
    shopping is predicated upon an assumption that some judges are
    ``fairer'' than others. Regardless of where a company
    reorganizes, a judge should call balls and strikes the same
    way.
        I believe our national bankruptcy system suffers when
    chapter 11 bankruptcy cases are concentrated in just two
    judicial districts on the east coast. When a large chapter 11
    case travels across the country to be heard in a far-away
    bankruptcy court, many of the business's stakeholders lose out.
    Employees, creditors, and the community in which the business
    operates feel out of touch with the reorganization process.
    Interested parties frequently have to travel long distances to
    present evidence to support their claims.
        In July, I introduced H.R. 2533, the Chapter 11 Bankruptcy
    Venue Reform Act of 2011, to reform the chapter 11 venue rules
    so that corporate debtors must reorganize in their home court.
    I am pleased to be joined in that effort by Ranking Member
    Conyers and the Chairman and Ranking Member of this
    Subcommittee.
        The bill requires corporate debtors to file for chapter 11
    where they have their principal place of business or principal
    assets. It also prohibits large parent corporations like Enron
    from leaving their headquarters and following tiny, well-placed
    subsidiaries into a preferred venue. The bill still allows
    subsidiaries to follow a parent firm into a venue, thus
    preserving the efficiencies that flow from joint administration
    of related debtors' cases.
        This bill improves the fairness of the bankruptcy system
    for all stakeholders in a chapter 11 case.
        I thank the witnesses for coming today and look forward to
    hearing from them.

    Prepared Statement of the Honorable John Conyers, Jr., a Representative
     in Congress from the State of Michigan, and Ranking Member, Committee
                                on the Judiciary
        Today's hearing focuses on H.R. 2533, the ``Chapter 11
    Bankruptcy Venue Reform Act of 2011,'' which I support for
    several reasons.
        To begin with, this bill will help level the playing field
    between creditors and business debtors that seek bankruptcy
    relief under Chapter 11.
        Under current law, a business can file for Chapter 11
    bankruptcy relief in the district where the debtor's
    incorporated, or where its principal place of business or
    principal assets are located.
        In addition, a business may file its Chapter 11 case in a
    district where an affiliate of the business is already pending.
        This explains how corporations headquartered in Michigan--
    like General Motors and Chrysler, from my hometown of Detroit,
    could file their Chapter 11 cases in New York in 2009.
        By choosing to file for Chapter 11 in a distant venue such
    as New York, a business--with its principal assets and most of
    its creditors and employees located in Michigan or California
    for example--makes it much more difficult for these creditors,
    particularly smaller creditors and workers, to participate in
    the case and defend their claims.
        These creditors are forced to retain counsel in the distant
    venue and, if they want to physically appear, incur travel
    costs. In effect, they have to pay more to collect on their
    claims.
        As a result, the ability of these small creditors and
    workers to influence the bankruptcy proceedings is greatly
    diminished. And, by choosing a distant forum, a company can
    reduce local press coverage of the case.
        Another concern is the potential under existing law for
    forum-shopping and manipulation which can undermine the
    fundamental purpose of having venue rules.
        These rules are intended to ensure that cases are filed
    where the locus of rights can be most fairly adjudicated.
        As I previously noted, a business can file a Chapter 11
    case in a district where an affiliate of the business has a
    bankruptcy case already pending.
        Thus, this would allow, for example, a lumber company in
    Maine--that employs hundreds of local unionized workers and
    owes money to numerous local suppliers--to file its bankruptcy
    case in any district where an affiliate of that company has
    already filed a bankruptcy case.
        This effectively permits management of a company--which is
    most likely to blame for the company's financial distress--to
    pick and choose the venue with the case law most friendly to
    management through this affiliate venue filing option.
        Particularly in cases where collective bargaining
    agreements may need to be rejected under the Bankruptcy Code, a
    jurisdiction espousing a pro-management, anti-union perspective
    would likely be very attractive to a company's management.
        A final concern I have about the current law is that it
    creates the potential to undermine the fairness--whether real
    or perceived--of the bankruptcy system and those charged with
    the administration of these cases.
        In an effort to attract larger cases, a bankruptcy court
    may be less aggressive in pursuing conflicts of interest or in
    second-guessing fee applications by practitioners.
        In addition, some have expressed concern that Chapter 11
    cases in these districts may have a higher failure rate because
    of less demanding requirements for confirmation.
        While the bankruptcy courts in New York and Delaware are
    without doubt highly respected, their counterparts in the rest
    of Nation are equally capable of handling large cases
    competently.
        In light of these concerns, various academics as well as
    the National Bankruptcy Review Commission have expressed
    support for narrowing venue choices for large business debtors.
        Accordingly, I look forward to hearing from our witnesses
    about the current law with respect to where Chapter 11 cases
    may be filed and whether H.R. 2533 is an adequate response.