[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:]
    
    
    
    
    
    
    
    
    
    
    
    
    
    
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    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:]
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
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    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

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               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.

                                












                                




                                






                                








                                













                                 
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