National Bankruptcy Review Commission
Georgetown University Law Center
600 New Jersey Avenue, NW
Washington, DC 20001
June 20, 1996
9:00 - 9:30 Opening Remarks: Personnel/Meeting Schedule
Certification of Minutes for May Meeting
Review of By-Laws and Operating Procedures
Speaking Engagements/Congressional Report
Monthly Material Distributions
9:30 - 12:00 Speakers
9:55 - 10:00 Recess
12:30 - 1:30 Lunch Break
June 21, 1996
9:30 - 12:30 Continued Meeting of Working Groups
12:30 - 1:30 Working Lunch: Group Summaries
IMPROVING JURISDICTION AND PROCEDURE
An important function of an appellate system is to provide stability
consistency in case law decision-making. In its most simple model, trial
make many rulings, some of which conflict with others, and appellate
review those decisions, resolving disputes and, over time, promoting
development of a coherent body of law.
The Constitution authorizes Congress to "establish a uniform law of
bankruptcies," but the bankruptcy appellate structure has yielded
results. Appeals from bankruptcy court decisions go to the district
many for de novo review of fact as well as law. The decision of
district court binds the parties in the case, but because there are
district courts in each district, the district court decision does not
binding precedent for all bankruptcy courts within the district. Only
case is appealed a second time to the Court of Appeals will the decision
binding precedent. Only when decisions from the Court of Appeals are
to the Supreme Court is there a nationally binding decision on all the
bankruptcy courts (and other courts as well) in a bankruptcy matter.
Many, although not all, bankruptcy court opinions are published in a
West reporter devoted to bankruptcy cases. Many bankruptcy opinions from
district courts are also published. The consequence is that about
volumes of opinions, few of which are binding on any other future case,
published each year. Practitioners assert that it is possible to find a
bankruptcy opinion to support any legal proposition.
A second difficulty with the current structure is that bankruptcy court
decisions are reviewed by judges with highly variable interest in
cases and differing bases of expertise in the area. As a result, a
number of published decisions are not carefully reasoned.
A bankruptcy litigant has access to more appeals than a criminal
tax litigant, a tort victim or almost anyone else in the federal system.
Because many bankruptcy court decisions are reviewed de novo,
litigants also frequently have an opportunity to recast their factual
presentations, taking two bites at the apple even before they begin an
on the legal issues. This is a wasteful system in both time and money,
great deal of duplication. Parties with greater resources to withstand a
lengthy and expensive appellate process have a distinct advantage.
The Ninth Circuit provides a Bankruptcy Appellate Panel (BAP) system,
other circuits are following suit. A BAP is three bankruptcy judges
a panel to hear and decide appeals from bankruptcy court decisions. But
are a voluntary alternative, which means that any party facing an appeal
front of a BAP that previously has ruled unfavorably on the issue
the instant case simply refuses to consent to using the BAP. BAP's may
accelerate the divergence of views on various legal questions; from a
parties may appeal to the Court of Appeals, as they may from a district
decision, so that BAP's do not necessarily reduce the number of appeals.
combined BAP/district court appellate structure, as exists in the Ninth
Circuit, does not create binding precedent with a single appeal. The
Commissions showed no enthusiasm for a BAP structure to solve the
Direct appeals may also exacerbate the Constitutionality problems that
in the current Article I/Article III system. While there is no
distinction between having a case reviewed by the District Court and by
Court of Appeals, the level of control currently exercised by the
courts will become more evident. In the eyes of many commentators,
courts are exercising the functions of Article III courts. With a more
appeals process, that view could become more widespread.
IMPROVING JURISDICTION AND PROCEDURE
But in a global economy, the questions of venue are not so obvious. For
multi-state corporations venue options are broad, and here is where the
mischief begins. Title 28 permits a corporation to file a bankruptcy
in its state of incorporation, the location of its "principal place of
business," or the location of its "principal assets." For the
corporation, the ability to manipulate the location of both the
place of business" and the "principal assets" provides a choice of a
different jurisdictions. As more businesses incorporate in a state that
where they do business, the magnitude of this opportunity, and its
the bankruptcy system, increases.
In addition to the state-of-incorporation option, Title 28 multiplies
opportunities for filing by corporations that have related entities. A
corporation may follow its corporate affiliate into bankruptcy in the
jurisdiction, even if it has no other ties to that jurisdiction. So, for
example, a corporation with an affiliate in bankruptcy in State A can
bankruptcy in State A even if it meets none of the other criteria for
State A. The famous example of this method of forum selection is Eastern
Airlines. Its frequent flier club, Ionosphere, Inc., filed for
New York. The huge corporation, Eastern Airlines, then followed its tiny
affiliate into a New York bankruptcy court without establishing any
with New York.
Does forum shopping occur frequently? In their landmark study of the
bankruptcies of publicly traded companies in the 1980s, Professors Lynn
and William Whitford documented the companies' choices for filing
They concluded that venue could be explained ONLY by forum shopping in
16% of the cases, and another 63% of the cases showed some signs of
shopping. In large cases, the widespread perception is that companies
frequently do--choose their fora based on a number of criteria other
listed in the statute.
The reasons for forum shopping vary among debtors and their attorneys.
debtors claim they choose a forum because its well-developed case law or
proximity to large, knowledgeable law firms actually decrease the cost
bankruptcy. Respect for a local judiciary with demonstrated abilities to
large cases may account for the disproportionate migration of large
one or two cities.
Other reasons are less benign. Professors LoPucki and Whitford identify
desire among debtors' counsels to go to fora that permit high attorneys'
and do not pro-actively review fee applications. Gaining strategic
over other litigants, such as choosing a forum where a harmful ruling is
applicable, is another frequently cited reason to select one forum over
another. Sometimes a venue is chosen for its inaccessibility for certain
litigants, driving up the costs of their pursuit of their claims and
difficult for them to serve on committees. Such strategies can affect
outcome of cases.
The law gives the initial judge great discretion in deciding forum
Professors LoPucki and Whitford report that attorneys in big cases
that judges were unlikely to turn away high-visibility cases because
"consider them to be career opportunities and are therefore reluctant to
transfer them to other districts." In the LoPucki-Whitford sample of
traded cases, no voluntary cases were moved after filing, despite some
challenges to venue and the fact that nearly 80% of the cases showed
of forum shopping.
Some of the costs of forum shopping, when it exists, are obvious. Forum
selection becomes a strategic tool, available for clever parties to
outcomes to the disadvantage of smaller creditors who are cut out of the
bankruptcy process. Because forum shopping is available in its extreme
only to large companies, it also involves an element of discrimination
smaller businesses and consumers who have no such choices.
The real costs of forum shopping, if it is widespread, might be even
The damning charge that forum shopping is used to select fora that are
fee-friendly, combined with the allegation that judges want to keep high
visibility cases, raises a troubling specter of courts competing for
bankruptcy business. If they do compete, they would do so by making
lawyer-friendly, debtor-friendly rulings. Of course, the application of
rulings is not limited to the mega-cases they attract; these rulings
affect every other business case before the courts. Given the complex
structure currently in existence and the extraordinary discretionary
decision-making vested in the bankruptcy courts, the impact of forum
is compounded. Court competition for cases could distort analysis of
problems and undermine the fairness--real or perceived--of the
These proposals for change in forum selection criteria are not novel.
part, they reflect the state of the law on forum selection in bankruptcy
to the 1978 Amendments.
"Principal place of business" is not an entirely rigid criterion. The
debates under this system, however, would likely be over whether the
place of business" was at the location of corporate headquarters or the
location of most of the assets. In either case, the venue choices would
sharply narrowed. More importantly, whatever venue was selected would
significant relationship to the operation of the business.
For some businesses, "principal place of business" would remain an
concept. As companies do more work by computer, the "virtual
be located anywhere. Moreover, as more businesses consist of intangible
questions about where the assets are located or where the business
take place become ephemeral. The courts would be called on to develop
guidelines for new kinds of corporations.
It is important to note that not all commentators believe that forum
is an inherently evil practice. Professors LoPucki and Whitford
forum shopping practices of the publicly traded companies as they
to file for bankruptcy, but they did not conclude that such practices be
curtailed. Forum shopping permits a few courts to develop expertise in
with large bankruptcy cases. It also encourages the law to develop in
facilitate large bankruptcy reorganizations. These may be positive
rather than negative implications of the current system.