The Bankruptcy Court in the District of New Jersey has garnered national attention with the
recent Chapter 11 bankruptcy filings of two well-known companies. The bankruptcy filings of
Bed, Bath & Beyond Inc. and the David’s Bridal LLC are just the most recent in big businesses
electing New Jersey as the bankruptcy venue. This is a departure from the historically elected
venues for large Chapter 11 cases, such as New York, Delaware, and in more recent years,
Texas. In fact, the Commercial Law League of America found that between 2004 and 2016, 63
large businesses that were primarily located in New Jersey filed Chapter 11 petitions either in
Delaware or New York. So of course, one must wonder, what allows for this sort of venue
selection?
How is it that a company may elect to file bankruptcy in the venue of its choice based on
anticipated favorable outcomes, ultimately resulting in bankruptcy venue shopping, or as some
call it, tactical venue selection? Regardless of what you call it, the result is the same. Simply put,
the liberal venue rules under the U.S. Code and the Federal Rules of Bankruptcy Procedure
provide extensive, though not entirely unfettered, discretion for business debtors to reorganize in
the venue of their choice. And why would businesses select a certain venue? That is due to the
manner in which different venues interpret and apply bankruptcy laws and procedures in
different ways. The different legal standards stem from the conflicting decisions of the higher
circuit courts, which are applied to the district courts within the circuit, but not the district courts
of another circuit. So, of course venue selection in a chapter 11 bankruptcy becomes a tactical
decision to garner the most favorable outcome in an already difficult financial situation.
WHAT IS THE LAW FOR VENUE SELECTION IN BANKRUPTCY?
The term venue generally refers to and deals with the proper geographic location for a matter to
be heard before a court. Title 28 of the U.S. Code sets forth the venue rules for all cases brought
in federal courts. Specifically, venue refers to the appropriate forum for the effective
administration of a bankruptcy case. Thus, Title 28 governs venue in bankruptcy proceedings.
Whereas Rule 1014 of the Federal Rules of Bankruptcy Procedure (the “Bankruptcy Rules”)
deals with dismissal and change of venue of a bankruptcy case.
Venue is governed by Section 1408 of Title 28 of the U.S. Code. Section 1408(1) provides that
venue is proper for bankruptcy cases in any district where the debtor has its (i) domicile, (ii)
residence, (iii) principal place of business, or (iv) principal assets, for a period of at least 180
days prior to the bankruptcy filing. Section 1408(2) provides that venue is also proper in a
district where the debtor's affiliate (or general partner or partnership) already has a pending
bankruptcy proceeding.1
Given the various methods to qualify a venue as the appropriate court for a proceeding, it is rare
that a venue selection is challenged. Moreover, there is generally a presumption that a debtor’s
choice in venue is proper. In the few instances where a debtor’s venue selection is challenged,
the bankruptcy courts of various districts are divided over which party bears the burden of proof
to establish that the venue selected is proper. In fact, a division in the various bankruptcy courts
1 Note that Section 1410 (not Section 1408) governs venue in Chapter 15 proceedings. 28 U.S.C. § 1410.
can be seen in a multitude of issues related to venue, including whether a corporation can be said
to have a “domicile” in a certain district. These differences also arise in the approval of initial
requests by a debtor, called the first-day motions, which are filed generally on an emergent basis,
together with a business debtor’s bankruptcy petition. These initial, procedural determinations
are also a significant factor in venue selection.
Notably, while blatant forum shopping is not permitted by the courts, there are many who
criticize the current venue rules, calling for reform to diminish venue shopping within the
bankruptcy courts. However, as no such reform has been implemented yet, the current
bankruptcy environment permits for a thorough analysis of the venue options available to a
debtor, and the tactical determination as to which district’s views and interpretations of the
bankruptcy rules and procedures align with the needs of the reorganizing debtor.
WHAT ARE SOME OTHER CONSIDERATIONS IN VENUE SELECTION?
Given the varying legal standards in each circuit and the differing application of the bankruptcy
rules and procedures by each district, debtors must consider the legal precedents in each venue
available, and their overall application of bankruptcy procedures. Other considerations that drive
a debtor to select a specific venue for its bankruptcy filing include court leniency afforded
debtors in the various districts. Some venues are viewed as debtor-friendly, and permit more
leeway for a debtor to formulate its plan of reorganization, while other districts may be known to
afford creditors more latitude in their objections to a debtor’s requests and actions. Another
factor considered is the judges’ expertise and experience in handling the issues and complexities
that arise in business chapter 11 cases. Furthermore, business debtors must consider the
availability of financing institutions and investors to assist with a business restructuring.
Logistically, debtors must also consider the financial burdens imposed by choosing a venue that
is not within the proximity of its business operations, such as the cost of travel for witnesses,
legal expenses incurred in retaining additional counsel familiar with the practices of a certain
venue, and such other costs affiliated with the administration of their bankruptcy case.
WHY IS NEW JERSEY TRENDING IN BUSINESS BANKRUPTCY FILINGS?
A recent Bloomberg Law article, “New Jersey Is the New Hot Spot for Big Businesses to Go
Broke” looks at the rise in business bankruptcy filings in New Jersey, which is a divergence
from the more traditional venues of New York and Delaware. One of the major factors credited
with the current trend in filings in New Jersey is predictability. That is, the ability to anticipate
certain rulings and awareness of how certain districts and the affiliated judge lean on certain
issues. New York and Delaware have recently experienced a changing of the guard, where
several judges have retired. The new judges do not have the long-standing record as the prior
judges, which heavily impacts the predictability factor in the outcome of bankruptcy matters.
Furthermore, the District of New Jersey is no stranger to complex bankruptcy cases, with its
share of business bankruptcy filings. For example, other considerations factor into the venue
selection analysis that make New Jersey favorable:
- Strategic location with proximity to major business centers such as New York and Philadelphia
- Range of industries, including, pharmaceuticals, finance, manufacturing, and retail, which have a qualifying presence to establish venue
- Well-established legal infrastructure for efficiency and effective handling of large bankruptcy cases, equipped with experienced judges and a pool of skilled legal professionals specializing in bankruptcy law
- Favorable post-COVID climate for chapter 11 bankruptcies creating a supportive environment for companies to restructure and emerge stronger, in turn revitalizing the economy
- Well-establish body of case law and precedent providing legal guidance and predictability
The District of New Jersey is an overall reliable and efficient venue for distressed businesses to
seek bankruptcy protection and chapter 11 reorganization. However, it is evident that each
business bankruptcy has complex issues and differing needs that require a tactful approach to
venue selection. There is no conclusive list of factors that can be provided, nor a checklist that is
determinative. Venue selection requires a case-by-case analysis of pertinent factors impacting a
business, case law and precedent within a district as to those factors, and the overall ability to
accomplish the goals of a business debtor.
Hence, navigating venue selection for businesses and exploring the various options available to a
debtor may require the legal expertise of experienced counsel. Bankruptcy can be a daunting
process, but it can also be a lifeline for businesses that are facing financial difficulties. . If you
are a business owner who is struggling financially, it is important to seek professional help as
soon as possible. The Scura Law Firm is experienced in business bankruptcies of varying
scales and can help you assess your options and navigate the bankruptcy process, while
avoiding potential pitfalls. Call one of our experienced attorneys for a free consultation
today!
