Analysis

Old Dominion Courts Emerge As New Bankruptcy Hot Spot

By Vince Sullivan
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Law360 (September 18, 2020, 9:06 PM EDT) -- With a small bench of two experienced judges accustomed to handling sophisticated Chapter 11 cases, the Eastern District of Virginia is emerging as a go-to filing destination for many distressed companies, challenging Delaware and New York as the traditional bankruptcy venues. But experts say the Old Dominion isn't going to dethrone the big two — yet.

Practitioners in Richmond, Virginia, say the courts there are becoming an attractive option for corporate debtors, especially in light of the effect of the COVID-19 outbreak on the retail industry, which was already facing headwinds because of the popularity of online shopping. As the pandemic continues to force some of the country's oldest and largest retail companies into bankruptcy, more and more are choosing the two-judge bench because of its experience and its judicial predictability compared to other venues.

Retailers Lord & Taylor, Pier 1 Imports, J. Crew, Ann Taylor and Lane Bryant have chosen Virginia this year for their Chapter 11 cases, while others like J.C. Penney and Neiman Marcus have also ventured out of the northeastern mainstays by filing in Texas.

Experts say Virginia's attributes don't yet endanger the status of the Southern District of New York and Delaware, which remain the busiest bankruptcy courts in the country despite the broad leeway given to debtors to choose the courts that oversee their insolvency cases. But the rules that allow a company to file its case in any jurisdiction where it has a business entity face a continuing challenge, particularly from those who argue the status quo has led to situations where debtors can start bankruptcy proceedings in a far-flung venue it has no meaningful relationship with.

Zev Shechtman, a partner with Danning Gill Israel & Krasnoff LLP in Los Angeles, said debtors with large balance sheets and complex cases have too much leeway in choosing a bankruptcy jurisdiction in a practice known as forum shopping. The surge of so-called "mega cases" in Richmond is an example of the issues created by concentrating these complex proceedings in a handful of venues.

"It's an illustration of the problem with forum shopping," Shechtman told Law360. "Companies based out of New York, Los Angeles, Chicago, Detroit, Seattle, Miami, anywhere are filing for bankruptcy outside of where they are located and creating these lopsided situations where mega cases are only filed in a few choice districts."

Retired U.S. Bankruptcy Judge Melanie L. Cyganowski, who spent 14 years on the bench in the Eastern District of New York, said she doesn't see Delaware or New York being toppled anytime soon, but noted Virginia will continue to be a viable option going forward.

"I suspect that the debtors bar will continue to file in the same handful of jurisdictions," Cyganowski told Law360. "There will always be some that won't. But I think the Southern District and Delaware will continue to be selected. ... It's nothing more than we now have a handful of courts that can handle complex Chapter 11s."

Douglas M. Foley, a partner in the Richmond office of McGuireWoods who has been practicing in the Eastern District of Virginia for more than 25 years, believes the consistency and efficiency of the judges in Virginia have led to the surge in filings, giving debtors a measure of certainty in how a case will play out.

"When you're going to file a case, that's one of the things you're looking for, some predictability," Foley said.

He described U.S. Bankruptcy Judges Kevin R. Huennekens and Keith L. Phillips as conservative in that they tend to stick to judicial precedent in their district and in the Fourth Circuit, lending that air of consistency to proceedings. Foley also said both judges appreciate the work of qualified professionals in their efforts to reach consensus in cases that can sometimes become contentious.

"These judges trust and expect, quite frankly, these highly paid professionals to do their jobs to try and resolve things if they can and try to add value to these cases and make the best out of bad situations," Foley said.

Foley said that venues with larger bankruptcy benches can create situations where, depending on which judge is assigned to oversee a case, there could be broad variations in how they tend to rule on a particular issue. Even though the six judges in Delaware are experienced and capable jurists, Foley said the risk of an unpredictable result could cause debtors to seek relief in another jurisdiction like Virginia, where there is likely to be less variation in court decisions.

Cyganowski said that bankruptcy judges in all venues are capable of handling large Chapter 11 cases, but that administering them efficiently takes experience.

"It's not a difference that the Delaware or Southern District judges are more smart. All the bankruptcy judges are truly chosen based on their merits," she said. "It's more familiarity with the processes of a big case."

While there has clearly been an uptick in new bankruptcy cases filed in Richmond over the last few months, Foley said the choice of the venue for Chapter 11 proceedings is not a new phenomenon. He pointed to the bankruptcy of retailer Best Products filed in Virginia in 1996 as the first major case he recalls working on in the venue, as well as a steady stream of other large cases through the late 1990s and into the ensuing decades, such as the bankruptcy of electronics retailer Circuit City.

"It's been a popular jurisdiction for a long time," Foley told Law360. "Venue choices under the code are still dictated by where a company is headquartered but also by places of incorporation. Large conglomerates, if they have any entity incorporated in Virginia, they can file here."

McGuireWoods senior counsel Sarah B. Boehm said that cases move swiftly through the Richmond courts, where the federal district court has what's colloquially known as the "Rocket Docket." That tempo has been adopted by the bankruptcy bench, she said, and Judges Huennekens and Phillips are happy to allow negotiated Chapter 11 plans proceed at a rapid pace.

"Many recent cases have a lot of the work done on the front end," Boehm said. "The judges will accommodate those types of cases where a lot of work is done by the professionals even before they get to court."

The apparent advantages of filing in the Eastern District of Virginia notwithstanding, some professionals like Shechtman believe debtors have too much of a choice in where they can file for bankruptcy and that has led to a troubling trend that may cause problems as more and more debtors tip into insolvency during the COVID-19 pandemic.

Shechtman pointed to rules that permit a debtor to select any venue where an affiliate is incorporated, with the 2011 Chapter 11 filing of the Los Angeles Dodgers in Delaware, more than 2,500 miles away from the team's home, standing out as a key example.

The problem is becoming evident due to the large influx of cases, especially among retailers, as COVID-19 impacts that industry. Ann Taylor was able to file in Virginia based on the incorporation of one of its dozens of affiliates, Shechtman said.

"The law is very permissive," he said. "Any affiliate can be a basis for venue, and so it creates a situation where people are just choosing the district where they want to file for whatever reason."

The issue isn't a new one and has been the subject of legislative action several times over the last decade. The most recent push came from U.S. Rep. Zoe Lofgren, D-Calif., last fall in a move that would limit the choice of venue to where a debtor's principal place of business is located.

The move drew support from 42 state attorneys general and more than 160 sitting and retired bankruptcy judges, who said forum shopping abuses have harmed creditors and employees of bankrupt companies.

Shechtman said his firm is involved in a working committee that is looking at the venue reform issue, calling it an issue of access to justice. He pointed out that regular district court cases must have some kind of nexus to the venue in order to be filed there, and that bankruptcy cases should have the same restrictions.

"It shouldn't be that there is one ivory tower of mega cases that rules on most of these cases throughout the country. There really should be a more equitable distribution of these cases," he said. "It's just in bankruptcy that this happens. Someone can submit a piece of paper and pay a filing fee [to incorporate an affiliate] and it's a magic wand to pick your venue."

--Editing by Jill Coffey.

Correction: An earlier version of this story incorrectly spelled the name of Zev Shechtman. The error has been corrected.


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