Toys R US. (Mike Kalasnik via Wikimedia Commons)
By now, most of you have read a number of stories about the Chapter 11 filing on Sept. 18 by Toys R Us. Toys R Us is the third largest retailer to ever file for Chapter 11 protection. Its headquarters are, and have been for many years, located in Wayne, New Jersey. What none of the stories have focused on is why a New Jersey based company filed its Chapter 11 petition in the Eastern District of Virginia. Why indeed?
The venue provisions for bankruptcy cases are contained in 28 U.S.C. 1408. That section provides that a bankruptcy case may be commenced in the district court for the district:
(i) In which the domicile, residence, principal place of business in the United States or principal assets in the United States of the person or entity that is the subject of such case, have been located for the 180 days immediately preceding such commencement ….; or
(2) In which there is a pending case under Title 11 concerning such persons affiliate, general partner or partnership.
Based upon these venue provisions, one would expect Toys R Us to have filed its Chapter 11 petition in the United States Bankruptcy Court for the District of New Jersey. Unfortunately, over the years, crafty attorneys for companies and their lenders have manipulated the venue provisions to allow them to “forum shop” large Chapter 11 filings. Seldom have parties contested the chosen venue of a Chapter 11 case, even where creditors, employees and other parties were severely inconvenienced by the choice of venue.
General Motors, which is based in Detroit, Michigan, filed its Chapter 11 petition in the Southern District of New York. Texas-based Enron filed its Chapter 11 petition in Manhattan. New Jersey-based A&P Stores also filed its Chapter 11 proceeding in the Southern District of New York. The A&P filing utilized an initial filing by a small affiliate of A&P located in White Plains, New York, to serve as the “hook” for the filing of the larger main Chapter 11 case.
Drug Fair, based in Somerset, New Jersey, with no stores located in the state of Delaware, nevertheless filed its Chapter 11 petition in Delaware, based upon incorporation in that state.
Information compiled by the Commercial Law League of America reflects that, between 2004 and 2016, 63 large businesses that were primarily located in the state of New Jersey filed Chapter 11 petitions either in Delaware or the Southern District of New York. The combined assets of those 63 cases exceeded $22 billion, and the combined liabilities exceeded $26 billion. In those 63 cases, 427,464 creditors were impacted, and 133,953 employees were affected by the filings.
The Delaware Bankruptcy Court is very restrictive with regard to appearances by out-of-state counsel. A Delaware firm must be involved in almost all aspects of the representation. New Jersey landlords, who were the predominant landlords in almost all of these 63 cases, were forced to hire out-of-state counsel, at significant additional cost, to represent their interests in these Chapter 11 cases which should have been filed in New Jersey.
For many years, members of the Bankruptcy Bar in New Jersey and in other states have attempted to garner legislative support for a change of the venue provisions of bankruptcy cases. For many years, those efforts were blocked by former Senator Biden and other legislators from Delaware and the Southern District of New York. The largest law firms in the country, many of whom practice in Delaware and Manhattan, exerted tremendous pressure to rebuff any attempts to change the venue provisions. Many of the largest New Jersey law firms have adopted a “if you can’t beat them, join them” approach, opening Delaware and New York offices.
The argument advanced by the large firms who seek to preserve the current venue provisions are that the Bankruptcy Courts in Delaware and the Southern District of New York are uniquely qualified to handle large bankruptcy cases. Having practiced in the Bankruptcy Court for over 35 years, I am confident that our Bankruptcy Court could ably handle any large bankruptcy case as well as, if not better than, the courts in the Southern District of New York or Delaware. It should be noted that Toys R Us chose to file that Chapter 11 case not in the Southern District of New York, or Delaware, but in the Eastern District of Virginia.
The Bankruptcy Law Section of the New Jersey State Bar Association is currently considering support for proposed legislation that would alter the venue provisions regarding bankruptcy cases, to restrict the filing of large corporate cases to the state in which the principal place of business and principal assets of that company are located. I urge all of the members of the New Jersey Bar to support this important change.•