Filing a petition with the appropriate bankruptcy court is the first step toward any successful business reorganization under Chapter 11, limited by proper "venue" for the commencement of a Chapter 11 case. "Venue" is the particular area in which a court with jurisdiction is permitted to hear and determine a case. As set forth in Section 1408 of Title 28 of the United States Code, there are two areas in which a Chapter 11 debtor may properly file their bankruptcy petition.
Title 11 Case Concerning Debtor's Affiliate or General Partner
First, proper venue for commencing a case under Chapter 11 can be in a federal judicial district where there is a pending case under Title 11 concerning the debtor's affiliate, general partner, or partnership. An "affiliate," as defined by the Bankruptcy Code, can include an entity that owns 20% or more of the debtor company's stock, or an entity that is owned 20% or more by the debtor. Effectively, this means that if one corporation has already filed for Chapter 11 bankruptcy in a particular district, the corporation's "affiliate" may properly file in the same district.
180 Days of Location or the Longer Portion Thereof
Second, proper venue for commencing a case under Chapter 11 can be in the district of one of the following:
- Debtor's domicile (state of incorporation)
- Debtor's residence
- Debtor's principal place of business in the United States (the "nerve center" of a corporation or partnership, or wherever executive offices are located)
- Location of the debtor's principal assets in the United States
In order for venue to be proper in any one of these locations, the debtor must have been located there for the 180 days preceding commencement of the case, or for the longer portion of such 180 day period than the debtor was located in any other area. Practically, this means that if a company has not been in a particular area for a consecutive 180 days prior to the commencement of a Chapter 11 case (i.e., the company has recently moved its executive offices), the proper venue for commencement of the case is where the company has been for the longer portion of the last 180 days.
For example, if Company moved its executive offices from Location A to Location B 85 days ago, and the debtor wants to file its petition in Location A, the debtor should not wait more than six days to file (85 + 6 = 91). Otherwise, the debtor will not have spent the longer portion of 180 days in Location A (91 days), and proper venue for commencement of the case would be Location B.
Large Companies and "Forum Shopping" for a Debtor-Friendly Venue
Because a large company is likely to have more than one principal place of business, and perhaps even a different domicile state (i.e., state of incorporation), multiple venues may be available to large companies for the proper filing of a Chapter 11 petition. Accordingly, the aforementioned venue rules seem to give large companies the option of "forum shopping," which involves the selective choosing of a particular district to file, based on the consideration of the following kinds of factors:
- Whether the judge who will be assigned in a particular district is known to be sympathetic to debtors
- Whether the judges and staff in a particular district are experienced in handling complicated cases
- Whether the controlling case law in a particular district would work against the debtor's best interests
Based on their reputations for being "debtor-friendly," the District of Delaware and the Southern District of New York have been the two most popular venues for Chapter 11 filings in the last decade. However, in cases where an insolvent corporation has the option of "forum shopping," it is important to consider all of the relevant case law and procedures in a particular district which might affect the outcome of the insolvent corporation's case.
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