January 16, 2018 - As reported in the WSJ, in a move that could have profound implications for the leveraged loan market, early last week Senators John Cornyn, Republican of Texas, and Elizabeth Warren, Democrat of Massachusetts, introduced a bill called the Bankruptcy Venue Reform Act of 2017. The bill would require companies that file for bankruptcy protection to bring their cases where they have their principal assets or their principal executive offices. The bill would eliminate the ability to file where they are incorporated (for large companies, overwhelmingly Delaware or New York) and restrict their ability to file where an affiliate’s bankruptcy case is pending.
Advocates of the bill argue that the bill is meant to prevent “forum shopping” for favorable courts and allow employees and other small claimants to participate in cases that impact them directly. On the other hand, proponents of the current system argue that experienced courts and judges, such as the ones in Delaware and New York, are better positioned to handle the complicated issues that attend to big bankruptcy cases and are capable of managing these cases in a more efficient, less costly and less risky manner.
Importantly, the arguments made by those proponents may be particularly apt for loan market participants. If passed, this bill would represent an enormous shift from current bankruptcy practice where the vast majority of large and sophisticated cases are adjudicated in Delaware or New York. These cases include, in particular, companies with defaulted broadly syndicated leveraged loans. Limiting the ability of such companies to file in experienced courts could arguably result in a significant negative impact for secured lenders. While the Bankruptcy Code includes important protections for secured creditors, bankruptcy courts have significant leeway, and local courts might be inclined to worry more about creditors further down the priority scale rather than the less sympathetic secured creditors.
Predictably, the bill faces opposition from Delaware’s governor and its three-member Congressional contingent who, talking their own book, noted that more than two-thirds of Fortune 500 companies incorporate in Delaware to gain access to its “world-class bench and bar with exceptional expertise in corporate issues, including bankruptcy.” Experts believe that the chances of this bill being considered in the current Senate are remote because of the very full schedules of the Senate in general and the Judiciary Committee (which has initial jurisdiction over this bill) in particular. Given its potential importance to the loan market, the LSTA will continue to closely monitor this bill.