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New Proposed Federal Law Threatens Delaware's Popularity as Preferred Bankruptcy Forum

According to a new proposed federal law, the state of Delaware may lose its ranking as one of the most (if not the most) preferred bankruptcy venues in the U.S. The impact of this proposed federal law, if passed, could be staggering on Delaware and its economy. Estimates report that approximately $100 million of the state’s annual economy would be lost.

What Is the Proposed Federal Legislation That Threatens Delaware?

Bloomberg News reports that House Judiciary Committee leaders have introduced a bill to help prevent forum shopping by corporations seeking to file for bankruptcy protection. These lawmakers wanted to end the practice of large companies seeking out preferred courts for their Chapter 11 reorganization filings in the most friendly courts and jurisdictions. The proposed federal legislation is entitled the Chapter 11 Bankruptcy Venue Reform Act of 2011. It has gained support from legislators on both sides of the aisle, too. It is expected to be brought up for a vote in the near future.

What does the recently proposed federal legislation require? The proposed bill would mandate that corporations file for bankruptcy relief in their home forums and jurisdictions so that they would have maximum participation and input in the bankruptcy process and proceedings from all impacted parties. The bill would make businesses file bankruptcy within the particular federal district in which their principal place of business is located or, alternatively, where the majority of their assets are found. It seems as though the lawmakers were interested in helping the stakeholders in those bankruptcy filings to maximize their ability to economically and efficiently participate at an active level in a corporation’s bankruptcy case.

Why Does Delaware Suffer if the Legislation Is Passed?

Delaware offers businesses favorable tax laws and regulations that are very hospitable to American corporations. As such, the state is a preferred locale for new business incorporations. In particular, big banks flock to form in Delaware. Just as businesses gather in the state to form at inception, it seems as if they gravitate toward the state at the time of their potential demises, as well. Delaware has become known as a business-friendly location for corporations seeking to file for bankruptcy protection and relief.

Out-of-state corporations flock in huge numbers to the courts of Delaware to file for bankruptcy because the laws and treatment in that state’s court system are perceived by businesses to be that favorable. This type of forum shopping is hard on creditors and parties in interest though as they may reside or be located far from Delaware. This can make meaningful and active participation within the bankruptcy system quite difficult for tasks like attending a creditors’ meeting, motions hearing, or adversary proceeding in the bankruptcy court.