Picking Bankruptcy Court Can Be Near Limitless in Virtual World

Bankrupt companies’ ability to select their preferred court for Chapter 11 protection is gaining strength, even as complaints of rampant judge shopping grow louder.

Decades-old bankruptcy venue rules appear ill-fitted to a post-Covid world where the physical ties—like corporate headquarters or office locations—long used to establish which court a business could file in matter less and less.

A judge’s ruling this month marked the second time this year that the government’s bankruptcy watchdog, the US Trustee, failed to convince a Texas court to move a Chapter 11 proceeding out of the state on the grounds that it lacked ties to the location.

“It’s possible that the company is wherever the CEO’s laptop is,” said Stephen Sather, who leads the bankruptcy practice group at Barron & Newburger PC out of Austin.

Judge Stacey Jernigan’s ruling allowed drugmaker Eiger Biopharmaceuticals Inc. to use a $377,000 legal retainer to justify its bankruptcy in a Dallas court. The decision in the US Bankruptcy Court for the Northern District of Texas was, on some levels, a response to a company that is largely virtual.

But it followed a separate court blessing another company using a days-old P.O. Box and bank account to establish a connection to Houston. Taken together, the decisions suggest judges themselves haven’t been swayed by calls to rein in what critics say is improper judge shopping.

Read More: Texas Bankruptcy Court Sticks to Judge Practice Others Banished

The action in bankruptcy courts reflects a wider debate over shopping for a preferred court or judge, which has touched cases ranging from corporate financial disputes to more hot-button topics like immigration, abortion, and voting.

Bankruptcy rules have long been permissive. But Jernigan, the Texas judge, suggested more flexibility is emerging under the bankruptcy code as companies become less tied to specific physical locations.

“We have some real room for creativity of lawyers pursuant to the venue statute,” Jernigan said at a hearing earlier this month.

No More Nerve Centers

Some large companies have used lack of geographic ties to establish favorable venue when attempting the strategy known as the Texas Two-Step to shed liabilities. Companies like Johnson & Johnson and Trane Technologies have set up shell companies in the districts they think will be friendliest to their turnaround efforts.

Despite the US Trustee’s two losses on venue disputes this year, some attorneys expect the office to continue keeping a close eye on how companies are picking courts.

“For a big enough company, there’s effectively no rules on venue,” Brown Rudnick LLP restructuring partner Kenneth Aulet said.

Congress passed bankruptcy venue rules in 1984, decades before companies like Alphabet Inc.'s Google and Zoom Technologies Inc. introduced tools for operating without being in one place.

The venue statute allows debtors to file where their domicile, residence, principal place of business, or principal assets are located—or where an affiliate is in bankruptcy. For companies like Eiger, which had just nine full-time employees when it filed Chapter 11 in April, those standards aren’t clear-cut.

Eiger’s top executives are in Nevada, New Jersey, and North Carolina. The company’s location is reported to be in California, where it has a rarely-used office. Eiger is incorporated in Delaware and holds meetings virtually.

The US Trustee argued the case should be transferred to California or Delaware, saying none of Eiger’s affiliates had principal assets or business in the Northern District of Texas.

“The venue rules were made years ago,” Sidley Austin LLP partner Tom Califano, who represents Eiger, said in an interview. “I don’t think they anticipated that there would be companies like this.”

Two Eiger affiliates were based overseas, providing the company even more flexibility on venue. Eiger used the affiliates’ bankruptcy filings in Texas to bring the rest of the company into the court.

Eiger, which reported $39 million in assets when it filed for bankruptcy, argued in court papers that the affiliates “simply do not have contacts with any other district to justify venue anywhere else.”

More than a decade ago, Judge Shelley Chapman, now senior counsel at Willkie Farr & Gallagher, moved Patriot Coal Corp.'s bankruptcy from her Manhattan courtroom to St. Louis. Coal miners had argued it was unfair for the bankruptcy to be in New York when many of them lived in West Virginia.

“Federal practice with respect to venue has continued to evolve to keep pace with the rapidly changing nature of our nation, from the development of interstate commerce to the rise of the corporation and national banks to the dawn of the digital age,” Chapman ruled in 2012. “Life and the law are decidedly more complex than they were when the very first federal court convened.”

Venue practices have evolved even more since then, she said in an interview.

“The notion that you can pinpoint a principal place of business for a large corporation in the United States, and or for a business enterprise with a largely remote workforce, seems like an outmoded way of looking at venue selection today,” Chapman said.

Pay Lawyers, Get Venue

The Eiger affiliates successfully argued that their only US asset is the retainer payment they made to Sidley Austin, which the law firm says it is holding in Dallas.

Jernigan’s ruling suggests that the Eiger affiliates filing for bankruptcy could have established venue anywhere they placed the retainer. “When the retainer is sufficient to establish venue, it gives a significant amount of flexibility to attorneys,” Califano, the company’s attorney, said in an email.

Sorrento Therapeutics also used the location of cash to establish venue in Texas. The California-based drug developer transferred $60,000 to a Houston account and opened a P.O. box nearby. Judge Christopher Lopez allowed the case to proceed in the Southern District of Texas.

“I don’t think anybody cares which state their bank account is in unless it comes time for bankruptcy venue,” Aulet said.

The US Trustee had urged a judge to shift Sorrento’s case to another district. Its failure in both bankruptices shows how hard it is to get a case moved. Creditors in the bankruptcy of talc supplier Barretts Minerals Inc. late last year failed to get that case moved from Texas to Montana, where the company is based.

“If a company wants to go somewhere, it’s very difficult to find a way that it can’t, unless a judge doesn’t want it to file there,” Aulet said.

Jernigan’s ruling also echoes the standard for establishing venue in Chapter 15 cases, where companies being restructured in foreign courts obtain US recognition of the foreign proceeding. Retainer locations have long been widely used for venue selection in those cases, Chapman said.

Everywhere and Nowhere

In court, Jernigan said it was the first time the US Trustee had asked her to move a case. She asked if the issue was a new policy priority for the office.

“Our decisions were based on the facts of this case,” US Trustee attorney Elizabeth Ziegler Young said. The office declined to comment for this story on whether venue motions are a new priority.

At the hearing, Young said the US Trustee’s office has discussed how to handle venue issues for remote companies, while Jernigan pondered whether a business could simultaneously exist everywhere and nowhere.

“People still have to physically be some place,” Young replied.

Califano, the lawyer for Eiger, bristled at at the US Trustee’s involvement, and said it was trying to “usurp” the ability of debtors to pick the best venue.

“I have a long history of filing cases in the Northern District of Texas,” he said in a later interview. “And I think it’s a very good jurisdiction for company-side matters.”