Photo of Frederick (Rick) HymanPhoto of Monique Almy

On the heels of this month’s confirmation of Purdue Pharma’s controversial plan of reorganization which contained third-party releases in favor of the Sackler family members, a new bill has been introduced in the Senate seeking an end to what some critics refer to as “bankruptcy forum shopping.”  The bill is a companion bill to H.R. 4193, introduced in the House in June under the moniker “Bankruptcy Venue Reform Act of 2021.”  The bills, if passed into law, would generally (i) require individuals to file bankruptcy in the district where their domicile, residence, or principal assets are located; (ii) require corporate debtors to file bankruptcy in the district where their principal assets or principal place of business is located (or in which there is case pending concerning an affiliate that owns, controls, or holds 50% percent or more of the outstanding voting securities of, or is the general partner of, the entity that is the subject of the later filed case); (iii) prevent corporate debtors from filing solely on the basis of their state of incorporation; (iii) prevent debtors from filing bankruptcy in a district simply because one of its affiliates has filed there; and (iv) require courts to transfer or dismiss cases filed in the wrong district.  The bill would further discourage forum shopping by giving no effect to a change in the ownership or control of an entity or to a transfer of the principal place of business or principal assets of an entity that takes place within one year before the petition date or “for the purpose of establishing venue.”

While the cry for bankruptcy venue reform is not new – similar bipartisan legislation has been introduced in each of the last two sessions of Congress, and prior to that in 2011 by Senator John Cornyn (TX)  – this time may be different.  The recent ruling by the Bankruptcy Court for the Southern District of New York approving third-party releases for members of the Sackler family may have triggered a change in sentiment among the members of Congress (and gotten the attention of their State attorney generals and constituents).  The ruling, which provides broad releases in favor of members of the family in exchange for an aggregate $4.5 billion contribution to the estate, has drawn criticism from many circles.  The United States Trustee and a number of states have appealed the confirmation of Purdue Pharma’s plan of reorganization.  Indeed, that change in sentiment is evidenced by the recently-introduced Nondebtor Release Prohibition Act of 2021 (S. 2497 & H.R. 4777) which would, among other things, prohibit the use of non-consensual third-party releases of the nature granted to the Sacklers (and any consent would be required in writing by creditors for consensual third party releases).

Proponents of bankruptcy reform legislation argue that Purdue Pharma engaged in forum shopping in order to bring its complex Chapter 11 case before Bankruptcy Judge Drain in White Plains, New York.  They assert that the company chose White Plains because the Judge  approved third party releases in the complex bankruptcy cases in the past.  Currently, the Bankruptcy Code generally allows an entity to file bankruptcy in the district where (a) its domicile, principal place of business, or principal assets for 180 days immediately preceding the date of the petition (or for a longer part of such 180 days than in any other district), or (b) a bankruptcy case concerning its affiliate, general partner, or partnership is pending.  Purdue Pharma LP, the parent of the Purdue corporate family, was organized in Delaware and based in Connecticut.  Purdue Pharma Inc., however, was organized in New York, and once it filed its petition, all other affiliates were entitled to file there as well. Under the proposed bill, Purdue Pharma Inc., as a majority-owned subsidiary of Purdue Pharma LP, could have filed in any jurisdiction where Purdue Pharma LP satisfied the venue requirements but not vice versa.

Under the current circumstances, the instant version of bankruptcy venue reform legislation is likely to get a much closer look (and maybe even a vote unlike prior attempts).  The arguments from both proponents and opponents have not changed but the emotions and political pressures may have.  We will keep our readers apprised of the legislation as it moves through Congress.