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November 30, 2022 Feature

How a 176-Year-Old Boston Newspaper Ended Up Filing for Bankruptcy in Wilmington, Delaware: A Venue Story

By Judge Frank J. Bailey (Ret.)

The Boston Herald is a daily newspaper whose market is Boston, Massachusetts, and its surrounding area. It was founded in 1846 and is one of the oldest daily newspapers in the United States. It had been awarded eight Pulitzer Prizes in its history, including four for editorial writing and three for photography, before it was converted to tabloid format in 1981. The Herald was named one of the “10 Newspapers That ‘Do It Right’” in 2012 by Editor & Publisher.

My brother-in-law has been a photographer at the Herald for 30-plus years. He has logged thousands of miles following the Bruins, Red Sox, Patriots, and Celtics. He was among the first to photograph the horrific scene in the aftermath of the Boston Marathon bombing, photos that were important in piecing together the timeline of the events leading to the attack.

In December 2017, the Herald, following the path of so many newspapers in the country, filed for bankruptcy protection under Chapter 11. On Valentine’s Day, February 14, 2018, Digital First Media successfully purchased the Herald in a bankruptcy auction. By August 2018, the paper had approximately 110 total employees, compared to about 225 before the sale.

The fate of the Herald, however, was never in the hands of the local bankruptcy court at Post Office Square in Boston, just a few miles away from the Herald’s headquarters. Rather, it was in the hands of a judge in Wilmington, Delaware. So, if my brother-in-law and his colleagues at the paper decided to go to court to see what was happening in the case of his long-beloved employer, he had to take time away from the newsroom to travel to the middle Atlantic state of Delaware, nearly a 400-mile trip.

An iconic Boston newspaper, integral to the daily lives of so many Bostonians for so many years, was adjudicated in Delaware. The story is one that has been repeated again and again in the past 40 years. Major bankruptcy litigation has moved inexorably toward only a few jurisdictions—New York City, Delaware, and (more recently) Houston. The vast majority of so-called mega cases have filed in those places during those years. But more recently, even the not-so-mega cases, like the Herald, have migrated to those venues.

This phenomenon has been the subject of much rancor in the bankruptcy community, including lawyers, restructuring officers, accountants, politicians, and even judges. In fact, in 2011, I testified before the House Judiciary Committee on the issue of venue reform soon after General Motors (GM) and Enron filed in New York. The members of Congress from Michigan (GM’s headquarters) and Texas (Enron’s headquarters) were fit to be tied. They introduced legislation to stop companies from filing in the select locations of New York and Delaware.

Their proposals entailed amendments to venue provisions in the U.S. Bankruptcy Code. This article sets forth the issues regarding venue reform. And I take no position on the outcome of this debate; I offer the story and arguments on both sides. Much of this article is from a “White Paper” published by the National Conference of Bankruptcy Judges (NCBJ) a few years ago. I served as president of the NCBJ in 2020–2021.

Venue is about the location of a lawsuit or a case, as opposed to jurisdiction, which relates to a court’s ability to adjudicate a dispute. An optimal venue is a forum that is “. . . closest to, most knowledgeable about, or most accessible to the litigants.”

Outside of bankruptcy, a plaintiff in federal civil litigation in which venue is proper in more than one district chooses the venue for an action. A corporate plaintiff is not permitted to commence an action based on the plaintiff’s own state of incorporation. But in a bankruptcy case, it is up to the debtor that files the case to choose the venue. The optimal venue for a large business bankruptcy case is more complicated than venue in typical civil actions or bankruptcy cases of individuals, who must file in the district in which they reside, because the case involves multiple parties in interest in many different locations.

The current debate centers on bipartisan legislation to revise the venue provisions for the filing of bankruptcy cases introduced by Senators John Cornyn (R-TX) and Elizabeth Warren (D-MA). Under the Bankruptcy Venue Reform Act of 2018, S. 2282, the existing bankruptcy law pertaining to venue for filing cases would change in two principal ways. First, the bill would require an entity to file bankruptcy in the venue in which the entity’s headquarters or principal assets are located. The bill would eliminate the provisions in existing law that also permit entities to file bankruptcy where the business is incorporated, regardless of the location of its place of business or assets. Second, in the case of a group of entities wishing to file multiple bankruptcy cases in a single venue, the bill would allow the affiliate group to file all cases in the venue proper for the parent. The bill would eliminate the current ability of a group of entities to file their bankruptcies in the place of incorporation of any affiliate.

Whether one is a proponent of venue change or a proponent of the status quo, there is little debate that the existing venue law has resulted in a concentration of filing of large entity bankruptcy cases (primarily Chapter 11 reorganizations) in the bankruptcy courts for the District of Delaware and the Southern District of New York (the “magnet courts”), and now in the Southern District of Texas (Houston). Most of the arguments about venue change focus on whether the concentrated filings in these magnet courts is a good thing or not. One side views the legislation as positive and much-needed “reform,” while the other side sees it as the unnecessary “restriction of venue choices” that should remain available to debtors and creditors.

The proposed federal law provides four possible locations where an entity or individual could file for bankruptcy: (1) the place of the debtor’s domicile, (2) the debtor’s residence, (3) the location of the debtor’s principal place of business, or (4) the location of the debtor’s principal assets. As the NCBJ pointed out in its paper, there are potential positives from this reform: (1) Venue reform will promote public confidence in the integrity of the bankruptcy process and the U.S. courts; (2) venue reform will further the development of uniform national bankruptcy law on significant issues arising in complex business cases; (3) venue reform will further the intent of Congress in establishing nationwide bankruptcy courts that administer all types of cases in all districts; (4) venue reform will promote access to justice for all parties in large business Chapter 11 cases; (5) venue reform will lead to the more efficient allocation of judicial resources, including the utilization of experienced and qualified judges in districts other than in the magnet courts; (6) venue reform may assist in reducing administrative expenses in Chapter 11 cases, in particular professionals’ fees, as the current system and concentration of large Chapter 11 cases in just two or three districts requires the necessity of employment of duplicative local counsel and other duplicative professionals, and the cost of travel to the magnet courts for the professionals who may regularly be used by the debtors and stakeholders in the cases; and (7) venue reform is in the interests of local economies and bankruptcy professionals in the communities of the principal place of business of Chapter 11 debtors.

A little history is helpful here. During the late 1980s, most large Chapter 11 cases were commenced in the Southern District of New York. For example, in 1989, Eastern Airlines, which was headquartered in Florida, filed its Chapter 11 case in New York. It established its venue there, however, through the Chapter 11 filing of one of its minor affiliates, the Ionosphere Club, which had a New York office. The so-called affiliate filing practice increased in prevalence thereafter. Forum shopping became a controversial practice in the 1990s with the rise of the District of Delaware as a magnet court for Chapter 11 filings. Critics of the bankruptcy venue rules began calling for reform. The Chapter 11 cases of Enron, Worldcom, General Motors, and the Los Angeles Dodgers were all commenced and handled by the magnet courts while their headquarters and business operations were elsewhere. These cases have long been cited as examples of abuse of the bankruptcy venue process. These and more recent cases have fueled the sentiment for reform.

Recently, Senator Warren, one of the sponsors of the bipartisan venue reform bill, S. 2282, and a former bankruptcy scholar at the Harvard Law School, emphasized the need for venue reform, pointing to the Boston Herald bankruptcy case as a premier example of venue abuse. Senator Warren theorized that companies “. . . run away from home to put as much distance as they can between themselves and their communities . . . in an effort to keep creditors and employees in the [local] community away from the proceedings.” Noting that Boston has a bankruptcy court with “excellent bankruptcy judges,” Senator Warren dismissed the argument that the magnet courts have “specialized expertise” in big-business bankruptcies as a euphemism for “more favorable legal precedents that line up with the interests of corporate management.” It is corporate management that selects the venue of filing.

There is, of course, significant sentiment that the current system of bankruptcy in the United States is the best in the world and that it should not be changed. They maintain that Congress has long provided corporate debtors contemplating a bankruptcy filing with broad discretion on where to file their cases. Indeed, the present venue statute provides a corporate debtor with several choices of where to file its bankruptcy case. The debtor can file a bankruptcy petition in any district where (1) the debtor is domiciled, (2) the debtor’s principal place of business is located, (3) the debtor’s principal assets are located, or (4) an affiliate has filed for bankruptcy. For all except five years since 1898, corporate debtors have had the option to file for bankruptcy relief where they are incorporated and since 1973 have been allowed to file in the same district as an affiliate’s bankruptcy case. Allowing a corporation to file a bankruptcy case in the district of the state of its incorporation is consistent with the venue provisions for federal cases generally. Venue based on an affiliate’s bankruptcy filing—arguably the most controversial aspect of the current law—has been recognized since the start of modern bankruptcy practice involving large corporate debtor groups, first in 1973 and then in the 1978 Bankruptcy Code. The rationale for this choice is clear: Modern corporations often conduct business and borrow money in groups of affiliates. To force related entities to file in different venues would be remarkably inefficient and could lead to potentially conflicting results within the corporate group.

Some argue that the state of incorporation and affiliate filing should not be included as options for venue of a corporate debtor’s bankruptcy case, notwithstanding that such a restriction would be contrary to (1) the general federal venue statute, (2) the example of other federal statutes, and (3) the history of the bankruptcy statutes themselves. Restricting long-available venue options is not wise, they argue. First, the purported problems caused by existing venue choices are not supported by the facts. Statistics of Chapter 11 filings do not support the assertions that extraordinary numbers of small, medium, large, and even “mega” Chapter 11 cases are being skewed to a limited number of courts. In addition, statistics show that bankruptcy courts readily transfer venue where warranted. Second, it is submitted that restricting venue options is contrary to a primary purpose of the Bankruptcy Code, which is to allow the debtor sufficient flexibility to reorganize efficiently, thereby maximizing value for stakeholders. Opponents to venue change argue that facts and common sense support maintaining flexibility in choosing venue for Chapter 11 cases, which has been a factor contributing to the U.S. corporate bankruptcy law becoming a worldwide model for preserving businesses. Companies entering Chapter 11 are fragile. They and their various constituents—lenders, vendors, employees, retirees, and other creditors and parties in interest—value the predictability, consistency, and efficiency of courts that have been proven over time to administer such cases successfully.

The debate regarding the bankruptcy venue laws rages on. Powerful arguments can be made on each side of the debate. Do the current rules encourage debtors and their constituents to “run and hide,” as Senator Warren suggests? Or should troubled companies be granted broad latitude in selecting a venue that is most likely able to guide them through the dark days of restructuring to a confirmed Chapter 11 plan? As noted, I testified before Congress in 2011—11 years ago—on the then pending proposed changes to the venue laws. Given the seeming lack of an ability to get agreement on very much in Congress, it seems unlikely that changes will be made anytime soon.

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    By Judge Frank J. Bailey (Ret.)