COVID-19 Debt and Bankruptcy Infrastructure

The COVID pandemic put unprecedented pressure on all economies around the world. Many foretold that this economic dislocation would lead to an unprecedented number of corporate bankruptcies. This did not happen. The American government and other governments responded with extraordinary measures. Congress pumped trillions of dollars into the economy, both in the form of grants and loans, and the Federal Reserve ensured that interest rates were kept at historically low levels. Companies where able to gain access to necessary funds to continue operations despite the drastic cut in their cash flows. While these measures allowed companies to ride out the worst of the pandemic, they did have consequences. Namely, many large companies were left with unprecedentedly large amount of debt on their balance sheets.

Perhaps a robust economy will allow the companies to grow their way out from under their debt burden. But perhaps not. The looming spike in interest rates or a less vibrant recovery than expected would force many large businesses to seek to restructure their debts under Chapter 11. To prepare for the possible increase of large companies filing for bankruptcy, Congress should act now to build up a bankruptcy infrastructure sufficient to handle an influx in cases. In particular, Congress should require that every circuit create a ‘business bankruptcy panel’ designed to administer the Chapter 11 filing of large companies. These panels would be staffed by a small number of existing bankruptcy judges drawn from the circuit.

As is well-known, three bankruptcy districts currently serve as dominant venues for large cases—the District of Delaware, the Southern District of New York and the Southern District of Texas. It is by no means clear that these three courts could deal with a significant increase in caseloads. In past cases of large waves of corporate bankruptcies, the system was stretched to its limits. By creating expertise across the country, the system would be prepared for any future rise in cases. This proactive building up of capacity for large bases would not require the inflow of additional resources into the bankruptcy system. Rather, it would be more in the nature of coordinating extant resources. A small number of sitting judges would be tapped in each circuit by its Judicial Council to staff the panel. If a rise in cases does not come, these judges would continue to handle their normal dockets. But when cases filings do increase, there would be sufficient judicial capacity to ensure that the cases are managed with expertise.

This change would also have a positive effect on the on-going—some may say never-ending—debate over bankruptcy venue. Serious concerns have been raised over the years by the dominance of a small number of venues when it comes to large corporate cases. These concerns are that the concentration of venues is skewing corporate bankruptcy law in a deleterious direction. For example, it has been pointed out that having only three courts handle large cases means that important issues of statutory interpretation often are not considered by a wide range of judges. If more courts handled these cases, this worry would be ameliorated.

Perhaps the major concern with the creation of specialized panels in each circuit would be from those who view the current system as a race to the bottom. They could well worry that a system with twelve jurisdictions competing for cases is worse than the current system with three competitors. The race to the bottom would become a sprint. The response to this concern, however, is not to narrow the choices. Distressed companies have a legitimate concern that their cases be handled by judges with experience in such cases. Forcing companies to have their fate decided by judges with little experience in the complex world of modern corporate reorganizations has little to commend it. Rather, to prevent a company from choosing the most favorable venue only after it is in distress and arguably in conflict with its creditors, companies could select a venue in advance in their corporate charter, thus ensuring that creditors could ascertain where a future Chapter 11 case would be heard.

Indeed, the Delaware Supreme Court’s decision in Salzberg v. Sciabucucchi suggests that such a provision would be upheld under current Delaware law. There, the Court held that Delaware’s corporate law allows a company to specify in its charter that any future securities action be filed in federal court. The validity of such a forum selection clause strongly suggests that a requirement that a Chapter 11 case be filed in a particular venue would be valid as well.

Robert K Rasmussen is the J Thomas McCarthy Trustee Chair in Law and Political Science at USC Gould School of Law, University of South California

This post is based on Prof Rasmussen's paper ‘COVID-19 Debt and Bankruptcy Infrastructure’. An earlier version of this post was previously published with the CLS Blue Sky Blog