Texas AG Supports Federal Legislation to Ban Bankruptcy Forum Shopping

Texas Attorney General Greg Abbott announced his support of legislation filed by U.S. Sen. John Cornyn, R-Texas, that would stop corporations like Enron from exploiting a loophole by filing bankruptcy in federal courts far from their headquarters.

The Fairness in Bankruptcy Litigation Act would amend federal law to require corporations that file bankruptcy to do so where their principal place of business or principal assets are located.

“Infamous bankruptcy filings like Enron’s underscore the need for corporations to do the tough work of reorganizing in their home states—not in far-flung locations where most people can’t afford to participate,” Attorney General Abbott said. “Corporations based in Texas should be accountable and accessible to their employees, pensioners, creditors and shareholders who live in Texas.”

Sen. Cornyn’s legislation would stop “forum shopping,” a common practice in which corporations file bankruptcy in debtor-friendly courts far from the scrutiny of the communities where they are based. The bill, S. 314, which implements a major recommendation of the National Bankruptcy Review Commission, also forbids parent companies from filing first through a subsidiary.

Enron, one of the world’s largest energy corporations prior to its 2001 collapse, had 7,500 employees in its Houston headquarters, but filed for bankruptcy in New York where it had a small, 57-employee subsidiary. The Office of Attorney General unsuccessfully asked the court to transfer the case back to Texas.

In addition to the inconvenience caused by the distant location, the New York case resulted in ridiculously high professional fees, which are expected to exceed $1 billion by the time the bankruptcy case concludes. Meanwhile, the company’s creditors will likely receive 20 cents on the dollar and shareholders—including Texas retirement funds—will get nothing.

Abbott added, “Enron may be the poster child for corporations that abuse the bankruptcy system, but it is by no means the only one. Forum shopping by corporate debtors harms Texans from all walks of life. It is time for this gamesmanship to stop.”

To obtain a copy of the bill or for comment from Sen. Cornyn’s office, contact Don Stewart at (202) 224-0704.