By Jonathan Randles 

Top law enforcement officials from California, Texas and dozens of other states and U.S. territories are backing the latest bid by federal lawmakers to restrict the ability of financially troubled companies to file for bankruptcy protection far from where they have their headquarters.

The National Association of Attorneys General on Thursday sent a letter to Congress supporting a bipartisan bill that would make it harder for companies whose principal place of business is outside New York or Delaware to file for chapter 11 protection in those states, which have long been the most popular venues for large corporate bankruptcies.

The letter, signed by 42 attorneys general, touches on an issue in corporate bankruptcy that for years has been a source of debate and occasional controversy. The letter was sent days after the Boy Scouts of America, which has its headquarters in Irving, Texas, filed for chapter 11 protection in Wilmington, Del., to reckon with mounting legal pressure over allegations of childhood sexual abuse by employees or volunteers.

Proponents of the existing rules argue bankruptcy judges in Delaware and New York and other popular venues like Houston are the most experienced and therefore the best equipped to usher large corporate reorganizations for the benefit of debtors, creditors and other stakeholders.

Critics of the status quo argue that employees of bankrupt companies and smaller creditors can find themselves at a disadvantage if a company files far away from where it operates. They also say it perpetuates a perception that corporate bankruptcy is unfair to smaller stakeholders even if the result of a particular case would wind up being the same in the end.

The attorneys general's letter said that while they respect the expertise of judges in Delaware and New York "we reject the argument that judges in other districts are not equally capable of exercising an expertise in handling corporate cases, large or small."

"Under the current rules, those who already have suffered as a result of a corporate debtor's financial collapse must spend substantial additional amounts, travel long distances, and often hire additional local counsel simply to participate on an equal footing with the debtor, " the letter said. "While some suggest that distant parties can try to catch up by participating telephonically in court hearings, the inability to appear in person or to engage in face-to-face discussions with those who are in courts puts them at a distinct disadvantage."

The venue-reform bill was introduced in Congress last year and had it been law would likely have presented a hurdle to the Boy Scouts filing in Delaware. The national organization is headquartered in Texas, has a warehouse and distribution center in Charlotte, N.C., and land for adventure camps in Florida, Minnesota, New Mexico, West Virginia and parts of Canada.

But the organization created a Delaware nonprofit limited liability company in July that has been put into chapter 11 along with the national organization. The primary asset of the limited liability company, called Delaware BSA LLC, is a depository account located in the state. The bankruptcy petition says its estimated assets are no more than $50,000.

The Boy Scouts' chapter 11 filing is a "blatant" example of an organization manufacturing jurisdiction in Delaware, said Pamela Foohey, a professor at the Maurer School of Law at Indiana University who has written about the issue on finance and bankruptcy blog Credit Slips. Filing for bankruptcy far away from where an organization actually operates can create the perception that it has left its local community behind and is attempting to get out of its commitments, even if that isn't what winds up happening, she said.

"First impressions matter a lot, whether it's with one person meeting another person face to face or companies that have no connection to Delaware filing in Delaware bankruptcy court," Prof. Foohey said Friday.

A Boy Scouts of America spokeswoman declined to answer questions about why it chose to file for chapter 11 in Delaware but said the organization "is committed to fulfilling our social and moral responsibility to equitably compensate victims who suffered abuse during their time in Scouting, while also ensuring that we carry out our mission to serve youth, families and local communities for years to come."

"Our plan is to use this chapter 11 process to create a Trust that would provide equitable compensation to victims. The BSA will provide clear and comprehensive notices to ensure all victims have an opportunity to submit claims and receive compensation," the Boy Scouts of America said.

Write to Jonathan Randles at Jonathan.Randles@wsj.com

(END) Dow Jones Newswires

February 21, 2020 18:09 ET (23:09 GMT)