Delaware Dethroned
It was the first hearing in the chapter 11 bankruptcy of Tampa, Fla.-based Anchor Glass Container Corp., and U.S. Bankruptcy Judge C. Timothy Corcoran had to ask: What prompted one of the largest glass container manufacturers in the country to bypass the bankruptcy courts of Del aware, where it was incorporated, in favor of filing in the Middle District of Florida, where it was headquartered?
After all, over the last decade, the U.S. Bankruptcy Court for the District of Delaware has been considered the reigning venue of big bankruptcies for three very simple, very important reasons: Its judges understand complex bankruptcies, cases move quickly and professional fees get approved.
“I remember specifically what the lawyers told me in response to that question,” recalls Judge Corcoran. “They told me they were concerned that they would not be able to get the kind of early attention from [a Delaware] judge that they knew they could get in Tampa, regardless of which judge they happened to draw.
“They also felt that a local court would provide a friendly forum for the case, which involved a large business in our community, and they did not feel there was any reason to go to a distant court for work that could be done locally.”
Bankruptcy lawyer Robert A. Sori- ano, who represented Anchor Glass in its reorganization, confirms the response. “We felt the case would get more TLC if it were filed where the corporation was headquartered,” says Sori- ano, who heads the bankruptcy and creditors’ rights department at the Tampa branch of Florida-based Carlton Fields.
With the matter now winding down, Soriano believes his theory was right on the money. “The case was big, and it got a little tricky, but we went from petition to confirmation in less than four months. I think that’s pretty good.” venue shopping on the rise
anchor glass is not the first, nor by any means the largest, corporation to opt out of filing for Chapter 11 bankruptcy in Delaware recently. Courts from Manhattan to Dallas have been experiencing an uptick in complex corporate bankruptcy filings. Bankruptcy lawyers and scholars advance various theories for this shift, but all agree that Delaware’s dominance is waning.
“There was a time that it could be said that it was almost malpractice if you filed a case outside of Delaware, if you had the choice to file there,” says David M. Neff of Chicago’s Piper Rudnick. “The same isn’t true anymore.”
Long popular as a venue for incorporation, Delaware began to gain favor with bankruptcy lawyers in the early 1990s, in part because of a series of business-friendly rulings by its then-lone judge, according to UCLA law professor Lynn M. LoPucki, who has been tracking bankruptcy filings for the past 20 years.
Two provisions in Delaware’s rules that are particularly attractive, says LoPucki, are the promise to move prepackaged bankruptcies through the system in 30 days and the payment of attorney fees on a monthly basis rather than on a more traditional 120-day billing cycle. Another signature Delaware practice is the omnibus hearing, at which a judge sets aside blocks of time to hear motions rather than scheduling them randomly. That makes life easier for out-of-town lawyers.
By 1996, Delaware was the venue of choice among the nation’s 200 bankruptcy courts, handling 87 percent of all major public bankruptcies and con- tinuing to receive more than half of such filings through the first four months of 2002, according to LoPucki’s bankruptcy research database, WebBRD (www.lopucki.law.ucla.edu).
Delaware had become a more popular venue than ever, and this caused a slowdown, says Robert B. Millner, co-chair of the ABA’s Section of Litigation’s Bankruptcy and In- solvency Litigation Committee. “The Delaware court became overburdened, so the level of efficiency and the ability to get the judges’ attention declined,” says Millner, a partner at Sonnenschein Nath & Rosenthal in Chicago. “The judicial management issues became such that the perceived advantage became less.”
LoPucki says the Delaware defections started as early as 2000—the year bankruptcy filings doubled nationally and the court began to struggle under the weight of its own success.
In 2001, the biggest year ever for bankruptcies, the num- ber of cases filed in Delaware actually went down, accord- ing to LoPucki’s data.
Delaware’s solution to its expanding workload didn’t help matters. To lighten its docket, Delaware added man- power, bringing its judge count from two to six with the addition of four visiting judges.
These new judges presented a problem: They were often not on board with the court’s business-friendly program and were not always used to its trademark fast-track approach. The consequences, says LoPucki, were clear. “If a court doesn’t give managers and lawyers what they want, they take their cases elsewhere.”
Major Players Get Major Cases
By 2001 many of the sexiest bankruptcies had migrat- ed to New York City and Chicago. In December 2001, Houston-based Enron Corp. brought its $24.4 billion reorganization to the Southern District of New York’s Man- hattan Division. It was joined in January 2002 by Los Angeles-based Global Crossing’s $25.5 billion filing and in July by Mississippi-based Worldcom’s $107 billion case, considered the largest bankruptcy in history. And in 2002, the Northern District of Illinois’ Eastern Division welcomed the largest bankruptcies in retail and aviation history with Kmart Corp. of Detroit’s $17 billion case and Chicago-based UAL Corp.’s $14.6 billion filing.
Although the lion’s share of high-dollar bankruptcies have been heading to Chicago and Manhattan, a few big-name filings have also landed in mid-sized markets. For example, the bankruptcy of USAirways Group Inc. is being heard by the Eastern Division of Virginia in Alexan- dria, and the Southern District of Texas’ Houston court snagged Metals USA’s reorganization.
William J. Rochelle of Fulbright & Jaworski’s New York City office agrees. “The word is out that if you have a complicated case, it’s difficult to get significant court time in Delaware. And if you do file, you don’t know what judge you’re going to get, so it’s like a judicial lottery,” he says. “Human nature is such that you like to know what universe the judge is in.”
But the Delaware court isn’t entirely at fault. Across the country, other bankruptcy courts have been taking steps to let their local lawyers know they can find the business-friendly perks of the First State’s courts right at home, with none of the inattention or uncertainty. Two venues that have adopted case rules similar to Del- aware’s are Dallas and Houston. “Dallas is a big company-headquarters city, and Houston to some degree was the same,” LoPucki says, “yet the two cities lost a lot of cases … until they adopted complex case procedures.”
No one can blame judges for wanting to attract big cases to their jurisdictions. “Judges are lawyers, too; they like interesting work,” says Neff. “They want the prestige and the intellectual curiosity of handling a complex Chapter 11 case.”
But Delaware bankruptcy lawyer Norman L. Pernick thinks the commotion over caseloads is overblown. “There’s a lot of Delaware bashing out there,” says Per- nick, who heads the bankruptcy and reorganization department at Saul Ewing in Wilmington. “In the beginning [of the boom], when 90 percent of the cases were coming here, the workload was tremendous and sometimes it meant that people were getting hearings on the second day rather than the first day, which made people start to freak out. Is it the end of the world? No, but they were just used to instant gratification.”
He similarly dismisses concerns over his venue’s visiting judges. “When you see a judge is part-time, it’s natural to be concerned,” he says. “But my experience is that all of the visiting judges are very accommodating.”
Pernick does concede the movement of complex reorganizations beyond Delaware’s borders. But, he insists, “You’re still only talking about four or five jurisdictions getting the major cases, and Delaware certainly isn’t drop- ping off that list.”
LoPucki says the competition for big bankruptcies will continue until either Congress passes a bill limiting filing to the venue where a company has its headquarters or Delaware gets enough funding to hire additional, permanent judges. (As of press time, there were two House bills requesting more judges, H.R. 975 and H.R. 1112.) Until then, Neff believes that Delaware will continue to lose its luster as more and more companies successfully resolve cases in other jurisdictions. And lawyers like Soriano will continue to consider non-Delaware venues for their clients.
“I recently had a case where the bankers’ lawyers were trying to convince us to file in Delaware. They said it was ‘reorganization friendly,’ ” he says. “I told them we can accomplish all of that here for less money. And we did.”
