As we read the numerous business articles concerning bankruptcy it
seems preferences is the most important concern to creditors today.
However attorney/writers have focused our attention away from a more important
concern to both secured and unsecured creditors.
Imagine your largest customer is going to file bankruptcy and they have
the opportunity to
choose among over 200 bankruptcy courts to file their petition. Most of
these courts want your customer to file in their jurisdiction because the
not only provides career opportunities for the judges but also millions if
not billions of dollars in fees for local attorneys, accountants and other
professionals. In many cases the competition is all or nothing.
To attract your customer's case, these competing courts will allow your
customer's management to remain in control of the company and all its'
remaining assets. They will let the company pay it's managers large
bonuses, bend laws or in some cases just outright break them. And, if your
customer chooses to reorganize the court will approve any plan they submit
regardless if they can perform under the plan or not
Does this sound farfetched? Well, according to Lynn Lopucki, a
law professor at the University of California -Los Angeles Law
School and author of Courting Failure: How Competition for Big Cases
is Corrupting the Bankruptcy Courts, this is the United States
bankruptcy system as it operates today and it is out of control.
According to Lopucki, two courts - Delaware and New York - hear more
than half of the big bankruptcy cases in this country while many others
get none. In 1996 Delaware heard 87 percent of the big case filings, 13 of
the 15 cases filed. In 2003 Delaware heard 17 of the biggest cases while
New York heard 12. Why? Because in 1970 a legislative accident gave big
companies the right to choose their bankruptcy courts. In 1997, The
National Bankruptcy Review Commission recommended Congress end the
competition by revoking the companies' right to pick their courts.
Congress never acted on that recommendation.
Delaware's two bankruptcy judges are so overworked that United Airlines
and K-Mart elected to file in Chicago. Delaware needs four new bankruptcy
judges to handle the overwhelming number of cases filed in their
jurisdiction and under the bankruptcy bill now pending, Congress would provide
A New Bill to Prevent Court Shopping
Senator John Cornyn, R-Texas has introduced a stand alone bill (S.314)
that would require companies to file in their local bankruptcy courts
thereby eliminating the practice by big companies of shopping for
Cornyn's action is prompted by the Enron bankruptcy filing. Then State
Attorney General for Texas, Cronyn argued, unsuccessfully, that Enron
bankruptcy court proceedings should have been litigated in Houston, home
to the majority of its employees and others who were victimized by the
scandal. Enron was able to use the place of incorporation of one of its small subsidiaries
in order to file a bankruptcy claim in New York and then used that
smaller claim as the basis for shifting all of its much larger bankruptcy
proceedings into that same court
Senator Cornyn's legislation would require (1) that corporate debtors
file where their principal place of business or principal assets are
located (rather than their state of incorporation), and (2) forbid parent
companies from manipulating venue by filing first through a subsidiary.
Enron is only
one example of abuse by the present bankruptcy system allowing large
companies to "shop around" for friendly courts. Other examples
- K-Mart. In January 2002, the executives
delivered Michigan based K-Mart to the bankruptcy court in Chicago,
which reportedly had been actively soliciting large corporate debtors
to file in there jurisdiction. The Chicago judge permitted K-Mart executives to take
millions of dollars in bonuses, perks and loan forgiveness..
Bankruptcy lawyers pocketed nearly 140 million in legal fees but
43,000 creditors received less than ten cents on the dollar.
- Polaroid. In October 2001, the Boston based
company filed for bankruptcy in Delaware, listing assets at 1.9
billion. Company executives claimed the company was a "melting
ice cube" and arranged to sell the company to a single bidder for
$465 million. Over creditor objections, the court refused to hear
testimony as to the true value of the company and closed the sale in
70 days. Polaroid executive went to work for the new company and
received millions of dollars in stock while disabled employees had
their health coverage cancelled. The "melting ice cube"
became profitable the day after the sale was finalized.
- Continental Airlines. In 1990, a Delaware judge
ruled that creditor's lawyers could not appear in a Houston court even
though the company was headquartered in Houston and a bankruptcy
proceeding was still pending in the Houston court. The Delaware judge
ruled favorably for Continental on every major issue to the detriment
of Continental's creditors.
legislation concerning "forum shopping" has been introduced
previously in both the House and Senate beginning in 2002, Senator
Cornyn's bill is the first known stand-alone legislation to specifically
target the problem of bankruptcy forum shopping.
Floor debate on S.314 is scheduled to commence Monday, February 28.
Interested parties are encouraged to contact their respective Senators
and voice their concerns about this important piece of legislation to
reform the bankruptcy venue rules.
I wish you well.
The information provided above is for
educational purposes only and not provided as legal advice. Legal advice
should be obtained from a licensed attorney in good standing with the Bar
Association and preferably Board Certified in either Creditor Rights or