Predictability. Among bankruptcy lawyers, it is the ultimate consideration when deciding which federal court best suits a corporate client seeking protection from creditors.
For the past decade, that jurisdiction has been Delaware, a pro-business state where many of the nation's major companies are incorporated. Those firms, faced with the option of filing in their home states or elsewhere, have almost invariably turned to Delaware's two-judge bankruptcy court and its reputation for quick hearings, high attorneys' fees and a pro-debtor bent.
But that may all be changing.
Bankruptcy lawyers say that a Texas federal judge's 2-year-old idea could be the thin end of a wedge that separates Delaware from its hegemony. The Texas judge, Richard S. Schmidt, implemented new court rules aimed at providing debtors a smoother and quicker transition into bankruptcy. Judges in other states are taking note in an effort to keep homegrown companies from bolting to Delaware when times get tough.
"There were a lot of complaints, people saying that companies should be forced to file where they are headquartered, not where they are incorporated," says Joel H. Levitin, a partner at the New York office of Dechert and chair of the Rules subcommittee of the American Bankruptcy Institute. "Now the other courts want to emulate Delaware."
Veteran bankruptcy lawyer Joel P. Kay of Houston's Hughes, Watters & Askanase, says it was early 2000 when he filed one of the first cases under the new complex Chapter 11 framework in Houston.
"When you know you're going to have access to the court to deal with these matters at a certain date and at a certain time, that eliminates a lot of anxiety and reduces the costs," says Kay, who filed a bankruptcy petition on behalf of Houston's Tri-Union Development Corp.
In the past, he says, he would have filed a similar case in Delaware, if only because the Texas bankruptcy courts would not move quickly enough to keep a client afloat by authorizing continued spending on payroll, supplies and other expenditures that keep a business alive.
Though courts in Miami, New York, Chicago and Los Angeles are contemplating measures similar to those adopted in Texas, most interviewed agree Texas is far ahead of the pack chasing Delaware.
"Courts are changing their first day orders, being more courteous to the lawyers, okaying fees and changing the way the cases are assigned," says bankruptcy law expert Lynn M. LoPucki, the Security Pacific Bank Professor of Law at UCLA School of Law.
Not long after Schmidt took over as chief bankruptcy judge for the Southern District of Texas in 1999, he recalls hearing a story of one local bankruptcy lawyer who said that filing a Chapter 11 petition in his district would be tantamount to malpractice. Lawyers there felt that the court's slow approval of expenditures and unreliable scheduling of hearings would place their clients in jeopardy, he explains.
"A number of cases were withering on the vine because the court was not ruling on time-sensitive matters in a timely manner," explains bankruptcy lawyer Robert D. Albergotti, a partner at the Dallas office of Haynes and Boone. "When a company is in financial free-fall, the court needs to act pretty quickly."
Schmidt promptly formed a 13-lawyer Advisory Committee on Chapter 11 Issues, which a year later created a category dubbed "Complex Chapter 11 cases."
Adopted by the court, the new rules provide special scheduling for petitioners who qualify under one of these categories:
The debtor shows a need for "first day" emergency hearings on matters vital to the survival of the business;
There is total debt of $5 million or more than $2 million in unsecured, non-priority debt;
There are a large number of parties with interest in the case;
Claims against the debtor or equity interests in the debtor are publicly traded; and
There is a need for simplification of noticing and hearing procedures to reduce delay and expense.
A case that qualifies as "complex" will receive a so-called "first orders" hearing within two days of filing, and the court will designate a specific date and time of each week as the time for hearings in the case. But it is the expedited "first orders" that are the most important facet of the reform, say bankruptcy lawyers.
"If you're doing a big case, you might be doing a million dollars [of] work in that first 20 days so you need an order right off the bat" approving you as counsel, Schmidt says. "Your client might also need money right off the bat for a line of credit [or] to pay employees."
Schmidt claims that his initiative is encouraging more filings. The American Bankruptcy Institute says that in 2000, business filings in Texas rose by 13 percent, while nationally they declined by 21 percent. In addition, once-rare complex Chapter 11 cases are now being filed regularly in Houston. "There's no question big cases have come back to Houston," he says.
One of those cases is the July bankruptcy filing of Houston-based manufacturer Sterling Chemicals Holdings Co., which was unable to make interest payments on $1 billion worth of debt. Hugh Ray, a bankruptcy lawyer with Houston's Andrews & Kurth, currently serves as local counsel in that case.
He says the new reliability of Houston's bankruptcy court made it an easy and cost-saving decision to file in Houston. "It's saved a lot of money in travel expenses, in not having to hire local counsel in Delaware, having judges familiar with the business who don't need to be educated."
While Schmidt says he expects other busy bankruptcy courts across the country to adopt similar procedures, a sister district in Texas has already joined him.
Albergotti says that he advised one of his clients, Dallas-based Kitty Hawk Inc., an air freight carrier that declared bankruptcy last year with $200 million in debt, to file for bankruptcy protection in Dallas, in the Northern District of Texas, rather than in Delaware.
At the time, Albergotti was chairman of a 10-member lawyers committee created in that district to address complex Chapter 11 cases. He says the promise of quick action in his home district made a big difference.
"One consideration was that we are an important corporate citizen in the Dallas-Fort Worth area and we are just another name in the phone book in Delaware," he explains. "We knew that this would be a fairly active case, [and we can avoid] the administrative expense of moving people and professionals to Delaware."
He attributes other recent complex Chapter 11 filings in Texas to the new rules, including the 2000 bankruptcy filing of Houston-based department store chain Stage Stores Inc., which had $300 million in debt, and publicly traded, Dallas-based investment firm Amresco Inc., which is looking to sell its $300 million in assets.
Chief Judge Robert C. McGuire of the US Bankruptcy Court for the Northern District of Texas doesn't like labeling the changes as reform. "It's a setting out of policies so that anybody from any part of the country, if they were considering filing a case in the Northern District of Texas, would know what our procedures are."
STILL KING OF THE HILL
Despite Texas' effort, it is a very long way from matching Delaware when it comes to handling corporate bankruptcies. "In Delaware," says Dechert's Levitin, "I can tell a client now, if we filed by noon on Monday, we'll have a first-day hearing on Wednesday. In other jurisdictions, you don't know."
In the year ending last September, 2,527 Chapter 11 business bankruptcy cases were filed in Delaware, 27 percent of the nation's filings of that type during those 12 months. More specifically, UCLA's LoPucki claims that two-thirds of all major corporate bankruptcies--those of publicly traded corporations worth more than $210 million--were filed in Delaware.
"The lawyers in my Delaware office-- they know every nuance of what has to happen on the first day in order to make those motions flow through the courts smoothly," says Keith J. Shapiro, a partner at the Chicago office of Greenberg Traurig and president of the American Bankruptcy Institute. "Other courts have realized that this is a very important issue to debtors."
But Shapiro cautions that this year's bankruptcy boom, a 50 percent increase from 2000, may obscure the larger changes taking place in bankruptcy courts.
"The draw of Delaware was ready access to the judges and predictability, but they got so overloaded there that you couldn't get sufficient court time to get your cases heard" after the first orders hearing, says a veteran Delaware practitioner who declined to be identified. "You may be assigned 15 minutes," says Texas' Judge Schmidt. "In some ways, it's harder to get a hearing there."
Secretaries for Delaware US Bankruptcy Court Judges Peter J. Walsh and Mary F. Walrath said the judges do not talk to the media.
ABI President Shapiro says other jurisdictions have been contemplating changes similar to those in Texas in an effort to combat Delaware's strong pull.
"In Chicago, the courts haven't made any pronouncements, but over the years they have adopted practices that look very similar to Delaware," says Shapiro. In Miami, says Patricia A. Redmond, a former president of the Bankruptcy Bar Association there, a committee is considering similar reforms, as are judges in the Central District of California, according to a Los Angeles bankruptcy attorney who declined to be identified.
Not surprisingly, attorneys' fees, says another bankruptcy attorney, play a large role in the current reform effort, both in the pursuit of more cases and in higher fees to handle them.
"I started out in Philadelphia," explains the lawyer, who requested anonymity. "The two judges there had a rule that the maximum rate any lawyer could charge was $200, what we paid our fifth-year associates--when you could take a drive down to Delaware and get the going rate."
"The judges see these large... cases as national rather than local," says Houston lawyer Kay. "Skadden Arps recently came into Houston to file a case--they are looking for fees that are reasonable on a national level, not by Harris County standards."
Kay says that while fees haven't exceeded $500 in Texas yet, there is an evolution occurring among judges where senior practitioners who could once expect only $250 per hour are now getting as much as $400.
"Recently I saw a senior practitioner ask a court for $500 an hour," Kay says. "Whether the judge will approve that, I don't know."
This article is reprinted with permission from the August 13, 2001 issue of The National Law Journal (c) 2001 NLP IP Company All rights reserved. Further duplication without permission is prohibited.…