Texas Leads a Charge to Dethrone Delaware's Bankruptcy Supremacy: Texas Changes Rules in Bankruptcy Case

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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. …