by Mark Curriden, Senior Legal Affairs Writer
NOVEMBER 27 — Dynegy and American Airlines are multibillion-dollar corporations based in Texas based companies that filed for Chapter 11 bankruptcy protection in November. Their restructurings are predicted to be lengthy and highly complex, meaning that legal fees could approach $100 million each.
But for Texas-based law firms, the big payday remains a distant fantasy. That’s because the two businesses filed in New York, not Dallas or Houston. The law firms leading the bankruptcies are based in New York and Chicago, not Texas.
Many bankruptcy lawyers across the country say the Dynegy and American Airlines cases expose a flaw in the bankruptcy code that allows businesses seeking to restructure and reorganize to do so in jurisdictions where the companies have little to no assets or business operations.
Now, a bipartisan group of Congress is pushing legislation that would shift scores of major corporate bankruptcies away from Delaware and the Southern District of New York to cities across the country.
The result could mean a shift in hundreds of millions of dollars in revenues from national and New York-based law firms to local and regional bankruptcy practices in Atlanta, Boston, Dallas and San Diego.
“Most lawyers outside of Delaware and New York like this legislation a lot,” says Lou Strubeck, a bankruptcy partner at Fulbright & Jaworksi in Dallas. “We would see a significant jump in major bankruptcies filed in Texas if this passes.”
Nowhere is the advocacy supporting the legislation stronger than in Texas and Massachusetts. In October, the Boston Bar Association officially endorsed the reform in an effort to end “forum-shopping.”
“Requiring that a corporate bankruptcy take place locally ensures that the distinct needs of the most directly affected community are not over looked, or worse, ignored by a group of professionals who live and work hundreds, if not thousands, of miles away,” the Boston Bar Association said in a statement.
Thirty-three years ago, Congress amended Chapter 11 to allow companies to seek to restructure their debt in the state of their incorporation, which allowed corporations to venue shop for the most favorable jurisdictions.
Hundreds of companies based across the country have taken advantage of this by filing in Delaware and New York during the past three decades. Bloomberg News reported last month that Delaware receives more than $100 million in economic benefits from its bankruptcy docket.
“It became the full employment act for bankruptcy lawyers in Delaware,” says Strubeck.
North Carolina law professor Melissa Jacoby testified in October before Congress that more than 70 percent of the 200 large corporations that have filed for bankruptcy since 2005 have done so in Delaware or New York.
A separate database kept by the University of California in Los Angeles found that 405 U.S. companies with assets of more than $500 million sought bankruptcy protection between 2000 and 2011. Thirty-eight percent – or 155 – of them did so in Delaware. Another 23 percent – or 93 – filed in New York.
“There’s no reason to send a hometown company to Delaware, where it clearly adds to the expense of the case,” says Tom 
Howley, a partner in the bankruptcy section at Jones Day. “Delaware has made an industry of handling bankruptcies for out-of-town businesses.”
Howley says many companies file in Delaware or New York because corporate executives and boards view the judges in those jurisdictions as more predictable and thus being “the safe choice.”
Bankruptcy judges in Delaware developed a reputation for being pro-debtor and favoring financial institutions in disputes against creditors, according to many lawyers.
Tom Horton, the CEO of AMR Corporation, which is American Airlines’ parent, cited this exact reason as the reason his company filed in New York instead of Fort Worth.
“We think New York is the right place for this,” Horton said. “They have a very experienced bankruptcy venue up there.”
As a result, the significant players – bondholders, hedge funds buying the debt, banks doing the financing, and the legal advisors – in the pre-arranged or pre-negotiated bankruptcies, which is the preferred type of Chapter 11 these days, push companies to file in Delaware or New York.
“Commercial lenders and buyers of distressed debt pressure companies to file bankruptcy in Delaware by sometimes telling them, ‘if you want financing, you must file in Delaware or New York,” says Vinson & Elkins bankruptcy partner Josiah Daniel.
“Most financial and legal advisors are all based in the Northeast and love to go to Wilmington because they can take the train in the morning, walk to the courthouse, and then take the train home at the end of the day,” says Daniel.
Strubeck says another significant but much less discussed factor is that the major national law firms, especially some based in New York and Chicago who represent big debtor companies and financial institutions, believe they get paid more when the cases are handled in Delaware and New York.
“The courts in New York and Delaware are used to lawyers charging up to $1,000 an hour,” says Strubeck. “But in Dallas and Houston, that’s a lot and the judges will push back.”
The lawyers leading the Dynegy bankruptcy are from two New York-based law firms, White & Case and Paul, Weiss, Rifkind, Wharton & Garrison and Chicago-based Sidley Austin.
Meanwhile, Stephen Karotkin and Harvey Miller, two nationally prominent bankruptcy partners at Weil, Gotshal & Manges in New York are leading the Chapter 11 efforts for American Airlines’ parent, AMR Corp. Both lawyers played leading roles in the 2009 historic bankruptcy filing of General Motors. However, Weil Gotshal points out that three partners in its Texas offices are significantly involved in the case.
In addition, the creditors committee selected New York-based Skadden Arps to lead its efforts, once again shutting out the Texas firms.
AMR’s Horton said he selected Weil Gotshal because the law firm has been its lead outside corporate counsel for many years.
“That’s a firm that we know well and feel good about,” he said.
In contrast to the perceived pro-debtor predictability of Delaware bankruptcy judges, bankruptcy judges in other parts of the country developed a different reputation. For example, former long-serving Dallas bankruptcy judge, Harold Abramson, prided himself on being unpredictable.
Judge Abramson, who was on the bench for nearly two decades, once described himself in court as “a monkey with machine gun.” Lawyers say that cities across the country have similar stories about bankruptcy judges in their jurisdictions.
The first push to reform the bankruptcy venue law came in 2001 when Enron filed for bankruptcy in New York instead of Houston, where a great majority of its creditors resided. Texas Senator John Cornyn in 2005 introduced legislation designed to end the bankruptcy obsession with Delaware and New York.
However, efforts to change the law always failed, according to lawyers, because Delaware had a powerful advocate blocking reforms: Sen. Joe Biden, who chaired the Senate’s Judiciary Committee.
Seeing an opening, U.S. House Judiciary Committee Chairman Lamar Smith (R-San Antonio) introduced the Chapter 11 Bankruptcy Venue Reform of 2011 in July. It is co-sponsored by the Judiciary Committee’s ranking Democrat, Rep. John Conyers (D-Michigan), and appears to be gaining support in Congress.
H.R. 2533 will be successful, lawyers say, because of its simplicity. The legislation is only two-and-a-half pages long. It merely strips away the ability of corporations to file for restructuring and reorganization in the jurisdictions of their incorporation if that also is not their “principle place of business” or where they have “principle assets.”
Lawyers say the legislation, if it passes, would reduce the cost of bankruptcy for even mid-sized companies by as much as $1 million.
“Not being forced to file in Delaware or New York means that you don’t have to hire local Delaware counsel for your client, “ says Karol Denniston, a bankruptcy partner at Brownstein Hyatt Farber Scheck in Los Angeles. “It means not having to get on a plane dozens of times to travel to the East Coast for hearings and depositions, and not having to stay in hotels.
“Not being forced to filed in Delaware or New York means saving the client a lot of money,” says Denniston, who was involved in the General Motors and Leman Brothers bankruptcies. “There is a huge opportunity here to rebalance the system and redistribute the caseload to bankruptcy courts throughout the country.”
However, some of the nation’s most prominent bankruptcy lawyers believe the legislation is misdirected.
“Businesses file Chapter 11s in certain jurisdictions for two reasons,” says Martin Sosland, a bankruptcy partner in Weil, Gotshal’s Dallas office. “It’s because those courts have developed a reputation for efficiently processing pre-packaged bankruptcies and because the law in those states in more favorable.
“I think this bill focuses on a problem that isn’t really a problem,” says Sosland, who has handled Chapter 11 cases in 30 states. “Sometimes Congress tries to fix one problem but creates another problem. I fear that is what is happening here.”
Sosland and others agree that the current bankruptcy law is inline with other federal civil statutes allowing businesses to file suit in any number of different venues, including the state of incorporation. The proposed legislation would be a deviation from this.
The most adamantly opposed, as you might suspect, are the bankruptcy lawyers practicing in Delaware. In the words of one of those Delaware lawyers who asked not to be identified, “There’s one reason most companies want to file in Wilmington: it’s because we are the most business friendly jurisdiction in the country and this is where they have the best chance to survive.”
Mark Curriden is senior legal affairs writer for TexasLawbook.net and is Writer in Residence at SMU Dedman School of Law.