© 2015 The Texas Lawbook.
By Mark Curriden
(Feb. 6) – Radio Shack stores may be far from fashionable, but the company’s decision to file bankruptcy in Delaware was very trendy.
The Fort Worth-based retailer is the latest in a growing number of financially troubled North Texas corporations, including Energy Future Holdings, American Airlines and the Dallas Stars, to go outside the state to restructure its business operations under Chapter 11 of the U.S. Bankruptcy Code.
Neither Radio Shack officials nor lawyers representing the company will discuss why they decided to file bankruptcy in Delaware instead of Dallas or Fort Worth.
General counsel for the companies that snubbed Texas bankruptcy courts say they did so because the judges in Delaware and the Southern District of New York are more experienced and more predictable in handling large complex corporate restructurings.
But legal experts say the supposed advantages in the East Coast courts are not based in reality.
“The perception by lawyers at some law firms is that Texas is not a good place to file a complex Chapter 11 bankruptcy and that the judges in Delaware are much more cooperative with debtors in the reorganization process,” said Lou Strubeck, a bankruptcy partner at Norton Rose Fulbright. “These lawyers think the Texas bankruptcy judges are not as good, which is simply not true.”
Strubeck and other lawyers say the Dallas bankruptcy courts initially obtained a negative reputation among national bankruptcy lawyers in the 1990s when Judge Harold Abramson was on the bench.
Judge Abramson, who once described himself in court as “a monkey with a machine gun,” took pride in the fact that he was unpredictable – a trait risk-adverse bankruptcy lawyers viewed as dangerous.
But the days of Judge Abramson are long gone and the bankruptcy judges in Texas are now regarded as some of the best and most diligent, said Vinson & Elkins bankruptcy partner Josiah Daniel.
“A lot of lenders believe they will get a more consistent result in Delaware and New York than they do in Texas,” said Daniel, who represents Dallas entrepreneur Sam Wyly in his ongoing bankruptcy case in Dallas. “They are wrong.”
Gregory Hesse, a partner at Hunton & Williams in Dallas, agrees that financial institutions and purchasers of assets contend there are strategic benefits to having bankruptcies litigated in courts outside of Texas.
“I can tell you that I’ve seen some strange decisions come out of the bankruptcy courts in Delaware and New York, too,” Hesse said. “But there are a lot of boards of directors and executives who decide to file bankruptcy in Delaware or New York because they believe it’s the safe thing to do and they won’t be blamed if it goes bad.”
U.S. Bankruptcy Judge Michael Lynn of Fort Worth said lawyers “study the judges in Delaware so much that they think they know what the outcomes will be.” But he said the reality is that judges in Delaware and New York handle bankruptcy cases no differently than jurists in Texas.
The judge said companies that file for bankruptcy outside of Texas are hurting the local economy because they tend to use non-DFW based lawyers to handle their litigation.
“It is a shame because it has done harm to a very fine bankruptcy bar in Texas,” Judge Lynn said, noting that several Texas law firms have trimmed back their bankruptcy practices because of the lack of big cases.
Former American Airlines General Counsel Gary Kennedy says he now regrets filing bankruptcy in New York instead of Texas.
“I wish I had made all those New York bankers and financial advisers to have to travel to Fort Worth for court hearings,” Kennedy says. “Looking back, I think it would have benefited us by playing in our hometown court.”
Judge Lynn said financial advisers and bankruptcy lawyers push their Texas clients to file in New York or Delaware for purely selfish financial reasons.
“They know the judges there will approve their large fees,” he said, noting that lawyer fees in complex bankruptcy cases often exceed $1,000 an hour in New York or Delaware.
By contrast, lawyers say, judges and bankruptcy trustees in Texas will question legal fees exceeding $750 an hour.
Lawyers point to the bankruptcy of the Texas Rangers in 2010 as the most recent point of friction between bankruptcy attorneys and court officials.
According to court documents, the bankruptcy trustee strongly objected to the legal fees submitted by Weil, Gotshal & Manges, which is widely viewed as one of the best bankruptcy law firms in the U.S. The national law firm sought $4.5 million in legal fees for representing the Rangers, but was forced to accept a $1 million reduction.
That case, according to legal observers, was closely watched by a handful of national law firms with strong bankruptcy practices, some of which said they would try to avoid Dallas bankruptcy courts if possible.
“The truth of the matter is that it is less expensive for businesses to file for bankruptcy in Texas because the legal fees here are lower and the judges should be conscientious in monitoring legal fees,” Strubeck says.
© 2015 The Texas Lawbook.