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Wilmington, Again

posted by Stephen Lubben

My thoughts on the latest effort to restrict chapter 11 cases filing in the jurisdiction of incorporation, up on Dealbook.


A great idea, long overdue.

Squeezing most of the larger Chapter 11 cases into a tiny geographical space - even if you include New York City with Delaware - leads to: 1) much higher attorney fees; 2) an insular bench and bar that has no real input from the outside world; and 3) a system that inconveniences creditors, increases their expenses, and decreases their participation in Chapter 11 cases.

The Chapter 11 world could use a good dose of Midwestern, or Southern, or Western common sense. And attorney fees that top out under $500 an hour.

It is a fair point that mid-size regional law firms may have insufficient bench strength to handle a large bankruptcy filing, and judges outside of NYC may not have the resources to incorporate a mega case into their docket. However, I think you ignore the inverse: there are too many examples of mega New York law firms getting involved with mid-size regional companies that are filing cases in what is unquestionably their "principal place of business" somewhere out in Americana. The big firms have no business "going local". It needlessly increases administrative costs in terms of significantly higher legal fees, ineffecient staffing and travel costs, plus the additional expense of local counsel. I also think you give short shrift to local counsel, many of whom are highly qualified practioners who started out in large NYC practices, made partner, and then traded in the city for a better quality of life in a smaller market. Ask yourself this question - if you are filing a case in Ohio or Virginia or Tennessee, would you rather pay $500/hour to get the services of a name partner in a local firm or the same amount for a second-year associate in NYC? From a value perspective, it's a no-brainer. (PS - for the record, I am NOT a local practioner trying to protect my turf. I am a NY-based creditor-side lawyer who has witnessed on a first hand basis the efficiencies of local counsel acting in their home jurisdictions).

All of AMC's points are wrong.

1) Fees are not "much higher" in larger cases filed in NY or DE vs elsewhere. As a percentage of the assets or liabilities, big case fees are pretty small to begin with and don't vary very much based on venue.

2) The Delaware and New York bankruptcy benches are far more exposed to the outside world - because the outside world comes to them - and thus far less insular, than many other states' benches.

3) Forcing large bankruptcies around the nation would inconvenience the creditors who tend to be the most impaired, namely the institutional creditors, who tend to be located on the East Coast. Given statutory priorities and the desires of senior secured creditors to keep admin costs down, small creditors tend to get treated pretty well in large NY and DE reorgs, many of which are prenegotiated, and allow the small ones to ride through.

4) it's false to think that management and directors are using more expensive counsel because they pursue a NY or DE case and that if they could only file in some Midwestern state they would happily select a $500/hour lawyer. They have that option right now and never seem to choose it. If larger cases were forced to file in a local state, they would still likely hire the more expensive counsel. There are plenty of cases filed outside NY and DE and the lead debtor counsel is usually one of the leading debtor firms, not a local lawyer.

Channelling cases to a handful of jurisdictions is very efficient in terms of the number of judges we have to pay for. Resources get used efficiently. You know where to put more judges and where to put less. This is management 101, which the government sorely needs more of.

Venue limitations are just protectionism.

This is all moot anyway as the Senate is controlled by Democrats and NY and DE's Senators are all Democrats, so a Texas Republican's proposal to take business away from those states is not going anywwhere.

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