A bipartisan bill sponsored by leaders of the House JudiciaryCommittee may strip Delaware of its status as the premier venue forU.S. bankruptcy cases, costing the state's economy an estimated$100 million a year.

Lamar Smith, the Texas Republican who chairs the Judiciarypanel, introduced the bill with Michigan's John Conyers, itsranking Democrat. The aim is to prevent court-shopping and makecompanies reorganize at home “to ensure maximum input from allaffected stakeholders,” Smith said in a statement. Delaware'sCongressional delegation disagreed, citing the Wilmington-basedcourt's expertise.

“When someone has a specific medical problem, they go to aspecialist,” Representative John Carney, a Democrat, said bye-mail. “Delaware's courts are our nation's bankruptcyspecialists.” The state's two U.S. senators, Democrats ThomasCarper and Chris Coons, also oppose the bill.

Under the measure, a corporation may file for Chapter 11reorganization only in the federal district housing its principalplace of business or assets. The Chapter 11 Bankruptcy Venue ReformAct of 2011 would thus rule out most of the 90 public companiesthat since 2006 have sought protection from creditors in U.S.Bankruptcy Court in Wilmington, Delaware, where they areincorporated.

Delaware's ascendance as a center for bankruptcy filings came inresponse to New Jersey's quest more than a century ago to becomethe U.S. corporation capital, according to University ofCalifornia, Los Angeles Professor Lynn M. LoPucki in his 2005 book,“Courting Failure.”

Law of 1899

The Delaware General Corporation Law of 1899 sought to makestate regulations less burdensome and develop a more predictablebasis of court precedent for business disputes. The reformsattracted more companies and, by the 1920's, “no state could bestDelaware,” LoPucki wrote.

“Nearly all of the large companies that file for bankruptcy inDelaware are incorporated in Delaware,” David A. Skeel Jr., aUniversity of Pennsylvania law professor, said last month intestimony to Congress. The proposed legislation “would make itimpossible for most to file” for bankruptcy there.

A company can file for bankruptcy in its state of incorporation,which for 63 percent of Fortune 500 companies is Delaware,according to the state. Courts there have often “established thetone and legal direction of corporate governance in America,”according to Directorship, a magazine for board members, whichcited a survey of readers and a panel of experts in its Septemberissue.

'Advanced and Flexible'

Wilmington attorney Lewis S. Black, in an article printed anddistributed by the state, said Delaware's “advanced and flexible”corporation law, its Court of Chancery and a pro-business attitudeamong citizens all contribute to its popularity as a place forincorporation. The court's judges hear cases without juries, andpunitive damages aren't available to plaintiffs.

Joseph J. Farnan Jr., a retired federal judge who heardbankruptcy cases in Wilmington, said the Smith-Conyers bill maystem from a desire of bankruptcy judges elsewhere to bring businessto their areas.

“I think they see the benefits Delaware has seen economically,”he said.

The state's economy garners about $100 million a year inbankruptcy-generated legal fees and spending, according to adatabase maintained by LoPucki.

Non-Delaware Lawmakers

The bill has support from non-Delaware lawmakers seeking “toshow they are looking after the interests of their constituents whoare attorneys active in the political process and generous withtheir checkbooks,” said Neal Colton, a bankruptcy attorney at CozenO'Connor in Philadelphia.

Though no companion Senate bill has been introduced, Colton saidhe considers the House bill “a very serious piece oflegislation.”

This isn't the first effort to change the law. A similar measurein 2005 sponsored by Senator John Cornyn, a Texas Republican, diedin committee.

The UCLA database shows that 155 public companies with assets ofmore than $500 million sought bankruptcy protection in Delawarefrom 2000 to 2011. That is 38 percent of the U.S. total of 405. NewYork's Southern District, which includes Manhattan, was second with93 cases, or 23 percent. The local economy benefitted by as much as$190 million because of larger cases and higher costs, according tothe data.

Backers of Bill

Gregory J. Wawro, a political scientist at Columbia Universityin New York, said backers of the bill have an advantage becauseDelaware is a small state with just one House member.

“Based on sheer numbers, they should be able to find a majorityin favor of it,” he said.

Law firms in Wilmington with bankruptcy practices includeRichards Layton & Finger PA and Young Conaway Stargatt &Taylor LLP. National firms with offices in Wilmington include Weil,Gotshal & Manges LLP and Pepper Hamilton LLP.

Some firms might move or shrink if bankruptcies dry up, saidCharles M. Elson, director of the University of Delaware's Centerfor Corporate Governance. The change would cut the state's wage andproperty tax revenue and hurt businesses like restaurants andcopying services — “an impact we don't need,” he said.

The bill was supported in U.S. House testimony last month byU.S. Bankruptcy Judge Frank J. Bailey of Boston.

“At the very heart of the concept of venue is the idea thatthose affected by a court proceeding should have access,” Baileytold the subcommittee on courts.

Magnet Courts

So-called magnet courts in New York and Delaware are accessibleonly by major creditors, not company employees, local officials,landlords and small vendors, Bailey said.

The judge pointed to the bankruptcies of Polaroid Corp. andEvergreen Solar Inc. as companies closely identified with thepeople and government of Massachusetts that filed in Wilmington, asix-hour drive away.

Evergreen received $58 million in state incentives to put aplant in his state, Bailey said. Polaroid's headquarters were inCambridge, Massachusetts, from its inception in 1937 until afterits first Chapter 11 reorganization in 2001. After being bought byMinneapolis-based Petters Group Worldwide LLC in 2005, Polaroidentered bankruptcy again in 2008 in Minnesota.

Attorney Peter C. Califano, a partner at Cooper White &Cooper LLP testifying for the Commercial Law League of America,argued at the Congressional hearing that the bill would bringbankruptcies “back to the communities most affected by theoutcome.” He chairs the firm's Bankruptcy and Creditors' Rightsgroup.

Disputed Claim

Colton, the Cozen O'Connor lawyer, disputed the claim thatputting cases in the home towns of businesses would boost smallcreditors' involvement.

“As a general rule, little creditors do not actively participatein bankruptcy cases,” he said in an interview. “They don't have thetime or the sophistication.”

Also opposing the bill is Edward T. Gavin, a principal in theturnaround firm NHB Advisors in Wilmington.

“It's a bad solution to a problem that doesn't exist,” Gavinsaid. Creditors aren't locked into the filing jurisdiction sincethey can ask that the case be moved, he said.

U.S. bankruptcy judges are appointed to 14-year terms, with thenumber in each district determined by Congress. Delaware has six.Massachusetts, with seven times as many people, has five. TheSouthern District of New York, which includes Manhattan, has11.

Manhattan Courts

Manhattan courts sometimes handle bigger cases than Delaware's,including those of Lehman Brothers Holdings Inc., the largest inhistory, with assets of $715 billion, and Ambac Financial GroupInc., with more than $19.5 billion, according to the UCLAdatabase.

Delaware's largest case last year was Affiliated Media Inc.,with $2.71 billion in assets listed on the database.

Nicholas Govatos, 58, owns Govatos restaurant a few doors fromthe Wilmington courthouse on Market Street. His place is sometimespacked with lawyers and briefcases that “take up the aisles,” hesaid.

States like Texas and Nevada that are hungry for bankruptcybusiness already have “cattle businesses and casinos,” Govatossaid. “I think they should leave Delaware alone.”

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