As Bankruptcy Judge Steven Rhodes of Detroit commented in Time magazine, "There is no district in this country that has a greater stake in the outcome of a General Motors case than the Eastern District of Michigan." Exactly. And that is exactly why General Motors filed bankruptcy in New York as Chrysler did ahead of it. GM and its lawyers know and like what they will get out of a New York bankruptcy filing. They might get the same in Detroit, but why take a chance? Delaware and New York City handle most of the U.S. large corporate bankruptcies and have a long track record.
To legal eagles, the phenomenon is known as "forum shopping," a time-honored tradition of filing a case before the court where you are most likely to prevail. The place where a case is filed is known as its "venue," and the venue rules for corporate bankruptcy filers are quite broad. In bankruptcy, a corporation can file in its state of incorporation or the location of its principal office or place of its principal assets. It also can file in any jurisdiction where an affiliate, such as a subsidiary, has filed bankruptcy. Hence, a GM-owned dealership in Harlem filed bankruptcy in New York, where it is located, and GM filed bankruptcy there a moment later as an "affiliate" of the Harlem dealership. These rules are very generous to large corporations with many subsidiaries scattered all over the country, meaning a large corporation can file almost anywhere it wants.
For an update on the state of bankruptcy forum shopping, I went to Lynn M. LoPucki's incredibly useful web-based Bankruptcy Research Database (WebBRD). The WebBRD contains every publicly held company bankruptcy filing since 1978 with over $100 million in assets (measured in 1980 dollars). It was last updated on May 1, 2009 (although it does not yet have the Chrysler bankruptcy which was April 30).
The WebBRD reports 52 large public company bankruptcies so far in 2009. That number alone is staggering as there were only 39 in 2008 and only 13 in 2007. Of the 52 cases in 2009, 54% were filed in a place other than their corporate headquarters in a way that we could say there were forum shopped. The large percentage of forum-shopped cases will not be surprising to bankruptcy specialists. I had expected it to be even higher. In 2008, 66.7% were forum-shopped away from the corporate headquarters, and in 2007, all 13 cases were forum-shopped.
From 2007-2009, the biggest loser of cases was Chicago, which saw 12 large company bankruptcies and saw 10 of them go to Delaware or New York. The Hartmarx Corporation and Kimball Hill, Inc., were the two exceptions. Undoubtedly, the reason is the ruling of the U.S. Court of Appeals for the 7th Circuit in the KMart bankruptcy, where the court held that common practices in first-day may be common but they ain't legit if they don't comport with the four corners of the Bankruptcy Code. (I'm summarizing as the court would never have used the word "legit.")
I'll stop there lest a blog post turns into a law review article. I've tried to update some information on forum shopping but stayed away from the normative question of whether it is good or bad. For my money, I would like to see it done away with for corporate bankruptcies. The comments are open so you can show me the error of my ways, or even better, tell me that I'm right.
DATA NOTE: In making my calculations, I adjusted a few cases that the WebBRD counts as forum shopped, but I thought were difficult to classify that way. Herbst Gaming headquartered in Las Vegas, filed in Reno (same judicial district). Meruelo Maddox Properties headquartered in Woodland Hills filed in Los Angeles (just down the road). Team Financial, Inc. headquartered in Kansas City, KS filed in Wichita (same judicial district). Pilgrims Pride headquartered in Tyler, TX, filed in Dallas (just down the road).