Document Type

Article

Publication Date

5-1999

Keywords

Venue choice, Bankruptcy forum shopping, Chapter 11 reorganizations, Empirical legal studies, Trends in forum shopping, Judge shopping

Disciplines

Applied Statistics | Civil Procedure | Litigation

Abstract

For almost two decades, an embarrassing pattern of forum shopping has been developing in the highly visible world of big-case bankruptcy reorganization. Forum shopping--defined here as the act of filing in a court that does not serve the geographical area of the debtor's corporate headquarters--now occurs in more than half of all big-case bankruptcies. Two jurisdictions have attracted most of the forum shoppers. During the 1980s, when a large portion of the shopping was to New York, the lawyers involved asserted that New York was a natural venue because of its role as the country's financial capital and because so many of the companies, creditors, and professionals involved had their offices there. In the early 1990s, however, when the favored destination shifted abruptly from New York to Delaware, these explanations wore thin. Delaware was then a sleepy, backwater bankruptcy district virtually devoid of bankruptcy professionals or corporate headquarters.

In response to widespread concern and the "troubling specter of courts competing for big-case bankruptcy business," the National Bankruptcy Review Commission recommended in the fall of 1997 that Congress amend the bankruptcy venue statute to prevent forum shoppers from filing in Delaware. One influential participant in the Commission's deliberations crystallized the sentiment for change, stating that "the effort to find debtor-friendly courts ... demeaned the entire system by suggesting that bankruptcy courts were for sale." While the Commission deliberated, the Delaware federal court re acted by shifting the assignment of cases from the bankruptcy court to the district court.

This Article reports the results of a comprehensive study of big-case bankruptcy forum shopping from 1980 to 1997. A description of what has occurred helps explain both the causes of Delaware's rise as the preferred Chapter 11 forum and why embarrassment forced the system to take extraordinary countermeasures. The temporal coincidence of three major changes in Chapter 11 practice obscures those causes: (1) a nationwide increase in the rate of Chapter 11 forum shopping; (2) a national trend toward faster case-processing times; and (3) the rise of "prepackaged" bankruptcy cases in which the necessary majorities of creditors have accepted the reorganization plan before the debtor files the case. Two prior studies partly illuminate the phenomenon of big-case bankruptcy forum shopping, but each analyzes fewer years of data and accounts for fewer variables than this study.

This Article casts doubt on the two common explanations for forum shoppers' attraction to Delaware: (1) that Delaware resolves bankruptcy cases more quickly, and (2) that Delaware has developed expertise in prepackaged cases. Delaware's replacement of New York in 1990 as the forum shopper's destination of choice makes sense only in light of the political context in which it occurred. Changes in New York's judge-assignment mechanisms and a bankruptcy venue decision in Delaware, in combination with Delaware's recognized tradition of providing pro-corporate legal structures, may have triggered this shift to Delaware.

Publication Citation

Published in: Cornell Law Review, vol. 84, no. 4 (May 1999).