For those of you who aren’t interested in restructuring/legal inside baseball, feel free to just scroll down to the News section below. Why? Well, we about to get legal up in this m*ther$%&$*, that's why.
Thanks to that pesky little thing called federalism, every state has their own court system. This makes "venue" a big deal in bankruptcy cases as companies on the verge of a bankruptcy filing generally have several venue options based on various factors (i.e., principal place of business, location of an affiliate, etc.). Historically, Delaware has been an obvious choice of venue because most companies are incorporated there. It also helps that the jurisdiction's law is debtor-friendly and the judges are viewed as smart, sophisticated, and fit to handle the most complex and commercial of issues.
Right now, though, there are a number of Delaware practitioners wondering what's behind a recent shift of significant bankruptcy filings to other venues. There are a number of theories swirling around.
- Jurisdictional Competition. One theory is that that other jurisdictions, i.e., Texas and Missouri, want in on the recent surge of restructuring action. And to get in, they’re intentionally exhibiting a greater willingness to work with Yankee professionals and ensure a smooth case. Otherwise known as "playing ball." This is why some believe Payless Shoesource landed in the lap of a Missouri judge (note: curiously, the judge, by certain accounts, has virtually no track record to speak of - yes, there are plenty of folks who monitor judicial leanings). It stands to reason, then, that a $100mm+ critical vendor ask would slide by without as much as a batted eye by the judge (note: even the company must have anticipated some controversy here; it filed a declaration in support of the relief - not something typically deserving of a separate evidenciary filing). Query this: if many of these vendors were already stretched to 100-day terms - per the company's own declaration - what real difference would another 10-20 days make so that a creditors' committee could form to evaluate the request? Hmmm.
- Releases. Play ball with what, exactly? This may be the bigger question. We’re not going to opine on the current state of the law vis-a-vis third-party releases but, suffice it to say our favorite topic of late - dividend recaps - seems in play here too. After all, Payless is another private equity backed retailer and, by all accounts, there were dividends to speak of within the relevant lookback period. Why WOULD those guys want to take the likelier risk that releases would be in question in Delaware? Well, they wouldn’t. And so the question is: will they be in question in Missouri? The fact is that, more and more, these cases are driven by the interests of those other than the debtor. Delaware is often looked upon as a solid choice of venue because of the vast and relatively predictable case law. If you're funding and/or driving a case, that may be part of the problem. Sometimes it may just be worth rolling the dice (Caesars notwithstanding).
- Too sophisticated? The third theory relates to whether the Delaware judges are TOO sophisticated. Apparently practitioners scare easily. When the Texas bench filleted investment bankers early on in the oil and gas wave (see BPZ Resources Inc.), bankers on subsequent deals purportedly grew increasingly skittish about United flights and advocated for Delaware filings instead. But this was short-lived. Once the Delaware bench dropped Paragon Offshore’s plan confirmation attempt faster than Pepsi drops distasteful ads and demonstrated that we have a feasibility problem, that mood quickly shifted. Fickle bunch. Clearly nobody wants to be on the wrong side of a bad feasibility opinion. After all, why risk losing the chance to refile the case in approximately 12 months and collect on a second round of fees, right? See, e.g., American Apparel, Radio Shack/General Wireless, Global Geophysical Services. Had the Delaware judge turned a blind eye to day rates, utilization and refinancing ability - sophisticated inputs that factor into valuation and feasibility - maybe there’d be discounted shoes lining up outside the Delaware courthouse steps. Then again, maybe not...releases!
It’ll be interesting to see where the next set of cases file...
Have thoughts, critiques, love for us? Want to partner with us? Email us and let us know.