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Nation's bankruptcy capital still growing

WILMINGTON - For many failed businesses, bankruptcy is a trail of tears ending in a shuttered company and shattered dreams.

TWA pilots outside U.S. Bankruptcy Court in Wilmington, in 2001. They were showing support for a deal to sell the carrier to American Airlines, blocking Continental's bid for assets.
TWA pilots outside U.S. Bankruptcy Court in Wilmington, in 2001. They were showing support for a deal to sell the carrier to American Airlines, blocking Continental's bid for assets.Read moreTIM SHAFFER / Bloomberg News

WILMINGTON - For many failed businesses, bankruptcy is a trail of tears ending in a shuttered company and shattered dreams.

For Wilmington's large and growing bankruptcy bar, and related businesses that support the profession, it is a cascade of billable hours and fees that in this tough economy show no signs of abating.

In several years, Wilmington has become the favored jurisdiction for large public companies seeking bankruptcy protection. Its federal Bankruptcy Court handles more big cases than any other in the country, including New York, where many filing companies are based or have substantial operations.

And hundreds of lawyers are employed representing failed businesses and their creditors.

On Wednesday, Tribune Co., which owns the Los Angeles Times, Chicago Tribune and Chicago Cubs, became the latest big company to appear in Wilmington, where it asked for protection from billions in claims by lenders, employees and vendors.

There will surely be more.

"You can't swing a dead cat in Wilmington without hitting a bankruptcy lawyer," said Barry Bressler, a bankruptcy lawyer at Philadelphia's Schnader, Harrison, Segal & Lewis L.L.P.

Bankruptcy lawyers say Wilmington's court is popular because its seasoned judges and well-developed case law lead to predictable outcomes.

"Mostly, what you get is a high degree of predictability," said James Patton Jr., chairman of Young, Conaway, Stargatt & Taylor, a leading Wilmington firm. "Businesses hate uncertainty. I can say with a high degree of confidence on this issue that is important to you that the judge will go right or left. You may not like the answer, but at least you can plan around it."

But the bankruptcy bar and courts in Wilmington also have come under sharp criticism from a handful of critics who say its judges and lawyers are too cozy with the big players in bankruptcy cases and entirely too entrepreneurial in seeking big cases.

Judges and lawyers have tilted to favor big companies over the interests of labor unions, employees and smaller creditors, critics say.

"Their program is to make Delaware the bankruptcy capital of the world, to bring large-company cases to Wilmington and thus build an industry," said Lynn LoPucki, a law professor at UCLA and Harvard, who has spent decades studying the practice of bankruptcy law.

LoPucki accuses bankruptcy lawyers of shopping for the most favorable venues, and bankruptcy courts of seeking to curry favor with large companies and their lawyers by adopting favorable rules and approving higher lawyers' fees. He published his findings in a 2005 book, Courting Failure: How Competition for Big Cases Is Corrupting the Bankruptcy Courts.

LoPucki keeps a database on large public filings and says Wilmington, if anything, has vanquished the opposition.

"Without the case flow continuing to go to Delaware, the judges won't have the work, and not having the work means you get to sit around and look at the walls," LoPucki said. "These are high-powered people. They only have jobs as long as they keep the executives, the lawyers and the [bankruptcy] lenders happy."

LoPucki's analysis is well-known among the tight community of Wilmington bankruptcy lawyers and court employees, who almost uniformly reject it.

"My view is different," said David Bird, the clerk of the federal Bankruptcy Court in Wilmington. "Certainly, anyone can look at the factual situation and draw different conclusions. The way I view it is, the debtor has a choice of a number of different venues, a business judgment is made, and the case is filed. A party can request that a case be transferred, and the fact that there are not many objections" shows that most participants are satisfied.

Whatever the reason, no one disputes that Wilmington now is the center of the bankruptcy universe and that cases are surging.

According to the court's statistics, Chapter 11 filings hit 1,007 this year after a low of 258 just three years ago, at the height of the bull market and strong economy.

By far, the most important metric in the bankruptcy world, however, is the number of big cases. And by this measure, Wilmington is the winner hands down.

From 2000 to 2008, federal bankruptcy courts in Wilmington handled 39 percent of all U.S. filings by companies with assets of $250 million or more, a total of 158 cases, according to statistics compiled by LoPucki. The closest competitor was the federal Bankruptcy Court in Manhattan, which had half as many - 75 - during this period.

Of the 26 big bankruptcy cases over the last two years in jurisdictions around the country, Wilmington's share has grown to 58 percent.

Such cases can generate enormous professional fees. LoPucki estimates that in the Enron Corp. bankruptcy, which was filed in New York, lawyers, investment bankers, accountants and other professionals were paid $1.2 billion. The smaller Montgomery Ward bankruptcy filing in Wilmington in 1997 generated $37 million in fees.

Although Delaware long has been known for its favorable treatment of corporations, Wilmington was not always a bankruptcy hot spot.

Pepper Hamilton L.L.P. lawyer David Stratton, co-chair of the firm's bankruptcy practice, recalls that when he started practicing in Wilmington in the early 1980s, the number of bankruptcy lawyers numbered "five or six." The Delaware Bar Association now lists more than 250 in its bankruptcy section.

By the mid-1990s, the jurisdiction started to gain a reputation for favoring measures that eased the way for companies to exit bankruptcy and get back on their feet again.

As the pace of filings began to pick up, the district's two sitting judges could not keep up, and judges from other jurisdictions were brought in to hear cases.

The workload grew further in 2005 as Congress debated and passed the federal Bankruptcy Reform Act, which made it harder for consumers to escape debt through bankruptcy. Many sought to evade the new restrictions by filing before the law was passed. In anticipation of the greater workload, funding for four additional judges was included in the bill.

In Wilmington, the judges were selected by a committee comprising mostly local bankruptcy lawyers, who forwarded their choices on to the U.S. Court of Appeals for the Third Circuit, in Philadelphia, which made the final decision.

Three of the picks were bankruptcy lawyers; the other had been a bankruptcy judge in Philadelphia.

It is a system that has worked well, contends James Patton of Young Conaway.

"Bankruptcy is really one big transaction, where you are either restructuring or selling assets," he said. "It is pretty rare that anyone wants to get out of Delaware. It does happen from time to time, and our judges are pretty willing to send them away."