I have a story up on Time.com which Justin called “actually really interesting.” I thought that was “actually really insightful” on his part, so I decided to do a post. The story begins:
General Motors desperately wants to avoid bankruptcy. But at the same time the automaker is preparing for that possibility. One thing on the to-do list: figuring out where to file for bankruptcy protection, should it come to that.
GM is headquartered in Detroit and employs more than 53,000 people in Michigan, but in the corporate bankruptcy system courts compete for cases — especially big ones — so the company could easily wind up at a courthouse hundreds of miles away. Likely venues include Wilmington, Delaware, the state in which GM is incorporated, and New York City, which has a history of landing large out-of-town cases, such as WorldCom and Enron.
Lawyers — particularly those based in New York and Wilmington — say that the process helps shepherd complicated cases into the hands of experienced judges. Yet some legal experts argue that venue shopping is a way for companies to run from local suppliers, creditors and employees, making it tougher for those groups to file claims and otherwise participate in the case. “The autoworkers live around Detroit,” says Lynn LoPucki, a law professor at UCLA. “You go to New York and suddenly all of those workers can’t sit in the courtroom.” [Click this to read the rest of the story.]
From there, things only get scarier. Bankruptcy lawyers—like those at big New York firms—have an incredible amount of sway over where companies file. Which is maybe part of the reason why over the past 28 years 17% of public companies filing for bankruptcy did so in New York, even though the companies were headquartered here only 7% of the time. The numbers for the corporate nirvana of Wilmington are even more spectacular: 34% of bankruptcies were filed there, while companies were based there less than 1% of the time.
There’s a lot more where that came from. One thing I didn’t get around to addressing in the story is how GM might be able to file bankruptcy in Wilmington or New York. The automaker is incorporated in Delaware, so filing in the First State should be easy.
New York might be a little trickier. The law says that a company can file in a court if one of its subsidiaries is already in bankruptcy there. That’s how Enron filed in New York. And how the southeastern supermarket chain Winn-Dixie tried to, too. At least until some of its smaller creditors, like a Birmingham beverage bottler and a Miami flower company, caught on to the fact that just 12 days before Winn-Dixie filed for bankruptcy protection, the company incorporated a subsidiary in New York and then used it to get access to the court here. After folks started talking about that, Winn-Dixie decided to ask the bankruptcy judge to move the case to Jacksonville, Florida, where the company is based.
But back to GM. Of the 173 GM subsidiaries listed here, I only see one based in New York: General Motors Trust Bank (now Promark Trust Bank). Banks, though, generally don’t file for Chapter 11 bankruptcy. That would seem to be a hiccup in getting GM into a New York court. Though that’s not to say it’s impossible. I have the utmost faith in the creativity of the legal system.
Barbara!