GM goes shopping for a bankruptcy court

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!

Stocks Rally Further in Run-up to EU Summit

MOSCOW — Global stocks enjoyed one of their best days in weeks on Tuesday ahead of a summit of European leaders that’s expected to be dominated by calls to boost economic growth.

Europe remains the focus of attention across all financial markets in the run-up to the June 17 Greek election that could go a long way to determining the country’s membership of the euro as well as the future of the single currency zone.

Justin Fox

I find it actually really interesting that GM has 173 subsidiaries. Clearly, that’s been their problem. They can’t even keep track.
bryanfromhouston

Barbara,
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As a former law clerk, I find the premise of this post flawed. New York and Delaware has long and well-established local rules and precedent for handling bankruptcy matters. Further, the Judges in those districts are likely to be more keen in applying the law applicable to the corporation. Since many companies incorporate in NY or DE, it is not just a matter of expediency to file in those jurisdictions. As an aside, while people might be permitted to sit in a bankruptcy court proceeding, I think it is safe to say that only the lawyers would be talking. Most of the proceedings will happen by rather voluminous filings and it will not be readily transparent to the lay observer what is taking place in such a complicated court proceeding. I doubt that a sophisticated commentator, such as CNN’s Toobin, would relish the task of trying to give a plain English breakdown of such proceedings. I liken it to my attempt to explain to my mother why AIG posed a systemic risk and why the CDS market played such a large role. About 4 sentences in, her eyes glossed over and I just told her, well it is like oil in the car engine…just gotta be done.
Barbara Kiviat

@BfromH: I understand what you’re saying. I do. But I am always deeply suspicious when the best explanation for why something has to be a certain way is “it’s too complicated for you to understand, so just trust me.” I think we have plenty of contemporary examples to point to to illustrate the danger of that logic. The law is a human invention, after all–as one bankruptcy lawyer told me, it’s just not that complicated. Plus, if it were actually true that a guy who becomes a judge in Detroit isn’t capable of handling a case that a guy who becomes a judge in New York is, then we have a huge problem with our courts system and we need to start addressing it immediately.
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I don’t have the figures in front of me here, but the number of bankruptcies in New York are completely out of whack with the number of bankruptcy-filing companies incorporated there. In Delaware, there is a higher percentage of incorporations than bankruptcies, but that, I think, says more about how disproportionate Delaware incorporations are than anything else.