LEXIS-NEXIS® Academic Universe-Document

LEXIS-NEXIS® Academic

June 10, 1999 Thursday Final

SECTION: Business Pg. 1

LENGTH: 927 words

HEADLINE: Debtor firms turn to Delaware for relief
Harnischfeger latest to file for bankruptcy outside its home state

BYLINE: MARK SAVAGE

SOURCE: Journal Sentinel staff

BODY:
When Harnischfeger Industries Inc. filed for Chapter 11 bankruptcy protection in Delaware Monday it followed the lead of many large corporations, including the likes of Chicago-based Montgomery Ward & Co.

The U.S. Bankruptcy Court in Delaware is considered a haven for large corporate bankruptcy filings.

"I think it's safe to say that debtors' lawyers feel Delaware is a friendly court," said Robert Ginsberg, a federal judge in Chicago who served on the National Bankruptcy Review Commission.

That group, appointed by the president, Congress and chief justice of the U.S. Supreme Court, issued a 1,300-page report in 1997 that made 172 recommendations for bankruptcy law reform, including one that said corporations should only be able to file for Chapter 11 in their principal place of business in the United States. "That was the least controversial decision in the report," said Brady Williamson, a Madison lawyer who headed the commission.

The provision is included in a bankruptcy reform bill that passed the House of Representatives in May, but it has been omitted from the Senate bill that recently cleared its Judiciary Committee, whose leading minority member is Sen. Joseph Biden (D-Del.)

Delaware's federal court leads the nation in handling Chapter 11 cases. For instance, from March 1998 to March of this year it dealt with 329 cases, compared with the 23 that passed through federal court in Milwaukee, which serves eastern Wisconsin.

Harnischfeger executives were unavailable for comment Wednesday about the St. Francis-based firm's decision to file in Delaware. But Dave Brukardt, the firm's spokesman, said the firm filed there because it is incorporated in Delaware.

Current law allows a firm to file where it or its subsidiaries have major operations or in its state of incorporation. Many firms are incorporated in Delaware due to favorable corporate laws, especially those that protect company executives from liability suits.

Under the current law, area and Chicago bankruptcy lawyers also say, it's not unusual to advise corporate clients to file in Delaware.

The lawyers, who asked not to be named, said it's believed the federal judges in Delaware have more experience with bankruptcy cases than local federal judges and have a track record that makes it easier to predict the outcome of a filing there.

Many said the Delaware judges are considered to be debtor friendly, meaning they give the benefit of the doubt to the firm filing for bankruptcy protection instead of to creditors.

Elizabeth Warren, a law professor at Harvard University and a bankruptcy expert, is appalled by such reasoning. She said the purpose of the law is to be even-handed with equal treatment for all.

"I'm troubled by debtors deciding in advance what type of judge they want. It implies we have a system of justice for hire," Warren said.

"The only people who get to make this choice is the large corporation, not a struggling family. . . . It's also insulting to the local judges, saying that they can't handle such cases."

Warren added that the P.A. Bergner & Co. bankruptcy trial here in 1991 proved there is plenty of local legal talent.

John Byrnes, the U.S. Bankruptcy Trustee in Milwaukee, agrees. "We've had a lot of experience in corporate bankruptcy here, so that's not an issue anymore," he said.

"The question is, 'Do you think you're likely to get your way?' And I'm assuming they wouldn't file there if they didn't think they'd get their way."

Warren also notes that prior to a law change in 1978, companies could not file outside their home areas.

She and others associated with the bankruptcy review commission say the law needs to be changed back for several reasons.

"The local interests are harmed in such a case. They have no input. They are shut out of the process," said Ginsberg.

Warren said smaller creditors, many of whom usually are located near a firm's main plants, local employees and their unions, and concerned shareholders are excluded from participating in the bankruptcy hearings because they can't afford to travel to Delaware or hire lawyers there. Delaware mandates that local lawyers be used in the bankruptcy hearings.

In addition, she said some creditors find it difficult to hire Delaware lawyers because they are too busy representing the debtors or large creditors that will pay a higher fee.

The review commission also noted in its report that "choosing a distant forum also has the effect of reducing local press coverage." Warren agreed, saying such a move makes covering the proceedings more difficult and expensive, and she adds that many firms simply "hope to escape local scrutiny."

It's possible the law could change if the House version of the bankruptcy reform bill is adopted. But that is far from certain.

Wisconsin's senators, Russ Feingold and Herb Kohl, both Democrats, said through press aides that they would support wording to change the current Senate bill to include a provision limiting a company's ability to file for bankruptcy to its main area of business. That would mean a Wisconsin-based firm would have to file in Wisconsin.

But there has been no such amendment offered on the Senate side.

Ken Klee, a UCLA law professor, said most of the country is in favor of an amendment to the bill to match the House's version, but it needs a push from a Midwestern or Western senator.

"There's strong grass roots support for this among creditors and lawyers who are off the eastern seacoast," Klee said.

LOAD-DATE: June 14, 1999