Editor: Long known as a friendly venue for corporations filing for chapter 11, Delaware seems to have lost its preferred status with the filings of Enron, Worldcom, and others in the Southern District of New York, and United Airlines, K-Mart and others in different venues. Can you tell us why this change occurred?
Felger: To appreciate the shift that began around 2001, you need to understand what was happening in the Delaware bankruptcy court at that time. Until early last year, the court had just two permanent bankruptcy judges, which was insufficient given the large number of cases and adversary proceedings that were pending in the district. Real credit must be given to Judges Mary F. Walrath and Peter J. Walsh for the way they handled this enormous caseload - regularly remaining on the bench well into the evening to deal with an emergent matter for a debtor. Recognizing how overloaded the two judges were, the Delaware District Court, in an unusual move, withdrew the automatic reference of bankruptcy cases to the bankruptcy judges and began taking assignments of these cases to ease the burden on the two bankruptcy judges. This action sent tremors throughout the bankruptcy community and people grew concerned over how the cases would be handled by district court judges with little or no experience in managing complicated chapter 11 proceedings. The district court judges actually did an exemplary job in handling the cases during the short time that they were asked to do so. After a period of time, however, the automatic reference was reinstated and the district began to bring visiting bankruptcy judges from other districts around the country to assist with the chapter 11 caseload.
Editor: What was it like having judges you did not know - and who did not know Delaware?
Felger: Well, it certainly presented some challenges. For a period of about three years, the district was a revolving door of visiting judges from places not only outside of the Third Circuit, but outside of the Eastern time zone, including Arizona, Hawaii, Montana, Oklahoma, California, and Illinois. Judges would be assigned to short rotations and travel to Delaware for about one week a month. Some would be renewed while others would be replaced. Unfortunately, with the visiting judges came the perception, if not the reality, of a loss of predictability and consistency in how cases and contested matters within cases were being handled and decided. Over the lifespan of one case, for example, the case was assigned to a new judge five times, which helped to perpetuate a sense of instability. If the Hawaii judge, for example, had to hold a telephonic hearing when he was not in Delaware, there would be a six-hour time difference in trying to schedule a call that worked for everyone. The diminished accessibility experienced just prior to the time the automatic reference was withdrawn, the concern over the manner in which district judges would process the cases, and the potential (if not actual) loss of consistency and predictability when the visiting judges entered the scene, had a significant role in the decision by many large debtors to file their cases in New York, Chicago and elsewhere rather than in Delaware.
Editor: What's the likelihood that Delaware will once again become the venue of choice for large chapter 11 filings?
Felger: There is every reason to believe that Delaware will once again regain its preferred venue status. In fact, I believe that the sea change has already begun. Last year, Delaware seated four new "permanent" bankruptcy judges. Each of these judges was an experienced chapter 11 practitioner in the Third Circuit before taking the bench, so they were very familiar with local procedure, and custom and case precedent in the Delaware bankruptcy court and in the Third Circuit. Since the new judges have been on the bench, we have witnessed accessibility, consistency and predictability that we had not seen since before the automatic reference was withdrawn. The filings in Delaware over the past six months including Dura, Pliant, Tower Records, Hancock Fabrics, and New Century - the huge sub-prime lender - provide evidence that the bankruptcy community is comfortable once again with filing mega chapter 11 cases in Delaware.
Editor: Are there possible impediments to Delaware once again becoming the preferred venue for large corporate chapter 11 filings?
Felger: Venue options are based upon domicile or state of incorporation, location of principal assets, principal place of business and whether an affiliate has a case pending in the district. Almost without exception, Delaware is an option because the company chose to be domiciled or incorporated in Delaware. As such, two areas of potential concern are (i) other states beginning to have corporate-friendly laws and attracting corporations away from Delaware for their incorporation, and (ii) Congress eliminating state of incorporation as a venue option. With the recent Delaware Chancery Court decisions in Production Resources and Trenwick, the Chancery Court has offered comfort to directors of Delaware corporations, with respect to deepening insolvency exposure and the vitality of exculpatory provisions in Delaware corporate charters. These recent decisions and others, coupled with the business-friendly orientation of the state's laws, make it difficult for other states to compete with Delaware.
Editor: What is the issue regarding state of incorporation as a venue option?
Felger: With respect to state of incorporation as a venue option, there has been a movement afoot to amend the Bankruptcy Code to eliminate state of incorporation as a filing option, principally kept alive by the writings of Professor Lynn LoPucki. I believe that when you really analyze and drill behind Professor LoPucki's data you find that his conclusions do not necessarily follow from the data and are out of step with reality. Further, when he went so far as to call the judges in New York and Delaware "corrupt," I believe he lost a good deal of credibility and momentum in his effort. While these are two areas of potential concern and something we can discuss at great length, my sense is that the risk of either of these changes happening in the near term is remote.
Editor: Is there anything else that may affect Delaware as a venue of choice?
Felger: Another area of potential concern is precedent that may be created at the appellate court level. With two experienced and well respected former bankruptcy practitioners sitting on the Third Circuit, that court has shown a real savvy and sophistication for understanding the chapter 11 practice and appreciating the policies underlying a code that can seem a bit obtuse to judges who do not come from a bankruptcy background. I believe that the decisions we have seen recently from the Third Circuit have shown a real understanding of bankruptcy practice and there is no reason to think this will change. Some would argue that recent precedent from the Court of Appeals for the Third Circuit, such as the Armstrong World opinion on the absolute priority rule and the decision in Owens Corning on substantive consolidation, may tip the scales for filers away from Delaware. In my view, these decisions, upon close examination, are consistent with approaches taken by other circuits and should not steer a company away from Delaware.
Editor: What other practice areas are hot in Delaware?
Felger: Cozen's Delaware office concentrates primarily on bankruptcy, but we have a growing Chancery Court practice as well. I believe that corporate litigation in the Delaware Chancery Court will remain strong. While many states are looking to replicate Delaware's user-friendly regulation of corporations and their governance, Delaware remains the state of choice for corporate residence. When you look at the strength of the Delaware Chancery Court, with hundreds of years of case precedent upon which to rely, and the vitality and flexibility of the Delaware corporate law, no other state can match Delaware.
Editor: Can you offer an example?
Felger: Absolutely! We recently had a corporate client come to us in a panic over a transaction for the sale of one of its aircraft to a foreign company. Title was released to the buyer before it had made payment in full for the jet. Fearing that the foreign company would fly the jet out of the country without paying the balance of the purchase price, we were asked to file papers in federal court to enjoin the buyer from removing the jet from the United States. We recommended that we commence the action before the Chancery Court, rather than the federal court, principally based upon the Chancery Court's experience and expertise in dealing with emergent situations. The client agreed and we filed papers on a Friday morning with the Chancery Court. On Saturday morning the client was informed that the foreign company had received our injunction papers and was enroute - in the jet - from Texas to Russia. After numerous discussions with the FAA, and the willingness of one of the Chancellors of the Chancery Court to break away from dinner to consider and enter a TRO late on Saturday, two F-16 fighter planes intercepted and grounded the jet in Wisconsin, just 30 minutes before it would have left U.S. airspace. Four days later, after the Chancery Court had granted an extension of the TRO at a Monday hearing, the buyer paid our client in full, as well as our attorneys' fees. It is not often that a lawyer is able to utilize F-16 fighter pilots to obtain justice for his client!
Editor: What other practice areas are active in Delaware?
Felger: In addition to Chancery Court practice, other areas that are particularly busy in Delaware include the issuance of opinions of counsel in major corporate transactions, including securitizations and leveraged buyouts, and intellectual property since many corporations throughout the country form Delaware holding companies for intellectual property ownership.