I’m reading Lynn LoPucki’s Courting Failure: How Corruption for Big Cases is Corrupting the Bankruptcy Courts. For those not familiar with the bankruptcy literature, LoPucki is one of a group of legal scholars who argue that the rules for bankruptcy venue in the United States are horribly broken and too many cases are filed in debtor-friendly bankruptcy courts in Delaware and the Southern District of New York. (The Borders bankruptcy case is a recent example of this phenomenon.)
In addition to competition between US bankruptcy courts for US cases, there is also a degree of international competition, leading to a race to the bottom in bankruptcy law as other countries copy US bankruptcy law to retain cases. This is because any company with “property” in the United States, but essentially no other connection, can file in an American court. LoPucki gives the example of the Global Ocean Carriers bankruptcy:
The Delaware bankruptcy court began from the accepted premise that having “property” in the United States qualified a foreign corporation to file bankruptcy in the United States. The property, the court said, could be “a dollar, a dime, or a peppercorn.” The court acknowledged that most of the corporations in the Global group did not have a dollar, a dime, or a peppercorn in the United States. But the Delaware court nevertheless managed to find that each had property in the United States.
In the cases of large public ocmpanies, bankruptcy lawyers do much of their work on credit. When the debtor is foreign, however, the lawyers routinely require that the debtor pay a substantial portion of the fees—referred to as a “retainer”—in advance. One of the corporations in the Global group had paid such a retainer for representation of the entire group. That, the court pointed out, meant that all 15 corporations had property in the United States—their right to the lawyer’s representation.
As LoPucki points out, this means that any foreign corporation that files for bankruptcy in the US will automatically qualify.
