The most prominent company now facing the issue of bankruptcy forum is American Airlines (AMR
). It appeared to dodge the Chapter 11 bullet late last week, when its unions agreed to $1.62 billion worth of compensation and work-rule concessions. But revelations that top managers took steps to protect their own wallets infuriated union members and have raised the possibility that the new labor agreements will be rescinded (see BW Online, 4/18/03, "How American's Execs Covered the Bases"). If that happens, American is expected to file for bankruptcy in the U.S. Bankruptcy Court for the Southern District of New York.
Why would the airline file in far-away Manhattan rather than its hometown of Fort Worth? American won't comment publicly. But experts see a variety of factors that could be influencing the decision. On Friday, Apr. 18, BW Online first reported on this likely tactic (see "AMR's Destination: New York?"). Now, here's a comprehensive look at the reasons why AMR might seek a Manhattan venue:
Home Court Disadvantage: When a company files for Chapter 11 in the courthouse closest to its headquarters, one thing is for sure: Lots of employees and other stakeholders will be sitting on the wooden benches watching the proceedings. This used to be viewed as a good thing, on the assumption that the judge would have an interest in getting the company back on its feet, rather than chopping it apart and selling it for the benefit of creditors.
Now, though, many top bankruptcy lawyers prefer to file as far away from HQ as possible. Why? To make it easier for the judge to cut employee salaries and benefits. That's a big reason why Houston-based Enron filed for Chapter 11 in the Southern District of New York. "People have figured out that it's better to get far away from the creditors sometimes," says Lynn LoPucki, a visiting professor of law at Washington University in St. Louis. (Advantage: New York.)
Union Leverage: Some bankruptcy judges are more willing than others to force unions to renegotiate the terms of their collective-bargaining agreements. Though the two federal bankruptcy court jurists who sit in Fort Worth, Barbara Houser and Dennis Michael Lynn, aren't considered especially friendly to unions, they have no clear track record on the issue of renegotiation, according to one Houston bankruptcy lawyer who has been retained to represent some major American creditors if the airline files for Chapter 11 protection.
In contrast, case law coming from the Manhattan-based bankruptcy judges "has some pretty good precedents for the renegotiation of labor contracts," says Los Angeles bankruptcy attorney Kenneth Klee, who's also a professor at UCLA law school. But he cautions: "You can't paint a whole bench with one brush." Klee notes that the 10 judges who sit in the Southern District of New York all have differing philosophies on the issue, and American has no assurances as to which judge would be assigned to its case. (Advantage: Even.)
Executive Pay: The senior team running American is clearly concerned about protecting executive pay packages in case the airline goes bankrupt. That's what got them into their latest mess with the unions. And the judges in the Big Apple are considered to be more willing to approve expensive severance, deferred compensation, and retention payments. "Everything costs more in New York, including executives," says a Houston bankruptcy specialist who has been retained to counsel American's creditors. (Advantage: New York.)
Convenience: American's bankruptcy law firm, Weil Gotshal & Manges, is located in New York City. So is Greenhill & Co, the airline's bankruptcy consulting firm. As are J.P. Morgan Chase (JPM
), Citigroup (C
), Merrill Lynch (MER
), and CIT Group (CIT
), the banks that have committed to offer American debtor-in-possession financing if it goes bankrupt.
This might be an important factor in any forum selection. All of the professionals in these institutions are close to Manhattan's bankruptcy courthouse, on good terms with the judges there, and comfortable with its procedures.
New York jurisdiction isn't a cakewalk for bankruptcy advisers, however. According to a new study by LoPucki, Manhattan bankruptcy judges cut fee requests by an average of 4.6% -- compared to a national average of 2%, and less than 1% in Wilmington, the other court that's highly popular with corporate debtors. (Advantage: New York.)
Paying Suppliers: For a bankrupt company to become viable again, it's critical to maintain a good relationship with important vendors. In American's case, this would include its food and fuel suppliers. Different bankruptcy judges have a varying degrees of willingness to strike deals with critical vendors. Some judges decide with little creditor input. Others are languorous and demand a full hearing.
For instance, new precedents set in the Seventh Circuit Court of Appeals, governing Chicago, have made it much harder for bankrupt companies to simply channel money to longstanding, critical vendors. This is a key factor that governs many bankruptcy-forum choices, but not one where New York and Fort Worth appear to have a significant difference. (Advantage: Even.)
Which factor has played the greatest role in management's thinking? While AMR declined to comment on such decisions, lots of other big companies facing similar crises have found themselves in a New York state of mind. By Mike France in New York, with Wendy Zellner in Dallas