Back when President Obama toured the company last year, California-based Solyndra LLC billed itself as an innovative solar-panel maker whose product would transform the energy market and create lots of jobs near its Fremont, Calif., headquarters.
But when the company ran out of cash in September, just two years after winning a half-billion-dollar federal loan guarantee, Solyndra attorneys decided to file for bankruptcy reorganization thousands of miles away from its headquarters and the majority of its many employees and creditors.
Solyndra’s bankruptcy filing in Wilmington, Del., wasn’t unusual. Colorado-based Open Range Communications and Beacon Power, of Massachusetts — like Solyndra, both of which collapsed in recent months after winning tens of millions of dollars in federal loan guarantees — also filed in U.S. Bankruptcy Court in Delaware.
Critics view the practice as forum shopping, arguing that it gives corporations an advantage by seeking out venues that might be more business-friendly. Supporters say there is nothing wrong with big companies seeking the most experienced bankruptcy courts.
Either way, it’s a practice that soon could be ending. While Congress remains split along partisan lines on just about every major issue, efforts to place tougher restrictions on where companies can file for bankruptcy have won support from both parties in recent months.
Rep. Lamar Smith, Texas Republican and chairman of the House Judiciary Committee, introduced a bill in July that would place restrictions on where companies can file for bankruptcy protection. Rep. John Conyers Jr., Michigan Democrat and ranking member of the committee, also sponsored the bill.
In a statement about the bill, Mr. Smith cited the 2001 bankruptcy of Enron, which was based in Houston, had 7,500 employees and claimed assets of more than $60 billion. However, the company filed for bankruptcy in New York.
“The current Chapter 11 venue rules allow many corporations to forum-shop for a venue with favorable judicial precedent for the business,” Mr. Smith said.
“For example, a nationwide retailer may prefer to file in Delaware because of the 3rd Circuit’s well-known rulings on the treatment of unpaid rent in bankruptcy,” he said. “At the same time, a business with many unionized employees can avoid filing in Delaware to avoid 3rd Circuit precedent on collective-bargaining rights in bankruptcy.”
Mr. Conyers said the current system makes it harder for smaller creditors and employees who can’t afford highly paid out-of-state lawyers to defend their claims in court.
“This effectively permits management of a company, which is mostly likely to blame for the company’s financial distress, to pick and choose the venue with the case law most friendly to management,” he said.
The proposed legislation would require companies to file for bankruptcy reorganization in the judicial district where their assets or business are located.
Under current law, companies can also file in the judicial district where they are incorporated. For many big businesses, that means Delaware. Companies doing business elsewhere often incorporate in Delaware because of its lack of a corporate income tax on companies operating out of state.
Many large businesses, like Enron, also file for bankruptcy in New York. That’s because current law also allows companies to file in a district where an affiliate’s bankruptcy proceeding is already under way.
A critic of the current system, U.S. Bankruptcy Judge Frank J. Bailey, chief judge for the bankruptcy court in Massachusetts, testified in a committee hearing in July that “creative lawyering” is why many cases get filed so far from a company’s main place of business.
“The driving force in venue decisions in bankruptcy filings has become what is best for the lawyers and other turnaround and workout professionals that advise corporate management,” Judge Bailey said.
“This means the banks, bondholders and hedge funds can, together with the debtor, select a venue that is convenient for them, and the employees, local governments, landlords and smaller vendors will be stuck with that choice.”
David Skeel, a bankruptcy specialist and law professor at the University of Pennsylvania, disagreed, saying the restrictions in the proposed legislation would be an “enormous mistake.”
“While there have been occasional missteps, I believe the emergence of Delaware and New York as the venues of choice in some of the large cases has been extremely beneficial for the bankruptcy process overall,” Mr. Skeel said.
He said bankruptcy courts in Delaware handle cases faster than in other districts and that companies are attracted to the expertise of the Delaware bankruptcy judges.
“The administrative efficiency that the Delaware and New York bankruptcy courts have developed would be lost,” he said. “Other courts would not handle enough cases to replicate this efficiency, which would increase the overall administrative costs of the bankruptcy system.”
Despite high-profile cases such as that of Solyndra, Mr. Skeel said, the vast majority of Chapter 11 reorganization cases are filed in the district where companies have their headquarters.
One of the arguments for changing the system is that smaller creditors and employees are left out of touch when bankruptcy proceedings take place thousands of miles away.
Still, two smaller creditors in the Solyndra case, both in California, said they are not concerned with the company filing in Delaware. In interviews, they said don’t think they’re going to get much money back - no matter where the case is filed.
Steve Ransom, president of California-based Old Time Coffee, which filed a claim this month for $17,782 in the Solyndra bankruptcy case, said he is more concerned with getting his company’s coffee machines and other vendor equipment returned than with chasing down money he might not see again as an unsecured creditor.
Wayne Martinez, president of Navajo Co., which provided marketing services to Solyndra and filed a claim for $15,161 in the bankruptcy case, said he is not expecting to see much, if any, of that money.
He said he doesn’t think his chances of getting a return would be any different in a California bankruptcy court than in Delaware.
“You can’t squeeze blood out of a turnip,” he said.
• Jim McElhatton can be reached at email@example.com.
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