Study Shows Forum Shopping in Bankruptcy Cases

Large companies that decide to file for bankruptcy shop for judges the way most persons shop for groceries: they look for the best deal.

That's the finding of a study by Cornell Law School professors Theodore Eisenberg and Lynn M. LoPucki. LoPucki is a visiting professor at the Law School this year.

The study, which charts filings by the 273 largest public companies that filed for bankruptcy between 1980 through 1997, shows a rapid increase in the rate of forum shopping. In the early 1980s, about 20 percent of the cases were filed in a district other than the one in which the company's headquarters were located. Since 1994, more than half of the filings have taken place in other districts.

New York City was the most popular destination for forum-shopping bankrupts during the 1980s. At that time, the Delaware Bankruptcy Court was a sleepy backwater, handling only a single large case during the decade. In 1988, New York City clamped down on judge-shopping. Two years later, debtors filed two large cases, Continental Airlines and United Merchants and Manufacturers, in Delaware. Forum-shopping to Delaware increased rapidly in the following years. It peaked in 1996, when 12 of 14 (86 percent) of the largest public companies filing for bankruptcy did so in Delaware, even though none had headquarters in Delaware.

When the Chief United States District Judge in Delaware withdrew the large bankruptcy cases from the bankruptcy judges in February 1997, the rate of shopping to Delaware fell sharply, but by the end of the year Delaware still had five of the ten big cases that year.

"This study shows that big businesses don't just take the judge or the court that the system offers them," LoPucki said. "Big businesses act strategically to come before the judge or court where they will get the best outcome. This pattern can't be explained by convenience; these companies are deliberately filing away from their own headquarters."

The 34-page report is entitled "Shopping for Judges: An Empirical Analysis of Venue Choice in the Bankruptcy Reorganization of Large, Publicly Held Companies."