Why GM Will -- or at Least Should -- File Bankruptcy in Michigan
Lately everyone has stopped talking about IF General Motors will file bankruptcy. Instead speculation has moved on to WHERE it will happen. (Click here and here for more speculation.)
It’s not like you can file just anywhere you want. Under 28 United States Code section 1408, a company can file ONLY in the following places:
- Where their principal place of business is
- Where the company was incorporated or formed
- Where an affiliate or subsidiary has already filed bankruptcy
For GM, these choices boil down to:
- Michigan where its headquarters and many other operations are located
- Delaware where it is incorporated
- Possibly New York if it has an affiliate or subsidiary located there
So let’s look at how these stack up.
Michigan
Michigan is the most obvious choice when one thinks about GM and where its business emanates from. Michigan's Attorney General has even taken the unusual step of sending letters to the CEOs of both Chrysler and General Motors urging them to file bankruptcy in Michigan rather than New York or Delaware. However, in the overall worsening economy, Michigan bankruptcy courts are likely to see significantly increased filings even apart from a GM bankruptcy filing. That, together with the relatively less experience Michigan bankruptcy judges have with “big” cases, might make the goal of a quickie “in and out” bankruptcy more difficult to obtain.
Delaware
Other things being equal, Delaware might well be the jurisdiction of choice, Its bankruptcy judges are very experienced in handling mega-cases, regularly handle cases with national and even international ramifications, and have tended to make many rulings favorable to debtor companies before them. As GM’s state of incorporation, Delaware falls squarely within the venue provisions. One drawback might be that Delaware does not have (or at least I couldn't locate) any specific local rules governing prepackaged bankruptcy. In addition, the governing law in the Third Circuit Court of Appeals (of which Delaware is a part) has fairly strict rules for breaking collective bargaining agreements.
New York
Like Delaware, the U.S. Bankruptcy Court for the Southern District of New York has bankruptcy judges with substantial experience in handling mega-cases of national importance. In addition, it has specific local rules governing procedures for prepackaged bankruptcies. In the past it has reeled in several large cases that would otherwise not have been filed there. However, while the lawyers GM has retained to assist it with a possible bankruptcy hale from NYC, New York is a bit of a stretch from a venue perspective. As others have also noted, only one of GM's many subsidiaries, and one fairly unrelated to its core business at that, is incorporated in New York.
>>>>>>> SO, assuming it's just too difficult to justify a filing in NYC, why choose Michigan over Delaware as the place to file a General Motors bankruptcy?
Well for one thing, it's like a death in the family. People in Michigan need closure. But if that's not enough, there's still...
ONE SIMPLE REASON -- Motion to Change Venue. Section 1412 of the United States Code provides:
A district court [28 USC 157(a) also gives bankruptcy courts the same authority] may transfer a case or proceeding under title 11 [the Bankruptcy Code] to a district court [and bankruptcy court in that district], in the interest of justice or for the convenience of the parties.
If General Motors chooses to file in Delaware rather than Michigan, it will be in for one heckuva a nasty fight over venue which will put the brakes on accomplishing anything else in the speedy manner whose importance has been so emphasized. And the stakes are so high, you can bet this one is going all the way up to the United States Supreme Court.
Whether the case gets transferred from Delaware to Michigan will be up to the Bankruptcy Judge in the jurisdiction General Motors has chosen to file (Delaware in our assumption). And the party seeking a change of venue does have the burden of demonstrating that a change should be made.
Nevertheless, consider the factors usually relied upon by bankruptcy courts in Delaware and elsewhereto decide whether a case should be moved to another bankruptcy court. A fairly recent Delaware decision (In re Buffets Holdings, Inc. , 397 B.R. 725 (Bktcy D. Del. 2008)), interestingly involving a motion to change venue to Michigan, enumerates the following factors as pertinent to determining what the interest of justice or convenience of the parties dictate:
- plaintiff's [i.e. debtor] choice of forum
- defendant's [i.e. creditors and parties of interest] forum preference
- whether the claim arose elsewhere
- location of books and records and/or the possibioity of viewing the premises if applicable
- the convenience of the parties as indicated by their relative physical and financial condition
- the convenience of the witnesses -- but only to the extent that the witnesses may actually be unavailable for trial in one of the fora
- practical considerations that would make the trial easy, expeditious, or inexpensive
- the relative administrative difficulty in the two fora resulting from congestion of the coourts' dockets
- the public policies of the fora
- the familiarity of the judge with the applicable state law
- local interest in deciding local controversies at home
When one considers the place the auto industry holds in the Michigan economy and the numerous employees and retirees living there, it seems obvious that the case should unfold in Michigan. Now, I'm not saying an argument couldn't be made for Delaware, and perhaps even New York, based primarily on the experience of their bankruptcy judges with large cases. One might also argue that a Delaware bankruptcy court could be more objective than one in Michigan although one could also argue that the inate understanding of what a GM bankruptcy neans is precisely WHy it should take place in Michigan. All I'm saying is that if getting in and out really is a priority to General Motors, filing anywhere but Michigan is going to have the case tied up for weeks, if not months.
And the same goes for Chrysler...
UPDATE: Well they both wound up filing in NYC. Chrysler just got its sale approved although it appears there will be appeals. And GM, well,click here for details on its filing.
