Distressed companies are increasingly picking and choosing favorable jurisdictions to file for bankruptcy protection, in a growing trend that is concerning creditors because the decisions can affect recoveries. David Heller, partner at Latham & Watkins in Chicago, said where a company files has become more and more important to a company's ability to repay debt. "Where you file may affect your ability to attain a collective bargaining agreement and whether you can assume certain contracts," he stated, adding there is rumored to be some kind of publication which grades the favorability of various locales circulating in the issuer community.
Interstate Bakeries' recent bankruptcy filing is an example of where protection was sought will prove critical, Heller predicted. "They filed in Missouri to get some home cooking," he noted. Heller added the current system is at fault because it allows companies to drive cases to locales where their needs will be served best. "It's naïve to be in our industry and not believe this is happening," he said.
To be sure, the merits or demerits of venue shopping depend on perspective. While it may be potentially detrimental to creditors in the short term, distressed buyers acknowledge the potential long-term benefits. In fact, it may amount to a good business decision for a company's reorganization process because venue shopping can help it achieve the most favorable decisions, noted Murry Stegelmann, managing director at Kilimanjaro Advisors, an investment fund in Norwalk, Conn., which specializes in distressed and stressed bonds and bank debt.