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When Enron Corp. filed for Chapter 11 bankruptcy protection in December 2001, the Houston-based energy company sought refuge from creditors in the Southern District of New York, where a subsidiary was headquartered, instead of in the Southern District of Texas. That didn’t sit well with then-Texas Attorney General John Cornyn. Cornyn, now a U.S. senator, and lawyers representing numerous creditors of Enron and its bankrupt subsidiaries filed motions in 2001 asking U.S. District Judge Arthur J. Gonzalez of New York to move the bankruptcy to Houston, where the company once employed more than 7,000 and had its headquarters. But Gonzalez denied the request. That still rankles Cornyn, who filed a bill in the U.S. Senate on Feb. 8 that would require corporations to file for bankruptcy where their principal place of business or their principal assets are located. It would prevent a corporation from filing for bankruptcy in a location that’s simply the home of a subsidiary, or the state where it is incorporated. In a statement issued in connection with the filing of the Fairness in Bankruptcy Litigation Act of 2005, Cornyn says the legislation would prevent forum-shopping. “Quite simply, my bill will prevent corporate debtors from moving their bankruptcy cases thousands of miles away from the communities and their workers who have the most at stake. And it will prevent bankrupt corporations from effectively selecting the judge in their own cases — because picking the judge isn’t far off from picking the verdict,” Cornyn said in a statement. Cornyn did not return a telephone message seeking comment before presstime on Feb. 10. “All bankruptcy cases deserve to be handled fairly and justly, and no corporate debtor should be allowed to escape responsibility by fleeing to another venue,” Cornyn said in the statement. The venue issue has been a hot topic in the bankruptcy bar for years, ever since bankruptcy courts in Delaware two decades ago began to attract a greater share of the bankruptcies of large public companies. In response, judges in New York, and then in Texas and elsewhere, stepped up efforts to compete for those cases, largely by streamlining procedures. Bankruptcy judges in the Southern District of Texas, for instance, adopted new procedures in 2000 designed to make complex Chapter 11 cases run more predictably and faster. But Cornyn wants to do more by amending the venue provisions in 28 U.S.C. 1408. The bill, S.314, would implement a recommendation from the October 1997 National Bankruptcy Review Commission. “I think it’s an essential idea for fairness,” says Hugh Ray, head of the bankruptcy practice at Andrews Kurth. “Everyone who is not a regular habitu” on the Metroliner [Amtrak trains running between New York and Washington, D.C.] would love it. Cases, quite candidly, are filed in Wilmington, [Del.], and the Southern District of New York for the convenience of counsel. A company should not be allowed to run away from where its creditors are.” Ray says the proposed legislation should receive strong support from bankruptcy attorneys in Texas. “The lawyers in virtually every part of the country, other than Delaware and New York, would say, “Right on. This is what we need to do,’” says Jay Westbrook, a professor at the University of Texas School of Law who supports Cornyn’s proposal. When filing the bill, Cornyn included letters of support from lawyers including Texas Attorney General Greg Abbott, former Massachusetts Attorney General Scott Harshbarger and Westbrook. Several Texas bankruptcy attorneys also provided letters including William Greendyke, a partner in Fulbright & Jaworski in Houston who was a U.S. bankruptcy judge in the Southern District for 17 years; Barry Spears, a San Antonio lawyer who heads the bankruptcy practice at Winstead Sechrest & Minick; and Russell Munsch, a shareholder in Dallas-based Munsch Hardt Kopf & Harr. Abbott said in a letter to Cornyn that the legislation would prevent the “unseemly” practice of “unsavory court-shopping.” The practice undermines the credibility of the nation’s bankruptcy system, Abbott said. “When you have companies based in Houston, like Enron, or wherever, file their cases in far-flung jurisdictions, a lot of people are disenfranchised,” Munsch says in an interview. “I genuinely think it’s wrong that Enron’s fate is being sorted out in a courtroom so far away from the folks that most depended on Enron,” Westbrook says. Others who wrote letters to Cornyn in support of the legislation include Lynn LoPucki, a professor at the University of California, Los Angeles, School of Law, who contends in a new book, “Courting Failure: How Competition for Big Cases Is Corrupting the Bankruptcy Courts,” that the fight among courts for large bankruptcies is leading to an increasing number of unsuccessful bankruptcies. According to LoPucki’s research, more than half of all bankruptcy filings by large public companies since 1982 have been filed in New York and Delaware. He says that, since judges in more cities began competing for big bankruptcy cases, more of the corporations are landing back in bankruptcy court, because the judges are making rulings to please the corporate executives and their lawyers to attract more big cases. “The forum-shopping that is going on has led the courts into a competition for the cases. … It’s having an adverse effect on the companies themselves,” LoPucki says. “There is this very powerful correlation between courts competing for the cases and failure of the companies.” BACK AND FORTH Greendyke, the former bankruptcy judge who now practices at Fulbright, says in an interview that Cornyn’s proposed change in the venue laws is needed. When a corporation files a bankruptcy in a location far from its headquarters, it’s difficult for shareholders and employees of that company to understand why, he says. “This migration of large cases is not unique to Texas, and it represents a fundamental flaw in the perceived and actual fairness of the bankruptcy system,” Greendyke wrote in a letter to Cornyn. “The “little people’ (small creditors, former employees, etc.) in a large bankruptcy case are at once the most vulnerable economically and the parties least capable of participating in a distant forum,” he wrote. Rhett Campbell, a bankruptcy lawyer in Houston who in 2002 argued the motion asking Gonzalez to transfer the Enron bankruptcy to Houston, says Cornyn’s bill is a step in the right direction. Campbell, a corporate reorganization and creditors’ rights partner in Thompson & Knight, says the Enron bankruptcy cost more than it needed to because of the New York venue, and it was “tremendously unfair” to creditors and shareholders. “I represent a number of creditors and claimants in the case. I have specific examples of where lawyers for Enron will go to New York, I will go to New York, my client from Houston will go to New York, Enron’s principals will go to New York, witnesses will go to New York. Everybody will go to New York except the judge. It’s tremendously unfair,” he says. But Martin Bienenstock, a partner in Weil, Gotshal & Manges in New York who is Enron’s lead bankruptcy attorney, says Judge Gonzalez made the right call. “A lot of the Enron personnel were in Houston. On the other hand, a lot of the creditors, the biggest bank lenders, the investment bankers, the joint venture partners, were in New York and around the rest of the country. People were going to be flying to any hearing no matter where the case was,” Bienenstock says. “By a landslide, the bulk of the parties in interest wanted the case to be in New York. There’s no question in my mind that if the bulk of the parties wanted it to be in Houston” Gonzalez would have moved it, Bienenstock says. He says that, throughout the case, Gonzalez has conducted hearings via telephone when necessary and used the Internet for pleadings. Bienenstock says the change in the law Cornyn has proposed is not necessary, and it discounts the ability of a bankruptcy judge to decide the correct venue for a particular bankruptcy. “What his [Cornyn's] proposal does is he takes away the flexibility of a judge to put a case in the right court. There’s no purpose to that,” Bienenstock says. According to Cornyn’s statement, creditors in the Enron bankruptcy will likely receive about 20 cents on the dollar, and shareholders will receive much less, while court-approved fees for lawyers, accountants and other professionals will exceed $1 billion. Robin Harrison, a partner in Houston’s Campbell Harrison & Dagley who filed a motion in 2001 to move the Enron bankruptcy to Houston, says the Enron bankruptcy would have been handled more efficiently and at less expense if it had been moved to the Southern District of Texas. He says all the creditors were well represented but at a greater expense in New York.

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