Delaware messes with Texas, sparks fight over mega-bankruptcy

WILMINGTON, Del, April 29 Tue Apr 29, 2014 6:49pm EDT

WILMINGTON, Del, April 29 (Reuters) - Energy Future Holdings is all Texas: It's the state's biggest power company with the state's largest network of power lines, and it is run by a Houston native.

But when Energy Future's owners filed for bankruptcy early Tuesday, they went to a court more than 1,000 miles away, in Wilmington, Delaware. That immediately sparked an unusual, long-shot bid by a group of creditors to move one of the biggest bankruptcies in U.S. history to Dallas, an indication that creditors believe they could get a fairer shake outside of Delaware.

"I think it was naked forum-shopping" to file in Wilmington, Ed Weisfelner, a lawyer for the group, told Reuters. "You scratch your head as to what this case is doing there."

The dispute over where to hear the case risks bogging the restructuring down for weeks, particularly if Texas politicians and regulators support the move, and it could eventually lead to a mini-trial.

Energy Future's bankruptcy filing came on the heels of more than a year of complex negotiations with a diverse group of creditors who were owed more than $40 billion. The company says it has reached the framework of a restructuring with its biggest creditors and that it wants to exit bankruptcy in less than a year.

Weisfelner's group, which mostly consists of sophisticated funds accustomed to investing in distressed companies, could get nothing as things currently stand.

In arguing for a change of venue, Weisfelner cited the added expense of sending the company's executives, regulators and local creditors to Delaware. He also noted that Texas has been the venue for the bulk of more than 200 lawsuits involving Energy Future since 2012.

Energy Future has not filed a response in court to Weisfelner's motion. A company spokesman said Delaware is the proper venue for the bankruptcy, since several of its corporate entities are incorporated there.

"The major issues in our restructuring involve our financial structure, rather than our high-performing operations or other constituents based in Texas such as our employees, customers or others," spokesman Allan Koenig told Reuters.

Wilmington and New York City are the preferred jurisdictions to file corporate bankruptcy cases. Many bankruptcy professionals say the two courts are more efficient and experienced in handling large, complex turnarounds with billions of dollars at stake.

Weisfelner, a bankruptcy guru known for representing creditors, is challenging the company's position that his clients, which are owed about $1.5 billion in low-priorty bonds, are out of money.

Weisfelner said he wants a trial to determine the company's value. He's concerned, he said, that the Delaware court might allow Energy Future to forgo such a hearing, while a Texas court might be more willing to hold one.

In addition to seeking a change of venue, his group is demanding the right to subpoena witnesses and information from Energy Future, in order to try to prove that the company has the ability to repay them.

To be sure, it may be in Weisfelner's interest to raise as many obstacles as he can to a quick reorganization. Barring some action by the court or concessions from other creditors, his group does not figure to see any recovery.

Energy Future was formed in 2007 in a record $45 billion buyout of TXU Corp by KKR & Co, TPG and Goldman Sachs' private equity arm. The deal loaded the company with debt just before new drilling technology depressed natural gas prices and in turn prices for the company's electricity.

FRIENDLY VENUE?

Critics have long complained that the Wilmington and Manhattan bankruptcy courts bend over backwards to please lawyers that represent bankrupt companies, often to the detriment of creditors and employees.

Lynn LoPucki, a law professor at the University of California Los Angeles, describes a form of quid pro quo in his book "Courting Failure": The court tends to defer to the wishes of debtors while approving big legal fees, so lawyers bring almost every sizeable case to one of those courts. LoPucki declined to comment on Tuesday.

Companies have a lot of leeway as to where they file. The federal bankruptcy code allows them to file where their headquarters are located, where they have significant assets, or where they are incorporated -- which for most U.S. companies means Delaware.

There often is not an obvious connection between the bankrupt company and Wilmington.

In recent years, for example, the bankruptcies of the Los Angeles Dodgers baseball team, savings and loan company Washington Mutual, and the owner of the Chicago Tribune and Los Angeles Times newspapers all took place in the Wilmington bankruptcy court.

Bankrupt companies have often taken clever routes to get to a preferred court, including using an obscure subsidiary to establish the "venue hook."

General Motors, for example, established jurisdiction in Manhattan in 2009 by first filing a bankruptcy petition for a unit that consisted of a single dealership in Manhattan's Harlem neighborhood. The rest of the corporate family followed immediately after.

Still, fights over venue in bankruptcy are rare, and only 26 large cases have been transferred since 1989, according to LoPucki's extensive bankruptcy database.

Texas Senator John Cornyn led one failed bid when he was attorney general of his state to remove Enron Corp's bankruptcy from Manhattan back to its home base of Houston.

In 2012, Patriot Coal Corp became one of the biggest cases transferred -- to St. Louis from Manhattan. Just weeks before filing for bankruptcy, the company incorporated a New York subsidiary, with a Capital One Bank checking account with $97,985 as its principal asset, as its venue hook.

Judge Shelley Chapman decided that was going a step too far. "Nothing in our jurisprudence requires the court to condone every strategy devised by clever lawyers to outsmart statutory purpose and language," she wrote when transferring the case.

Weisfelner has requested that Judge Christopher Sontchi consider his motion to transfer the venue to Dallas as soon as possible, but the court has not scheduled its initial hearing in the case. (Reporting by Tom Hals in Wilmington, Delaware and Nick Brown in New York; editing by Andrew Hay)

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