Will bankruptcy boom be boon to Delaware firms?
WILMINGTON – Some of America’s biggest corporate names have filed for bankruptcy in Delaware over the last 30 years, earning it a reputation as the place for big business to get a fresh start.
With the COVID-19 pandemic wreaking havoc on the American economy, many companies that had been treading water are suddenly looking to restructure their debts or fold altogether. The rental car giant Hertz, nutritional supplement retailer GNC, Madison Avenue men’s clothier Brooks Brothers, fitness center franchise 24-Hour Fitness, drug treatment provider American Addiction Centers, and contemporary circus Cirque du Soleil are among the debtors who have sent lawyers to the Delaware Bankruptcy Court on Market Street in recent months.
Although many predicted during the direst early days of the pandemic that bankruptcy filings would swamp courts nationwide as families lost jobs and businesses saw doors mandated to close overnight, that hasn’t actually happened. For the first half of 2020, total new U.S. bankruptcy filings across all chapters are down 23% from the same period last year, according to Epiq, a legal services firm that tracks bankruptcy filings.
Although bankruptcies overall remain low, commercial Chapter 11 filings, or businesses looking to restructure debt rather than sell their assets, are growing quickly, especially in Delaware which has by far the largest share of the cases nationwide. Una O’Boyle, clerk of the Delaware Bankruptcy Court, said that 805 Chapter 11s were filed in Wilmington through the end of July – 678 of which were filed since March 17. Last year saw 613 such cases in total.
Kevin Carey, a retired Delaware Bankruptcy Court judge and a partner in Washington, D.C.-based Hogan Lovells‘ business restructuring and insolvency practice, said that he believes those stats will begin to tick upward even more in coming months.
“There are lots of folks who’ve been saying that in end of the third quarter or beginning of fourth quarter, you’ll really begin to see [Chapter 11s] in greater numbers as government help runs out, as lines of credit have been drawn down, and the prolonged effects of COVID linger on,” he said.
While a historically high number of cases are currently passing before the six-member Delaware bankruptcy bench, which pre-pandemic already handled the most cases per judge, O’Boyle said that the judges have held up their duties. They are awaiting the addition of two more judges after a nominating procedure through the Third Federal Circuit.
With hundreds of new cases filed here each month – a byproduct of federal law that allows bankruptcy filings in any state that a business is incorporated or has operating affiliates, and Delaware’s preeminence for incorporation – there remains potential for legal services growth. Many large Chapter 11 debtors choose law firms from New York or Washington, D.C., but they must find local counsel in Delaware to serve on the case.
Some firms though, like New Jersey-based Porzio, Bromberg & Newman, are choosing to establish offices in Wilmington to serve their clients and attract new ones. Vito A. Gagliardi Jr., managing principal of Porzio, said that his firm has actually added about 10 employees since the pandemic struck. After looking at opening a Wilmington office for more than a decade, they finally decided to dive in.
Porzio hired experienced bankruptcy and commercial real estate lawyer Cheryl Santaniello from Cohen Seglias’ Wilmington office to make the jump.
“While being very careful and very conservative with our investments, we still need to make investments if we expect to have a successful firm in 2021 and beyond,” Gagliardi said. “Given what we expect with the bankruptcy courts, it obviously reduced our risk because we will be so quickly able to justify the investment in this office.”
By Jacob Owens