Why Companies Like to Go Bankrupt in Richmond, Virginia

Virginia State FlagCertain courts are seen as favorable for certain kinds of cases. This can lead to "forum shopping" — the practice of bringing a case in a favorable court, or having a case moved to such a court.

For decades, for example, the federal court for the Eastern District of Texas has been favored by so-called "patent trolls," as it's seen as friendly to patent owners.

However, as Ars Technica reported, a Supreme Court decision earlier this year may lead to the decline of the Eastern District as a venue for patent cases by making it harder for companies to be sued there.

Why Richmond?

As the New York Times reports, the US Bankruptcy Court in Richmond, Virginia has become popular with major companies filing for bankruptcy.

Toys "R" Us and Gymboree are among the companies that have chosen to file for bankruptcy in Richmond, even though their corporate headquarters are located elsewhere.

Companies can file for bankruptcy wherever they have an "affiliate."

An affiliate can be incorporated in a state by using a registered agent with a local address. These agents are often little more than mail drops.

76% of companies file for bankruptcy in a state other than the state where they actually do business.

Rocket Docket

The Eastern District of Virginia has long been known as a "rocket docket" — a place where civil cases can get resolved more quickly than in other courts.

For example, during recent years the time from case filing to trial in the Eastern District has been around 12.5 months — compared to a national average of 24.9 months.

Bankruptcy cases under Chapter 11 often take years, but Gymboree's bankruptcy was completed in less than four months.

Case law in the Eastern District is also more favorable to companies filing bankruptcy, making it easier for them to be free of agreements with labor unions, for example.

The two bankruptcy judges in Richmond are known for their expertise in handling the cases, which makes things go more smoothly.

Legal Fees

One side effect of this convivial legal environment is that lawyers practicing in the District can charge a premium for their services.

Lawyers for one firm in the Toys "R" Us case are charging up to $1,745 per hour — 25% more than average for the top 10 bankruptcy cases this year.

Fees for bankruptcy lawyers have been increasing at a rate of about 9.5% per year — four times the overall rate of inflation.

Legal fees in bankruptcy cases need to be approved by the courts, and courts more likely to approve high fees tend to attract more cases.

Lawyers in the Toys "R" Us case are expected to earn $96 million in fees.

Those legal fees will come out of the amount that might otherwise go to the company's suppliers.

For example, the chief executive for a distributor for several small toy suppliers said that her clients might only recover $120,000 out of the $1.2 million they were owed.

Creditors in bankruptcy cases can challenge the number of hours billed by the lawyers for bankrupt companies.  The United States Trustee Program can also raise objections if legal fees seem too high.

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