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Reasons why many companies incorporate in Delaware

It's the Law

Posted: June 20, 2008 2:14 a.m.
Updated: August 21, 2008 5:03 a.m.
 
How did Newhall Land and Farming Company - the renowned, 125-year-old California real estate owner - end up in a bankruptcy court in Delaware?

In 2004, nationwide homebuilders Lennar and Lennar Property Corp. acquired it, then merged with some other major real estate concerns to form a business complex under the parentage of an entity called LandSource Communities, LLC, a limited liability company established under Delaware law.

For more than a century, many publicly-held corporations have been created under Delaware law. This has been true, even through the company doesn't really have a practical business relationship to Delaware. The main reason so many businesses have incorporated under Delaware law is that its laws have been uniquely cordial to business.

Even though it is legally known as a "Delaware limited liability company," LandSource is headquartered in Aliso Viejo. LandSource is the legal "parent" over various entities with names we recognize, such as Newhall Land and Farming, Tournament Players Club and Valencia Realty Company. Most of its residential subdivisions are in the southwestern United States.

While each state has the legal right to establish its own business and corporation laws, the U.S. Constitution expressly grants to the federal government the power to enact a uniform bankruptcy law, applicable everywhere in the country. However, laws enacted by Congress must be interpreted by courts; in other words, the United States Bankruptcy Code must be interpreted by the United States bankruptcy courts throughout the country.

As authorized by the bankruptcy law, LandSource voluntarily filed its own Chapter 11 - and those of numerous subsidiaries - including Newhall Land and Farming. LandSource's Delaware legal status provided the link to bankruptcy court venue in Delaware.

Why the United States Bankruptcy Court in Delaware, rather than a federal judicial district in California, where LandSource is headquartered? Just as corporate directors find Delaware a friendly haven to incorporate, so do corporate bankruptcy experts find Delaware unusually accommodating for a bankrupt company going into Chapter 11 reorganization.

In Wilmington, Del., a dozen or so major, "local" law firms serve as co-counsel along with the world's largest legal establishments in shepherding the Chapter 11 bankruptcy reorganization cases of big business. The partners in these "local" law firms who are the bankruptcy specialists number no more than a few dozen, and they know the handful of United States bankruptcy judges for the district of Delaware. When a major Chapter 11 bankruptcy is about to proceed, it is typical for the local partner in charge to phone the bankruptcy judge or his or her law clerk and make arrangements for a special filing procedure.

United States bankruptcy court clerk's offices throughout the U. S. are not "24/7" convenience stores. They keep regular hours. Of course, this is the case with the bankruptcy court clerk's office in Wilmington, which is open for business Monday through Friday (legal holidays excepted). Nevertheless, a special procedure is evident in LandSource's Sunday Chapter 11 filing in the Delaware Bankruptcy Court Clerk's Office.

Because Chapter 11 is supposed to keep a business running rather than kill it, there are emergency measures that invariably must be presented very quickly to the U.S. bankruptcy judge who is handling the case.

While some busy bankruptcy court districts find it necessary to take a bit of time and insist on some technical paperwork for even the most urgent motions, the bankruptcy courts in Delaware have developed an open-door, "first-day-order" procedure that pretty much means what its name says - that is, the lawyer calls the bankruptcy judge or law clerk, makes an appointment and personally presents the so-called "first-day motions" asking for the "first-day orders."

Thus, last week's headlines about LandSource's bankruptcy seem to those familiar with Delaware Bankruptcy Court Chapter 11 practices a bit hysterical. Of course Newhall Land and Farming will continue in business. Of course LandSource and its subsidiaries, including Newhall Land and Farming, will have money to continue while in Chapter 11. Of course, utilities will not be allowed to pull the plug on any of these entities.

Meanwhile, for some quite some time - possibly years - distinguished lawyers, accounting firms, appraisers, financial and turnaround experts and will be working and billing, and all will eventually be settled - by the time the real estate iceberg melts. At that point, these experts will be heroes asking for large bonuses.

Thomas Henry Coleman specializes in bankruptcy and corporate law and has served as a court receiver for many years. His column represents his own views, and not necessarily those of The Signal. "It's the Law" appears Fridays and rotates between members of the Santa Clarita Valley Bar Association.

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