CHARLOTTE, N.C. — In the Charlotte area, the Belk name is on a freeway, a theater, two football stadiums, a basketball arena and too many college dormitories to count.
So, why is Belk — the department store chain that announced it would file bankruptcy last month — going bankrupt in Houston, a city in which it has no stores? And how will Belk get in and out of bankruptcy in as little as 24 hours, as its private equity owner Sycamore Partners hopes it will?
It's because of the judges, experts say. Belk's choice of the Southern District of Texas for its bankruptcy will allow it to have a quick, unsurprising bankruptcy, with a very short time for examination by the company's stakeholders.
No stores are expected to close as a result of the bankruptcy, nor are any of the chain's 17,000 workers expected to be laid off in the process. The formal filing is expected Feb. 24.
U.S. bankruptcy law allows companies to effectively file for bankruptcy in the federal jurisdiction of their choice.
For years, most companies chose New York or Delaware, regardless of their true headquarters. With most of the bankruptcy bar in Manhattan and lots of companies incorporated in Delaware, Houston wasn't a major option.
But over the last five years, Chief Judge David Jones of the Southern District of Texas's bankruptcy court put in place a series of reforms that made Houston a top destination for billion-dollar U.S. bankruptcies. Jones, a bankruptcy lawyer-turned-judge from North Carolina, created a two-judge panel to exclusively handle the district's complex bankruptcies, complete with easy-to-use digital access to hearings and a steady calendar.
The changes removed some variables in a bankruptcy filing. A company was getting one of two judges, who used standardized procedures and operated on a quick calendar that companies wanted.
"Lawyers know they're going to get one of these two judges. Both of whom are going to be very good. They're going to be comfortable with them," said Tom Kirkendall, a Houston lawyer who has worked with Jones as well as the other judge on the panel, Marvin Isgur.
"It really comes down to expediency," said Kirkendall. "These cases are complex. They often have emergencies that arise, so if lawyers and management feel that they can get a quick, fair hearing, they just gravitate towards that."
A central drive behind the changes was to make sure that Texas companies went bankrupt in Texas, according to an article in The Texas Lawbook. Jones and other lawyers wanted to keep the Texas bankruptcy bar alive. They succeeded, and in the process attracted scores of filings from outside Texas to their jurisdiction.
In 2020, 47% of all large U.S. bankruptcies were filed in Jones' Houston court, according to the UCLA-LoPucki Bankruptcy Research Database. The court had none in 2010.
Some of that was driven by a wave of bankruptcies in Texas's oil companies. But the court also attracted the bankruptcy of Dallas-based department store Neiman Marcus, and other retailers.
A positive experience with filing a bankruptcy in a certain court can make lawyers likely to choose that court again. And Belk is being represented by the same firm that took Neiman into bankruptcy, the massive New York shop Kirkland & Ellis. A representative for Belk's owner, Sycamore, declined to comment.
"They know what to expect. They know what they're going to get," said Lynn LoPucki, a law professor at the University of California, Los Angeles. "This is all a way to choose your judge."
LoPucki believes the practice of a company choosing its bankruptcy venue, known as forum shopping, has corrupted the country's bankruptcy courts, leading to sloppy reorganizations that shield bad actors.
Quick bankruptcies, like what Belk hopes its will be, can leave little time for people to weigh in and identify potential problems. In a likely scenario, Belk will produce a bankruptcy filing detailing the inner-workings of the company on its planned filing date in February, then promptly exit bankruptcy a day or so later.
If there is anything eyebrow-raising, there's a tight window to find it. "We don't know what the problem is because there's no disclosure," said LoPucki.
A representative for the Houston court declined to comment, as Belk has yet to formally file bankruptcy.
Belk is going through Chapter 11 bankruptcy through what's called a "pre-packaged" bankruptcy, in which its lenders vote on the terms of the exit from bankruptcy in advance of the filing.
Usually, the lenders vote as a part of the bankruptcy process. According to the "pre-packaged" proposal, Sycamore will remain in control of Belk, but some creditors will get a stake in the stores in exchange for a haircut on Belk's $1.9 billion of debt.
That's what allows the bankruptcy to be so quick in the first place. Maybe not the 24 hours that Belk anticipates to be in bankruptcy, but pretty close.
The speed is not without its trade-offs.
"You lose the opportunity to inspect a company and its future prospects and see how much value is left on the table," said Jared Ellias, a law professor at the University of California, Hastings. "That's one of the most important things that bankruptcy law tries to do."
Businesses spent the least time in bankruptcy of any bankruptcy court when they filed in the Southern District of Texas last year, according to LoPucki's database. The average business spent 82 days in Chapter 11 in Houston, versus 103 for the country as a whole.
Belk's quick turn filing doesn't leave much time to examine the long term sustainability of the department store, and whether the terms of the "pre-packaged" bankruptcy are the best for Belk.
"If you give the bankruptcy judge one day to do that work, they may not get it right," Ellias said.
