In an 11 page decision signed June 22, 2011, Judge Walsh of the Delaware Bankruptcy Court denied a motion to dismiss, holding that the Bankruptcy Court of the District of Delaware has personal jurisdiction over an insider of a debtor when the debtor files for bankruptcy in the District of Delaware. Judge Walsh’s opinion is available here (the “Opinion”). DBSI’s preference actions have resulted in Judge Walsh publishing a number of opinions. Here are some of our prior posts dealing with DBSI preference actions:
Decision in DBSI Delays Motion for Summary Judgment
Decision in DBSI Inc., Holds that the “Particularity” Requirement of F.R.C.P. 12(b)(6) and 9(b) was Satisfied, Notwithstanding the Number of Alleged Fraudulent Transfers
Trustee In DBSI Bankruptcy Files Adversary Actions
DBSI and certain of its affiliates filed for bankruptcy on November 6, 2008. A plan of liquidation was confirmed October 26, 2010, and a Litigation Trust was formed. The Litigation Trustee was given the power to pursue the Debtors’ causes of action, including bringing lawsuits to recover preference payments and fraudulent transfers.
The Litigation Trustee brought a claim against certain DBSI insiders, including Thomas Var Reeve, alleging fraudulent transfers were made to these insiders prior to DBSI’s bankruptcy. Opinion at *2. Mr. Reeve moved to dismiss the complaint under Federal Rules of Civil Procedure 12(b)(2), arguing that he did not have any contact with Delaware, so the preference action against him should have been brought in Idaho, where his interactions with DBSI occurred. Opinion at *3-4. The Trustee raised three arguments in response to the motion to dismiss: (1) the confirmed Plan provided for Delaware to retain jurisdiction, (2) Rule 7004 provides for nationwide service of process, and (3) Reeves either has sufficient contact with Delaware or would not be severely burdened by litigating in Delaware. Opinion at *4.
Judge Walsh’s Opinion
Judge Walsh’s legal analysis begins with the quote “When the court does not hold an evidentiary hearing on the motion to dismiss, the plaintiff need only establish a prima facie case of personal jurisdiction and is entitled to have its allegations taken as true and all factual disputes drawn in its favor.” Opinion at *5, citing Charan Trading Corp. v. Uni-Marts, LLC (In re Uni-Marts, LLC), 399 B.R. 400, 406 (Bankr. D. Del. 2009). Judge Walsh then turned to a discussion of nationwide service of process, holding that because Congress allows for this wide ranging service, federal courts have equally broad jurisdiction. Opinion at *6.
Judge Walsh also examined the relative burden upon Reeve of litigating in Delaware and upon the bankruptcy estate should litigation occur in Idaho. Reeve did not argue that he was unable to afford to litigation in Delaware and he is alleged to have received over $6 million in transfers from DBSI in the four years prior to DBSI’s bankruptcy. Opinion at *9. If Reeve were allowed to remove his trial to Idaho, it is likely that the other five defendants in this preference action would have to testify in Idaho and Delaware, creating unnecessary expenses for the estate. Opinion at *9-10. Thus, Judge Walsh determined that the motion to dismiss should be denied.
Judge Walsh finished his opinion by addressing the section of the Bankruptcy Code concerning jurisdiction, 28 U.S.C. § 1409. Section 1409(b) creates a very limited exception to the presumption that the Bankruptcy Court in which the bankruptcy filing occurred is the proper venue for any preference actions. The exception provides that claims against non-insiders for less than $11,725 may only be brought in the district court for the district in which the defendant resides. In this case, however, the claim is both in excess of $11,725 and against an insider, making this limited exception inapplicable.
Jurisdiction and Venue in a bankruptcy proceeding are difficult to challenge. As Judge Walsh stated, Congress created a very limited venue restriction in 28 U.S.C. § 1409(b) for claims brought against non-insiders for less than $11,725. Trustees who operate in Delaware are well aware of the venue restrictions, making it very difficult for defendants of preference actions to successfully remove a claim on the grounds of improper venue.