On her The Bottom Line 11 blog, Fox partner Mette Kurth examined new bankruptcy venue reform legislation recently unveiled in the U.S. Congress:

U.S. Capitol Building, Washington, D.C.Earlier today, Senators John Cornyn (R-TX) and Elizabeth Warren (D-MA) introduced the Bankruptcy Venue Reform Act of 2017The bill would require companies to seek bankruptcy protection where they are physically headquartered. And it would simultaneously prohibit them from filing where they are incorporated or where an affiliate has a pending case. The end result? The bill would effectively limit access to popular bankruptcy courts in New York and Delaware. If passed, this would represent a seismic shift for corporate bankruptcies.

Sens. Cornyn and Warren said in a joint statement that the bill is meant to strengthen the integrity of the bankruptcy system and build public confidence by preventing companies from “shopping” for favorable courts. The bill is also intended to allow employees at bankrupt companies, small business creditors, and others to participate in cases that will have tremendous impacts on their lives.

To read Mette’s viewpoint on the new legislation and its impact, please visit her blog.

On her The Bottom Line 11 blog, Fox partner Mette Kurth notes an expected imminent push in the U.S. Congress for bankruptcy venue reform:

U.S. Capitol Building, Washington, D.C.I have barely unpacked my suitcases, and yesterday the Commercial Law League of America (CLLA) announced that a bankruptcy venue reform bill will be proposed this week in the U.S. Senate. The bill will to seek to change the venue rules for filing Chapter 11 business cases. If you want to view the CLAA’s press release, it is available here. (The CLLA previously supported S.314 (109th Congress 2005-2006) and H.R.2533 (112th Congress 2011-2012), which were not enacted.)

To read Mette’s full discussion of the debate over the reforms, which are set to be proposed the week of December 18, 2017, please visit her blog.

Introduction

In September of this year, the Honorable Mary F. Walrath, the presiding Judge in the DHP Holdings bankruptcy, issued a decision addressing  the effect of a forum selection clause when deciding a motion to change venue.  This issue came before the court in an adversary action filed by DHP against The Home Depot.  After DHP filed for bankruptcy, the company sued Home Depot for $5.5 million alleging Home Depot owed the company for an outstanding account receivable.  Opinion at *2.  In its Answer, Home Depot raised various defenses, one being that venue in Delaware was improper pursuant to a forum selection clause under the parties’ Supplier Buying Agreement (the “SBA”).  Home Depot filed a motion to transfer venue pursuant to the terms of the SBA.

Analysis

The court began its analysis by noting that motions to transfer venue require consideration of several factors.  Factors for consideration include the parties’ forum preferences, where the claims arose, convenience to the parties and witnesses, as well as the location of books and records.  Opinion at *5, n.5.  Even though the court should consider various factors, it nevertheless has discretion to determine on a case by case basis whether convenience and fairness support transfering venue.  Id. at *5.

Turning first to the SBA’s forum selection clause, the court noted that selection clauses are “prima facie valid” and are generally enforced unless there is a strong showing that the clause would be unreasonable under the circumstances.  Id. Other courts have found forum selection clauses unenforceable where the clause was obtained through “fraud or overreaching.”  Id. at *5, citing M/S Bremen v. Zapata Off-Shore Co., 407 U.S. 1, 18 (1972).  DHP argued that the forum selection clause should be given less weight because it was part of a form contract and therefore not a bargained-for contract provision.  The court disagreed, finding that the “lack of actual negotiations over the forum selection clause does not affect its validity.”  Opinion at *6, citing Foster v. Chesapeake Ins. Co., Ltd., 933 F.2d 1207, 1219 (3d Cir. 1991).

Although the court found that the forum selection clause (which supported a change in venue) valid,  it also found that the presence of the forum selection clause was not determinative.  Instead, such provisions are only a significant factor that is included in the court’s analysis.  Opinion at *6.  The court next looked at whether the forum selection clause arose in either a core or non-core matter.  This distinction was significant as the court observed that forum selection clauses generally are more likely to be enforced in non-core matters.  Opinion at *7.

In deciding whether a matter is core or non-core, courts often consider two sources – section 157(b) of the Bankruptcy Code, as well as a two-part test under In re Guild & Gallery Plus, Inc., 72 F.3d 1171, 1178 (3d Cir. 1996).  Opinion at *8.  Section 157(b) provides a list of proceedings that may be considered core.  The Third Circuit’s decision in Guild & Gallery Plus, on the otherhand, provides that a proceeding is core (1) if it involves substantive rights provided by title 11, or (2) if it is a proceeding that, by its nature, could arise only in the context of a bankruptcy case.”  Opinion at *8.

The court next considered whether each of the causes of action brought in the DHP adversary action were core or non-core.  DHP asserted three causes of action against Home Depot: (1) turnover of property under 542(b) of the Bankruptcy Code; (2) breach of contract; and (3) disallowance of claim under 502(d).  Opinion at *2.  Starting first with the turnover claim, the court observed that although such claims are core proceedings, the court must nevertheless determine whether DHP properly invoked this section of the Bankruptcy Code.  On this point, the court found that DHP’s claim against Home Depot was non-core because it involved a “disputed” claim.  In doing so, the court recognized that “[m]ost courts require that the debt be undisputed for the action to be core.”  Opinion at *11, citing U.S. v. Inslaw, Inc., 932 F.2d 1467, 1472 (D.C. Cir. 1991).

After finding that all the counts in the complaint were non-core, the court went on to consider the factors for and against transferring venue.  Here, the court found that “most of the factors either favor transfer [of venue] or are neutral.”  Opinion at *22.  Having reached this conclusion, the court granted the motion to transfer venue.

Conclusion

The decision in DHP is helpful in several respects.  First, it looks at the effect of a venue selection clause in the context of a motion to transfer venue.  Next, the court distinguishes between core and non-core matters, a common issue in bankruptcy proceedings.  Finally, the decision reviews those factors courts consdier in determining whether to grant a motion to change venue.  A copy of the decision is available here for review.   The DHP bankruptcy is in the United States Bankruptcy Court for the District of Delaware.