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.

Summary

In a very easy to follow opinion issued October 21, 2011, Judge Sontchi of the Delaware Bankruptcy Court denied a motion to dismiss an avoidance action for improper venue or, in the alternative, to transfer venue of the action. Judge Sontchi’s opinion is available here (the “Opinion”). The Opinion provides an excellent framework for all preference defendants to analyze how applicable this defense may be in actions brought against them. The following posts have addressed issues of venue:

Decision in NWL Holdings, Inc., Limits the Ability of Defendants to Transfer Preference Actions

Decision in DBSI Inc., Reminds Us that District Courts have Personal Jurisdiction Throughout the United States

Decision in DHP Holdings Considers Forum Selection Clause in Deciding Whether to Grant Motion to Change Venue

Background

In 2009, Visteon and its affiliates filed for bankruptcy. In May 2011, Visteon filed a preference and fraudulent transfer action against Governor Business Solutions, Inc. (“GBSI”). GBSI then filed a motion to dismiss the action to dismiss for improper venue, or to change the venue. Opinion at *2. The Opinion was written in response to GBSI’s motion.

Judge Sontchi’s Opinion

Judge Sontchi very quickly eliminated the possibility of granting the motion to dismiss, citing 28 U.S.C. § 1409 and HLI Creditor Trust v. Keller Rigging Constr., Inc. (In re Hayes Lemmerz Int’l Inc.), 312 B.R. 44, 45 (Bankr. D. Del. 2004) for the principle that “[A] proceeding arising under title 11 or arising in or related to a case under title 11 may be commenced in the district court in which such case is pending.” Opinion at *3. He then moved to a point by point discussion of the twelve-factor test established by the Third Circuit, as provided by Hayes Lemmerz, 312 B.R. at 46. These same twelve factors were considered by Judge Walrath in the NWL Holdings decision, which is discussed in the first blog post linked above.

Judge Sontchi spent the majority of the Opinion analyzing each of the following 12 factors:
1) plaintiff’s choice of forum;
2) defendant’s forum preference;
3) whether the claim arose elsewhere;
4) the location of books and records and/or the possibility of viewing premises if applicable;
5) the convenience of the parties as indicated by their relative physical and financial condition;
6) the convenience of the witnesses, but only to the extent that the witnesses may actually be unavailable for trial in one of the fora;
7) the enforceability of the judgment;
8) practical considerations that would make the trial easy, expeditious, or inexpensive;
9) the relative administrative difficulty in the two fora resulting from congestion of the courts’ dockets;
10) the public policies of the fora;
11) the familiarity of the judge with applicable state law; and
12) the local interest in deciding local controversies at home.

Judge Sontchi determined that the majority of factors in this instance weigh in favor of keeping the action in Delaware. Opinion at *9. He thus denied the entirety of GBSI’s motion.

As Judge Sontchi concluded, “a plaintiff’s choice of venue should only be disturbed when the balance weighs heavily in favor of the defendant’s motion to transfer.” Opinion at *9. While it is not clear how much difference is required to “weigh heavily in favor” of granting a motion to transfer, it is important to remember that “deference is given to the plaintiff’s choice of forum.” Opinion at *9. Thus, if a motion to transfer venue is your only hope of avoiding a preference claim, it may be worthwhile to consider settling.

Summary

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

Background

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.