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Bankruptcy Litigation

Common Bankruptcy Litigation Scenarios — Venue Fights

In bankruptcy litigation, the venue can have a major influence on an outcome.

We selected expert members of the Financial Poise Faculty—each a partner or managing director in the restructuring industry—to discuss why venue fights occur and how business owners (and their advisors) should approach selecting venue or challenging venue in a bankruptcy case.

Our expert panelists explore how courts resolve disputes over the venue of a case.

EXPERT PANELISTS:

  • Lisa Vandesteeg, Partner at Sugar Felsenthal Grais & Hammer
  • Rob J. Feinstein, Managing Partner at Pachulski Stang Ziehl & Jones LLP
  • Steve Kotarba, Managing Director at Alvarez & Marsal
  • Nora Schweighart, Partner at The Law Firm of Faegre Baker Daniels

Remember: Venue is not just a routine thing in bankruptcy cases.

- Lisa Vandesteeg, Sugar Felsenthal Grais & Hammer

 

What is Venue — How is it different than jurisdiction?

The United States Code defines venue and jurisdiction in different sections.

U.S. District Courts have original and exclusive jurisdiction of all cases under Title 11 (either Chapter 7, 11 or 13 bankruptcy cases). From here, District Courts automatically refer cases down to individual bankruptcy courts.

There are serious questions about the jurisdiction of specific bankruptcy courts to hear items related to cases under Chapter 11 that involve state law matters.

According to Lisa Vandesteeg of Sugar Felsenthal Grais & Hammer, “for a more basic practitioner, what you should know is jurisdiction deals with the power to hear the case.”

“With venue, we are just talking about ‘Where is the right place to put it?’ ”

Venue is spelled out in several areas in the Code, with certain areas pertaining to cases and other areas to proceedings.

Some of the controversy around venue has to do with where the debtor is domiciled—which, for corporations under federal law, has been defined to include the state in which the company’s articles of incorporation are filed.

Rob Feinstein of Pachulski Stang Ziehl & Jones LLP says that jurisdiction and venue are “[t]wo very different things. Jurisdiction really goes to the power of a particular court – the power to hear a particular case or controversy.”

 

How Can You Pick the Best Venue for the Debtor?

The need for a plan for determining venue grows along with the size of the debtor. “At the outset of a representation, you really want to think about how big the debtor is and where their operations are,” mentioned Nora Schweighart, Faeger Baker Daniels

Suppose an attorney or firm represents a very large debtor with operations in many geographic locations. In such cases, counsel has several practical venue options and, often, no obvious first choice.

Many debtors choose states with corporate-friendly reputations. Rob Feinstein added, “It is common to see companies with no physical presence in Delaware nevertheless able to file (Chapter 11) in Delaware.”

(Small debtors with one state of incorporation tend to be simple, at least by comparison.)

Practitioners need to identify probable legal issues that may arise in the case. For example, it is common for a debtor to be party to several important contracts or leases at the time of filing—some of which they will want to assume or reject.

Steve Kortarba of Alvarez & Marsal instructs owners and advisors to “pay attention to the practical, behind-the-scenes and day-to-day factors. These often supersede the legal aspects of the case.”

These considerations affect the kinds of relief that the debtor should seek as soon as the case files:

  • Retention plans
  • Other labor agreements
  • Provisions for plan of reorganization with major constituents
  • Considerations about major creditors and other parties of interest
  • Domicile (or residence)
  • Principal place of business
  • Multiple entities in the same broader business structure

A really important component of venue analysis is to understand the level of predictability that you’re going to have in a particular court. Having a predictable process is extremely important.

- Nora Schweighart, Faeger Baker Daniels

 

Some Courts Are More Friendly to Your Case than Others

Part of good representation is substantively evaluating each potential venue.

Look at:

  • Sophistication of the court
  • Track record of the court when handling complex or large cases
  • Likelihood of favorable outcomes based on established court precedent
  • Availability of favorable case law in the respective District
  • Predictability

…also consider:

  • How active the U.S. Trustee is in a given region
  • Practical convenience of the court to the debtors involved in the case
  • The power of the respective secured lenders in the case

Remember that, ultimately, the debtor gets to decide where to file and which venue to use.

Even so, the debtor is handcuffed by the preferences of their secured lender(s), whose considerations on venue often come down to the cost of litigation.

Factors that matter to Bankruptcy Courts, Venue Fights

Think Strategically

As previously mentioned, U.S. bankruptcy cases have federal rules, but different regions interpret and apply those rules inconsistently.

Nora Schweighart, of Faeger Baker Daniels, added, “[o]ften time, the ability to assess venue and where to file depends on the reality of the situation. If you don’t have a lot of time to choose, you may have to choose a more obvious venue and get the company into bankruptcy to protect its assets.”

Example: Vitality of critical vendors.

A hot button issue: Some circuits are very tough on the vitality of critical vendors. Some make it very difficult—if not impossible—to get critical vendor orders approved.

Other courts are much more permissive. This is an example of the kind of little nuance that, when considered in advance, greatly enhances legal representation and provides value.

Nora Schweighard added, “It isn’t always black and white. There’s wiggle room in there. You can be creative using the venue rules—but not too creative, or you risk getting your venue transferred.”

The debtor often times gets bottlenecked and, rather than fixing the company, they are just stressed on getting the restructuring done from a legal perspective.

- Steve Kotarba, Alvarez & Marsal

 

CAUTION: Different Rules Apply to Different Cases

If you look at U.S.C.A § 1409 cases, there are several exceptions to how proceedings are filed in specific case types.

Example: If, for individual cases, trustee seeks to commence related proceeding to recover:

  1. Money or property less than $1,300,
  2. Consumer debt less than $19,250, or
  3. Non-consumer debt from non-insider worth less than $12,850.

Then…

Venue MUST be where the defendant resides.

There are also provisions for avoidance actions that are different and allow some flexibility.

Change of Venue

The debtor’s choice of venue in its own bankruptcy case is entitled to great preference. In fact, there is a presumption that debtors select their venue with good faith.

Even so, creditors have some recourse when it comes to forcing a change in venue.

Is Venue Improper?

For example, someone files the case in a venue totally incompatible with the specific needs of the case—such as when the debtor simply doesn’t have domicile.

In such cases, the remedy may be to dismiss the case. Or, more likely, the case is transferred to a proper venue under U.S.C.A. § 1412.

Is Venue Technically Proper, but Does Creditor Have Statutory Basis for Invoking a Change Anyway?

More commonly, venue is placed in a proper district, but the creditor finds the location to be a major practical inconvenience.

It is only permissive for the court to transfer the case in the interest of justice and convenience to the parties. Creditors have to come up with reasons that such a transfer is necessary.

 

For more advanced legal advice:

Ultimately, debtors have great discretion about when and where to file bankruptcy.

No matter how prepared and involved you may be, there is a real chance you may end up litigating venue. Whether you are an experienced litigator or a business professional who has never stepped foot in a bankruptcy court, there is an economic advantage to seeking help and advice from real experts in business restructuring.

For attorneys: to best represent your client, you need to stay abreast of interpretations of the Bankruptcy Code, public policy, the practical realities of your client’s situation, idiosyncrasies of each venue and the activities of secured lenders and other creditors.

For business owners or managers: restructuring can be daunting and, if not executed properly, needlessly lengthy and expensive. You don’t need to be an expert in commercial bankruptcies, but you should be conversant enough with the language and process.

 

If you look at your debtor and what they hope to achieve in a bankruptcy case, there may be material differences where it really would be catastrophic to file in one locale versus another. In some cases, it would be malpractice to file in venues hostile to your debtor’s needs

- Rob Feinstein, Pachulski Stang Ziehl & Jones LLP

 

Want to Learn More:  Financial Poise created the following webinar to help you out.

EPISODE #1: Bankruptcy Battle Royale—Venue Fights

Our webinars are developed and executed exclusively by professionals who are top performers in their fields of expertise. Our Faculty Selection Team chooses each panelist selectively on merit, based on his or her substantive knowledge and ability to teach effectively.

About Sean Ross

Editor In Chief at Financial Poise

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