Opinion
No. 80 B 10150.
May 1, 1980.
Bankruptcy Reform Act — Venue — Change of Venue — Location of Liquidation
A bankruptcy court will retain improperly laid venue if retention is in the interests of justice and for the convenience of the parties. Thus, an objection to the Chapter 11 court's retention of venue was denied since the present forum is the center for liquidation of the debtor's intangible assets, the creditors representing half the debts are within close proximity, and creditors holding substantial claims sought retention of the case in this district. See 28 U.S.C. § 1472 at ¶ 4502, 28 U.S.C. § 1475 at ¶ 4505, and 28 U.S.C. § 1477 at ¶ 4507.
[Opinion of the Court]
Certain petitioning creditors object to this court's retention of venue of the Chapter 11 case, and seek to transfer the case to the Western District of Pennsylvania. These creditors assert in their moving papers that venue is improper in this district within the meaning of Section 1472 of Title 28 U.S.C. Bankruptcy Reform Act of 1978, Pub.L. No. 95-598. (The "Code"), and moreover, that the "interests of justice and convenience of the parties", §§ 1475, 1477 of the Code, requires that this court transfer venue.
Affidavits in opposition to the creditors' motions were filed with this court by the debtor, the Creditors Committee, Chemical Bank as holder of an approximately $20 million secured claim and Quaker Oats, Co., holder of an approximately $5 million secured claim. Pursuant to an order of this court, Chemical Bank is also factoring the accounts receivable of the debtor-in-possession. These parties opposing the motion contend whether or not venue was properly laid in this district, the interests of justice and the convenience of the parties require this court's retention of the Chapter 11 case.
The facts are generally undisputed and were stipulated to at an evidentiary hearing before this court on April 10, 1980. This opinion constitutes findings of facts and conclusions of law required by Bankruptcy Rule 752.
The debtor is a manufacturer of toys and sells its products under the names of "Marx" and "Aurora". On February 1, 1980, seven creditors who were not related to the petitioning creditors herein filed an involuntary petition under Chapter 11 of the Code with this court. The debtor consented to the involuntary petition on February 6, 1980, without objection to the creditor's choice of venue. On February 7, 1980 an eleven member creditor's committee was appointed by the United States Trustee for the Southern District of New York. The manufacturing operations of this debtor in West Virginia and Pennsylvania had been discontinued shortly prior to the filing of the petition. The debtor's present activities are directed towards obtaining financing in connection with its business operations and searching for prospective purchasers for all or part of its assets. Lewis, Eisner Co., were appointed as management consultants to the debtor.
There are three provisions of the Code, pertaining to venue, which are applicable here.
§ 1472. Venue of cases under title 11. Except as provided in section 1474 of this title, a case under title 11 may be commenced in the bankruptcy court for a district —
(1) in which the domicile, residence, principal place of business, in the United States, or principal assets, in the United States, of the person or entity that is the subject of such case have been located for the 180 days immediately preceding such commencement, or for a longer portion of such 180-day period that the domicile, residence, principal assets, in the United States, of such person were located in any other district; or
(2) in which there is pending a case under title 11 concerning such person's affiliate, general partner, or partnership.
§ 1475. Change of venue. A bankruptcy court may transfer a case under title 11 or a proceeding arising under or related to such a case to a bankruptcy court for another district, in the interest of justice and for the convenience of the parties.
§ 1477. Cure or waiver of defects.
(a) The bankruptcy court of a district in which is filed a case or proceeding laying venue in the wrong division or district may, in the interest of justice and for the convenience of the parties, retain such a case or proceeding, or may transfer, under section 1475 of this title, such case or proceeding to any other district of division.
(b) Nothing in this chapter shall impair the jurisdiction of a bankruptcy court of any matter involving a party who does not interpose timely and sufficient objection to the venue.
Under § 1472 of the Code, proper venue is defined for the purposes of a corporation, as being the location of the "principal assets" or the "principal place of business" during the 180 days prior to the petition being filed. §§ 1475 1477 of the Code governing changes of venue where the original venue is either proper or improper, permit such changes "in the interests of justice and convenience of the parties". These sections supersede prior Rule 116(b) of the Rules of Bankruptcy Procedure. 1 Collier on Bankruptcy, ¶ 3.02 (15th ed. 1979). Except for the fact that the court no longer has the discretion to dismiss a case where venue was improperly laid, the standards under §§ 1472, 1475 and 1477 are the same as under Bankruptcy Rule 116(b); and the old cases under Rule 116(b) remain persuasive. 1 Collier on Bankruptcy, supra.
As a preliminary matter, the court resolves the question as to the burden of proof. The cases are not unanimous on the question. In re Fairfield Puerto Rico, Inc., 333 F. Supp. 1187 (D.Del. 1971). However, this court believes sound the rules that the movants have the burden of showing by a fair preponderance of the evidence that venue is improper in the district of original venue; once having carried that burden, the burden shifts to those who ask the court to retain a wrongfully placed case. In the Matter of The Valley Fair Corporation, 4 Bankr. Ct. Dec. 154 (S.D.N.Y. 1978).
Turning to whether venue is proper under § 1472, this court must make a finding that this particular district is the location of either the "Principal place of business" or "Principal assets". Such a finding is one of ultimate fact. See Matter of Commonwealth Oil Refining Co., Inc., 594 F.2d 1239 (5th Cir. 1979).
After due deliberation, I find that venue in the Southern District of New York fails to satisfy either of the criteria for proper venue set forth in § 1472. It is undisputed that the debtor had few, if any tangible assets in this district, whereas it had substantial assets in the form of manufacturing plants located in Pennsylvania and West Virginia, and warehouse facilities located in Erie, Pennsylvania. While counsel ably argues that as a result of the debtor's financing arrangement with a New York Bank as factor, there is located in New York approximately $15 million in accounts receivable plus a possible additional $12 million in charge backs on receivables, such receivables are being held for Chemical's benefit and only the remainder after payment of Chemical's indebtedness may be considered "assets" of the debtor.
The most recent Circuit Court of Appeals to examine the meaning of "Principal Place of Business" appears to have been the case of Commonwealth Oil Refining Co., Inc., supra. The case decided under old Bankruptcy Rule 116(b), held that the place where the debtor makes its day to day business decisions would constitute the principal place of business, notwithstanding the location of its assets, and its production facilities in a different district. Commonwealth Oil Refining at 1246, 1247. Earlier cases in this Circuit appear to reach a similar result. See In re Flexton Corp. 203 F.2d 869 (2nd Cir. 1953).
The record is clear here that management decisions, either on a broad policy level basis or on a day to day basis, were not made in New York. Neither the executives who made such decisions nor the books and records upon which such decisions would be based were located in New York. While the record indicates that executive personnel, did visit New York, such visits were only periodically made and do not support an inference of management decision making in New York.
Since neither the debtor's assets nor the debtor's principal place of business are in New York, venue was improperly laid in New York.
Thus, whether venue should be retained turns on §§ 1475 and 1477 of the Code and the urgings by the parties on both sides for the exercise of this court's discretion to either retain or transfer. Clearly, the question turns on the exercise of the court's discretion. In re S.O.S. Sheet Metal Co., 297 F.2d 32 (2d Cir. 1961).
§§ 1475 and 1477 provides that the court's determination on whether to transfer or retain shall be made in the "interests of justice and for the convenience of the parties". Courts grappling with this and predecessor statutes define the following factors as relevant to its determination;
1. The proximity of all creditors and debtor to court,
2. the proximity of witnesses and the books and records to the court,
3. The location of the debtor's assets,
4. The economic administration of the estate, and
5. The necessity for ancillary administration in the event of bankruptcy.Commonwealth Oil Refining Co., supra, In re S.O.S. Sheet Metal Co., supra; In re Macon Uplands Venture, 5 B.C.D. 1279 (D. Md. January 22, 1980).
This court will not in its discretion uproot the pendency of a Chapter 11 proceeding without strong considerations for transferring the case. Crucial to such a determination are any facts and circumstances bearing on the success of the Chapter 11. See In re Fairfield Puerto Rico, Inc. 333 F. Supp. 1187 (D. Del. 1971). There in the interest of justice and convenience of the parties, the court retained the Chapter 11 case in Delaware, the district where some of the activity involving the administration of the Chapter 11 proceeding was taking place, even though the location of the assets, the principal place of business and the majority of the creditors were in Puerto Rico. In a case decided under the Bankruptcy Reform Act of 1978, Public Law 95-598, In re Macon Uplands Venture, 5 B.C.D. 1279 (D. Md. January 22, 1980), major creditors sought to transfer the Chapter 11 case from Maryland to the district in Georgia where the debtor's sole assets, an ongoing hotel business, was located. A decision had already been made in a prior proceeding brought in Maryland under Chapter XII of the old Bankruptcy Act to have the case transferred to Georgia. The court examined the factors as stated above and held that transfer was warranted. 5 B.C.D. at 1284, 1285.
(1) The first factor is the proximity of the creditors and the debtor-in-possession to the court. Involved here is a determination of which district will be more convenient to most creditors in number and amount, as well as the personnel employed by the debtor. The movants number approximately 40 parties (including 28 former employees) with claims aggregating approximately $400,000. There are a total of 900 creditors with claims in this Chapter 11 proceeding aggregating approximately $21,000,000 in unsecured claims. The seven creditors who joined in the voluntary petition brought here in New York represent $1.9 million in claims.
Approximately 300 creditors, which is 1/3 of the number of creditors, representing $10.5 million in debt, which is approximately half of the debt, are located in the States of New York, New Jersey and Connecticut. There are approximately 211 creditors located in Pennsylvania with an undetermined amount of debt. The movants assert that there are an additional 174 creditors located in Ohio, West Virginia and Western New York state who would find Western Pennsylvania closer and presumably more convenient. On the other hand, it may well be that there are numerous other New England creditors for whom New York would be more convenient.
It is important, although perhaps not controlling that creditors representing substantial claims object to a change in venue. While the court must weigh the convenience and interest of all creditors due consideration must be given to the convenience of the larger creditors representing 2/3 in the amount of the claims, without whom a plan of reorganization will not be possible. Chemical Bank, a creditor alleging a secured claim in the sum of $20 million and Quaker Oats Co., Inc., alleging a secured claim in the sum of 5.5 million voiced their objections to any transfer. The Creditors Committee representing approximately $3 million in unsecured debt, likewise seeks the retention of this case. Thus the creditors who urge retention have substantially greater claims than the creditors with claims of less than $400,000 who seek a transfer.
Pursuant to Chemical Bank's financing arrangement with the Debtor-in-possession, all the accounts receivable of the debtor are being factored in New York. The day to day monitoring by the court of Chemical's efforts and conversely Chemical monitoring of the Chapter 11 case is more easily accomplished in New York.
It appears that on balance, while there is inconvenience to the Pennsylvania creditors, most of the creditors will find New York more convenient. Pennsylvania creditors involved in disputes with the debtor, it should be noted, may move for a change of venue of their particular adversary proceeding.
The debtor's officers are located in Pennsylvania, New York and Connecticut as well as in other parts of the United States. However at the present time, I find that the focal point of the debtor's activities is not Pennsylvania and West Virginia where the manufacturing operations were being reduced and discontinued even prior to the commencement of the Chapter 11 proceedings, but rather New York where efforts are being made to obtain financing and to search for prospective purchasers of assets. The facts indicate that the financial data stored in Connecticut is easily transmitted to New York if there is a need for such data.
Moreover it appears that the debtor's parent company situated in the United Kingdom will be involved in the proceeding in New York and will find the New York area more convenient than Pennsylvania.
(2) The facts underlying the proximity of witnesses to the court is closely related to the factors involved above. Since the debtor's operations have ceased, the debtor's personnel in Pennsylvania will not find it as necessary as the debtor's personnel in New York and Connecticut to appear in court.
(3) With respect to the location of the debtor's assets, it is clear that substantial assets exist in Pennsylvania. The most important asset, in terms of possible resulting benefit to the debtor's estate, is the accounts receivable which are being collected in New York by Chemical Bank. This court finds that the posture of the Chapter 11 case renders the location of the debtor's tangible assets of less importance than the location of the liquidation of the debtor's intangible assets.
(4) The economic administration of the estate requires retention here. This court has already discussed the extent of the debtor's activities in New York, as well as their counsel, who are from New York.
The Creditors Committee and their counsel are based in New York and have been involved in the administration of the estate. It is clear that wasteful delay would result if the case were transferred to Pennsylvania and a Pennsylvania court, and new counsel would be required post haste to become familiar with the case. The center of the toy industry of the United States is New York. New York's greater access makes it more convenient, in terms of the international character of the debtors activities. The two primary activities of the debtor, collection of the receivables and the sale of assets, are centered in New York.
(5) While there is the possibility of an intervening bankruptcy which may conceivably require the closer supervision of a court over the tangible assets, that possibility should not jeopardize the vitality of the ongoing Chapter 11 proceeding. Since substantial assets are located in jurisdiction other than Pennsylvania, it is not at all clear that a Pennsylvania court should preside over a liquidation of all the assets. I believe that this factor may be resolved by granting the movants leave to renew the motion in the event of an adjudication. See In re Fairfield Puerto Rico, Inc., 333 F. Supp. 1187 (D. Del. 1971).
Weighing all the factors and considering the facts and evidence and giving consideration to the fact that the business operations in Pennsylvania were discontinued, this court concludes that the parties opposing the transfer sustained their burden in showing that the "interests of justice and, the convenience of the parties" requires retention of the case in the Southern District of New York.
The motions are denied. The movants are given leave to renew their motions in the event the debtor is converted into a bankrupt under the Bankruptcy Code.
So Ordered.