The Bankruptcy Court for the District of Delaware, Judge Kevin Gross, has confirmed the applicability to preference actions of the venue dollar threshold of 28 USC Section 1409(b). Dynamerica Mfg. LLC v. Johnson Oil Co., LLC, 2010 WL 1930269 (Bkrtcy.D.Del., May 10, 2010).
Under Section 1409(b), venue is limited to the district in which the defendant resides for proceedings to recover money or property from a noninsider of less than $11,725 (for adversary proceeding brought before April 1, 2010 the venue limit was $10,950). See $11,725 (Pre-April 1, 2010 $10,950) Threshold for Bankruptcy Preference Venue Impediment to Claims. This decision should abate the flood preference action filings seeking recovery of small preference amounts that have continued to clog the Delaware Bankruptcy Court.
The applicability of the dollar threshold for local venue of preference actions should never have been in doubt. As the Court in Dynamerica noted:
In 2005, Congress enacted the Bankruptcy Abuse Prevention and Consumer Act of 2005 (“BAPCPA”). Among the many changes Congress made was the amendment to 28 U.S.C. § 1409(b). Section 1409(b), as amended, gives substantially greater protection to creditor defendants by making noninsider defendants on non-consumer debts subject to suit where they reside if the debt is less than $10,000 (which has since been amended to $10,950 [now 11,725]). Charles J. Tabb, The Brave New World of Bankruptcy Preferences, 13 ABI L. REV. 425, 428, 437-39 (2005).
Despite the 2005 amendment, preference claimants continued to file bankruptcy preference actions in Delaware bankruptcy court below the venue limitation. The door was opened by the decision of the Bankruptcy Court for the Western District of Michigan in Moyer v. Bank of America, N.A. ( In re Rosenberger), 400 B.R. 569 (Bankr.W.D.Mich.2008). In Moyer, the Court used a very strict interpretation of the other subsections Section 1409 to conclude that Section 1409(b) did not apply to preference claims. Fortunately, Judge Gross disagreed with the Moyer decision finding its “textual interpretations inconsistent with the statute’s clear legislative history.”
The losing preference claimant in the Dynamerica decision must not have gotten the memo from the Delaware bankruptcy preference collection mills, who had been happy to leave the issue unresolved in Delaware. After all, a “no decision” continued to allow small preference actions to be brought on the grounds that the applicability of the venue threshold had not been decided in Delaware. Preference settlements continued to be extracted from small preference defendants who simply paid a settlement amount rather than legal fees to assert a defense. As Judge Gross noted: “The amended venue provision, as the Court interprets it, protects creditors by enabling them to choose litigation or settlement without the coercion of having to defend in a distant forum.”
The Dynamerica decision does not mean that preference collectors will stop bringing small transfer recovery actions in Delaware. Defendants must be vigilant for tactics that aim at circumventing the venue limitation, which will likely include the following:
- Some plaintiffs will take the position that venue remains proper unless and until the defendant timely raises a venue objection in an answer or motion to dismiss;
- Complaints will be filled that effectively “aggregate” transfers by individual debtors in multiple debtor bankruptcies rather measuring the venue threshold against the amount transferred by each debtor; and
- Preference claimants will continue to include “bounced” checks and payments against non-antecedent debts in the total amount claimed in order to exceed the venue threshold.