Middle District of Tennessee, U.S. Bankruptcy Judge Keith M. Lundin opines that the small-dollar home court venue exception in 28 U.S.C. § 1409(b) applies to bankruptcy preference recovery litigation. To reach that conclusion, he holds that there is an “overlap between ‘arising under title 11’ and ‘arising in’ a case under Title 11 for purposes of venue under § 1409.”   Judge Lundin thereby honors the clear legislative intent found in his scholarly, exhaustive review of the legislative history of Section 1409. Click here to see a copy of this opinion. To see a complete discussion on the use of the “venue defense” see: $11,725 (Pre-April 1, 2010 $10,950) Threshold for Bankruptcy Preference Venue Impediment to Claims.

The Confusion in Interpreting Section 1409(b)

The venue provisions for adversary proceedings are in Subsection 1409(b) of the Judiciary and Judicial Procedure title of the United States Code. That subsection provides:

“[A] trustee in a case under title 11 may commence a proceeding arising in or related to such case to recover . . . a debt (excluding a consumer debt) against a noninsider of less than $11,725, only in the district court for the district in which the defendant resides.”

Subsection 1409(b) covers only two categories of proceedings: those “arising in” a bankruptcy case and those “related two” a bankruptcy case. However, there is a third category of bankruptcy proceedings — those arising under the Bankruptcy Code. Bankruptcy preference proceedings unquestionably arise under title 11 and are therefore in a category of proceedings not included in Subsection 1409(b). With this observation, the bankruptcy courts that have rejected application of Subsection 1409(b) to bankruptcy preference claims have stopped their analysis. Judge Lundin concludes that there is another step in the inquiry.

The Categories of Proceedings Overlap

Judge Lundin asks: Why can’t the categories overlap, allowing some types of adversary proceeding to both “arise under title 11” and “arise in” a bankruptcy case? To answer this question, Judge Lundin reviews decisions of the United States Court of Appeals for the Sixth Circuit that have rejected treating the three categories of proceedings as rigid definitions.

The United States Court of Appeals for the Sixth Circuit has addressed the meaning of “arising under title 11,” “arising in” a case under Title 11 and “related to” a case under Title 11 on several occasions, always in the context of defining the subject matter jurisdiction of the district courts under 28 U.S.C. § 1334 or distinguishing core from noncore jurisdiction of the bankruptcy courts under 28 U.S.C. § 157. See, e.g., Browning v. Levy, 283 F.3d 761 (6th Cir. 2002); Sanders Confectionery Prods., Inc. v. Heller Fin., Inc. (In re Sanders Confectionery Prods., Inc.), 973 F.2d 474 (6th Cir. 1992); Michigan Emp’t Sec. Comm’n v. Wolverine Radio Co. (In re Wolverine Radio Co.), 930 F.2d 1132 (6th Cir. 1991). In Wolverine Radio, the Sixth Circuit noted that it was not necessary to distinguish between the three categories for purposes of 28 U.S.C. § 1334(b) because “[t]hese references operate conjunctively to define the scope of jurisdiction.” Wolverine Radio, 930 F.2d at 1141. The Sixth Circuit cited with approval a Fifth Circuit decision, Wood v. Wood (In re Wood), 825 F.2d 90 (5th Cir. 1987), in which the Fifth Circuit concluded:

Legislative history indicates that the phrase “arising under title 11, or arising in or related to cases under title 11” was meant, not to distinguish between different matters, but to identify collectively a broad range of matters subject to the bankruptcy jurisdiction of federal courts.

Wood, 825 F.2d. at 92 (citing S. Rep. No. 95-989 (1978), reprinted in 1978 U.S.C.C.A.N. 5787, 5939-40).

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It was not necessary in Wolverine Radio—or in any other decision to date—for the Sixth Circuit to determine whether “arising under” and “arising in” are mutually exclusive terms. Several courts of appeals have easily concluded that preference avoidance actions under § 547 “arise under” Title 11, without determining whether those same causes of action also “arise in” cases under Title 11. See, e.g., Clinka v. Murad (In re Housecraft Indus. USA, Inc.), 310 F.3d 64, 70 (2d Cir. 2002); In re Wood, 825 F.2d at 96.

Judge Lundin also finds support in the Ninth Circuit for his conclusion that the three categories of bankruptcy proceedings are not intended to be mutually exclusive.

The debtor in Muskin, Inc. v. Strippit Inc. (In re Little Lake Indus., Inc.), 158 B.R. 478, 479 (B.A.P. 9th Cir. 1993), brought suit in the Northern District of California to recover a preference of $547.88 from a New York corporation. The defendant moved to dismiss for improper venue under 28 U.S.C. § 1409(b). The plaintiff argued, as does the Trust here, that proceedings “arising under title 11” are not covered by § 1409(b). The Ninth Circuit BAP acknowledged that “arising under” is absent in subsection (b), and accepted as undisputed that “a preference action is one that arises under title 11.” Id. at 480. However, the panel dismissed for improper venue, holding that “for the purposes of 28 U.S.C. § 1409(b), a proceeding arising under title 11 may also be a proceeding arising in a case under title 11.” Id. at 484.

The BAP in Little Lake reasoned that “arising under” and “arising in” are linguistically similar and are importantly distinguishable from the third category “related to” proceedings. Id. at 482. The BAP described “arising in” as a “residual class of cases” with an “affinity or interchangeability with ‘arising under’ that the attenuated ‘related to’ does not.” Id. at 482.

Little Lake noted that 28 U.S.C. § 1409(c) also does not address “arising under” proceedings. As the subsection governs proceedings “under section 544(b),” which are clearly “arising under” proceedings, excluding “arising under” proceedings from § 1409(c) would make the subsection nonsensical. Id. at 483. The BAP concluded that “the terms ‘arising under’ and ‘arising in’ cannot be interpreted as mutually exclusive.” Id. at 484.

In Montana v. Goldin (In re Pegasus Gold Corp.), 394 F.3d 1189 (9th Cir. 2005), the Ninth Circuit also recognized the possible overlap between “arising under” and “arising in” in a jurisdictional context.  Discussing subject matter jurisdiction, the Ninth Circuit referred to “arising in” cases as “proceedings that would not exist outside of bankruptcy, such as ‘matters concerning the administration of the estate,’ ‘orders to turn over property of the estate,’ or ‘proceedings to determine, avoid or recover preferences.’” Id. at 1193 (emphasis added).

Judge Lundin concludes that that “arising under title 11” and “arising in” a case under Title 11 overlap. A proceeding to recover a bankruptcy preference under Section 547, even if arising under title 11, also arises in a bankruptcy case. The small dollar venue exception in Subsection 1409(b) thus applies to bankruptcy preference adversary proceedings.

The Legislative History of Section 1409

Judge Lundin bolsters his conclusion by providing a exhaustive analysis of the legislative history of the venue provisions of Section 1409 starting with the Bankruptcy Reform Act of 1978. In this review, Judge Lundin cites legislative resources not mentioned in any other decisions addressing the scope of Subsection 1409(b). After probing every nook and cranny of the various iterations of what is now Subsection 1409(b), Judge Lundin observes that:

Despite the constantly changing wording of the provision that became § 1409, no discussion of the inclusion or exclusion of the phrase “arising under title 11″ in either subsection (a) or (b) has been discovered. This silence will not support the conclusion that Congress intended a striking change to a provision that undoubtedly had been thought to include preference actions.

Judge Luding further cites the legislative history of the venue threshold changes in Subsection 1409(b) enacted as part of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (the “BAPCPA”).

Expanding the small dollar exception to home court venue was initially advanced in the National Bankruptcy Review Commission Final Report. “28 U.S.C. § 1409 should be amended to require that a preference recovery action against a noninsider seeking less than $10,000 must be brought in the bankruptcy court in the district where the creditor has its principal place of business.” Bankruptcy: The Next Twenty Years, National Bankruptcy Review Commission Final Report, Rec. 3.2.2 (Oct. 20, 1997).19 The Commission explained that this recommendation was “[c]onsistent with the efforts [of § 1409(b)] to protect small trade creditors from certain preference litigation tactics . . . . Section 1409(b) generally was designed to deter ‘noneconomic’ actions that cost more to defend than the action itself seeks. Creditor protection against blanket preference actions is furthered by raising the limit for invoking this provision. Increased costs may provide enough incentive for trustees and debtors in possession to look at the merits of each possible preference before commencing the action.” Id.

Judge Lundin then looks at the bankruptcy reform bills that followed the commission report and found that almost every one referenced prerential transfer actions. He concludes: “[t]he history is singularly consistent: it was believed that § 1409(b) applied to preference actions commenced under § 547—that is, ‘arising under’ the Bankruptcy Code.”

Closing Kudos and Cautions

Judge Lundin must be applauded. He must be applauded for unequivocally showing that Congress believed that Subsection 1409(b) protected debtors from small preference actions brought as strike suits in foreign jurisdictions. He must be applauded for showing a way to honor this Congressional intent consistent with the current statutory verbiage. Finally, he must be applauded recognizing that this “small” claim issue deserved the effort shown by his opinion. Judge Lundin’s effort hopefully will enlighten other bankruptcy courts as to the proper interpretation of the venue limitation in Subsection 1409(b).

Unfortunately, a venue dollar amount limitation has proven itself to be a poor impediment to small claim bankruptcy preference strike suits. Even in those jurisdictions that have recognized the application of Subsection 1409(b) to preference claims, those claims in amounts below the venue limitation continue to be brought, sometimes in large numbers. See Lessons of an Economic Analysis of the 204 Intermet Bankruptcy Preference Adversary Proceedings. The remedy of the defendant in such a proceeding, a motion to dismiss or motion for change of venue, still entails incurring of legal defense costs. Accordingly, the strike suit impact remains. Plaintiffs continued to be rewarded with settlement payments for the filing of noneconomic bankruptcy preference actions for less than the venue limitation in a jurisdictions where the defendants do not reside.

To see a complete discussion on the use of the “venue defense” see:  <a title=”$11,725 (Pre-April 1, 2010 $10,950) Threshold for Bankruptcy Preference Venue Impediment to Claims” href=”http://www.burbageweddell.com/defenses-bankruptcy-preference-overview/venue-defense/”>$11,725 (Pre-April 1, 2010 $10,950) Threshold for Bankruptcy Preference Venue Impediment to Claims.</a>