[Last updated: April 5, 2013] At the same time as Congress established a jurisdictional threshold requirement for bringing a preference claim, it also restricted the location of the court – i.e. venue – for a proceeding on a commercial debt against a non-insider. This small claim venue limitation is contained in Subsection 1409(b) of Title 28 – Judiciary and Judicial Procedure. If a trustee seeks recovery of an amount less than $12,475,fn1 the bankruptcy proceeding must be brought in the judicial district where the defendant is resident – i.e. in the case of a corporate defendant, where it has its principal place of business. Although there is no question that Congress intended this venue limitation to protect creditors from bankruptcy preference strike suits – ‘noneconomic’ actions that cost more to defend than the action itself seeks – the bankruptcy courts are currently split on whether the venue small claim limitation applies to adversary proceedings to recover preferential transfers. Understanding the availability and use of the “venue defense” remains an important consideration in responding to a small preference claim.
[fn1 The dollar threshold was adjusted on April 1, 1013 from $11,725 to $12,475 and is going to be adjusted again on April 1, 2016 based on changes in the Consumer Price Index for the preceding 3 years. A trustee or other preference claimant may attempt to argue that the time of filing the bankruptcy case determines what threshold amount applies. However, the language of the statute itself supports the conclusion that the date of filing of the preference action controls, and at least two bankruptcy courts have implicitly so held. ]
How Does the Bankruptcy Preference Claim Threshold Requirement for Venue Work?
Your customer files bankruptcy in California. Your company has its principal place of business in Texas. Your now-bankrupt customer paid your company $9,000 within 90 days prior to the bankruptcy filing (i.e. within the preference period). One day your company gets a demand letter from a lawyer who tells you that he or she intends to bring a preference action against your company in California to recover the $9,000 as an avoidable preference. The lawyer generously offers to settle the claim for $7,000. What do you do?
One option is to tell the lawyer that you are ready to defend the preference claim vigorously, and by the way, your company’s principal place of business is in Texas so any action to collect a preference claim needs to be brought in Texas. This could effectively put the ball back in the opposing lawyer’s court. He or she will need to consider if it’s worth it to sue your company in another state, before another judge.
The odds should weigh in your company’s favor that the preference claim will be dropped. Why? It is just too expensive to bring a small-dollar preference claim in a court other than the court where the bankruptcy case is already pending. This is exactly why Subsection 1409(b) reads as it now does. Congress desired for preferential transfer recovery plaintiffs to think twice about the economics of pursuing small preference claims when Congress modified Section 1409(b) in 2005.
Unfortunately, the desired result is not a mandatory result and bankruptcy courts have not uniformly applied the venue limitation to preference actions. This uncertainty means that it is critical to know if the defense is available and tactics in the use of this venue defense.
Not Uniformly Applicable
Bankruptcy courts in some jurisdictions have decided that the dollar threshold venue requirement does not apply to preference actions. The Bankruptcy Court for the Western District of Michigan decided in Moyer v. Bank of America, N.A. ( In re Rosenberger), 400 B.R. 569 (Bankr.W.D.Mich.2008), using a very strict interpretation of the other subsections Section 1409, concluded that Section 1409(b) did not apply to preference claims. The Bankruptcy Court for the District of Kansas reached the same conclusion in Redmond v. Gulf City Body & Trailer Works, Inc. (In re Sunbridge Capital, Inc.), — B.R. —-, 2011 WL 3236478 (Bkrtcy.D.Kan. July 27, 2011). See also Van Huffel Tube Corp. v. A & G Industries (In re Van Huffel Tube Corp.), 71 B.R. 155 (Bankr. N.D. Ohio 1987) (a decision pre the 2005 amendments so in some question but still reaching the same result)
Bankruptcy courts on the other side of the issue – holding that the venue limitation does apply – include the Bankruptcy Court for the District of Delaware, Judge Kevin Gross. He confirmed the applicability to preference actions of the venue dollar threshold of Subsection 1409(b) in his decision in Dynamerica Mfg. LLC v. Johnson Oil Co., LLC, 2010 WL 1930269 (Bkrtcy.D.Del., May 10, 2010). See Delaware Bankruptcy Court Confirms Applicability of Section 1409(b) Venue Dollar Threshold to Claims for Recovery of Avoidable Preferential Transfers under Section 547.
Middle District of Tennessee, U.S. Bankruptcy Judge Keith M. Lundin provided the definitive analysis of the issue and the legislative history behind the small claim venue limitation in his opinion in NI Creditors Trust v. Crown Packaging Corp. (In re Nukote International, Inc.), Adv. Proc. No. 11-00102 (Bankr. M.D. Tenn. September 2, 2011). Judge Lundin not only established legislative intent for Subsection 1409(b) to apply to preference actions, he showed how it was possible to reach that conclusion giving full effect to the current statutory language. A summary of the decision is available by clicking this link.
Not a Defense; Tactics are Important
Even in those jurisdiction where Subsection 1409(b) might be applicable to a preference claim, a plaintiff is not prevented from filing a preference claim in a jurisdiction where venue is improper. Even in those jurisdictions that have recognized the application of Subsection 1409(b) to preference claims, claims in amounts below the venue amount continue to be brought. The remedy of the defendant in such a proceeding is to file a motion to dismiss, a motion for change of venue or an answer raising the objection to venue. A venue objection can be waived if it is not timely made.
Remember, a venue objection is not an absolute defense to a bankruptcy preference action. It is only a factor that may discourage pursuit of a preference claim. Even if the “local venue” requirement protects you from having to defend in an inconvenient location where the bankruptcy case was filed, it’s not a defense and the bankruptcy preference claimant can still come after your company where it has it principal place of business.
Tactics become an important part of the bankruptcy preference defense strategy. Experienced bankruptcy preference counsel can help in developing this strategy. Where the initial bankruptcy preference demand is slightly above $12,475 and the bankruptcy case is in a jurisdiction where the “local venue” requirement applies, it might be better to first attack other aspects of the preference claim, get the preference claimant to recognize that the claim is less than the threshold, and then raise the venue defense.
The Multi-Debtor Ploy
On a final note, we are seeing increasing instances where bankruptcy preference claimants are trying to mask the potential venue defense where there are multiple affiliated debtors.
For example, if your company did work for 5 different affiliated companies that are all part of the same bankruptcy brought in a jurisdiction that recognizes the “local venue” requirement, remember that the venue requirement applies to each of these companies separately. So if your company got paid $7,000 by Bloomers Limited, $6,000 by Bloomers US Inc, and $9,000 by Bloomers International Inc, your company should be able to demand that any bankruptcy preference actions be brought on your company’s turf. The total claims equal $22,000 (well in excess of the threshold) but each separate debtor’s claim is less than the threshold. As long as the different bankruptcies have not been substantively consolidated, the “venue defense” should still work.
Some bankruptcy courts, most notably those in Delaware, really have cracked down on these multi-debtor tactics. Delaware courts require that each transfer be specifically identified, including by naming the debtor who made the transfer.