The realities of the bankruptcy venue provisions require potential debtors and their advisers to prudently weigh the legal significance of a bankruptcy filing in various courts. In a recent decision, U.S. Bankruptcy Judge Kevin Gross of the District of Delaware reviewed the Bankruptcy Code's venue provisions and considered the various interests of a bankruptcy estate's stakeholders when he transferred a "first-filed" bankruptcy petition from Delaware's bankruptcy court to the court's counterpart in the Northern District of Illinois, in In re Caesars Entertainment Operating (Bankr. D. Del. Feb. 2, 2015).
On Jan. 15, Caesars Entertainment Operating Co. Inc. made a strategic decision to file its bankruptcy proceedings in the U.S. Bankruptcy Court for the Northern District of Illinois on the heels of a Jan. 7 involuntary bankruptcy petition filed in Delaware's bankruptcy court by a group of second lien noteholders. Following a hearing on the petitioning creditors' motion seeking a determination under Federal Rule of Bankruptcy Procedure 1014(b) as to proper venue, Gross ruled that the venue provisions of the Bankruptcy Code under the circumstances supported the transfer of the Delaware case to the Illinois bankruptcy court because it was in the "interest of justice" to do so.
The timing of the Caesars decision coincides with renewed discussions in recent months among bankruptcy practitioners around the country regarding the venue provisions of the U.S. Bankruptcy Code. Regarding venue, the Bankruptcy Code provides: "A case under Title 11 may be commenced in the district court for the district – (1) in which the domicile, residence, principal place of business in the United States, or principal assets in the United States, or the person or entity that is the subject of such case have been located for the 180 days immediately preceding such commencement ... or (2) in which there is pending a case under Title 11 concerning such person's affiliate, general partner, or partnership."
Critics of the current landscape contend that the venue provisions of the Bankruptcy Code have led to a disproportionate percentage of Chapter 11 filings in venues such as Delaware and New York. The discussion to "reform" bankruptcy venue has continued for the better part of 10 years since proposed legislation that would have amended the venue requirements was left out of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005. But following the December 2014 release of the American Bankruptcy Institute Commission to Study the Reform of Chapter 11's final report and recommendation rejecting a reform to the Bankruptcy Code's venue statute, the venue statute met with renewed criticism. A copy of the ABI's full report may be found at http://commission.abi.org.
The Bankruptcy Code both provides bankruptcy courts with the tools to determine the proper venue for a case and debtors with the flexibility to make strategic decisions to fulfill their fiduciary duties. This premise was tested recently in Caesars, where the debtor, the main operating subsidiary of Caesars Entertainment Corp., was incorporated under the laws of the state of Delaware. Venue, therefore, of the petitioning creditors' involuntary bankruptcy petition was proper pursuant to Section 1408(1). Venue was likewise proper in Illinois pursuant to Section 1408(2) because at least one of the Illinois debtors was incorporated under the laws of the state of Illinois and filed its voluntary bankruptcy petition prior to any of the Illinois debtors that were not incorporated in Illinois. To resolve the venue dispute resulting from the filing of dual petitions, Gross reviewed Section 1408's sister provision, 28 U.S.C. Section 1412, which provides that the court "may transfer a case or proceeding under Title 11 to a district court for another district in the interest of justice or for the convenience of the parties." Otherwise stated, Section 1412 provides the court with a mechanism to transfer a case if it believes that venue was initially chosen improperly or if the existing forum is inconvenient for the relevant parties.
Section 1412, however, did not directly address the issue squarely before Gross in Caesars, which was how to tackle two bankruptcy petitions pending against the same debtor in separate bankruptcy courts. To aid in his analysis, Gross looked to Bankruptcy Rule 1014(b), which provides: "If petitions commencing cases under the code or seeking recognition under Chapter 15 are filed in different districts by, regarding, or against (1) the same debtor, (2) a partnership and one or more of its general partners, (3) two or more general partners, or (4) a debtor and an affiliate, the court in the district in which the first-filed petition is pending may determine, in the interest of justice or for the convenience of the parties, the district or districts in which any of the cases should proceed."
While Sections 1408 and 1412 and Bankruptcy Rule 1014 would each permit the two bankruptcy cases to proceed before the bankruptcy court of either Delaware or Illinois, Gross determined that, pursuant to Rule 1014(b), he—as the presiding judge in the court in which the first-filed bankruptcy petition was pending—was charged with making the determination as to where the cases should proceed.
Gross noted that Rule 1014(b) follows the language in Section 1412 that provides a flexible, dual-track test to determine venue: A case should proceed based on (1) the interest of justice or (2) the convenience of the parties; see In re Qualteq (Bankr. D. Del. Feb. 16, 2012): "It has been observed that Section 1412 is ... written in the disjunctive, making transfer of venue appropriate either in the interest of justice or for the convenience of the parties, and that this statutory provision creates two distinct analytical bases upon which transfer of venue may be grounded," quoting In re LaGuardia Associates, 316 B.R. 832, 837 (Bankr. E.D. Pa. 2004). Applying this standard, Gross concluded that the interest of justice favored the debtor's choice of forum, which is entitled to substantial deference.
The careful analysis in Caesars should serve as a reminder that while corporate debtors will be permitted significant deference when making strategic business and filing planning decisions, the Bankruptcy Code permits bankruptcy courts and its judges to closely examine the circumstances to protect the integrity of the bankruptcy system. After briefly discussing whether transferring venue was convenient to the parties, Gross found that the interests of justice in this specific circumstance required significant deference to the judgment of the debtor and its selection of bankruptcy venue. The court concluded that the debtor offered sufficient justification for its choice of forum, despite the fact that the debtor's pre-petition behavior would seem to indicate that the choice was made for the benefit of non-debtor insiders. The petitioning creditors' first-filed Delaware involuntary bankruptcy was supported by a substantial majority of the debtor's creditors, but the fact remained that the debtor's bankruptcy filing was anticipated and imminent when the involuntary petition was filed. As such, the court was unwilling to reward the petitioning creditors' pre-emptive filing to win the race to the courthouse. Significant deference was provided to the debtor notwithstanding the "serious allegations" raised by the petitioning creditors and plaintiffs in various pre-petition lawsuits relating to alleged self-dealing that resulted in potential breaches of duties and fraudulent conduct that may be reviewed by the fully capable Illinois bankruptcy court. While such issues were left to the Illinois bankruptcy court to decide, critics of the Bankruptcy Code's venue provisions should take heart that the courts are well equipped to strike a balance between protecting the debtor's judgment and safeguarding the process.