Bankruptcy Court Denies Request to Transfer Case to Delaware

The venue reform movement has focused on cases filed in Delaware and the Southern District of New York which are either not transferred (Enron and Energy Futures) or transferred at considerable time and expense (Patriot Coal).   However, a decision out of Texas denied a request to transfer an adversary proceeding to Delaware.    Think3 Litigation Trust v. Zuccarello (In re Think3, Inc.), No. 13-1081 (Bankr. W.D. Tex. 1/4/15), which can be found here.

What Happened

The Think3, Inc. case was unusual in more ways than one.    Think3 was incorporated in Delaware and had a large branch office in Italy.   An involuntary bankruptcy proceeding was filed against the company in Italy.   The Debtor filed a voluntary chapter 11 petition in Texas on May 18, 2011.   The Italian Trustee filed a Chapter 15 petition in Texas later the same year; however, recognition was denied and the petition was dismissed.  

The voluntary chapter 11 case resulted in a confirmed plan with a Litigation Trust.    The Litigation Trust sued certain former officers and directors, four of whom were residents of other countries, primarily Italy.   The intrepid Litigation Trustee was able to serve the foreign defendants through the Hague Convention.     

The Defendants brought motions to dismiss for failure to state a cause of action and motions to transfer venue.   The Court's ruling on the motions to dismiss contains an excellent discussion of Rule 12(b)(6) as well as Delaware breach of fiduciary duty law.  (The Court actually discusses all nine causes of action in great detail, but I stopped reading after breach of fiduciary duty).  Nevertheless, what interested me was the motion to transfer venue.    

The Motion to Transfer Venue

According to Judge Mott:

(T)he Director Defendants (Defendants Zuccarello, Costello, Kaufmann and Perry) have requested this Court to transfer venue of this adversary proceeding to the U.S. District Court for the District of Delaware.11 In support, the Director Defendants primarily rely on Think3’s incorporation in Delaware and the resulting application of Delaware corporate law to many disputes in this proceeding. However, without more, the Director Defendants have failed to meet their burden to demonstrate that transfer of venue to Delaware is warranted.

Opinion, p. 53.  

The Bankruptcy Court started with the presumption that the adversary proceeding belonged in the Court where the main proceeding had its venue.     It then cited a six factor test as follows:

(a) Efficiency and economics of estate administration;
(b) Presumption in favor of the “home court”;
(c) Judicial economy and efficiency;
(d) Fairness and the ability to receive a fair trial;
(e) The state’s interest in having local controversies decided within its borders; and
(f) Plaintiff’s original choice of forum.

The Court found that five out of six factors weighed in favor of retaining the case in the Western District of Texas.   Of course, the test seems to be weighted in favor of retaining venue.   Two of the six factors, the presumption in favor of the home court and the Plaintiff's original choice of forum , will always favor keeping the case.   The ability to receive a fair trial is a factor unlikely to arise in a bankruptcy setting.   As a result, the six factor test really boils down to efficiency and economics of estate administration, judicial economy and efficiency and the state's interest in having local controversies decided within its borders.

In its discussion of judicial economy and efficiency, the Court found that applying Delaware corporate law was not a major concern.

The primary thrust advanced by the Director Defendants in support of venue transfer is that substantive issues of Delaware corporate law are involved in this adversary proceeding, which would best be handled by a Delaware court. However, the “learning curve” of Delaware corporate law is not as great as the Director Defendants suggest. Bankruptcy courts are regularly called upon to decide issues of corporate law of another state. Indeed, Texas bankruptcy courts are often required to interpret Delaware corporate law; just as Delaware bankruptcy courts are often required to interpret Texas law.

Opinion, p. 55.   Although Judge Mott spent his legal career based in El Paso, Texas, he had a national practice.   As a result, having to apply Delaware corporate law does not appear to have bene a daunting task.   Indeed, due to the ubiquity of Delaware incorporation, there are probably a great many lawyers versed in Delaware corporate law who do not practice in Delaware. 

This case could well have originated in Delaware and remained there.    Because the company was incorporated in Delaware, current law would have permitted a filing there.   Had the main case been filed in Delaware, the presumption would have been that the adversary proceeding should have been filed there as well.   However, because the main case was filed in Texas, the presumption was in favor of Texas venue and here the case remained.   

The Difficulty With Multi-Part Tests for Venue

Interestingly, there are as many multiple factor tests for transfer of venue as there are cases.   In re BDRC Lofts, Ltd., No. 12-11559 (Bankr. W.D. Tex. 2012), an opinion by Judge Craig Gargotta which was partially relied upon by the Court in the Think3 opinion, contained a wider list of factors to consider, including:

1.  Efficient Administration of the Estate;
2.  Judicial Economy;
3.  Timeliness;
4.  Fairness;
5.  Proximity of creditors;
6.  Proximity of the debtor;
7.  Proximity of witnesses;
8.  the location of the assets;
9.  whether transfer will promote the economic administration of the estae;
10.  the necessity for ancillary administration.

BDRC was an opinion dealing with transfer of a main case rather than an adversary proceeding.  As a result, it was necessary to massage the factors some.

A recent opinion by Judge Marvin Isgur divided the factors into public and private and discounted the plaintiff's choice of filing.

The private factors are: (1) ease of access to sources of proof; (2) availability of compulsory process to secure attendance of witnesses; (3) cost of attendance for willing witnesses; and (4) all other problems related to ease, expeditiousness and expense of trial. The public factors are: (1) administrative difficulties because of court congestion; (2) local interest in having local cases decided at home; (3) familiarity of the forum with governing law; and (4) avoidance of conflicts of law problems or applying foreign law. No single factor is dispositive and the factors are not exhaustive. Rather district courts have discretion to adjudicate motions to transfer venue on a case-by-case basis.

Additionally, the Fifth Circuit has held that a party's choice of forum should be given little, if any weight in venue analysis.

In re Charles Michael Lucas, 2012 Bankr. LEXIS 5067 (Bankr. S.D. Tex. 2012) at *7-8.

With all of these tests out there, it raises the question of whether they are useful at all.  28 U.S.C. Sec. 1412 identifies two factors to be considered:  the convenience of the parties and the interest of justice.   Rather than developing elaborate lists of factors to be considered, it might be just as easy to tick off the specific facts that weighed into convenience of the parties and the interest of justice.   While it would not look as precise as a six or eight or ten factor test, it could be just as useful, especially when the multipart tests all allow the court to give more weight to whatever factors it deems most important.  Such a fluid test is more of an illusion than a clear standard.      

Final Note

 Having written an epic, 58-page opinion, Judge Mott concluded with a similarly epic conclusion.  He wrote:

When viewed through the restrictive prism that Rule 12(b)(6) requires, much of Plaintiff Trust’s Complaint will survive until another day. The Court realizes that there will be another side to the story told in the Complaint–and that facts and proof (not just allegations and plausibility) will ultimately govern the outcome. There are mountains to be climbed and defenses to be scaled for Plaintiff Trust to ultimately prevail. Equally evident is that the Defendants will be forced to defend this suit and their actions in what they likely consider to be a faraway land.

This arduous preliminary skirmish, which involved hundreds of pages of pleadings and countless hours of effort, has now come to the end. The Court will enter a separate Order on the Motions To Dismiss under Rule 12(b)(6) filed by the Defendants consistent with this Opinion, and denying the request to transfer venue to Delaware. The Court will also enter an Order requiring the parties to conduct a planning conference and submit a proposed scheduling order, so that the discovery stage of this proceeding can commence.

Opinion, p. 58.    Judge Mott often employs a well thought out turn of phrase in his opinions, as well as quotes from films and popular music.   I am glad that I finally had a chance to feature one of his writings.