Restructuring

This article was contributed by Erica Coleman.
Yesterday, Judge Chapman of the Bankruptcy Court for the Southern District of New York issued a 61-page memorandum opinion and order on motions to transfer venue that were filed in the Patriot Coal Corporation chapter 11 cases.  Such motions, filed by the United Mine Workers of America and the U.S. Trustee, among others, were based at least in part on the debtors’ contemplation-of-filing creation of the two New York entities that served as their sole “hook” for venue in the SDNY.  Judge Chapman granted the motions to the extent they argued that a venue transfer was warranted in the interest of justice pursuant to 28 U.S.C. § 1412.
Judge Chapman, however, denied the UMWA’s motion to the extent it sought a transfer of the cases to West Virginia, finding that there was no evidence that West Virginia was a more convenient forum and that a transfer to that venue would create a perception of unfairness, for reasons discussed below.  Instead, Judge Chapman transferred the cases to St. Louis, Missouri, where Patriot Coal is headquartered.  In doing so, Judge Chapman granted the request of the U.S. Trustee, whose motion argued that the interest of justice required a transfer in these circumstances, but that it did not matter to the U.S. Trustee which of the available alternative forums was chosen.
In the opinion, Judge Chapman finds that, notwithstanding the absence of bad faith on the part of the debtors in filing their chapter 11 cases in the SDNY or their literal compliance with the bankruptcy venue statute, 28 U.S.C. § 1408, the court could not allow the debtors’ venue choice to stand, as to do so would elevate form over substance in way that would be an affront to the purpose of the bankruptcy venue statute and the integrity of the bankruptcy system.   Judge Chapman reasoned that permitting the Debtors’ cases to remain in the SDNY under these circumstances was inconsistent with Congressional intent and would all but render the venue statute meaningless.  It would allow potential large corporate debtors to choose what they view as the optimal venue for their bankruptcy cases and, in preparation for filing chapter 11, incorporate an affiliate in that location for purposes of satisfying section 1408.  Judge Chapman further stated that, while the court agrees, at least as a general matter, with the debtors’ observation that it is the province of Congress and not the courts to close loopholes in legislation, nothing in our jurisprudence requires the court to condone every strategy devised by clever lawyers to outsmart statutory purpose and language, even where, as here, they do so with the best of intentions.
Judge Chapman stated that ordering a transfer was “a particularly difficult call” in light of the “overwhelming support” from the debtors’ stakeholders and evidence of administrative efficiencies in New York.  Still, Judge Chapman concluded that the interest of efficient administration of the estate, although an important consideration in a section 1412 analysis, is not dispositive.  Otherwise, the SDNY would always trump other venues.
Judge Chapman noted that she did not seek to establish a per se rule and stated that any of the following facts might have changed the outcome: if no economic party in interest had sought to transfer venue (i.e., if the U.S. Trustee had been only party to move for a transfer); if there was any evidence of substantial economic consequences of moving the cases in the form of increased costs of administration and thus lower economic recoveries; or if the entirety of the debtors’ economic stakeholders had implored the court to leave venue unchanged because a transfer would have taken dollars from their pockets.
Judge Chapman denied the UMWA’s request for a transfer of the cases to West Virginia in part because of the perception created in the briefings and at the hearing that the UMWA believed its members would enjoy a “home court advantage” in that forum.  Judge Chapman reasoned that the fact that a single constituency may prefer a particular venue over a debtor’s chosen forum is patently insufficient to warrant a transfer of venue in the interest of justice.  In fact, she concluded, a transfer on such facts would be particularly unjust in the face of an impression that the transfer was being made to provide such party with an advantage over other stakeholders.  Notwithstanding its denial of this portion of the UMWA’s motion, the bankruptcy court was careful to be respectful of Patriot’s miners and retirees, noting that “without the dedication and sacrifice of the coal miners and their families, there would be no coal, and there would be no Patriot Coal.”  Judge Chapman’s refusal to transfer the cases to West Virginia was also based on her finding that the movants had failed to produce any evidence that proceeding in that district would enhance the convenience of the parties.
Having concluded that the cases must be transferred, but that they should not be transferred to West Virginia, Judge Chapman decided that the cases should be transferred to St. Louis, where the Debtors are headquartered and where, the court found, there is a convenient and accessible transportation hub.