Don’t Mess With Texas (Unless You Are Properly Venued in the Delaware Bankruptcy Court)! Texas Comptroller’s Motion to Transfer Venue of Chapter 11 Case Is Denied

Contributed by Charlie Chen

“You should try the chicken fried steak.  It’s like a chicken and a steak got together and made a baby. A delicious, crispy baby.”

– Hoyt Fortenberry, True Blood

For Texans, the acronym CFS (“Chicken Fried Steak”) is often synonymous with a meal at the Black-Eyed Pea Restaurant, which serves up generous Texas-sized portions of this delicacy at affordable prices.  Unfortunately, a liquidity crisis caused by tax disputes, higher operating costs, and a downturn in revenues recently forced the debtor entity that owned thirty Black-Eyed Pea Restaurants in Texas to seek chapter 11 protection in Delaware.  Two weeks after the filing, the Texas Comptroller of Public Accounts and the Texas Workforce Commission (“Movants”) filed a motion to transfer venue to the United States Bankruptcy Court for the Northern District of Texas because the Movants desired to resolve certain state tax claims against the debtor in a local forum. 
It is in this context that Judge Gross of the United States Bankruptcy Court for the District of Delaware recently denied the Movants request to transfer venue in In re Restaurants Acquisition I, LLC and held that the Movants had not carried their burden to demonstrate that a transfer would be in the “interest of justice or for the convenience of the parties.”
The debtor is a Delaware limited liability company and all but four of its 530 employees and staff live or work in Texas.  The debtor’s central management, books, and records were located in Tennessee.  While approximately 85% of the debtor’s known general unsecured creditors were located in Texas, 65% of the value of these claims were held by non-Texas entities.  In addition, the debtor’s prepetition secured lenders were not located in Texas.  As of the petition date, the debtor and the Movants were engaged in multiple legal disputes in Texas state court regarding the debtor’s tax liability.  The Movants asserted that the debtor’s tax liability exceeded $4 million while the debtor estimated that the amount was less than $200,000.
The Bankruptcy Court Denies the Motion to Transfer Venue
Relying upon Section 1408 of title 28 of the United States Code, which permits a debtor to commence a chapter 11 proceeding where it is domiciled, Judge Gross found that the debtor was organized under the laws of Delaware, and, thus, the Delaware bankruptcy court was a proper forum under the applicable statute.  The court also found that Section 1412, which permits the bankruptcy court to transfer venue in “the interest of justice or for the convenience of the parties” would not change that conclusion.
Judge Gross analyzed the following six factors to determine whether transfer of venue would serve the convenience of the parties:

  1. The proximity of creditors of every kind to the court;
  2. The proximity of the debtor to the court;
  3. The proximity of the witnesses necessary to the administration of the estate;
  4. The location of the assets;
  5. The economic administration of the estate; and
  6. The necessity for ancillary administration if liquidation should result.

Following controlling precedent in the Third Circuit and other jurisdictions, Judge Gross concluded that the debtor’s choice of forum should be given substantial deference and the Movants had the burden to show that the six factors strongly weighed in favor of a transfer.  Based upon an analysis of the evidence presented, Judge Gross found that a transfer would not serve the convenience of the parties.  Specifically, Judge Gross focused on certain factors which weighed heavily against a transfer: (i) proximity of creditors; (ii) proximity of debtor; and (iii) economic administration.
With respect to the proximity of creditors, Judge Gross noted that all of the secured creditors and a significant percentage of the unsecured creditors were based outside of Texas.  Many of these creditors had retained Delaware counsel and a transfer would place a significant burden on those parties and their professionals.  Turning next to the proximity of debtor, the court believed its inquiry should focus “primarily on the location of parties that must appear in court.”  Judge Gross noted that the debtor’s management was willing to travel to Delaware and the court was amenable to telephonic participation by the debtor’s employees for contested matters.  Therefore, Judge Gross determined that this factor weighed against a transfer.
Judge Gross considered the final factor, economic administration, to be the most important factor weighing against a transfer.  Specifically, the court was concerned that the debtor and its largest creditors would need to retain new or additional counsel if the case were transferred.  In addition, as the debtor has not obtained post-petition financing and was faced with liquidity constraints, Judge Gross believed that “this added financial burden and time delay could potentially derail the Debtor’s efforts to reorganize.”  Furthermore, the court noted that its decision would not preclude the Movants from filing a motion to lift the automatic stay and litigate their tax claims in Texas state court.  Upon a final disposition of the tax claims, the bankruptcy court would then handle such claims accordingly.
Next, Judge Gross considered whether a venue transfer would serve the interests of justice, specifically, whether such transfer “will promote the efficient administration of the estate, judicial economy, timeliness, and fairness.”  Judge Gross emphasized that a transfer would require “a new court to start over and familiarize itself with a debtor’s business operations and capital structure” and the court had already spent substantial time and effort to become familiar with the debtor’s case.  In addition, the debtor, its lenders, and trade creditors had also invested significant time and resources in the Delaware proceedings.  Judge Gross reasoned that it would be unfair to require the debtor and other parties in interest to hire new counsel and the subsequent delays could also jeopardize the debtor’s ability to successfully reorganize.  Based on all of these considerations, Judge Gross denied the Movants request to transfer venue.
As we have discussed in previous posts, ABI Chapter 11 Reform Commission Series: Venue and Core and Noncore Matters and New York City Bar Blasts Proposed Venue Legislation, the venue provisions governing bankruptcy cases have long been a contentious topic and the debate is far from resolved.  Some critics of the existing venue provisions believe that they give debtors too much flexibility and encourage forum shopping.  On the other hand, supporters of the status quo argue that the flexibility inherent in the current system allows debtors to choose jurisdictions that will facilitate the most effective and value-maximizing reorganization.
However, in this case, the clear application of established jurisprudence to the facts by Judge Gross is unlikely to generate similar controversy.  As stated in the court’s decision, the debtor was organized as a Delaware limited liability company and a majority of the factors considered weighed heavily against a transfer.  Coupled with the controlling precedent which gives substantial deference to the debtor’s choice of forum, the court’s decision should not come as a surprise to most readers (but may disappoint those parties in interest and their professionals who were hoping to come to Texas to enjoy a delicious CFS at the Black-Eyed Pea Restaurant).