Restructuring

Where should a single-asset real estate (“SARE”) bankruptcy case be heard? In In re NB Element,¹ Judge Goldblatt of the Delaware Bankruptcy Court held that a SARE case should be heard where the real estate sits, absent compelling circumstances to the contrary.  That presumption may suit many SARE cases, but for others, venue remains a fact-intensive inquiry.  Courts outside Delaware continue to defer to a debtor’s choice of venue. In larger real estate cases, particularly those involving multiple affiliated debtors, courts continue to look past the location of the real estate and focus instead on the prospects for a successful restructuring.

The Venue Statute, Rules, and Case Law

First, a quick review of the venue rules in bankruptcy cases.

Venue is governed by 28 U.S.C. § 1408. A case may be commenced in the district where the debtor (1) is domiciled, resides, or maintains its principal place of business in the U.S. or where its principal assets in the U.S. are located for the 180 days immediately preceding commencement of the case or (2) has an affiliate, general partner, or partnership.

Under 28 U.S.C. § 1412, a district court may transfer a bankruptcy case to another district, in the “interest of justice or for the convenience of the parties.”  Federal Rule of Bankruptcy Procedure 1014(a)(1) provides the same.

Neither the statute nor the rule explain how courts should weigh the “interest of justice” and the “convenience of the parties” when evaluating a venue transfer request. Instead, case law has developed a multi-factor evaluation.

Most jurisdictions apply the six factors the Fifth Circuit articulated in In re Commonwealth Oil Ref. Co.,² including (1) the proximity of creditors; (2) the proximity of the debtor; (3) the proximity of witnesses necessary to the administration of the estate; (4) the location of the assets; (5) the economic administration of the estate; and (6) whether ancillary administration will be necessary.

The Third Circuit applies a broader twelve-factor test from Jumara³, weighing both private interests (such as forum preference and convenience of the parties and witnesses) and public interests (such as local interests and the court’s familiarity with state law).

The Delaware Presumption

NB Element formalized Delaware’s long-standing unofficial position: a motion to transfer a SARE case to the district where the asset is located should be granted absent special circumstances.

In that case, the debtor’s sole asset was a student-housing complex in Sacramento, California.  Its $53+ million loan, secured by the complex, was governed by California law and required disputes to be litigated in California.  The debtor’s books and records were in California, as were half of its creditors.  Prior to the bankruptcy, Fannie Mae, which held the rights to enforce the note and mortgage, sued in California state court, alleging the debtor missed its monthly debt service payments.  The California court appointed a California-based receiver over the property and rents.

About six months after the receiver’s appointment in California, the debtor, a Delaware Statutory Trust, filed chapter 11 in the District of Delaware.  The U.S. Trustee moved to transfer the case to the Eastern District of California.  The debtor’s largest creditor, Fannie Mae, joined in the motion, which the debtor opposed. 

The Court granted the motion.  It observed that the “general proposition” that a debtor’s choice of venue is entitled to a measure of deference has a “long-recognized exception”: when a party-in-interest in a SARE case seeks to transfer venue to the jurisdiction where the asset is located, Delaware courts will typically grant the motion, unless there is a persuasive reason not to.  The rationale for this exception, the Court explained, is that improved real estate is “a peculiarly local concern” often better administered by the court in which the assets are located.⁴

The debtor argued the case should remain in Delaware because: (1) its choice of venue should be entitled to deference; (2) its counsel was based in Delaware; and (3) it was organized under Delaware law, the case would likely raise issues of Delaware law, and a Delaware court was better equipped to decide them.  The Court found none of these reasons sufficient to rebut the presumption.  As to the first two arguments, the Court held that (i) giving deference to debtors in these cases would swallow the exception and (ii) debtors have complete control over the counsel they hire; if the location of counsel was enough to defeat a motion to transfer venue, “there would be little left of the presumption in favor of transfer.”  As to the third argument, the Court agreed a court in a debtor’s state of organization may be best positioned to decide that state’s law, but NB Element failed to identify any specific Delaware-law issue likely to arise.  Accordingly, the Court granted the motion to transfer.

So what does this mean for debtors—in both SARE and multi-asset real estate cases alike—who have reasons for filing chapter 11 outside the jurisdiction where their assets are located?

Outside Delaware: Maintaining Typical Venue Transfer Analysis

Courts elsewhere have not adopted this presumption.  The party challenging venue still bears the burden of showing that venue is improper or should be transferred, and a debtor’s choice of venue is still entitled to deference.⁵  In several real estate cases outside of Delaware, courts kept venue where the case was filed rather than transferring it to where the asset sat. 

A leading decision is the Seventh Circuit’s opinion in Peachtree Lane Associates⁶, which upheld venue in the Northern District of Illinois for the chapter 11 case of a Texas limited partnership whose sole asset was a 400-unit apartment complex in Webster, Texas.  Although the debtor and its asset were in Texas, a third-party manager in California ran the operations, and Chicago parent made the major business decisions.  The bankruptcy court emphasized that the Chicago parent controlled the property’s budget, the sale negotiations, and decisions regarding the largest secured creditor.

The Seventh Circuit agreed that the debtor’s principal place of business, its “nerve center,” was in Illinois.  It reasoned that the “most important, consequential, or influential” place at which an entity conducts its business is likely to be where its management decisions are made, and that this focus is particularly appropriate in a reorganization, which generally involves the financial management of the debtor rather than its day-to-day operations. 

As the Seventh Circuit explained, a SARE case “is not likely to be about renegotiating the individual lease or deciding to increase rent $25.00 a month,” but about “raising new capital, renegotiating loan terms, or, if that cannot be done, attempting to ‘cram down’ a plan on the secured creditors, or selling the asset.”  Courts therefore “look to where those persons who will make those key decisions are located.” 

Other courts likewise look to the “brains” of the operation.  In In re Garden Manor Associates, L.P.⁷, the Southern District of New York denied a motion to transfer venue to the District of Arizona, the jurisdiction in which the debtor’s sole asset—a garden apartment complex—was located.  The debtor’s general partner and its management company were based in New York, where the books and records were kept and all tax, mortgage, and insurance payments were made.  The Court found that only “day to day decisions regarding the management of the property” were made in Arizona and that all “major business decisions” for the debtor were made in New York.  It also noted that the movant, the only secured creditor, was based in California, and that Arizona creditors had a “small stake in the conduct of the bankruptcy case.”

Holding venue proper in New York and declining to transfer venue to Arizona, the Court in Garden Manor Associates held that “the factor regarding the economic administration of the estate” is “generally held to weigh most heavily in the determination of whether to transfer venue.”  Because this case turned on whether the debtor could raise capital to fund a plan of reorganization, sell the property, or renegotiate its loan terms, and the major business decisions were all made in New York, venue in New York was proper.

Other courts continue to apply this reasoning.  In 2022, in In re Magnolia Storage and Logistics, LLC⁸, a bankruptcy court in the Northern District of Illinois denied a secured lender’s motion to transfer a single-asset case to the district in which the debtor’s sole asset was located, because the debtor’s owner managed it from an office in Illinois, an affiliated management company maintained the books and records there, and the prepetition sale and loan renegotiation efforts took place there. 

Courts have applied the same reasoning to cases involving multiple affiliated real estate debtors.  In an early and frequently cited case, Bankers Trust⁹, the Seventh Circuit affirmed the retention in the Southern District of Indiana of the reorganization of a Florida real estate investment trust that had been filed together with seven affiliated entities, notwithstanding that the trust’s major assets, and its principal place of business, were in Florida.  The court identified the “[i]ntertwined relationships of debtors” as a factor bearing on consideration of the requested transfer, and held that the location of the assets was “the only factor conclusively supporting transfer” and was “greatly outweighed by the other five [factors].”  The trust’s day-to-day affairs were conducted from Indiana, its records and the necessary witnesses were there, its financial affairs were “clearly intertwined” with those of the other entities, and a transfer would have entailed dual administration, substantial additional expense, difficulties arising from the commingling of the assets and debts of the various entities, and delay while a new trustee and new counsel became familiar with the case.  The commingling alone, the court held, would have supported retention.

More recent decisions follow the same principle.  In In re Red Door Property Management¹⁰, a Mississippi bankruptcy court denied a lender’s motion to transfer the debtor’s case to the Eastern District of Louisiana even though all ten of the debtor’s rental properties were located in New Orleans, the movant was the debtor’s only non-affiliate creditor and was based in Louisiana, and the debtor was domiciled there.  Venue in Mississippi rested entirely on the separately pending chapter 11 case of the debtor’s 99% owner.  Because the owner operated the business from Mississippi, the books, records, and bank accounts were maintained there, the owner’s guaranty of the same indebtedness gave rise to common questions of fact and law, and the lender would be required to appear in Mississippi in the owner’s case in any event, the economic and efficient administration of the estate was best served by administering the cases together in Mississippi.

Courts have also transferred multi-debtor real estate cases, as in In re Palmer Lake Plaza.  There the debtor’s primary asset (an office building), its state of organization, its principal place of business and its sole member were all located in Minnesota, as were its largest secured creditor and the majority of the debtor’s unsecured creditors.  The debtor nonetheless filed in the Western District of Wisconsin because the debtor shared common ownership with debtors whose cases were pending there.  The debtor’s largest secured creditor filed a motion to transfer venue to Minnesota.  The debtor argued that the ultimate plan of reorganization might involve merging with the Wisconsin entities, but the Court found that “this vague potential for restructuring must be juxtaposed against the fact that in the context of this case the costs of administration may be significantly increased by the lack of any meaningful connection to the prospective forum.”

The contrast is instructive: in Bankers Trust and in Red Door, the affiliated estates were genuinely entangled; in Bankers Trust the “funds and debts” of the estates were commingled; and in Red Door, the related debtor was an owner and guarantor of the main debtor, and the two shared common creditors.  But in Palmer Lake Plaza, the debtors shared nothing but a common owner and the estates and real estate operations were wholly separate.  Common ownership alone may not be enough to provide a basis for retaining venue in a jurisdiction other than where the real estate assets sit.

Conclusion

Delaware now presumes that single-asset real estate cases should be administered where the property sits, but venue remains fact and jurisdiction specific.  Other jurisdictions do not give the presumption the same weight, and its logic may not hold for larger cases involving larger and multiple affiliated real estate debtors.  Real estate companies – both SARE and non-SARE alike – should evaluate all applicable venues (not just the location of the real estate) when considering a chapter 11 filing.