The topic of transfer of bankruptcy venue continues to percolate. There were panels on the topic at both the summer 2013 American Bankruptcy Institute Mid-Atlantic Conference, and the May 2014 annual American Bankruptcy Institute New York City Conference. Both of these recent panels featured U.S. Bankruptcy Judge Shelly Chapman’s Patriot Coal decision, in which the Patriot Coal cases were transferred from their original venue in the Southern District of New York to the venue of Patriot Coal’s headquarters in the Eastern District of Missouri. Judge Chapman’s analysis and holding were based, in part, on the formation of certain subsidiaries in New York shortly before the chapter 11 filing. While certainly not the first transfer of venue decision issued by a Southern District Bankruptcy Judge, Patriot Coal seems to have left a substantial impression upon both bar and bench.
Two recent motions for transfer of venue, one granted by Bankruptcy Judge Landis in the District of Nevada and one pending before Delaware Bankruptcy Judge Christopher Sontchi, do not expressly rely upon the analysis in Patriot Coal. However, the Patriot Coal decision lurks in the background, and informs many practitioners’ and judges’ approach to venue motions.
In re Telexfree, LLC Transferred From Nevada to Massachusetts
Venue was recently transferred in the case of Telexfree, LLC, a limited liability company that had been formed under the laws of the state of Nevada. On April 13, 2014 (a Sunday), Telexfree, LLC and two affiliates filed chapter 11 petitions in the Bankruptcy Court for the District of Nevada, which is located in Las Vegas; a fairly unremarkable event on its face. However, Telexfree, LLC and its two non-Nevada affiliates did the vast majority of their business from Marlborough, Massachusetts. And the business they did there was of the type that attracted a considerable amount of unwanted attention from the Securities Division of the Massachusetts Office of the Secretary of the Commonwealth, the Securities and Exchange Commission, and the Department of Homeland Security. This unwanted attention culminated in the Department of Homeland Security and the local sheriff executing a search warrant on the companies’ headquarters on April 15, 2014, and the SEC obtaining a TRO and freeze of all the companies’ assets from the United States District Court for the District of Massachusetts on April 16. By all accounts, these events did not constitute a propitious start to the debtors’ chapter 11 reorganization. Apparently all three companies had been engaged in conducting an extensive and longstanding Ponzi scheme, which the authorities had been watching for some time.
It appears that the Telexfree debtors had hoped that the automatic stay in a bankruptcy case filed in another jurisdiction would render portions of the Massachusetts district court TRO obtained postpetition void ab initio, and permit the companies to continue to use their assets in the ordinary course of business.
On April 23, 2014, the SEC moved the Nevada Bankruptcy Court to transfer venue of the Telexfree cases to the Bankruptcy Court for the District of Massachusetts. The Debtor objected to the motion to change venue, pointing out, among other things, that it had installed new management, and was in the process of changing its business model. Although these are the types of institutional changes that could be used to avoid the appointment of an 1104 trustee or examiner, they could not prevent the continuation of the TRO obtained by the Massachusetts Securities Division. On May 6, 2014, Bankruptcy Judge August B. Landis issued an Order Granting the SEC’s Motion to Transfer Venue. The cases are now before Bankruptcy Judge Melvin S. Hoffman of the Bankruptcy Court for the District of Massachusetts.
Energy Future Pending Motion to Transfer Venue from Delaware to Texas
Another transfer of venue motion was argued on May 22, 2014, in the Energy Future Holdings Corp. case, before Bankruptcy Judge Christopher Soncthi in Delaware. Energy Future Holdings has been deemed the eighth largest Chapter 11 filing in history. Energy Future Holdings Corp. and over 70 of its affiliates (“EFH” or the “EFH Debtors”) filed their chapter 11 petitions on April 29, 2014. EFH, with over 9,000 employees, is the largest generator and retail provider of electricity in Texas, and is subject to regulation by the Public Utility Commission of Texas. The stated reason for EFH’s filing was the prolonged and significant decrease in natural gas prices caused by Congress’ 2005 lifting the ban on fracking as a means of extracting natural gas.
Pre-petition restructuring discussions with creditors began in July 2012. From these discussions, a consenting group of creditors emerged which supported EFH’s prearranged plan for restructuring its debt. The EFH Debtors entered bankruptcy with a pre-arranged plan, or “restructuring support agreement,” to restructure approximately $42 billion in debt. Ongoing negotiations with those creditors not agreeable to the prearranged plan were cut short by EFH’s rapidly declining liquidity situation in early 2014. EFH also faced sizeable impending debt maturities in late 2014, and an expected “going concern qualification” to EFH’s 2013 audited financial statements.
Wilmington Savings Fund Society (“WSFS”), indenture trustee for certain secured second lien lenders to the EFH Debtors, was one of the creditors that opposed the pre-arranged plan. On the same day the EFH Debtors filed for chapter 11, WSFS filed (among other things) its Motion to Transfer Cases to the U.S. District Court for the Northern District of Texas. WSFS argued in its Transfer of Venue Motion that, although some of the Debtors were formed under Delaware law, the EFH Debtors (i) have substantially all of their assets, customers, employees and trade creditors located in Texas; (ii) are subject to numerous Texas regulatory regimes; (iii) have potentially significant environmental cleanup obligations in Texas; and (iv) are parties to over 175 legal proceedings in state and federal courts in Texas. WSFS also pointed out that (a) the Delaware bankruptcy docket is much more congested that that of the Northern District of Texas, even on a per judge basis; and (b) several Delaware Bankruptcy courts have ruled that Delaware is not a per se superior jurisdiction for restructuring.
In response, the EFH Debtors argued that their cases should remain venued in Delaware, first citing the usual reasons: (i) the debtor’s choice of venue should be accorded significant deference; and (ii) because venue is proper, WSFS did not meet its burden of overcoming the strong presumption of maintaining venue where the cases are pending. Interestingly, the EFH Debtors sought to minimize WSFS’ arguments about location of assets, employees, pending litigation and trade creditors in Texas, by contending that the purpose of EFH Debtors’ chapter 11 cases was “to restructure their balance sheets.” Thus, the real parties in interest are comprised of major creditors and professionals, the vast majority of which are located in New York, not Texas.
The EFH Debtors also pointed to other major bankruptcy debtors whose headquarters, employees and assets were located far from their bankruptcy venues – (a) AMR Corp., Enron, and Lyondell, which were venued in New York although the debtors were located in Texas; (b) Calpine Corp., venued in New York although located in California; (c) Washington Mutual, venued in Delaware although located in Seattle, and (d) Delta Airlines, venued in New York, although headquartered in Georgia.
The EFH Debtors even quarreled with WSFS’s congested docket argument, contending that WSFS did not include the 14,353 chapter 7, 12, and 13 cases handled by Bankruptcy Judges in the Northern District of Texas during 2013 (although the Debtors did not complete the argument by counting the number of chapter 7, 12, and 13 cases handled by Delaware Bankruptcy Judges during the same period).
The hearing on the venue transfer motion in the EFH cases took place on May 22, 2014, before Judge Sontchi. Two previous venue decisions made by Judge Sontchi may shed some light on the analysis he may undertake in the EFH cases.
In re Cordillera
A prior case transferred by Judge Sontchi from Delaware to Colorado involved a 700 acre high-end residential golf development consisting of over 500 privately owned residences and three golf courses. In re Cordillera Golf Club, LLC, Case No. 12-11893 (CSS) (Bankr. D. Del. 2012). Starting in late 2010, disputes arose between residents of the residential development and Cordillera. This led to litigation in Colorado state courts. Cordillera filed a chapter 11 petition in the Bankruptcy Court for the District of Delaware in June of 2012. Motions to transfer venue to Colorado were filed by several parties in interest, including the Debtor’s secured lender. On July 16, 2012, the motions to transfer venue were argued before Judge Sontchi, who issued a ruling from the bench.
Judge Sontchi, applying the six-factor Innovative Communication Co. LLC, 358 B.R. 120 (Bankr. D. Del. 2006) test and the twelve-factor test set forth in In re Hays Lemmerz Int’l, Inc., 312 B.R. 44 (Bankr. D. Del. 2004), ruled that the Cordillera case would be transferred to Colorado. Judge Sontchi’s primary rationale was that the money used to run the case would come from Cordillera’s existing members, as well as future members, the vast majority of whom would be solicited from the Colorado area. It is also possible that the Court was swayed, to some extent, by the creditor’s argument that this was a “valuation case,” making Colorado a more suitable venue.
In re Allied Systems Holdings
On the other hand, however, Judge Sontchi denied transfer of venue of a case with affiliated bankruptcy cases pending in Georgia in In re Allied Systems Holdings, Inc., Case No. 12-11564 (CSS) (Bankr. D. Del. 2012). Allied was an involuntary case; the petitioning creditors chose Delaware. Allied had been incorporated in Delaware, but was headquartered in Georgia; it sought to transfer the case (although an order for relief had not yet been entered) to the Northern District of Georgia. Among its strongest arguments for transfer of venue was the fact that an affiliate of the alleged debtor was still in the final stages of a bankruptcy case venued in that district. The petitioning creditors argued (as do the debtors in EFH) that the debtors’ major creditors and professionals on both sides are located in the northeast, rather than in Georgia.
Judge Sontchi was not swayed by the open bankruptcy case in the Northern District of Georgia, stating that it was, for all intents and purposes, closed. The Court found that an application of the six and twelve factor tests essentially resulted in a “wash”, which in Judge Sontchi’s view meant that “the movant loses.” The Allied case remained venued in Delaware.
Given the Court’s reasoning in these two cases, one would have to surmise that Judge Sontchi would be reluctant to transfer venue of the EFH cases to Texas. This may be especially so because Judge Sontchi has already approved an interim $2.3 billion DIP facility for the EFH Debtors. Moreover, many of the EFH Debtors are incorporated in Delaware. Also, in neither Cordillera nor Allied Systems did Judge Sontchi seem to regard the location of employees as persuasive. If the Judge does respond to the creditors’ argument that other cases, such as Enron, AMR, Lyondell, Calpine Corp., Washington Mutual, and Delta Airlines (among many others, to be sure), were reorganized in either Delaware or New York despite having headquarters, employees and primary assets in faraway districts, the EFH cases may well remain in Delaware.