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Borders Improper Bankruptcy Venue

posted by Adam Levitin

Borders bankruptcy is demonstrating what an open joke bankruptcy venue has become. Ironic given the company's name.  

Briefly, the US Code provides that venue is appropriate in bankruptcy cases "in the district court for the district in which the domicile, residence, principal place of business in the United States, or principal assets in the United States" of the debtor are located or "in which there is pending a case under title 11 concerning such [debtor]’s affiliate, general partner, or partnership." As far as I can tell, Borders fails to meet any of these requirements for venue in the Southern District of New York where it filed for bankruptcy.  

I was using Borders' filings to teach my corporate reorganizations class today, and one of my bright students, Ankit Bhansali, inquired how it was possible that the holding company, Borders Group Inc., a Michigan corporation, headquartered in Ann Arbor, MI, had filed for bankruptcy in the SDNY. (We had recently discussed venue). BGI's filings emphasize that Borders has two flagship stores and several smaller stores in Manhattan (out of 632 stores in US/Puerto Rico). But no other connection to SDNY was alleged.  

My assumption was initially that one of Borders other entities was a NY entity and that Borders had bootstrapped the affiliated group's filing on the NY entities' filing, much like Eastern Airlines (Ionosphere Club), Enron, Chrysler (Chrysler Realty Co., LLC), and GM (Chevrolet-Saturn of Harlem, Inc.). Still, I went and looked at all of the Borders group filings. There are only 8 entities that filed. Not a single Borders entity that filed was a NY entity or had its headquarters in the Southern District of New York. There were Michigan, Delaware, Colorado, and Virginia entities, but no NY entities. As far as I can tell, Borders' only connection to SDNY is that it has a few stores there, much as it does in most major cities in the US. In other words, venue is entirely improper in Southern District New York.

Improper venue, however, does not deprive the court of jurisdiction. Instead, Bankruptcy Rule 1014 provides that "If a petition is filed in an improper district, the court, on the timely motion of a party in interest or on its own motion...may dismiss the case or transfer it to any other district if the court determines that transfer is in the interest of justice or for the convenience of the parties." 

Thus far, no creditor has objected to the venue. Neither has the court. Or the US Trustee. The court or US Trustee might think it inappropriate to object to the venue if creditors don't raise the issue. And I'm guessing most of Borders' creditors are NY based--financial institutions and publishing houses. But there's also the possibility that creditors simply haven't noticed the venue problem. In particular, smaller and perhaps less sophisticated creditors might not have noticed the venue flaw, and these creditors are the ones who might be most affected by improper venue (e.g., small suppliers for the corporate HQ in Ann Arbor). These are precisely the parties that most need the court and the UST looking out for them.  

Now that I'm putting this venue issue out there, I hope that the court or UST will at least raise the issue, and if all the parties are happy to keep the case in SDNY, let them. But seeing wholly improper venue like this does raise concerns about forum shopping and the corrosive effects of competition for large cases as described by Professor Lynn LoPucki. (And the Delaware bar ought to be steamed, given that there could be proper venue there.)

Comments

Very interesting article. In Canada, the venue issue is usually clear cut and because of our Federal Statute, "forum shopping" does not usually exist. However, in cross-border matters, it of course gets much more interesting.

Thank you for this.

Wow! This is amazing. Can't believe this issue has not been raised.

The U.S. Trustee has no excuse for not raising the venue issue in the Borders case.

The Office of the U.S. Trustee consistently objects to consumer cases filed in the wrong (read: "more convenient for the debtor(s)) venue based on the Sixth Circuit Court of Appeals holding in Thompson v. Greenwood, 507 F.3d 416 (6th Cir. 2007).

If the OUST is chasing consumer debtors into inconvenient courts based on the venue statute, they had better even-handedly chase Borders back to Michigan, where it belongs.

State of incorporation venue is a corrupt joke - it is the Joe Biden protected poison that is sapping the legitimacy of Chapter 11. But, if they aren't even enforcing the rules for corporations, while they are jamming it to individuals who want to go to a courthouse that is 10 miles away, instead of 60 miles away - somebody is going to note that the venue statute is not wearing any clothing.

What is the big deal with venue? Any interested party can object and be heard. This is court. No one has. Case closed. They filed in SDNY since judges and US Trustees are competent and are familiar with pleadings. Same way company wants good lawyers and advisors. Do not see an issue here.

The reason big companies file in SDNY is very simple;
THE MOST SKILLED JUDGES AND TRUSTEES are there, not to mention the best LEGAL firms.
There really isn't any competition as you get into other jurisdictions. Just look at the history of cases in ny verus the rest. Paying to educate lawyers and trustees is painful and expensive.
It's just cheaper and easier for debtors and creditors to work with skilled personnel.
Nothing else to it.

(I designed some of the court's software in the very ancient past)

Why do Trustees object in individual cases but not in large corporate cases? Structural bias.

No Trustee is going to come under fire from the local bench and bar for objecting to venue in an individual case. I imagine the New York Trustee's office would draw a lot of unwanted attention by objecting to venue in the Borders case.

AMC has a really good point about the Sixth Circuit's decision in Thompson v. Greenwood. I just went back and reread that opinion. It holds that venue is basically nonwaiveable. If the case is filed in the wrong venue, Thompson holds that the court's choices are only to dismiss or transfer. Although Thompson is a consumer case, the statute it interprets and the court's reasoning would seem to apply equally to a corporate case. It is also, of course, not binding on a New York bankruptcy court.

Bob, that's the court's issue. However, the reason companies FILE in SDNY, is because of SKILLS.

(Back in the day the judges were arrogantly cognizant of it too.)

I would submit that the bankruptcy judges in the Northern Distirct of Texas are every bit as qualified or skilled as those in the Southern District of New York. With that said there are "good judges" and "not so good judges" all over the United States. Don't base your argument that venue was proper because the "judges" are more skilled in New York. I am not going to touch the line about the best legal firms or Trustees being in New York, but I would note that such a conclusion is not a basis for juridsdiction under the Bankruptcy Code. The truth is that the case was filed in the Southern District of New York because it is more convenient for the Banks, publishing houses and New York law firms.

Craig, I disagree with you about reasons that companies choose to file in SDNY or in Delaware. I recently talked with a bankruptcy associate at a large firm that handles high profile reorganizations.

The firm will always prepare a venue memo analyzing the case law and local rules of different venue options. The debtor's (council) choice of venue turns on which venue will be most advantageous to the debtor and (of course) who has the most permissive policies regarding professional fees.

The quality of the local bench and bar will have an influence on the choices a debtor considers, but the paramount considerations are legal. Look at what happened to filings in the 7th Circuit after K-Mart. Similarly, debtors seeking substantive consolidation are wary of Delaware after Owens Corning.

@Jay and Curt
Thank you very much for declaring everyone outside Manhattan to be a bunch of incompetent asses.There is exactly ONE reason this case is where it is: structural bias. Grae is exactly right about the OUST operating with a two-class bias. Add this: The usual gang of lawyers are Wall Streeters who want to walk to court and have lunch at their favorite restaurants. And this: Corporations like Delaware because they want to go to court in the Sovereign State of DuPont. Garbage like this is why Washington State made venue jurisdictional for its state courts.

We can handle these things at least as well as the courts back there. Let me give an example. We out here in the sticks handled the actual litigation load in SCO vs. Novell while the Delaware BK court was showing its mad skilz by making absolute bollocks of the Chapter 11. I'll stake our "hick" judges, trustees, and bars against anything I've seen back there, and I'll spot you points.

Everything is better in New York. Just ask any New Yorker.

Cases are filed in the Southern District of NY or in Delaware because those courts have set up local rules and judicial mechanisms to more efficiently process larger cases. To say that the most skilled lawyers, judges and trustees are in NY is an example of NY provincialism that has given rise to the Bank Cartel and the myopic vision of this country portrayed by the Wall Street media pundits. The OUST does not object to venue because there is more money in the OUST budget in keeping the big cases in the SDNY and Delaware than doing their job to move them. The consumer cases need to be moved, because they are a drag on the OUST budget, time and resources of the Courts.

You have to wonder why so many bright and forward thinking people left NY! It is the arrogance and doubting preponderance of that old school society that discourages creative thinking and innovation. To think where our entertainment industry, including movies, television, music, games, and computers, would be if many of the founders of those industries had not left for Southern California. And, being a NY transplant in California, before you knock California, think about that computer and internet you are using and whether you could function without them. Yep! They were invented in California.

Probably the real reason it is being heard in the Southern Districy of NY is that that is where all the high priced "mouth pieces" attorneys, advisors, etc are located!!!!!!

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