On March 16, Judge Kaplan of the District of New Jersey issued an important decision in Multi-Color on bankruptcy venue. By blessing a common tactic by debtors to gain venue in friendly districts, the decision is sure to generate controversy and potential appeals.
The bankruptcy venue statute is “deliberately broad.” A debtor may file where its “domicile, residence, principal place of business … or principal assets of the person or entity that is the subject of such case have been located” for 180 days before filing, or at least “for a longe portion of such [180-day] period than … any other district.” And if one debtor can file in a district based on this test, all of its affiliates can file there as well.
The Multi-Color opinion is about which assets are the debtor’s “principal assets.” Judge Kaplan holds that the statutory language is unclear – in his words, “Congress has created a jump ball.” He identifies two possible readings. The first, the “asset-based approach,” asks whether the debtor’s principal assets at the time of the petition were in-district longer than they were located anywhere else in the last 180 days. By contrast, the “time-based approach” asks what – and where – were the debtor’s “principal” assets over the whole 180-day period.
Judge Kaplan opts for the “asset-based approach.” His decision does not rely on the statute’s text, and he states that there is no caselaw on point. Instead, he holds that the “asset-based approach” is “more consistent with the functional concerns of the administration of the bankruptcy estate. Judge Kaplan draws on legislative history to note that Congress has repeatedly rejected attempts to narrow the venue statute. And he also raises the concern that, under the “time-based approach,” as of the petition date the debtor may no longer have the “principal assets” it had over the last 180 days. He concedes that the “asset-based approach” can be manipulated by moving the debtor’s assets. But he argues that that risk is “tempered” by the 180-day requirement and by courts’ ability to transfer venue “in the interest of justice” or the parties’ convenience. Based on the “asset-based approach,” Judge Kaplan approves the common practice of putting money in a bank account to get venue. The facts here are striking: The principal debtor, a shell, put $1 million in a New Jersey account 16 days before filing. That move created venue for the debtor and its affiliates, even though the debtor had originally listed its principal place of business in the petition as Georgia. Judge Kaplan also made factual findings to reject arguments that various other assets of the debtor, including multiple patents, D&O insurance policies, and a nine-figure intercompany receivable, were “principal assets” instead of the bank account.
Judge Kaplan also denied a request to transfer venue. Much of his reasoning is based on how much work has already been done in the case, such as issuing an interim DIP and setting a schedule for plan confirmation. He argues that keeping the case in his court is therefore necessary to avoid “disruption.” Judge Kaplan concedes that the result does not “sit right” with him. But he argues that any more restrictive approach is for Congress to decide, not for him.
If this approach prevails, it effectively removes most limits on venue for corporate debtors. Almost any corporate family has an existing entity with no assets. As a result, under the “asset-based approach,” any debtor could in theory move funds into an otherwise empty affiliate, put those funds in a bank account in a friendly district, and claim venue for itself and the entire corporate family.
But there is a significant question about whether appellate courts will view the statute the same way as Judge Kaplan does. The Supreme Court has long shifted away from legislative history and results-oriented reasoning to focus deeply on statutory text. In Justice Kagan’s famous words, “we are all textualists now.” And, just as Purdue’s textual approach to the statute governing plan contents upturned the common bankruptcy-court practice of granting nonconsensual third-party release, a text-based approach may well lead to a different reading of the venue statute. For example, textualist judges may conclude that the phrase “principal assets” must be read as the “principal assets … for the one hundred and eighty days” before the petition. Either in Multi-Color or in a future case, appellate review is likely to highlight the tension between bankruptcy courts’ practical, results-oriented approach and the appellate courts’ textualist methods.
Justin Ellis is a partner of MoloLamken LLP in New York. He tries cases and argues appeals in complex business disputes, with particular focus on bankruptcy, distressed debt, and structured finance litigation.
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