Wednesday, August 5, 2015

Texas Judge Fires Shots on Venue

By Stephen W. Sather
Barron & Newburger, P.C.
Austin, TX

Come back to Texas
It's just not the same since you went away
Before you lose your accent
And forget all about the Lone Star State
There's a seat for you at the rodeo
And I've got every slow dance saved
Besides the Mexican food sucks north of here anyway

--Ohio (Come Back to Texas) by Bowling for Soup


Texas Bankruptcy Judge Russell Nelms has authored a thoughtful opinion on venue and a challenge to Texas companies who file in far off forums.  No. 15-41545, The Crosby National Golf Club, LLC (Bankr. N.D. Tex. 8/3/15).

The Case At Hand

The case in front of Judge Nelms involved a San Diego golf course that was having difficulties with the gated communities which surrounded it.   The company's management was based in Ft. Worth which is where the case was filed.   One of the homeowners' associations moved to transfer venue while the Debtor and its Texas-based bank sought to keep the case in Texas.



Judge Nelms found that the case was properly filed in Texas for the reason that its "nerve center," the place where upper management was located, was in Ft. Worth.   Nevertheless, the Court found that the case should be transferred to San Diego based on the convenience of the parties and the interest of justice.  

The Court placed special emphasis on the fact that the case involved real estate located in San Diego and that the Debtor's major antagonist, the homeowners' association, was located there as well.   The Court noted the optics of a San Diego golf course running off to Texas to deal with a dispute with its neighbors.   Judge Nelms wrote:
Regardless of who might prevail in the litigation, litigation does not make good neighbors.   This matter needs to be resolved by agreement between the debtor and a majority of the other constituencies, with the bankruptcy process perhaps being used as a means of bringing a dissenting minority in line. The pendency of a bankruptcy case in Fort Worth is counter-productive to any effort at a consensual resolution. Not only has the filing here already given Crosby HOA members and club members the impression that the debtor is hiding from them, but it has given them the impression that the debtor is trying to make it more expensive for them to protect their interests. That does not lend itself to consensual resolution.   
 Opinion, p. 7.    Thus, the Court sent the debtor back to California to face its neighbors there.

Dramatic Dicta About Texas Companies

The Court concluded its opinion with some dicta directed at Texas companies that flee the Lone Star State when filing their bankruptcies.  Judge Nelms wrote:
It is an axiom of good legal writing that one should stop when he has said all that needs to be said on the subject in question. I violate that axiom here out of frustration over the tendency of some debtors to file cases in venues that have almost no connection to the debtor or its creditors, a factor that is not present here.
The modern trend in large bankruptcy cases – which this is not – is to stand the proximity of creditors factor on its head when it comes to the debtor’s decision of where to file. Although one of the goals of bankruptcy is to facilitate creditor participation, many debtors now file for bankruptcy in locations that are certain to minimize it.
Two Fort Worth companies are prime examples of this trend. Radio Shack, which is .76 miles from this court, filed for bankruptcy in Delaware, as did Quicksilver Resources, which is .12 miles from this court.
Various excuses are given for these remote filings. Few are convincing. It has been said that because these large cases involve mainly the restructuring of large debt held by a few lenders, they should take place where the lenders and their lawyers are located and the judges have expertise with complicated debt facilities. Perhaps it is a measure of my lack of sophistication that I don’t consider the day-one dismantling of an electronics retailer an inordinately complex case that can only be overseen by the most expert judge. Still, ignoring the slight to the local judiciary, this argument has gossamer transparency.
The truly hard work of major bankruptcy cases occurs not in the courtroom, but behind the scenes. This is due to the Bankruptcy Code itself, which encourages consensual resolution of matters as opposed to protracted litigation. Because of this, the nuts and bolts of restructuring occurs in much the same way as the negotiation of complicated financial transactions where bankruptcy is not implicated, that is in phone calls, conference calls, texts, emails, and the occasional office meeting. The argument that this way of doing business will or must change once a debtor files for bankruptcy has little factual support.
The argument is also made that it is more convenient to file in New York and Delaware. The first answer to this argument is a question: “More convenient for whom?” If the answer is the lender, the next question is: “Why are the desires and convenience of a lender who voluntarily chose to do business with a Fort Worth-based company the be-all and end-all of venue determination?” And, of course, the convenience argument loses all credibility when a Fort Worth-based company with a New York-based lender files for bankruptcy in Delaware. The suggestion that it would be more convenient for those parties to meet and attend hearings in Wilmington, Delaware is laughable.
So, what motivates local companies to file so far from their home base? Clearly, part of it is lawyer-driven for reasons that only those lawyers can purport to defend. I doubt, for example, that the president of Quicksilver, whose offices are a two-minute walk from this court, was the one who made the compelling argument that it would be much more convenient for the company if its bankruptcy case were filed 1,400 miles away.
One might ask why we should care where a case is filed as long as the case is successful. The answer lies in the definition of “successful.” Even in “successful” cases hard-working people lose jobs, have their retirement cut, or have their claims significantly compromised. And yet, most large cases today are filed with little or no thought given to whether small or medium-sized creditors can appear and be heard in those cases. Some are filed with a goal of precluding easy access to the court by small creditors, especially if those creditors are soon-to-be former employees.
Individual citizens of this country interact with our judicial system primarily in two venues, the family courts and the bankruptcy courts. It is here where they see justice done or not done. And it is important that they have the opportunity to see it.
There is value in witnessing the messiness and frequent tedium of court proceedings. There is value in hearing someone argue why you are right and why you are wrong. There is value in watching a judge wrestle with uncomfortable issues that affect your livelihood. There is value in knowing that even though our judicial system is not perfect, those who serve it work hard to achieve what is fair, just, and right under the law.
No employee at Radio Shack’s corporate headquarters took off from work early and walked the few short blocks to this court to observe any proceedings in that bankruptcy case. And that’s a shame, not necessarily because the result would have been different, but because that employee might have felt a little better about the result and the system after seeing the sausage being made.
 Opinion, pp. 10-12.

I certainly share Judge Nelms' views on venue.   Bankruptcy affects real people and those individuals
are often concentrated in a specific locale.   When cases are filed somewhere else for the convenience of the lawyers and the banks, it gives the impression that the interests of the small players are not only unimportant but unwelcome.   As long as we have loose laws governing venue, lawyers will search for a venue they believe to be advantageous.   The only way to stop this questionable practice is for Congress to change the law.    The ABI Commission on Chapter 11 Reform punted on this issue because they thought it was too divisive.   However, it is worth noting that there are 96 senators from states that are not New York or Delaware.    Hopefully those senators will listen to the wisdom of a Texas judge who can literally look out the window and see companies that are filing their cases far, far away.

Hat tip to Patrick Hughes for circulating this opinion.

Correction:  An earlier version of this post stated that Judge Nelms was retiring soon.   It is actually his Fort Worth colleague Judge Michael Lynn who is retiring.  The good news is that we can look forward to many more opinions from Judge Nelms.  Thanks to John Penn for setting me straight.   

8 comments:

  1. As a creditor's attorney who regularly has to counsel clients on why they are being dragged into bankruptcy court in other jurisdictions when they and their now-bankrupt customer are right here in Georgia, I whole-heartedly agree with Judge Nelms.

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  3. For the convenience of the case which filed in Texas it should be stay there. As Judge Nelms said, "its a nerved center" why move to F.W?

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