Texas-Based Debtor Stays Bound by Delaware Venue's Gravity

By Stephen W. Sather

Barron & Newburger, P.C.

Austin, TX

 

The bankruptcy case of Texas restaurant chain Black-Eyed Pea will remain in Delaware after the Bankruptcy Court found that it would be too costly to move the case to the district where its operations are based.  In doing so, the Court found that the interests of the largest creditors outweighed the interests of the more numerous Texas-based creditors.     In re Restaurants Acquisition I, LLC d/b/a Black-Eyed Pea, Case No. 15-12406 (D. Del. 3/4/16).   The opinion can be accessed here.

About the Debtor

The Debtor is a Delaware limited liability company.   Prior to bankruptcy, the Debtor operated thirty restaurants, all located within Texas.   However, by the petition date, it had slimmed down to just twelve stores.    The Debtor employed approximately 530 employees and staff, all but four of whom reside in Texas.   However, the Debtor's management is located in Hendersonville, Tennessee.    

This was not a particularly large case.   The Debtor reported assets of $7.5 million and liabilities of $14.7 million.    The Debtor's secured lenders consisted of CNL Financial Group, which is located in Florida, AmEx Bank located in Salt Lake City and CFG XV, Inc. located in Florida.   Sixty-five percent of the creditors on the list of 20 largest unsecured creditors were located in Texas.    The Debtor owed the State of Texas somewhere between $200,000 and $4 million based on a tax audit.   If the audit was resolved in the State's favor, it would be the single largest creditor in the case.    

The Bankruptcy Case

The bankruptcy case was filed on December 2, 2015.   Two weeks later, on December 16, 2015, the State of Texas filed its Motion to Transfer Venue.   The motion was finally heard on March 1, 2016, some 76 days after it was filed.   The parties filed stipulations and the court noted that there were no disputed issues of fact.   The Court rendered its opinion    The Court rendered its opinion on March 4, 2016.

The Court's Ruling

The Court's ruling is a testament to the fact that once a debtor makes a venue choice, it is very difficult to dislodge it from its chosen forum.   In denying the motion, Court relied on the substantial deference granted to the Debtor's choice of forum, the fact that the secured creditors have all retained Delaware counsel and would have to hire new lawyers if the case moved to Texas and the substantial learning curve that a Texas judge would encounter in taking over the case.    On the other hand, the Court noted that the interests of the State of Texas could be resolved by lifting the automatic stay to have the tax dispute resolved in Texas.    

Here are some excerpts from the opinion:

The movant bears the burden of demonstrating that the factors strongly weigh in favor of a transfer as courts will generally grant substantial deference to a debtor’s choice of forum.

Opinion, p. 5.   Thus, if a case is properly filed in a distant venue based on the state of incorporation, the party wanting the case transferred must not only show that the factors support transfer of venue, they must strongly weigh in favor.

The Court applied the following six factors:

1. the proximity of creditors of every kind to the Court;
2. the proximity of the debtor to the Court;
3. the proximity of the witnesses necessary to the administration of the estate;
4. the location of the assets;
5. the economic administration of the estate; and
6. the necessity for ancillary administration if liquidation should result.

Proximity of Creditors to the Court

Although the vast majority by number of creditors were located in Texas, the Court found that some creditors were more equal than others.

In addition to the large amount of general unsecured debt held by non-Texas entities, all of the Debtor’s pre-petition secured credit was extended by financial institutions based outside of Texas. These creditors are owed, in the aggregate, approximately $4 million. Moreover, the Debtor’s pre-petition unsecured lender, CFG, is owed approximately $1.42 million. All three of these lenders have retained Delaware counsel and have invested substantial time and resources in this matter. Accordingly, transferring the case to Texas would impose a heavy burden on all three of the Debtor’s pre-petition lenders and their professionals.

Opinion, pp. 6-7.   Thus, because the case was filed in Delaware and the lenders had to hire Delaware lawyers, the case should stay in Delaware.  

The Court does not take lightly the 160 former employees and their claims. The Court will be amenable to their participation in hearings by telephone, as the Court has done in numerous other cases. Whether former employees will have consented claims remains to be seen.

Opinion, p. 7.   In the recent case of In re Crosby National Golf Club, LLC, 534 B.R. 888, 895 (Bankr. N.D. Tex. 2015), the Bankruptcy Judge lamented the fact that:

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.

While the Delaware court was willing to make reasonable arrangements for the Texas employees to listen in by telephone, what it did not do was allow them to appear in person to see the sausage being made.

Proximity of the Debtor to the Court

As was the case in CORCO, the Debtor’s management will likely have to appear before this Court with a greater frequency than its employees. Further, Mr. Barber has appeared before this Court on multiple occasions and has expressed his willingness to travel to Delaware. Should any disputes arise pertaining to the Debtor’s employees, the affected individuals may either appear telephonically or retain local counsel. Accordingly, (this) factor weighs against a transfer

 Opinion, p. 8.   The court found that because the Debtor's management, who chose to file the case in Delaware, were willing to appear in Delaware that this factor weighed against transferring venue.   This is just another way of stating that the Debtor's choice of forum is granted substantial deference.

Location of the Assets

Although the physical location of the assets weighs in favor of a transfer, this consideration does not factor heavily into the analysis. Because the Debtor is seeking to reorganize rather than liquidate, there is no need for the Court or a trustee to marshal and sell the Debtor’s assets. The Texas bankruptcy court’s proximity to the Debtor’s tangible assets provides minimal incremental benefits in the context of this chapter 11 proceeding.

Opinion, p. 9.   The problem with multi-part tests is that some factors are given more weight than others.   Here, one of the factors favored Texas venue, but it was given little weight.

Economic Administration of the Estate

The economics of the estate is generally considered the most important factor in determining whether a transfer would be in the convenience of the parties. (citation omitted). When analyzing this factor, courts focus on the potential adverse impact a transfer may have on a debtor’s ability to obtain financing and reorganize. (citation omitted). In support of its position, the Debtor notes that if the case were transferred to Texas, both the Debtor and its largest creditors would need to retain new or additional counsel. Because it has yet to obtain post-petition financing and is operating under numerous liquidity constraints, this added financial burden and time delay could potentially derail the Debtor’s efforts to reorganize. If the case were retained in this jurisdiction, however, the relative burdens on the Movants would be minimal. Out of town parties routinely make telephonic appearances before the Court, and governmental units are generally not required to retain local counsel. (citation omitted). Additionally, the Debtor’s trade creditors are geographically dispersed and a significant number of them would need to travel regardless of whether the proceedings were to take place in Delaware or Texas. While the Court is aware that the Movants may hold a substantial tax claim against the Debtor and respects their desire to adjudicate such claims in a local forum, nothing in this opinion precludes the Movants from seeking to lift the automatic stay and litigate such claims in a Texas state court. When a final judgment is rendered, this Court will handle such claims accordingly. As a result, the Court finds that this factor weighs against a transfer. 

Opinion, at 9-10.   In weighing the relative interests of the parties, the Court suggests that the Texas creditors could ask to lift the automatic stay to allow the tax dispute to be litigated in Texas.   It will be interesting to see the State holds the Court to this implicit promise.

Other Considerations

Because any venue transfer inherently requires a new court to start over and familiarize itself with a debtor’s business operations and capital structure, courts have applied a “learning curve” analysis when determining whether a transfer would be in the interests of justice. Id. “The learning curve analysis involves consideration of the time and effort spent by the current judge and the corresponding effect on the bankruptcy case in transferring venue.” (citation omitted). While the Debtor’s business model and capital structure are not complicated, the learning curve nonetheless weighs against a transfer. This Court has spent a significant amount of time familiarizing itself with the Debtor’s business and has granted numerous requests for relief in connection with these proceedings. Although it is certainly true that a Texas bankruptcy court is more than capable of overseeing this case, the Debtor emphasizes that any unnecessary time delay associated with the learning curve could substantially limit the Company’s ability to reorganize. (citation omitted). Furthermore, the parties that will play the largest role in the Debtor’s restructuring efforts include management, the lenders, and the trade vendors. All of these individuals and entities have invested time and resources in order to ensure that the Debtor can promptly exit chapter 11. The Court concludes that it simply would not be fair to these parties to require them to hire new counsel and wait for its new advisors to “get up to speed.” This delay could potentially have an adverse impact on the Debtor’s restructuring efforts and would further complicate the overall administration of the estate.

In other words, because the Delaware court has already had the opportunity to get up to speed, the case might as well stay there.

In applying the 6+ factors,  it appears as though most of the factors came down to allowing the Debtor its choice of forum.    While the Court threw a few crumbs to Texas interests (the ability to appear by telephone and the possibility of lifting the stay with regard to the tax case), they did not win the day.

What It Means

State of incorporation venue and affiliate venue allow many debtors flexibility in deciding where to file.    While the opponents of venue reform argue that creditors hardly ever challenge venue, this case illustrates the practical difficulties of dislodging a case.  

The Delaware and New York bars often argue that cases should be filed in their districts because they have the sophisticated judges, lawyers and advisers necessary to handle big, complex cases.   However, this case was not particularly big or complex.   In fact, it was so small that the Court found that the cost attendant to transferring it back to its home could sink it.    Thus, big cases need to stay in Delaware because East Coast lawyers are superior and small cases need to stay there because they can't afford the move.   Thus, cases both large and small need to stay put.  

While the analysis above may have been a little cynical, I can't fault the Court's reasoning.   Under the test for transferring venue, it is really, really, really hard to dislodge a case from its initial location.   If the Debtor's choice of venue is to be given so much weight, perhaps it makes sense to limit the debtor's choice to one that has some relation to the business.    In 2005 and 2011, Senators and Representative from a wide variety of states (including Sen. John Cornyn from Texas and Rep. Lamar Smith from San Antonio) tried to fix the venue laws.   This case is Exhibit A for why it is time to try again.