Bankruptcy Court Holds That Venue Of Houghton Mifflin Case Is Improper, But Delays Transfer

The authors analyze a decision in which a bankruptcy court found itself bound by the applicable venue statutes but nevertheless held that because the statutes did not dictate when it had to transfer the case, it would order the transfer at a time that would minimize the prejudicial effect to creditors.

Judge Robert E. Gerber of the United States Bankruptcy Court for the Southern District of New York recently granted the U.S. Trustee's motion to transfer the Chapter 11 cases of Houghton Mifflin Harcourt Publishing Company ("Houghton") and its affiliates to a different venue, notwithstanding the fact that the debtor's pre-packaged plan had been confirmed with unanimous support from its creditors, the cases were projected to conclude within 30 days of filing, and the debtors' primary creditor constituencies supported venue in New York. While the court found itself bound by the applicable venue statutes, the court nevertheless held that because the statutes did not dictate when the court must transfer the case, it would order the transfer at a time that would minimize the prejudicial effect to creditors – the first to occur of the effective date of the prepackaged plan or three weeks from the date of entry of the confirmation order.1

TRANSFER OF VENUE OF BANKRUPTCY CASES

Venue for bankruptcy cases is governed by Section 1408 of the Judicial Code, which provides five bases for venue. They are the district where:

the debtor has a domicile, the debtor has a residence, the debtor has a principal place of business, the debtor has principal assets, or there is a pending bankruptcy case concerning the debtor's affiliate, general partner, or partnership.2 Pursuant to Section 1412 of the Judicial Code, "a district court may transfer a case or proceeding under title 11 . . . in the interest of justice or for the convenience of the parties."3 This statute expressly addresses the transfer of cases under the Bankruptcy Code, but not situations in which venue is unsupportable under Section 1408.

Section 1406(a) of the Judicial Code, on the other hand, does not expressly address cases under the Bankruptcy Code, but does address cases in which venue is unsupportable. It provides that "[t]he district court of a district in which is filed a case lying venue in the wrong division or district shall dismiss, or if it be in the interest justice, transfer such case to any district or division in which it could have been brought."4 Courts are split as to whether Section 1406 applies to cases under the Bankruptcy Code; however, the majority view is that it does and, therefore, a bankruptcy court lacks authority to retain a case that fails to satisfy the venue requirements...