The March 2002Flash Alert noted the boost in corporate Chapter 11 filings in Delaware's bankruptcy courts. It also highlighted the burden placed on vendors located elsewhere around the country when the primary business center of a company is not on the East Coast. Given the prima facie venue choice recognizing the state of incorporation of the debtor is the state of the bankruptcy case, a high majority of public companies that will too often result in trade vendors facing long distance burdens attempting to meaningfully participate in the reorganization process.
However, that shouldn't always be the case. Local counsel can make a difference, and in some cases effectively reroute the Chapter 11 proceedings back to the home jurisdiction. Since that battle will be initially litigated in a Delaware bankruptcy court, it is not an easy task, but the cases can be won.
Ernst Home Center, Inc. filed a voluntary Chapter 11 petition in Delaware on July 12, 1996. On behalf of a number of unsecured creditors, the author, along with Dan Caine, now with Ryan Swanson in Seattle, were then engaged to attempt to change the venue to the Western District of Washington where the company was headquartered. A group of landlords filed a similar motion, both being filed approximately five weeks after the petition date. The hearing that followed took place only 10 days later.
The movants for such a proceeding bear the burden of proof to establish the four criteria cited in the primary reported cases: (1) the proximity of the court to the interested parties; (2) the location of the debtor's assets; (3) the economics of administering the estate; (4) the relative economic harm to the debtor and other interested parties.In re Ocean Properties of Delaware, Inc., 95 BR 304 (1988);In re Commonwealth Refinancing Co., 596 F2d 1239 5th Cir 1979,cert. den. 444 US 1045 (1980).
The primary focus of our challenge focused on the debtor's own information. This included the filed schedules, the list of the 20 largest creditors, filed reports of stores to be closed, previously filed 10-Qs on file with the SEC, and other generally available public information.
Corporate records reflected that Ernst had been incorporated in Washington in 1894 and its state of incorporation transferred to Delaware in 1993. It depicted itself as a Northwest corporation, as its principal locations were in the states of Washington, Oregon and Idaho, but its operations and stores did extend through a number of other western states. At the time of filing, the overwhelming majority of the stock was owned by a New York/New Jersey based investment group. The corporate officers remained in Seattle, Washington, and all the stores which were initially to be closed were in the Western states.
Outlining the makeup of the debtor's creditor base was very important in persuading the court that a change of venue was appropriate. The unpublished decision highlighted the material which we gleaned from the debtor's filed schedules. Our analysis showed that half the 20 largest creditors were west coast based and overall 40% of the unsecured creditors reflected Washington addresses. An additional 35% came from the other Western states. The court's opinion highlighted that creditor concentration. Judge Walsh noted particularly that if there were preference or avoidance actions filed, they would very likely be filed against parties entitled to seek transfer of venue on a case-by-case basis if the entire matter were not shifted to Washington. Similarly, the leaseholder group demonstrated that lease rejection disputes were likely to require non-Delaware locales focusing on non-Delaware choices of law.
The debtor-in-possession and the unsecured creditors committee opposed the motion, citing the "national committee, the east coast based reorganization consulting firm, and the initial activity post-petition before the court in Delaware." Finding the consultant's resume noted its "national practice" the court found that limitation of little impact. The judge also distinguished the Ernst situation from a previous decision in Delaware in the Pik 'N Pay case, a multi-state retailer, where only one large national creditor, NationsBank, not teams of landlords and unsecured creditors sought the change. He further contrasted the typical leased site in Pik 'N Pay which were small retail spaces of only a few thousand square feet to the multi-acre sites in Ernst, a big style box retailer. This disparate impact in terms of the relative loss to the creditor was also of concern to the court in terms of the unsecured creditor's objection to Delaware venue. He evaluated the scope of the losses as likely to be of high impact on those creditors. This was a significant basis in his view requiring transfer to Washington to let the local court handle the reorganization.
The opposition, as one might expect, contended that the costs of requiring those national parties that would be involved to travel to the west coast would increase the overall costs of administering the case. These objections were summarily rejected by the court which stated "If the cost of overcoming that disadvantage is some additional administrative expense to the estate, then that is a small price to pay for an even playing field." That final note was of particular benefit to the moving creditors as well in our later motion brought in the Western District of Washington for reimbursement of attorney's fees to the two groups of creditors. Despite continued strident opposition from the debtor-in-possession, the court allowed recovery of attorneys fees from the estate for both local and Delaware counsel for the two groups of creditors which had brought the motion to change venue.
True national entities will continue to justifiably remain in the Delaware courts, but vendors in the hinterlands should not be afraid to make the fight when the factual case can be presented, particularly in those instances where the debtor's historical documentation will effectively pin them down to a different venue.