The following is a case update analyzing a recent case of interest:
In Klein v. ODS Technologies, LP (In re J & J Chemical, Inc.), Adv. No. 18-08029-JDP (Bankr. D. Idaho Jan. 11, 2019), a U.S. Bankruptcy Court for the District of Idaho (the “Court”) held that the court in which a bankruptcy case is pending is a proper venue for a fraudulent transfer action brought under sections 544(b) or 548 of the Bankruptcy Code, regardless of the amount at issue or the residence of the defendant. The Court also held that even if 28 U.S.C. § 1409(b) applies to such an action, the court is a proper venue if the value of the property to be recovered is at least $1,300, and the higher $12,850 threshold for actions against a non-insider to recover “a debt” does not apply. If the Court’s analysis is correct, either (a) there is no monetary threshold for filing preference actions in the plaintiff’s home court against non-resident defendants, or (b) the monetary threshold is only $1,300. To read the full unpublished decision, click here.
From April 2013 to May 2016, the president of J & J Chemical, Inc. (the “Debtor”) transferred $11,100 from the Debtor’s bank account to ODS Technologies, LP (“ODS”). ODS operates an online horse race wagering service. ODS is a Delaware limited partnership, its corporate headquarters and principal place of business is in Los Angeles, and it is authorized to conduct business in Idaho under the name “TVG Network.”
In 2017, the Debtor filed a chapter 11 petition in Idaho. Under the Debtor’s confirmed plan, R. Wayne Klein was appointed as the plan administrator (the “Administrator”) and granted authority to pursue avoidance actions.
The Administrator filed a complaint to avoid and recover the transfers made by the Debtor to ODS. For the transfers that occurred within two years prior to the petition date, the Administrator sought to avoid the transfers under section 548(a) of the Bankruptcy Code. Invoking section 544(b), the Administrator sought to avoid all of the transfers in accordance with Idaho state law. Section 1409 of Title 28 of the United States Code provides, in relevant part, as follows (emphasis added):
(a) Except as otherwise provided in subsections (b) and (d), a proceeding arising under title 11 or arising in or related to a case under title 11 may be commenced in the district court in which such case is pending.
(b) Except as provided in subjection (d) of this section, a trustee in a case under title 11 may commence a proceeding arising in or related to such case to recover a money judgment of or property worth less than $1,300 . . . or a debt (excluding a consumer debt) against a noninsider of less than $12,850, only in the district court for the district in which the defendant resides.
ODS filed a motion to dismiss for improper venue. It argued that because the Administrator sought to recover less than $12,850, the adversary proceeding should have been filed in the bankruptcy court in the Central District of California.
The Administrator responded with three arguments. First, venue was proper under section 1409(a) because the proceeding arose “under” title 11 and was not merely “in or related to” a case under title 11. Second, even if section 1409(b) applied, venue was proper because the Administrator was seeking “to recover a money judgment of or property worth” at least $1,300 and was not seeking to recover “a debt . . . of less than $12,850.” Third, venue was proper because, under applicable federal law, ODS was a “resident” of Idaho.
In reply, ODS urged the Court to follow a line of cases holding that Congress intended section 1409(b) to apply to claims “arising under” the Bankruptcy Code, as well as to those “arising in” and “related to” a bankruptcy case. ODS also urged the Court to follow Muskin, Inc. v. Strippit Inc. (In re Little Lake Indus., Inc.), 158 B.R. 478 (9th Cir. BAP 1993), in which the Bankruptcy Appellate Panel of the Ninth Circuit (the “BAP”) concluded that the terms “arising under” and “arising in” cannot be interpreted as mutually exclusive, and that “[a]ll proceedings arising under title 11 arise in the bankruptcy case for purposes of § 1409(b).” Little Lake Indus., 158 B.R. at 484.
The Court agreed with all three of the Administrator’s arguments and denied ODS’ motion to dismiss.
First, the Court held that section 1409(b) does not apply to proceedings “arising under” the Bankruptcy Code. Section 1409(a) states that venue is proper in the district in which the underlying bankruptcy case is pending if the proceeding (a) “arises under” the Bankruptcy Code, (b) “arises in” the bankruptcy case, or (c) is “related to” the bankruptcy case. However, section 1409(b) imposes monetary thresholds only if the proceeding “arises in” or is “related to” the bankruptcy case. Noticeably, section 1409(b) omits proceedings that “arise under” the Bankruptcy Code.
Based on the plain language of these provisions, the Court concluded that proceedings that “arise under” the Bankruptcy Code are not subject to section 1409(b)’s monetary thresholds. The Court rejected Little Lake Industries’ holding that, for purposes of section 1409(b), all claims that “arise under” the Bankruptcy Code also “arise in” a bankruptcy case. Instead, it relied on Ninth Circuit precedent interpreting the terms as referring to separate, distinct categories of proceedings. See Maitland v. Mitchell (In re Harris Pine Mills), 44 F.3d 1431, 1435 (9th Cir. 1995). It further held that because the parties agreed that the claims asserted by the Administrator “arise under” the Bankruptcy Code, section 1409(a) rendered the Court a proper venue for the adversary proceeding.
Second, the Court held that an adversary proceeding seeking to avoid and recover a transfer is a proceeding to “recover a money judgment . . . or property,” not a proceeding to recover “a debt.” The Court stated that the Administrator’s adversary proceeding was, in effect, a proceeding to recover a money judgment or property. Since the amount sought was at least $1,300, the threshold for actions “to recover a money judgment of or property worth” at least $1,300 was satisfied. The $12,850 threshold for actions to recover “a debt” against a non-insider did not apply.
Third, the Court determined that, under section 1391(c)(2) of Title 28, ODS was a resident of Idaho. That section provides that an entity “shall be deemed to reside, if a defendant, in any judicial district in which such defendant is subject to the court’s personal jurisdiction with respect to the civil action in question.” The Court determined that ODS had sufficient minimum contacts with Idaho to render it subject to the personal jurisdiction of the Court. Thus, even if section 1409(b) applied, and even if the $12,850 threshold for proceedings to recover “a debt” applied, venue was still proper because, for venue purposes, ODS qualified as a resident of Idaho.
Prior to BAPCPA, section 1409(b) provided that a defendant could be sued only in the district in which it resided if the trustee sought to recover (a) a money judgment of or property worth less than $1,000, or (b) a consumer debt of less than $5,000. BAPCPA added the third category at issue in this case: “a debt (excluding a consumer debt) against a noninsider of less than $10,000.” (The dollar amounts adjust every three years.)
The final report of the National Bankruptcy Review Commission recommended that section 1409 “be amended to require that a preference recovery action against a noninsider seeking less than $10,000 must be brought in the bankruptcy court in the district where the creditor has its principal place of business.” The stated purpose of the proposal was “to protect parties from ‘noneconomic’ actions brought by trustees seeking to take advantage of the likelihood that it will cost the creditors more to litigate the action than the action itself seeks to recover.” When introduced in 1998, H.R. 3150 proposed to add “or a nonconsumer debt against a noninsider of less than $10,000” to section 1409(b). And in 2003, the House Judiciary Committee’s report expressly stated that section 1409(b) was being amended “to provide that a preferential transfer action in the amount of $10,000 or less pertaining to a nonconsumer debt against a noninsider defendant must be filed in the district where such defendant resides.” Not surprisingly, when BAPCPA was enacted, commentators recognized that Congress was trying to stop the practice of filing small preference actions against defendants who have no connection to the district in which the bankruptcy case is pending.
From the start, it was unclear that the amendment to section 1409(b) would actually accomplish this goal since an action under sections 547 and 550 seeks to avoid a transfer and recover the property transferred (or the value thereof), not necessarily “a debt.” J & J Chemical demonstrates that it’s not even clear that section 1409(b) applies in the first place.
These materials were written by John N. Tedford, IV, of Danning, Gill, Diamond & Kollitz, LLP, in Los Angeles (firstname.lastname@example.org). Editorial contributions were provided by ILC member Michael J. Gomez of Frandzel Robins Bloom & Csato, L.C. in Fresno, California (email@example.com).