Attention shoppers! Even after Winn-Dixie, a debtor still has the right to choose among several venues. To be sure, this right has recently come under attack from a wide variety of sources—politicians, an outspoken law professor and local creditors in national restructuring cases, among others. In April, the critics notched an apparent victory: Creditors successfully challenged Florida-based supermarket chain Winn-Dixie's choice of New York City as the forum for its chapter 11 filing and got the cases moved to Florida. But it wasn't a total victory for the critics. The court's decision makes clear that a debtor's right to choose among several venues is, in fact, alive and well.

The bankruptcy venue statute, 28 U.S.C. §1408, allows corporate debtors to bring a chapter 11 case wherever any affiliated debtor—even an inactive subsidiary—is either headquartered or incorporated. Because this rule usually gives large debtors several potential filing locations, strategic chapter 11 planning routinely includes a venue analysis to identify the most appropriate forum. Critics call this "forum shopping" and have tried—unsuccessfully, thus far—to amend the venue statute to severely restrict or prevent it. At the same time, debtors' lawyers have become more and more creative in taking steps to expand a debtor's venue options.

Winn-Dixie, for example, attempted to create venue in New York by incorporating a debtor subsidiary there a mere 12 days before its chapter 11 filing. A creditor objected that this was "blatant forum-shopping." The bankruptcy court thus was presented with a question of first impression concerning the limits of venue selection: Is "manufactured" venue appropriate? Ultimately, the court decided to transfer the cases to the Middle District of Florida under 28 U.S.C. §1412, which provides for venue transfer "in the interest of justice or for the convenience of the parties." The court found that venue in New York was technically proper, and that New York was a more convenient forum. Nevertheless, it concluded that the "interests of justice" warranted transferring the cases when "the facts were created to fit the statute."¹

The court's ruling in Winn-Dixie would seem to blunt venue selection as a tool in strategic chapter 11 planning, but a closer look reveals otherwise. Although Winn-Dixie closed an apparent loophole in the current venue statute, it affirmed the legitimacy of strategic venue selection and refuted some of the current misconceptions about the practice. As a result, albeit with some limitations, venue selection after Winn-Dixie remains a legitimate tool available to corporate debtors.

Venue Choices Today

The bankruptcy venue statute allows corporate debtors to bring a chapter 11 case where any affiliated debtor, even an inactive subsidiary, is either headquartered, incorporated or maintains its principal assets or place of business.² Thus, even without any unusual attempt to maximize options, a corporate debtor is likely to have several choices of venue.

Note also that venue is not jurisdictional. If a debtor files a case in a venue that is not permitted by §1408, the orders of the bankruptcy court presiding over the case are nevertheless valid.³ Moreover, a court will generally consider venue issues only if an objection is raised. If there is no venue-related objection in the first weeks after filing, the case may continue without transfer even if the venue is questionable.⁴

But while §1408 and related case law provide debtors significant flexibility in selecting venue, that power is not unlimited. Section 1412 provides that a court may transfer a bankruptcy case to a different district "in the interest of justice" or "for the convenience of the parties."⁵

There is an established standard for analyzing "convenience of the parties." When considering venue objections on that basis, courts generally use a balancing test, weighing (1) the proximity of creditors 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 debtor's assets, (5) the economic administration of the estate and (6) the necessity for ancillary administration if liquidation should result.⁶ On the other hand, the standard for analyzing the "interests of justice" is less well defined. It has been described as a "broad and flexible standard" that involves "a consideration of whether transferring venue would promote the efficient administration of the bankruptcy estate, judicial economy, timeliness and fairness."⁷

Historically, courts rarely transferred venue in large chapter 11 cases. This reflects an ongoing practical reality in such cases: There is often no one forum that is convenient for every party. In addition, as demonstrated in the Enron chapter 11 cases, courts may deny requests to transfer venue based on other factors, including (1) deference to the debtor's venue selection (if proper under §1408), (2) the court's "learning curve" related to the case, (3) the convenience of the original venue for core constituents and their legal and financial advisors, (4) the ability of creditors located outside the venue to access court documents electronically and participate in hearings telephonically, and (5) the support of the creditors' committee and/or a key creditor constituency for the original venue.⁸

The Venue Debate

The flexibility in venue selection under current law has caused much debate, including allegations that debtors' venue selections are based on ulterior motives such as avoiding creditors, obtaining management-friendly rulings, manipulating the outcome of their chapter 11 cases and rewarding their advisors and professionals with larger fees.

Despite sinister allegations by critics, there are numerous legitimate reasons for a debtor to select one venue over another. For example, a particular venue may facilitate meetings and negotiations among a case's key constituencies; it may enhance the prospects of a "soft landing" in chapter 11; it may minimize uncertainty; it may provide clear precedent for legal issues that might arise during the case, thus facilitating settlements; it may allow for expeditious consideration of key issues; and it may reduce the overall costs of the case through efficient case administration and reduction in travel expenses. In short, strategic venue selection, conducted with assistance from experienced advisors, can be crucial to the success of a chapter 11 case.

There is no magical formula for selecting the appropriate venue for a reorganization. Indeed, the best venue for one debtor may be inappropriate for another. Still, the strategic goal of venue analysis is always the same: Select the forum that best enables a debtor to successfully reorganize its business, thereby preserving jobs and value for the benefit of the debtor's employees, its creditors and all parties in interest.

Despite legitimate reasons for strategically selecting venue, perceptions of venue abuse could lead to rash action. Earlier this year, for example, Sen. John Cornyn (R-Texas) proposed the "Fairness in Bankruptcy Litigation Act of 2005," which would have made venue proper only where the debtor's principal place of business or its principal assets were located (and would have excluded its state of incorporation, if different).⁹ The act also sought to restrict the affiliate venue rule so that a subsidiary could only follow the filing of its parent company, and not the other way around (thus prohibiting the common practice of basing venue on the locus of a relatively minor subsidiary). Sen. Cornyn described the legislation as necessary to "combat forum shopping" in bankruptcy cases, which "enables corporate debtors to evade financial commitments."¹⁰ Although proposed as stand-alone legislation, the act also was offered, and ultimately withdrawn, as an amendment to the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, which was signed into law on April 20, 2005.

For the moment, at least, Sen. Cornyn's efforts at venue "reform" appear to be stalled. But even if legislation is not imminent, debate over venue selection continues. The recent dispute in Winn-Dixie is a case in point.

The Winn-Dixie Cases

Winn-Dixie Stores Inc. and its affiliates operate supermarkets in the southeastern United States. Notwithstanding this, in February 2005 the company decided to file its chapter 11 cases in New York.¹¹ The decision quickly drew creditor objections. Three weeks into the cases, creditor Buffalo Rock Co. moved to transfer venue to Florida, alleging that venue in New York had been improperly "manufactured" because the only debtor with a New York connection had been created only 12 days before the chapter 11 filing. Buffalo Rock claimed that the debtors "engaged in blatant forum shopping in an effort to neutralize creditor involvement" and argued that (1) venue was improper under §1408 or, alternatively, (2) even if venue was proper, the chapter 11 cases should be transferred pursuant to §1412.¹²

The debtors denied any impropriety and asserted that venue was proper in New York under the plain language of the venue statute. Nonetheless, citing intense media scrutiny and an uptick in creditor concern based on Buffalo Rock's inflammatory allegations, the debtors agreed that their chapter 11 cases should be transferred to Florida to minimize business disruption.

The creditors' committee took a different view. New York, the committee argued, was a proper venue under §1408, and no transfer was warranted under §1412; the chapter 11 cases could be administered most economically in New York both because of the convenience of New York for all professionals and for the creditor body as a whole, and because of the substantial learning curve for any new court.

The Bankruptcy Court's Decision

After oral argument, Judge Robert D. Drain issued a lengthy ruling from the bench. First, the court held that venue of the debtors' chapter 11 cases was "technically proper" in New York based on the plain meaning of §1408, even though Dixie Stores Inc. was newly incorporated. The court observed that §1408(a)(1) does not require a corporation to be domiciled in a district at least 180 days in order to file a case in that district, only that it be there for "a longer period of the 180-day period than anywhere else."¹³

Judge Drain then considered whether the cases should nevertheless be transferred based on either of the two prongs of §1412. The court noted that the "convenience of the parties" prong presented a "fairly close question," but ultimately found that the factors weighed in favor of keeping the cases in New York, which was recognized (in large part because of the location and preference of the debtors' larger creditors) as the "primary focus" of the debtors' restructuring.¹⁴

But even though New York was the most convenient forum, Judge Drain found that the "interest of justice" warranted transferring the cases to Florida. Specifically, the court focused on the stipulated fact that Dixie Stores Inc. was formed "solely to establish venue" and had "no economic substance" or "separate and valid reason for existing."¹⁵ While acknowledging that the text of the venue statute allows such action, the court held that, in the interest of justice, this loophole should be closed. Thus, in a clear signal to practitioners that there are limits to the ability to creatively manage venue, the court transferred the Winn-Dixie cases to Florida.

Despite ordering the transfer, the court took pains to point out that the debtors had not acted in bad faith or engaged in any improper forum shopping by filing the cases in New York. Specifically, the court noted that there was no evidence that the debtors filed in New York to obtain a debtor-friendly forum or a management-friendly forum, or to obtain any advantage over creditors.

Just as importantly, however, particularly for practitioners not involved in the Winn-Dixie cases, the court voiced unequivocal support for the practice of forum selection generally: "I do not believe it is otherwise improper to file within a district that Congress has expressly created for one. In fact, it may well be a duty to do so based on one's analysis of all of the facts at hand."¹⁶ And lest critics mistake his opinion as anything but an endorsement of appropriate venue analysis, Judge Drain also directly confronted attacks on the practice. In particular, after finding that Winn-Dixie chose its venue in good faith, the court referred to remarks to the contrary as "an unfortunate aspect of the venue debate," noting that "these types of allegations not only by the movants, but by purportedly learned professors and members of Congress, do no good to the bankruptcy system and impugn and malign the courts."¹⁷

Conclusion

Winn-Dixie undoubtedly sets limits on a debtor's ability to create venue for its chapter 11 case. At the same time, however, it clarifies that venue selection remains a legitimate part of a corporate debtor's chapter 11 planning and indeed may impose on debtors and their professionals a duty to actively weigh available venue options. Clearly, therefore, corporate debtors can and should continue to carefully consider all aspects of venue selection in connection with chapter 11 planning.

But while Winn-Dixie has answered some questions regarding venue, it raises other new ones. How close is too close to a chapter 11 filing for a subsidiary to be formed and serve as the basis for venue? Would the "interest of justice" warrant transferring venue established by a newly created subsidiary if that company also had a separate economic purpose? Will other jurisdictions adopt the Winn-Dixie principles or adhere to a bright-line rule? These questions, along with the ongoing criticisms of current venue rules, suggest that venue selection will continue to be an interesting issue for restructuring professionals for the foreseeable future.

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Footnotes

¹ Transcript of April 12, 2005, Hearing at 171, In re Winn-Dixie Stores Inc., Chapter 11 Case No. 05-11063 (RDD) (Bankr. S.D.N.Y. 2005) (on file with authors). Return to article

² 28 U.S.C. §1408. If any location changes within 180 days before the bankruptcy filing, then proper venue will lie in the location that existed for the longer part of that 180-day period. Return to article

³ In re Moss, 267 B.R. 834, 838 (B.A.P. 8th Cir. 2001). Return to article

⁴ Hunt v. Bankers Trust Co., 799 F.2d 1060, 1068 (5th Cir. 1986). Return to article

⁵ 28 U.S.C. §1412; see, also, Fed. R. Bankr. P. 1014. Return to article

⁶ See, e.g., Puerto Rico v. Commonwealth Oil Refining Co. (In re Commonwealth Oil Refining Co.), 596 F.2d 1239, 1247 (5th Cir. 1979). Return to article

⁷ Gulf States Explorations Co. v. Manville Forest Prods. Corp. (In re Manville Forest Prods. Corp.), 896 F.2d 1384, 1391 (2d Cir. 1990). Return to article

⁸ In re Enron Corp., 274 B.R. 327, 343-51 (Bankr. S.D.N.Y. 2002), as amended by In re Enron Corp., 317 B.R. 629 (Bankr. S.D.N.Y. 2004). Return to article

⁹ S. 314, 109th Cong. §1 (2005). Return to article

¹⁰ Press Release, "Court Forum Shopping by Corporate Debtors Harms Consumers, Creditors, Shareholders, Cornyn Says" (Feb. 8, 2005) (on file with authors). Return to article

¹¹ The Winn-Dixie chapter 11 cases were filed on Feb. 21, 2005, in the U.S. Bankruptcy Court for the Southern District of New York. The debtors maintained their corporate headquarters in Jacksonville, Fla., and had no operations in New York. Venue was established based on a subsidiary debtor, Dixie-Stores Inc., that was incorporated in New York. At a later hearing, the debtors stipulated that they had created Dixie Stores Inc. solely to establish venue. Return to article

¹² Motion of Buffalo Rock Co. at 7, 12, Winn-Dixie Stores (No. 407). Return to article

¹³ Tr. at 153-54. Return to article

¹⁴ Id. at 158, 159, 166. Return to article

¹⁵ Id. at 167-70. Return to article

¹⁶ Id. at 171. Return to article

¹⁷ Id. at 165-66. Return to article