Rule 1014(b) A Voluntary Bankruptcy to Get Out of an Involuntary Bankruptcy

Rule 1014(b) A Voluntary Bankruptcy to Get Out of an Involuntary Bankruptcy

Journal Issue: 
Column Name: 
Journal Article: 

Though not necessarily common, it also is not rare for an entity to have two bankruptcy proceedings pending simultaneously. Such simultaneous bankruptcy proceedings can happen as the result of an involuntary petition and a voluntary petition being filed in two different districts at or about the same time—the involuntary petitioner(s) filing in their preferred forum, with the debtor filing a voluntary petition in its preferred forum.

In fact, when an alleged debtor is faced with litigating an involuntary bankruptcy petition in a less-than-preferable forum, it may make sense to accept the inevitable and submit to a bankruptcy proceeding. However, merely because the odds are against an alleged debtor does not mean that a debtor must succumb to an involuntary forum. Instead, the filing of a voluntary petition in a preferred forum provides a legitimate alternative. In re Caperoads Plaza Ltd. P'shp, 154 B.R. 614, 615 (Bankr. D. Mass. 1993) (holding that nothing in the Bankruptcy Code expressly prohibits a debtor from having two cases pending at the same time—though it has generall been held that simultaneous cases are prohibited).

However, the mere filing of a voluntary petition does not result in the automatic dismissal of an involuntary petition, nor an automatic transfer of venue. Instead, the drafters of the Federal Rules of Bankruptcy Procedure foresaw such a predicament and promulgated a rule addressing just such a scenario.

Rule 1014(b) and the Voluntary/Involuntary Standoff

Fed. R. Bankr. P. 1014(b) states that if petitions commencing cases under the Code are filed in different districts by or against (1) the same debtor, (2) a partnership and one or more of its general partners, (3) two or more general partners, or (4) a debtor and an affiliate, on motion filed in the district in which the petition filed first is pending and after hearing on notice to the petitioners, the U.S. Trustee and other entities as directed by the court, the court may determine in the interest of justice, or for the convenience of the parties, the district or districts in which the case or cases should proceed.

The express language of 1014(b) states that the district in which the first case is filed retains jurisdiction over a motion to transfer venue. Thus, if a corporation files for bankruptcy in Texas after an involuntary petition is filed against it in California, a motion to transfer venue is properly filed in the California case and heard by the California court. Fed. R. Bankr. P. 1014(b); see, also, Near v. Great American First Savings Bank FSB (In re Reddington Investments Ltd. P'shp-VIII), 90 B.R. 429, 431 (9th Cir. B.A.P. 1988). Rule 1014(b) does not, however, address venue of an adversary proceeding. Instead, Federal Rule of Bankruptcy Procedure 7012 governs the transfer of venue of an adversary proceeding.

The party seeking a transfer of venue, typically the party filing the second bankruptcy case, has the burden to prove, by a preponderance of the evidence, that transferring venue is in the interest of justice or for the convenience of the parties. Commonwealth of Puerto Rico v. Commonwealth Oil Refining Co. (In re Commonwealth Oil Refining Co. Inc.), 596 F.2d 1239, 1241 (5th Cir. 1979) cert. denied, 444 U.S. 1045 (1980); In re Island Club Marina Ltd., 26 B.R. 505, 507 (Bankr. N.D. Ill. 1983); In re Greenridge Apartments, 13 B.R. 510, 513 (Bankr. D. Hawaii 1981). Though this determination is in the discretion of the court where the first case filed, the court should wield such power with caution. First Nat'l Bank in Sioux City v. Dahlquist (In re Dahlquist), 34 B.R. 476, 485 (Bankr. D. S.D. 1983).

In addition, prior to wielding such power, the court must set the matter for hearing upon notice to those entities that the court directs, not just the competing petitioners. Fed. R. Bankr. P. 1014(b). The competing petitioners, therefore, are not the only parties whose convenience is in issue. See In re Trico Steel Co., LLC, 261 B.R. 915, 917 (Bankr. N.D. Ohio 2001). The convenience of the parties' counsel is given no weight in determining whether to transfer venue. Id. (citing Burstein v. Applied Extrusion Techs. Inc., 829 F. Supp. 106, 112 (D. Del. 1992)). Theoretically, however, the length and depth of counsel's involvement could affect the "interest of justice" test.

The "interest of justice" test is meant to be a flexible standard that considers whether transfer would promote or prohibit timeliness, fairness, efficient administration of bankruptcy estate and judicial economy. See In re Raytech Corp., 222 B.R. 19, 25 (Bankr. D. Conn. 1998). Thus, a debtor's counsel's inability to continue as lead counsel, due to local rules or travel expense and whose absence would effect the efficient administration of the bankruptcy estate, could effect the interest of justice. While the authors know of no case supporting such theory, it is food for thought.

1014(b)'s Automatic(?) Stay

In contemplation of the administrative inefficiency caused by two simultaneously pending bankruptcy cases, Rule 1014(b) provides for a stay of proceedings in a subsequently filed bankruptcy case(s), except as otherwise ordered by the first court, pending the outcome of a motion to transfer venue. Though Rule 1014(b)'s use of "shall" indicates an automatic stay, interpretations differ as to whether the mere existence of two cases results in a stay of proceedings or whether it is the filing of a motion to transfer/determine venue that creates a stay of proceedings. See, e.g., In re Bagel Bros. Bakery & Deli Inc., 220 B.R. 1, 3-4 (Bankr. W.D.N.Y. 1998); contra In re United Press Int'l. Inc., 134 B.R. 507, 510 (Bankr. S.D.N.Y. 1991); In re Shapiro, 128 B.R. 328, 332 (Bankr. E.D.N.Y. 1991).

In Bagel Bros., for example, the court held that a stay only goes into effect to the extent ordered by the court where the first case filed, and that the stay is not mandatory. Id. The mandatory nature of Rule 1014(b)'s stay appears to be in its express language, and Bagel Bros.' ruling appears directly contradictory. Nonetheless, Bagel Bros. demonstrates the differences in opinion that courts have on the procedure.

What does not differ is the application of Rule 1014(b)'s stay to simultaneously pending bankruptcies involving the same debtor, much as it applies to those involving two affiliates. The application of Rule 1014(b)'s stay seems only logical where the two simultaneously pending bankruptcies are for the same debtor. But its application to simultaneously pending bankruptcies of mere affiliates is not as logical. Indeed, two cases involving related, but separate and severable, debtors does not present the same potential for inconsistent rulings that two cases involving the same debtor presents. Nonetheless, Rule 1014(b) does not distinguish between such circumstances.

The use of the same procedures, despite the potential for differing factual scenarios, underscores the need for applying the substantive venue analysis on a case-by-case basis to ensure that rulings are based on the interest of justice and/or the convenience of the parties. Thus, the factors for determining venue are the real issue for litigation.

Factors for Determining Venue

As a procedural rule, Rule 1014(b) does not address the factors for consideration in determining whether to grant a motion to transfer venue. Fortunately, two bases for transferring venue articulated in Rule 1014(b), interest of justice and convenience of parties, are the same bases for transferring venue set forth in 28 U.S.C. §1412 of the Federal Civil Judicial Procedure and Rules. As such, substantive factors for consideration in Rule 1014(b) are well established by bankruptcy and nonbankruptcy cases alike—the difference being, of course, that bankruptcy cases tend to involve significantly more parties, whose convenience must also be taken into consideration.

The following factors taken from both bankruptcy and nonbankruptcy precedence are typically analyzed in determining whether to grant a motion to transfer venue for the convenience of the parties: "(1) the proximity of creditors of every kind to the court, (2) the proximity of the bankruptcy (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 jurisdiction if bankruptcy should result." In re Kona Joint Venture I Ltd., 62 B.R. 169, 172 (D. Hawaii 1986); Landmark Capital Co. v. North Central Dev. Co. (In re Landmark Capital Co.), 20 B.R. 220, 223-24 (S.D.N.Y. 1982); In re Commonwealth Oil Refining Co., 596 at 1247 F.2d, accord In re Enron Corp., 274 B.R. 327 (Bankr. S.D.N.Y. 2002); In re MacDonald, 73 B.R. 254, 258 (Bankr. N.D. Ohio 1987); In re Baltimore Food Sys. Inc., 71 B.R. 795, 802 (Bankr. D. S.C. 1986); In re Walter, 47 B.R. 240, 241 (Bankr. N.D. Fla. 1985); In re Almeida, 37 B.R. 186, 188 (Bankr. E.D. Pa. 1984).

Similarly, when determining whether to grant a motion to transfer venue in the interest of justice, courts generally consider whether transferring venue would promote timeliness, fairness, efficient administration of bankruptcy estate and judicial economy. See In re Raytech Corp., 222 B.R. 19, 25 (Bankr. D. Conn. 1998). However, these are not the only factors for consideration, as each case must be analyzed on its own facts, equities and merits. Id. at 25-6; see, also, In re Toxic Control Technologies Inc., 84 B.R. 140, 143-44 (Bankr. N.D. Ind. 1988).

Because the definition of "promoting the economic and efficient administration of the estate" differs in each case, the determination often depends on the advocacy of counsel, necessitating the need for good oral advocacy and, sometimes, creativity.


The filing of an involuntary bankruptcy petition does not mean that the alleged debtor must succumb to the jurisdiction of the involuntary forum. While the involuntary forum will decide venue, a procedure exists to transfer venue to a district where a second bankruptcy case is pending.

The determination of whether to transfer venue to such alternate forum is the same standard as that used to transfer venue in the more ordinary sense. Transferring a venue, regardless of the procedural rule relied upon, has been and remains a fact-intensive query. As a fact-intensive query, practitioners must remain vigilant of the necessary evidentiary requirements to insure success in changing an otherwise involuntary forum.

Editor's Note: For a recent case involving these issues, see EZ Pay Services Inc., a Nevada Corporation dba EZ Pay Dental; EZ Pay Medical and EZ Pay Health Care, No. 06-50567 (Bankr. D. Nev.), and EZ Pay Services Inc., a.k.a. EZ Pay Health Care, a.k.a. EZ Pay Dental, a.k.a. EZ Pay Medical Care, No. 3:06-bk-02474-GLP (Bankr. M.D. Fla.).

Journal Date: 
Wednesday, November 1, 2006