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Second Thoughts on "Home Court Advantage" for Small-Dollar Preference Defendants

Web posted and Copyright © March 1, 2006, American Bankruptcy Institute.

Written by:
Byron C. Starcher
Nelson Mullins Riley & Scarborough, LLP; Atlanta

byron.starcher@nelsonmullins.com

he Bankruptcy Abuse Prevention and Creditor Protection Act (BAPCPA) amended 28 U.S.C. §1409, which relates to venue of certain bankruptcy proceedings. As amended, §1409(b) now states, in relevant part:

[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 $1,000 or a consumer debt of less than $15,000, or a debt (excluding a consumer debt) against a noninsider of less than $10,000, only in the district court for the district in which the defendant resides.

Does 28 U.S.C. §1409(b) Apply to Preference Actions?

Conventional wisdom seems to be that §1409 now requires preference actions of less than $10,000 to be brought in the defendant's home court. The weight of nonjudicial opinion seems to be that §1409(b) applied to preference actions even before BAPCPA.1 For example, the National Bankruptcy Review Commission Final Report recommended raising the floor in §1409(b) to $10,000 in nonconsumer cases to protect small trade creditors from abusive preference litigation tactics.2 Likewise, in 1999, the House of Representatives proposed an amendment to §1409(b) that would require a proceeding "to recover a money judgment of or property worth less than $1,000 or a consumer debt of less than $5,000, or a nonconsumer debt against a noninsider of less than $10,000" to be brought in the defendant's home court.3 The House Report accompanying the bill expressly stated that the change was to raise the floor on a "preferential transfer action" from $1,000 to $10,000.4 During hearings on the bill, Prof. Kenneth Klee acknowledged that the amendment would permit trustees to "commence a preference action to recover a nonconsumer debt of less than $10,000 only in the district in which the noninsider creditor resides."5 The National Association of Bankruptcy Trustees opposed the change because requiring a trustee to go to the defendant's home court to recover preferences of less than $10,000 would foreclose valuable recoveries in chapter 7 cases,6 and the Commercial Law League of America opposed on similar grounds.7

However, the argument that §1409(b) does not apply to preference actions is simple enough and is based on the statute's plain meaning. The U.S. Code in 28 U.S.C. §§1334(b) and 1409(a) recognizes three kinds of bankruptcy proceedings: proceedings arising under Title 11, proceedings arising in a case under Title 11 and proceedings related to a case under Title 11. By its very terms, §1409(b) applies only to "a proceeding arising in or related" to a case arising under Title 11 and does not apply to proceedings "arising under Title 11."

A proceeding arising under Title 11 is one "invok[ing] a cause of action, or substantive right, created by a specific section of the Bankruptcy Code." Continental Nat'l. Bank of Miami v. Sanchez (In re Toledo), 170 F.3d 1340, 1349 (11th Cir. 1999). Proceedings arising in a case under Title 11 are described as "administrative matters unique to the management of a bankruptcy estate," In re Toledo, 170 F.3d at 1349, or proceedings that, while not expressly provided for under Title 11, have no existence outside of bankruptcy. Maitland v. Mitchell (In re Harris Pine Mills), 44 F.3d 1431, 1435 (9th Cir. 1995). Accordingly, it should be well-settled that §547 preference avoidance actions are proceedings arising under Title 11. See, e.g., Wood v. Wood (In re Wood), 825 F.2d 90, 97 (5th Cir. 1987); Official Employment-Related Issues Comm. v. Arnold (In re Enron Corp.), 317 B.R. 701, 706 (Bankr. N.D. Tex. 2004). Recovery actions under §550 should similarly be proceedings arising under Title 11. Gandy v. Gandy (In re Gandy), 229 F.3d 489, 497 (5th Cir. 2002). Because preference actions are proceedings arising under Title 11, so the argument goes, they are not subject to §1409(b) under a plain-meaning analysis.

At least four courts have directly addressed the question of whether §1409(b) encompasses preference actions. Two held that §1409(b) does not apply to preference actions based on the foregoing argument. Ehrlich v. American Expr. Travel Related Servs. Co. Inc. (In re Guilmette), 202 B.R. 9, 12-13 (Bankr. N.D.N.Y 1996); Van Huffel Tube Corp. v. A&G Indus. (In re Van Huffel Tube Corp.), 71 B.R. 155, 156-57 (Bankr. N.D. Ohio 1987). The other two found that preference recoveries are governed by the venue provisions of §1409(b). Muskin Inc. v. Strippit Inc. (In re Little Lake Indus. Inc., et al.), 158 B.R. 478 (BAP 9th Cir. 1993); Armstrong v. Rainier Fin. Servs. Co. (In re Greiner), 45 B.R. 715, 716 (Bankr. D. N.D. 1985). Thus, courts have split on the issue.

Legislative History

If a statute is ambiguous, courts will turn to legislative history to try to determine the legislature's true intent. The genesis of 28 U.S.C. §1409 is found in the Bankruptcy Reform Act of 1978, which is formally the codification of H.R. 8200.8 H.R. 8200 proposed a new 28 U.S.C. §1473, which stated in part:

(a) Except as provided in subsections (b) and (d) of this section, a proceeding arising under or related to a case under Title 11 may be commenced in the bankruptcy court in which such case is pending.
(b) A trustee in a case under Title 11 may commence a proceeding arising under or related to such case to recover a money judgment of less than $1,000 or a consumer debt of less than $5,000 only in the bankruptcy court for the district in which a defendant resides.

The House Report accompanying H.R. 82009 explained that "[s]ubsection (b) permits venue of a proceeding commenced by a trustee to recover a money judgment of less than $1,000 or a consumer debt of less than $5,000 to be laid only in the district in which a defendant in the proceeding resides. This section prevents unfairness to distant debtors of the estate, when the cost of defending would be greater than the cost of paying the debt owed."10

This explanation wholly fails to resolve the issue. Several things should be noted about the language in H.R. 8200. First, §1473(b) refers to proceedings arising under a case under Title 11—not proceedings arising under Title 11. As will be discussed later, the term "proceeding arising under a case under Title 11" in the jurisdiction and venue sections of the bill would be replaced en masse by "proceeding arising in a case under Title 11" in a late amendment prior to passage. Second, both proposed §1473(d) and proposed 28 U.S.C. §1471, the latter dealing with jurisdiction of the bankruptcy courts, did refer to proceedings "arising under Title 11" as well as proceedings "arising under or related to cases under Title 11." Thus, both §1471 and §1473 acknowledged the existence of proceedings arising under Title 11 as being separate and distinct from proceedings arising under a case under Title 11 and proceedings related to a case under Title 11.11 Third, subsection (a), which addressed general or default venue for proceedings, did not include proceedings arising under Title 11, which raises the question of where default venue for proceedings arising under Title 11 was supposed to lie.

However, the House Report stated that "[a]ny action by the trustee under an avoiding power would be a proceeding arising under Title 11, because the trustee would be claiming based on a right given by one of the sections in subchapter III of chapter 5 of Title 11."12 It further stated that, "with two exceptions, enumerated in subsections (b) and (d) [of §1473], the court in which the bankruptcy case is pending is always a proper venue for proceedings arising under Title 11 or arising under or related to a case under Title 11."13 Congress arguably understood that preference actions were proceedings arising under Title 11 and intended the venue to be in the bankruptcy court in which the bankruptcy case is pending.

The Senate proposed a competing bill to H.R. 8200: S. 2266.14 It proposed a new 28 U.S.C. §1409(b) that was identical to the House's proposed §1473(b), except that venue was to be "in the judicial district in which a defendant resides."15 As with §1473(b) in H.R. 8200, the Senate's proposed §1409(b) addressed only venue of proceedings "arising under or related to cases under Title 11" and failed to include proceedings "arising under Title 11." While it added an example of the subsection's application to a consumer debt case, the Senate Report accompanying S. 2266 provides no additional guidance on the question of whether subsection (b) was intended to apply to preference litigation.16

The differences between H. 8200 and S. 2266 were resolved by the managers of the two bills in September 1978 without a formal conference.17 The compromise reached was presented to the House on Sept. 28 as a House amendment to the Senate amendment in the nature of a substitute.18 The venue section still proposed a new 28 U.S.C. §1473(b), but the concept of a "proceeding arising under a case under Title 11" was replaced with "proceeding arising in a case under Title 11."19 This same change was made throughout H.R. 8200's venue and jurisdiction provisions. Thus, as amended and passed in the Bankruptcy Reform Act of 1978, §1473(b) stated:

Except as provided in subsection (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 $1,000 or a consumer debt of less than $5,000 only in the bankruptcy court for the district in which a defendant resides.

Unfortunately, because the amendments were made in informal conference, no record appears to exist that explains the substitution of proceedings "arising in a case under Title 11" for "arising under a case under Title 11." Neither bill manager explained the changes, both reporting only that "[v]enue provisions pertaining to the new bankruptcy court have been described adequately in the House Report accompanying H.R. 8200."20 Apparently, the substitution was merely a change in terminology having no real affect. Regardless, proceedings "arising under Title 11" remained absent.

Due to the Supreme Court's Marathon decision,21 Congress substantially revamped Title 28 in the Bankruptcy Amendments and Federal Judgeship Act of 1984.22 The bankruptcy proceeding venue provisions were relocated from 28 U.S.C. §1473 to 28 U.S.C. §1409, and substantial changes made. Proceedings arising under Title 11 were added to subsections (a) and (e). The addition in subsection (a) fixed the problem of missing default venue for proceedings arising under Title 11, and all three types of proceedings could now be brought in the district court in which the main case is pending. The only changes to subsection (b) corrected jurisdictional issues identified in Marathon so that, despite being added in other subsections, proceedings arising under Title 11 remained conspicuously absent from subsection (b). No single report appears to explain the 1984 Act because it consisted of a Senate amendment in the form of a substitute to H.R. 5174, and the amendment itself was a compromise blend of provisions from at least three different bills or amendments.23 However, the legislative material surrounding the 1984 Act indicates Congress did not intend to change the substantive effect of the venue provisions in 1978 Act.24

Section 1409 was amended again by BAPCPA in 2005. While subsection (b)'s floor amounts have changed, as discussed in greater detail in the next section, it still lacks any reference to proceedings arising under Title 11. The section of the House Report accompanying S.256 (enacted as BAPCPA) provides no explanation as to why proceedings arising under Title 11 are not included or whether subsection (b) is intended to include preferences.25

Congress has had three opportunities to include proceedings arising under Title 11 in §1409(b) (and its predecessor, §1473(b)), but has failed to do so. Given the other changes made to the venue provisions over the years, a court today may be hard-pressed to find that Congress has not intentionally excluded proceedings arising under Title 11, including preferences, from the operation of subsection (b).

If 28 U.S.C. §1409(b) Applies to Preference Actions, What Floor Applies?

If 28 U.S.C. §1409(b) applies to preferences, what is the floor below which a trustee must sue in the defendant's home court? Subsection (b), as amended by BAPCPA, now applies to proceedings "arising in or related to such case to recover a money judgment of or property worth less than $1,000 or a consumer debt of less than $15,000, or a debt (excluding a consumer debt) against a noninsider of less than $10,000."

Leaving aside consumer and insider debts, which floor applies to preferences: $1,000 or $10,000? One answer could be that if §1409(b) applied to preferences before BAPCPA, a preference action must seek to recover either property or a money judgment, because these were the recoveries available pre-BAPCPA. Since the floor for each of these recoveries remains at $1,000 after BAPCPA, a party can argue that the $1,000 floor still applies to preferences, and the $10,000 floor applies to something else.

Analyzing whether a preference action seeks to recover property, a money judgment or a debt provides no better answers. If the trustee seeks to recover tangible property (as opposed to the value of such property) under 11 U.S.C. §550(a), the trustee is, presumably, recovering property as defined in §1409(b), which is subject to a $1,000 floor. Furthermore, through operation of 11 U.S.C. §§541(a)(4) and 551, avoided transfers are property of the estate, and a recovery action is arguably seeking to recover this property.

And how does a court determine whether a preference recovery involves recovery of a debt rather than recovery of a money judgment, or vice versa? The House Report accompanying S.256 (enacted as BAPCPA) provides no guidance as it merely parrots the language of §1409(b) as amended.26 Recovering a debt might conceivably encompass more remedies than recovering a money judgment (i.e., recovering a money judgment is a subset of the remedies available to recover a debt). Thus, equitable actions and actions to recover property might be actions to recover a debt and not to recover a money judgment. Of course, many of these actions seek to recover property, which conflicts with the $1,000 property-recovery floor provision in §1409(b). Recovering on a money judgment might also suggest a liquidated claim (which should apply to preferences), while recovering a debt might suggest an unliquidated claim. Regardless, the terms recovering a money judgment and recovering a debt have been used interchangeably,27 and recovery of a preference could be either one.

The answer may be that preference recovery is both, in which case the $10,000 floor should apply. Applying the $1,000 floor and permitting the trustee to bring a $6,000 preference action in the trustee's home court directly contradicts the requirement, with respect to recovery of a debt, that the action be brought in the defendant's home court. However, nothing in subsection (b) requires a proceeding to recover a money judgment for $1,000 or more to be brought in the trustee's home court, so applying a $10,000 floor complies with all of the language in subsection (b).

If 28 U.S.C. §1409(b) Applies to Preference Actions, Does It Even Matter?

So far, this article has addressed the extent to which §1409(b) applies to preference actions in general. The distinction between avoiding preferences under §547(b) and recovering avoided preferences under §550(a) has been conveniently ignored. Practitioners typically combine the two actions in one complaint. However, §550(a) clearly contemplates a two-step approach of avoidance and, separately, recovery.

While a court can plausibly apply §1409(b) to recovery actions, because subsection (b) refers to recovery of property, money judgments and debts, a court cannot plausibly extend §1409(b) to avoidance actions under §547(b). As a result, a trustee should be able to bring an avoidance action in the bankruptcy court in which the main case is pending without regard to the §1409(b) dollar floors. Once the trustee has avoided the transfers in her own court, she can recover a money judgment in the defendant's home court (pursuant to §1409(b)) on summary judgment or possibly even judgment on the pleadings. The hard part for the trustee, in a litigation sense, is winning the avoidance action, which she can still do in her own home court. To have any hope of averting an eventual money judgment, a preference defendant must still litigate the avoidance action in the trustee's court. In the vast majority of cases, the trustee need not even worry about venue of the subsequent recovery action because the parties will settle the avoidance action on terms requiring payment by the defendant. Thus, to the extent §1409 was intended to apply to preference recoveries, its protections are easily circumvented by the trustee's ability to bifurcate proceedings.

In conclusion, whether §1409(b) applies to preferences (or avoidance actions in general) is highly questionable. Even if courts determine that §1409(b) applies to preference recoveries, a trustee can avoid its effect by bifurcating proceedings and limiting the relief requested in a preference complaint to §547 avoidance.


Footnotes

1 See, also, Tabb, Prof. Charles J., "The Brave New World of Bankruptcy Defenses," 13 ABILaw Review 2, Winter 2005 at 425.

2 Nat'l. Bankr. Rev. Comm'n., Bankruptcy: The Next Twenty Years 799-800 (1997).

3 Bankruptcy Reform Act of 1999, H.R. 833, 106th Cong. §212 (1999).

4 H.R. Rep. No. 106-123, at 139-40 (1999).

5 Bankruptcy Reform Act of 1999 (Part II): "Hearing on H.R. 833 Before the Subcomm. on Commercial and Admin. Law of the House Comm. on the Judiciary," 106th Cong. 91 (Ex. F. of prepared statement of Kenneth Klee, National Bankruptcy Conference).

6 Id. at 198 (Prepared Statement of Robert Waldschmidt, National Association of Bankruptcy Trustees).

7 Bankruptcy Reform Act of 1999 (Part III): "Hearing on H.R. 833 Before the Subcomm. on Commercial and Admin. Law of the House Comm. on the Judiciary," 106th Cong. 92 (Prepared Statement of Judith Greenstone Miller, Commercial Law League of America).

8 H.R. 8200, 95th Cong. (1977). I state that the Bankruptcy Reform Act of 1978 is "formally" a codification of H.R. 8200 because, in reality, the Act was compromise between H.R. 8200 and competing Senate bill S. 2266.

9 H.R. Rep. No. 95-595 (1977) (hereinafter, House Report).

10 House Report at 446.

11 Proposed 28 U.S.C. §1473(d) also referenced proceedings arising under Title 11.

12 House Report at 445.

13 Id. at 446.

14 S. 2266, 95th Cong. (1978).

15 Id. §218(a).

16 S. Rep. No. 95-989, at 155 (1978).

17 124 Cong. Rec. 32,392 (1978) (Statement of Rep. Edwards).

18 Id.

19 Id. at 32,385.

20 Id. at 32, 411 (Rep. Edwards); Id. at 34,010 (Sen. DeConcini).

21 Northern Pipeline Constr. Co. v. Marathon Pipe Line Co., 458 U.S. 50, 102 S.Ct. 2858 (1982).

22 Pub. L. No. 98-353, 98 Stat. 333 (1984).

23 130 Cong. Rec. 13,060 - 13,062 (1984) (Statement of Sen. Thurmond) (referring to compromise between H.R. 5174, 98th Cong. (1984); S. 1013, 98th Cong. (1983); and Kastemeier-Kindness amendment, which either was or was based in part on their H.R. 3257, 98th Cong. (1983)).

24 See, e.g., 130 Cong. Rec. 13,062 (1984) (Statement of Sen. Thurmond) (venue "provisions are essentially the same as those in the Bankruptcy Reform Act of 1978, with necessary modifications to accommodate the continued jurisdiction of the district court over such matters"); S. Rep. No. 98-55, at 19 (1983) (accompanying S. 1013) (venue provisions "virtually identical to corresponding sections of the 1978 Act, with the exception of providing for venue in the district courts rather than in the bankruptcy courts"); H. Rep. No. 98-9, at 27 (1984) (accompanying H.R. 3, 98th Cong. (1984), which proposed adding proceedings arising under Title 11 to §1473(a): venue provisions are "same as present law").

25 H.R. Rep. No. 109-31, at 88 (2005).

26 Id.

27 See, e.g., The Mann-Paller Foundation Inc. v. Econometric Research Inc., 644 F. Supp. 92, 94, 95 (D. D.C. 1986).



 

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