In a recent decision by the Bankruptcy Court for the Southern District of Texas, In re Scotia Development, LLC,1 Judge Richard S. Schmidt denied the motions of several creditors and the State of California seeking transfer of venue from the Southern District of Texas to the Northern District of California, finding that venue was proper in Texas and that California would not be a more convenient forum for the financial restructuring of the debtors.
On January 19, 2007, Scotia Development, LLC (“Scotia Development”) filed a Chapter 11 petition in the Bankruptcy Court for the Southern District of Texas. Promptly thereafter, a number of its affiliates, including the Pacific Lumber Company (“Palco”) and Scotia Pacific Company LLC (“Scopac”) (collectively with Scotia Development, the “Debtors”), filed Chapter 11 petitions in the same court. All the Debtors are subsidiaries of Maxxam, Inc. (“Maxxam”) a non-debtor Delaware corporation based in Houston, Texas. The Debtors comprise the forest products group of Maxxam and own over 200,000 acres of land in Northern California, from which they harvest trees and produce lumber. Scotia Development was formed in June 2006 as a Maxxam subsidiary and opened a small office in Corpus Christi, Texas, to investigate the real estate market in south Texas. On January 18, 2007 (the day before its bankruptcy filing), Scotia Development became a subsidiary of Palco. As a subsidiary, Scotia Development was required to guarantee approximately $125 million of Palco’s secured obligations.
In February 2007, the State of California, the Official Creditors Committee (the “Committee”), the US Trustee, Humboldt County, and the City of Del Rio (collectively, the “Movants”) sought a change of venue, arguing that substantially all of the Debtors’ operations were in Northern California.2
Venue Is Proper in Texas
The Movants argued that venue was improper as to Scotia Development because, among other things, Scotia Development had been created to manufacture venue. The Movants cited the oral opinion of Judge Robert D. Drain in Winn-Dixie,3 where the Bankruptcy Court for the Southern District of New York found that venue was manufactured because the debtors had created a new entity the day before the bankruptcy and transferred the case. The court looked to the plain meaning of the venue statute, which states that venue is proper in a district in which a debtor has its domicile, residence, principal place of business, or principal assets.4 The court held that venue was proper because Scotia Development had its principal place of business and its principal assets in the Southern District of Texas. The court rejected arguments that Scotia Development’s creation 233 days before the filing made venue improper. Judge Schmidt noted that even the Winn-Dixie court found that manufactured venue was “proper” and that the court used its discretion to transfer the case “in the interest of justice.”5
After finding venue was proper for Scotia Development, Judge Schmidt also found that venue was proper for the other Debtors under the “Affiliate Rule.” The Affiliate Rule states that venue is proper in a district “in which there is a pending case under title 11 concerning [a] person’s affiliate....”6 Moreover, the Court noted that “Palco and Scopac have significant ties to the Southern District of Texas such that [the] Court could find it is their principal place of business.”7 The court held that, while Scotia Development may have become a subsidiary of Palco on the eve of bankruptcy, based on the Bankruptcy Code’s definition of affiliate,8 it had been an affiliate since its inception.
After rejecting all the Movants’ arguments, the court noted, “Venue selection is an appropriate decision made by a debtor with the assistance of counsel.”9 The court stressed that, where Congress created a proper venue, it is not improper to file in such venue. “In fact it may well be a duty to do so....”10 The court stated that, in asserting that venue was improper, the Movants had “disregarded the law and the facts, such that this Court has seriously considered but now declines to impose Rule 11 sanctions.”11 Therefore, the court found that venue for all of the Debtors was proper in the Southern District of Texas.
The Case Should Not Be Transferred in the Interests of Justice or for the Convenience of the Parties Having established that venue was proper in Texas, the court then addressed “the more pertinent question before it—whether venue should nevertheless be transferred.”12 Properly filed cases may be transferred (1) in the interest of justice or (2) for the convenience of the parties.13 Placing significant weight on the debtor’s choice of forum, the court stated that a debtor’s choice “would be respected unless...clearly outweighed by other considerations.”14 The court looked to Commonwealth Oil Co.15 and In re Enron16 and applied nine criteria for determining whether to transfer a case:
(1) the proximity of creditors of every kind 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 assets; (5) the economic administration of the estate; (6) the necessity for ancillary administration should liquidation result; (7) the choice of the debtor; (8) the choice of the creditors; (9) forum shopping.17 In applying such criteria, the court attempted to predict the issues that would arise in the case. The court found that the Debtors’ cases required financial restructuring and that there would not be a restructuring of the Debtors’ operations. Because the important issues in the case were financial, the court looked to where those financial decisions would be made.The court first looked to the creditor groups.
For Scopac, its major secured creditors, its timber note holders (the “Noteholders”), were predominantly located in New York. Additionally, the indenture trustee for the Noteholders was located in Texas, and the members of the ad hoc committee of Noteholders (who took no position on the motion until one day before the hearing)18 were located in New York, Texas and California. The court held that California would be no more convenient for these parties than Texas.
With respect to Palco and its non-Scopac subsidiaries, their largest secured creditors were a hedge fund headquartered in New York and a bank located in Chicago. Neither party supported a move to California.19 Most of Palco’s unsecured creditors were located in Northern California, however, its largest unsecured claimholder was its pension plan, which was administered in Texas. While the courthouse in the Northern District of California would certainly be closer to most of these creditors than the courthouse in Texas, the court looked further into the realities of the situations for the unsecured trade creditors. Most of these trade creditors were located in or around Humboldt County, California. The drive to the courthouse in Oakland is approximately five hours each way. The court stated that if these creditors desired to participate in the hearings, they would be unlikely to attend in person, regardless of whether the case was in Texas or California, and would be likely to appear telephonically in either court.20 While the Committee supported a transfer of venue, at the time of the hearing, the Committee was made up four creditors, two of which were actively suing the Debtors. The court analyzed the individual members of the Committee and found that their inconvenience could be minimized by implementation of the proper procedures.21 Overall, the California venue would be no more convenient for most of the creditor groups than Texas.
Finally, the court looked at the Debtors. The court noted that certain of the Debtors’ officers were located in the Southern District of Texas, and that Scopac’s Board of Managers and the Palco Board regularly met in the Maxxam offices in Houston. This was important because the Board members “are the persons that will make the important management decisions regarding the financial restructuring of the Debtors in these bankruptcy cases and the Southern District of Texas is much more convenient for their participation than the Northern District of California.”22 Additionally, the court noted the “significant amount of general administrative service and support [the Debtors receive] from Maxxam and certain other non-debtor affiliates, all of which are headquartered in the Southern District of Texas.”23 Therefore, Texas would be a more convenient forum for the Debtors to orchestrate their financial restructuring.
In re Scotia Development LLC demonstrates, among other things, two key points. First, if venue is proper within the letter of the statute, movants seeking a change of venue should focus on a transfer based on convenience of the parties or the interest of justice, instead of attacking the propriety of venue. Second, in the case of a financial restructuring, the court may look to where the financial decisions are made, instead of the location of the debtors’ operations, as the most appropriate venue.