In re Patriot Coal Corporation, et al., 492 B.R. 718 (2012)

CASE SNAPSHOT

A case that has made the news over the past several months is the decision from the United States Bankruptcy Court for the Southern District of New York regarding venue selection in the Patriot Coal Corporation chapter 11 case. The statute controlling venue selection of a bankruptcy case is 28 U.S.C. § 1408. It permits a debtor to file a bankruptcy case in either (i) the district where its principal assets are located; (ii) the district where its corporate headquarters are located; (iii) the district where it is incorporated, or (iv) any district where an affiliate, partner or general partner has a pending bankruptcy case. It has become commonplace for many of the larger chapter 11 corporate debtors to file in either the Southern District of New York or Delaware. Many corporations have the option to file a bankruptcy case in one of these two locations because they are the jurisdictions where many corporate entities are incorporated for reasons unrelated to bankruptcy. These jurisdictions are also widely regarded as "debtor friendly" forums and are experienced in handling large chapter 11 cases. Consequently, many corporate debtors that meet the criteria of 28 U.S.C. § 1408, usually with the blessing of their lenders or largest creditors, have selected one of these locations to file their chapter 11 cases. Over the years, the venue statute has been the subject of some criticism by persons who, for a variety of reasons, would prefer to see corporate bankruptcies filed in jurisdictions where the principal place of the debtor’s business or a substantial amount of its assets are located rather than where it is incorporated.

FACTUAL BACKGROUND

Patriot Coal Corporation and its 98 subsidiaries or affiliates filed their bankruptcy cases in the Southern District of New York July 9, 2012. Patriot Coal and its affiliates are companies that mine and prepare metallurgical coal and thermal coal. The debtors’ assets include coal reserves, surface property and other real estate interests located in a variety of states, including West Virginia, Kentucky, Illinois, Indiana, Missouri, Ohio and Pennsylvania. None of these assets or any of Patriot’s operations is located in New York. Most of Patriot’s workforce are subject to collective bargaining agreements and are located in West Virginia or Kentucky, as are the companies’ operations. The main headquarters are located in St. Louis, Missouri.

Up until five weeks prior to the petition date, none of Patriot’s subsidiaries or affiliates had any relationship to New York. However, several weeks before the petition date, two subsidiaries were formed – PCX Enterprises, Inc. and Patriot Beaver Dam Holdings, LLC (the "New Entities") – neither of which had any employees or substantial operations. Both entities were incorporated in New York and the largest asset held by either was a checking account in the name of PCX holding approximately $100,000. Based upon the state of incorporation of the New Entities, Patriot Coal and its subsidiaries and affiliates filed their chapter 11 cases in New York, and the cases were assigned to Judge Shelley C. Chapman of the United States Bankruptcy Court for the Southern District of New York.

The venue of the bankruptcy cases was challenged very soon after the petition date. The statute controlling the transfer of venue in a bankruptcy case, 28 U.S.C. § 1412, provides that venue may be transferred (i) in the interest of justice, or (ii) for the convenience of the parties. Motions seeking to change venue were filed by the United Mine Workers of America, certain insurance companies as sureties of the debtors, certain utility providers and the West Virginia Attorney General. These motions were based upon both the convenience of the parties and the interest of justice, and requested that the cases be sent to the bankruptcy court in West Virginia. The United States Trustee also requested that venue be changed, arguing that the debtors’ actions in forming new subsidiaries for no legitimate business purpose other than venue selection violated the interest of justice standard and was an abuse of the venue statute. The United States Trustee’s motion, however, did not propose to transfer the cases to any specific venue.

There were numerous arguments opposing a venue change – first and foremost by the debtors, but also the Creditors Committee, the two secured lender groups (which included the DIP lenders), and large numbers of unsecured creditors holding substantial claims in the cases. These parties argued that the debtors’ actions in forming the New Entities for the purpose of being able to file the cases in New York was not forbidden by applicable law, and that New York was a convenient forum for the vast majority of the debtors’ creditors, representing a substantial amount of the claims in the case as well as for the debtors’ professionals, virtually all of whom were resident in New York City.

COURT ANALYSIS

In a thoughtful and well-reasoned opinion, Judge Chapman ultimately decided to transfer venue, but not to a location suggested by the unions or many of the other moving parties. The judge agreed with the United States Trustee that justice would be served by moving the cases, and decided to transfer the cases to the Eastern District of Missouri, a location where the debtors’ headquarters, executive offices and management team were located.

The facts of this case were largely determinative of the outcome. The judge noted that there is little guidance in the scant cases dealing with the venue issue, although she did rely in part on Judge Drain’s decision in the Winn-Dixie case, which she found had facts most similar to the ones at issue in this case. The formation of the New Entities a short period prior to the bankruptcy filing and for the sole purpose of complying with the venue statute – a fact admitted by the debtors – was a determinative factor in the court’s decision. Even though this strategy, while carefully orchestrated by the debtors, was found not to be in bad faith, the fact that it was done so close to the bankruptcy filing amounted to what the judge in the Winn-Dixie bankruptcy case found to be problematic: that it was formulating facts to fit the statute rather than applying the statute to fit the facts. This action, Judge Chapman held, was "an affront to the purpose of the bankruptcy venue statute and the integrity of the bankruptcy system." In relying upon Winn Dixie, Judge Chapman held that the manner in which the debtors chose to comply with the venue statute must be taken into account when performing an analysis under the interest-of-justice test. To ignore the manner in which the debtors obtained venue in New York "would be to condone the Debtors’ strategy and elevate form over substance in a manner that courts have found impermissible; it would run afoul of any reasonable application of the intent of the venue statute." Interestingly, the judge did keep open the possibility of retaining venue in New York, even under a similar fact pattern, if so doing would promote fairness and would be in the best interests of the estates. The argument put forth by the debtors and others for retaining venue in New York was that most of the "key professionals" in the case were located in New York. This simply did not justify "condoning a ‘bootstrap’ venue selection" and thus was rejected by the court as a basis for allowing venue of the cases to remain in New York.

In a case that teaches us to "be careful what you wish for," Judge Chapman also rejected many of the movants’ requests to transfer venue to the bankruptcy court in West Virginia because in her view, "fairness and not geography…. has been and should continue to be the key factor in determining the appropriateness of venue," and section 1412 of chapter 28 of the United States Code requires the court to look at the interests and convenience of all parties, including, in this case, parties who supported the venue decision of the debtors. The court transferred the cases to the U.S. Bankruptcy Court for the Eastern District of Missouri, a district that met both the "convenience of the parties" and "interest of justice" tests contained in 28 U.S.C. § 1412.

PRACTICAL CONSIDERATIONS

While Section 1408 of the Bankruptcy Code allows a wide degree of latitude in venue selection, this case shows that there are limits. Section 1412 of the Bankruptcy Code permits venue to be transferred when the court evaluates two subjective factors - when transfer will serve the interests of justice, or when transfer will serve the convenience of the parties. It follows, therefore, that venue transfer requests will require fact-specific analysis. The Patriot Coal opinion provides insight into the type of analysis undertaken by the court, and demonstrates that efforts to create venue can run afoul of the "purpose of the bankruptcy venue statute and the integrity of the bankruptcy system."