Judge Kaplan in Trenton has issued a significant, but troubling opinion on bankruptcy venue in the Multi-Color Corporation’s Chapter 11 that effectively blesses a blatant forum-shopping method of opening a bank account in a judicial district days before filing in order to establish venue through the location of the debtor’s principal assets. If this sort of forum-shopping is permitted, is there anything that crosses the line?

Multi-Color Corporation is a Batavia, Ohio-based company, that is incorporated in Ohio. It claimed a New Jersey bankruptcy venue, however, based on the filing of its subsidiary MCC-Norwood. MCC-Norwood is itself an Ohio LLC. It was formed as an acquisition vehicle some years back, but has not been an operating entity; it has no employees or customers. It sprang to life, however, when Multi-Color wanted a New Jersey bankruptcy venue. 16 days pre-petition, MCC-Norwood opened a bank account in New Jersey, which Multi-Color Corporation funded with a wire transfer. MCC-Norwood claimed that this meant that its principal assets for the 180-day prepetition period were in New Jersey, so venue was proper based on the location of its principal assets. The US Trustee and an ad hoc group challenged venue. It’s hard to conceive of a case with much clearer venue abuse than Multi-Color. But Judge Kaplan reasoned his way to denying the venue transfer motions, which raises the question if these sort of shenanigans will fly, what won’t? Is there any scenario in which venue will be ever transferred out of one of the handful of judicial districts that “competes” for large case bankruptcy business? 

I strongly disagree with Judge Kaplan’s opinion, but it is among the most engaged venue decisions around. This is an opinion that will be key to future discussions of venue abuse. Judge Kaplan correctly recognized that 28 USC 1408 is textually ambiguous regarding the approach to determine venue based on principal assets. There are two potential interpretations: the “Time-Based Approach” and the “Asset-Based Approach”. The Time-Based Approach would look at what the debtor’s principal assets were for the entirety of the 180 days before bankruptcy (recognizing that they might change) and determine venue based on which district possessed the principal assets for the majority of those 180 days. In contrast, the Asset-Based Approach would look at the principal assets as of the petition date and then ask which district those petition-date assets were in for the majority of the 180 days (or fewer if there were no assets for part of the period). Under the Time-Based Approach, MCC-Norwood did not have appropriate venue in New Jersey, while under the Asset-Based Approach it would.

Given that there’s no textual reason to prefer one reading over another, Judge Kaplan preferred the Asset-Based Approach because he thought it produced the more sensible outcome based on a scenario in which the debtor has two assets for most of the 180 days pre-petition, but one is destroyed just before the bankruptcy (perhaps triggering the bankruptcy). In that scenario, he concludes, it makes no sense to have venue in the district where the destroyed asset was located, even if it was the principal asset for most of the 180 days pre-petition. In contrast, he believed that the Asset-Based Approach produced the more reasonable result.

I found this reasoning entirely unconvincing. The destroyed asset situation is just farfetched. Judge Kaplan was rightly trying to figure out which reading of an ambiguous statute produced the more workable result from a policy perspective. But it was strange then, that he didn’t consider the bigger picture of venue and the policy goals that a restrictive venue statute are meant to serve, one of which is to limit forum shopping because of all of the evils it produces. Indeed, it’s hard to read the opinion without getting the sense that Judge Kaplan doesn’t want to talk about the elephant in the room, namely the obvious venue abuse in the case. Instead, he wrote “The Court can conceive how some parties might develop creative workarounds to the protections built into the statute.” Ya think?

“Creative workarounds” are hardly a fantasy. MCC-Norwood itself is the apogee of venue abuse! MCC-Norwood spells out the game plan for everyone else: if you have an asset-less sub sitting around, just have it open a bank account in the preferred district and voila, there’s venue! The Asset-Based Approach is an absolute invitation to venue abuse. I’ve seen Judge Kaplan in action, and I don’t for a second take him as a naif, yet the opinion reads as if he has no actual awareness of the “creative workarounds” that are regularly deployed by firms to get into his own courtroom. 🙄

Even if you agree with Judge Kaplan’s interpretation of the venue statute, however, that doesn’t end the matter. Even if venue were technically proper in New Jersey, the case could still be transferred “in the interest of justice”. 28 USC 1412. That provision gave Judge Kaplan a second opportunity to address the obvious shenanigans going on in Multi-Color. But no. It wouldn’t be right to transfer the case, he concluded, because the “it would increase costs and delay the ongoing administration of these chapter 11 estates” because the court had already “entered a scheduling order, set confirmation timelines, supervised first-day relief, addressed several emergent motions and invested judicial resources. If the case were transferred, the proceedings would necessarily be delayed so that a transferee court could familiarize itself with the case. This delay would increase administrative costs and may disrupt certain restructuring milestones in the Restructuring Support Agreement and the DIP documents.”

Cry me a river. This is the gamble that the debtor counsel chose by concocting a New Jersey venue—it might have wasted some estate assets. Couldn’t those be taken out of the debtors’ attorneys’ fees? The debtor shouldn’t be saved from the consequences of its own abusive behavior by the fact that it hogtied itself with RSA milestones and a DIP agreement—a financial suicide pact that Judge Kaplan approved, which then tied his hands regarding the venue decision. How disruptive would a venue transfer really be? Peabody Coal survived its venue transfer. I’m inclined to be skeptical about the parade of horribles that debtors trot out every time they get pushback on their preferred transaction. I’m old enough to remember how in Purdue Pharma we were told for years that it would all fall apart if the Sackler’s low ball deal wasn’t accepted. And then, somehow, the Sacklers went from $4.3 billion to $6 billion to $7.5 billion when they encountered pushback.

More importantly, though, the “interest of justice” need not be case specific. Transferring a single case could help avoid many other instances of venue abuse. If debtors’ counsel learns that concocted venue won’t be honored, they’ll stop spending time on fabricating venue. Unfortunately, the litigation posture of bankruptcy means that courts rarely look at the bigger policy picture, but instead decide about the case in front of them. 

I’m glad that Judge Kaplan “shares the sentiment” that the debtor’s behavior does not “sit right,” but I have trouble with his explanation for why he cannot do anything about it: “this is the situation intentionally created by Congress when it elected to broadly draft—and decline to tailor—the venue statute. It is not this Court’s place to close loopholes in legislation.” This explanation is hard to accept. Judge Kaplan states this at the end of an opinion in which he has concluded that the statute is ambiguous and resolves the ambiguity based on his determination of which reading produces more sensible outcomes. Given the plausibility of an alternative reading, it’s not obvious that Congress got it wrong in the first place, but more importantly it’s a dodge from reality for any court to expect our necrotic Congress to fix anything with the bankruptcy system. Congress can’t even undertake the non-controversial step of raising the subchapter V limit. This one isn’t on Congress. It’s on the court. Let’s be clear: The easiest way to stop venue abuse is for courts to stop venue abuse.

I don’t want to get too down on Judge Kaplan’s decision, although I think it’s wrong. Forum shopping would continue to be rampant without the Multi-Color decision; the ability to bootstrap into the venue of an affiliate under the venue statute ensures that debtors can readily forum shop. All Multi-Color does is bless an alternative shopping method. Yet now we’ve got both Houston and Trenton saying that a hastily created bank account or PO box is sufficient for venue, so we’re going to keep seeing jurisdictional competition between Houston, Trenton, and, of course, there’s Delaware (although it doesn’t have to resort to blessing such tawdry maneuvers given the prevalence of Delaware incorporation). Meanwhile everyone’s going to just pretend that the “creative workarounds,” are just a hypothetical problem. They’re not. Forum shopping abuses are a cancer on the entire Chapter 11 system.

When a judge allows a blatant forum shop at the beginning of the case, it undermines parties’ confidence in the judge’s neutrality for everything else in the case. I’ve worked with or for many attorneys in forum-shopped cases who after seeing a court look the other way on abusive venue conclude everything in the case is a forgone conclusion in the bankruptcy and that the only chance is getting the case heard on appeal by an Article III judge who isn’t trying to attract cases. They’ll never say a word about this in court, lest they incur the wrath of the judge, but when they see the judge overlook forum shopping, they are convinced that they are not appearing before a neutral tribunal. I don’t know if judges understand this, but it is really a horrible feeling to be litigating a case when you don’t think you can get a fair shake. And that’s happening too often. When courts tolerate forum shopping abuses, they create the impression of bias, regardless of whether it actually exists. That’s terrible for the bankruptcy system. 

And let’s not pretend that venue abuse is victimless. It’s not. Venue abuse doesn’t just hurt the bankruptcy system abstractly. It concretely hurts torts victims and other creditors. When a party can choose its venue, it can choose its law, and it will use this ability to the detriment of any party that isn’t needed for its own going business plan. (The Multi-Color opinion never considered why an Ohio company would go to such lengths to get its case heard in Trenton, New Jersey, and I don’t know what drove the venue choice, but I doubt it was the Trenton nightlife, and that alone is reason enough to disfavor forum shopping.)

Consider, for example, how forum shopping interplays with things like the 3rd Circuit’s (terrible) decision in Whittaker, Clark & Daniels, in which it held that product line continuation-based successor liability claims are property of the estate. By making these claims property of the estate, the 3rd Circuit makes it possible for the estate to settle the claims, and we all know how this racket works: the “independent” director, who is handpicked for the assignment, “investigates” the claims and settles them for some lowball amount, with the court pressured to approve the settlement because it’s tied up with a milestone in the financial suicide pact (a/k/a DIP loan) that the court has previous approved. Having law like that makes the 3rd Circuit an attractive filing venue for some debtors with mass tort problems, just as the TWA decision makes it an attractive venue for asset washing through 363(f) sales. All of that is coming out of the hide of tort victims, who are generally positioned to be rolled in Chapter 11 because they’re never going to be part of the club doing the deal.

Multi-Color Corporation isn’t a mass tort case, but the law that gets made for forum-shopped pre-packs also applies to those mass tort cases, and we’ve seen problems with the interface of forum shopping with mass torts in too many cases already: Purdue Pharma, Boy Scouts, J&J/LTL, among others. We have an on-going public corruption scandal around the Houston bankruptcy court because of forum shopping. Forum shopping has a really corrosive effect on Chapter 11. I’ve been banging this kettle for a while (and others have for decades before me). I fear that bankruptcy courts just aren’t understanding the damage they are doing not only to their own credibility but also to the administration of justice by coddling forum shopping.