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Bruce Nathan, Esq.

rade creditors, facing an onslaught of preference actions, had hoped for a reprieve from small pref-

erence claims by invoking the increased venue limit on small dollar claims promulgated by the Bankruptcy Abuse and Consumer Protection Act of 2005 (BAPCPA). If the increased venue limit on small claims applies to preference claims, a trustee suing for recovery of a pref-erence of less than $10,950 in bankruptcy cases filed from April 1, 2007 through and including March 31, 2010, and less than $11,725 in bankruptcy cases filed on or after April 1, 2010, would have to commence suit in the jurisdiction where the creditor resides—its home court—which is not necessarily the court where the debtor’s bankruptcy case is pending. This change was supposed to deter trustees from pursuing small prefer-ence claims and pressuring creditors to fully pay such claims because the cost of defending them, including attorneys’ fees, typically exceeds the amount of the claim.

Well things don’t always work out as we expect. Because of a glitch in BAPCPA’s wording, the venue limit for small dollar claims might not be available to preference defendants after all. The United States Bankruptcy Court for the District of Kansas, in In re Sunbridge Cap-ital, Inc., and the United States Bankruptcy Court for the Middle District of Pennsylvania, in In re Excel Stor-age Products, L.P., recently ruled that the venue limita-tion for small dollar claims does not apply to preference claims. However, at around the same time, the United States Bankruptcy Court for the Middle District of Ten-

nessee, in In re Nukote International, Inc., reached the contrary holding that the venue limit for small dollar claims applies to small preference actions.

So how can one reconcile these conflicting court deci-sions over the applicability of the small claims venue limit to small preference actions? Let’s enter the murky world of statutory interpretation.

The Elements of a Preference ClaimAccording to Section 547(b) of the Bankruptcy Code, a trustee can recover a preference by proving that: (a) the debtor made a payment, or other transfer, to or for the creditor’s benefit; (b) the transfer was made on account of antecedent or existing indebtedness owed by the debtor to the creditor; (c) the debtor was insolvent when it made the transfer based on a balance sheet defi-nition of insolvency (liabilities exceeding assets), which is presumed during the 90-day preference period; (d) the debtor made the transfer within 90 days of its bank-ruptcy filing for transfers to non-insider creditors, and within one year of bankruptcy for transfers to the debt-

Because of a glitch in BAPCPA’s wording, the venue limit for small dollar claims might not be available to preference defendants after all.

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Is There a Small Preference Venue Limit? Yes and No!

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or’s insiders, such as the debtor’s officers, directors, control-ling shareholders and affiliated companies; and (e) the credi-tor received more than it would have recovered in a Chapter 7 liquidation of the debtor.

When a debtor or trustee satisfies all of these requirements, the burden shifts to the preference defendant to reduce or eliminate its preference exposure by satisfying one or more of the preference defenses contained in Section 547(c) of the Bankruptcy Code. These defenses, including the contempora-neous exchange (COD), new value and ordinary course of business defenses, are supposed to take into account creditor actions that replenish the debtor and its bankruptcy estate during the 90-day preference period, such as the creditor’s sale and delivery of goods or provision of services to the debtor in exchange for, or subsequent to, any alleged preference pay-ment, and all ordinary course payments made during the pref-erence period. These defenses are designed to encourage cred-itors to continue doing business with, and extending credit to, financially distressed customers.

The bankruptcy Code’s Venue ProvisionThe Bankruptcy Code’s venue provisions contained in 28 U.S.C. §1409 deal with proceedings “arising under the Bank-ruptcy Code” and “arising in or related to cases under the Bankruptcy Code.” Section 1409(a) states that the bankrupt-cy court where the debtor’s bankruptcy case is pending (the Debtor’s Home Court) is the proper venue for proceedings that: (a) “arise under the Bankruptcy Code”; (b) “arise in a case under the Bankruptcy Code”; and (c) “relate to a case under the Bankruptcy Code.” Section 1409(b) identifies pro-ceedings for the recovery of small dollar claims against a noninsider over which the non-debtor party’s home court, specifically the district court for the district in which the non-debtor party “resides” (which may not necessarily be the Debtor’s Home Court) is the proper venue. Proceedings sub-ject to Section 1409(b)’s limit for small dollar claims include those “arising in” or “related to” a pending bankruptcy case where the trustee is seeking recovery of a money judgment of, or property valued at, less than $10,950 in bankruptcy cases filed from April 1, 2007 through March 31, 2010 and less than $11,725 in bankruptcy cases filed on or after April 1, 2010.

The issue in the Sunbridge Capital, Excel Storage Products and Nukote International cases is whether Section 1409(b)’s venue limitation for small dollar claims applies to preference actions. The Sunbridge Capital and Excel Storage courts, on the one hand, and the Nukote International court, on the other hand, reached contrary holdings on this issue. These courts had to grapple over whether a small dollar preference action is a pro-ceeding that “arises in or relates to a case under the Bank-ruptcy Code” to which Section 1409(b) limits the venue of the lawsuit to the creditor’s jurisdiction, or whether a small dollar preference action is a proceeding that “arises under the Bank-ruptcy Code” to which Section 1409(a) grants venue in the Debtor’s Home Court.

The Sunbridge Capital CaseOn March 7, 2011, the Chapter 7 trustee of the Sunbridge Capital estate sought to recover a pre-petition wire transfer in the amount of $7,794.38 as a preference and fraudulent con-veyance from the defendant, Gulf City Body & Trailer Works, Inc. (Gulf City). The trustee had commenced the lawsuit in the Debtor’s Home Court, the U.S. Bankruptcy Court for the District of Kansas.

Gulf City moved to dismiss the lawsuit, arguing that the Debt-or’s Home Court was not the proper venue because Section 1409(b)’s venue limit for small dollar claims applied to the case. Gulf City argued that it resided in the Southern District of Alabama and had no place of business, office or branch in Kansas. The trustee argued that venue for preference and other avoidance claims is in the Debtor’s Home Court in Kan-sas because the venue limit for small dollar claims does not apply to these claims.

The Sunbridge Capital court relied on the language of Sections 1409(a) and (b) in ruling that the venue limit for small dollar claims does not apply to preference, fraudulent conveyance and other avoidance type claims. The court noted that accord-ing to Section 1409(a), the Debtor’s Home Court is the proper venue for proceedings “arising under the Bankruptcy Code,” “arising in a case under the Bankruptcy Code” or “related to a case under the Bankruptcy Code.” However, Section 1409(b)’s venue limitation for small dollar claims omits any reference to proceedings “arising under the Bankruptcy Code” and applies only to proceedings “arising in” or “related to” a case under the Bankruptcy Code.

The court characterized preference, fraudulent conveyance and other avoidance actions as proceedings “arising under the Bankruptcy Code” to which Section 1409(a)’s venue provi-sion applies and for which the Debtor’s Home Court is the proper venue. The court contrasted proceedings “arising under the Bankruptcy Code,” with proceedings “arising in or related to a bankruptcy case” to which Sections 1409(b)’s venue limit for small dollar claims applies. The court charac-terized a proceeding “arising under the Bankruptcy Code” as a claim created by the Code, such as preference and other avoidance claims. In contrast, a proceeding “arising in a bank-ruptcy case” is one that would not exist outside of a bank-ruptcy case, but excludes causes of action, such as preference claims, created by the Bankruptcy Code.1

The court relied on the holdings of the United States Bank-ruptcy Court for the Western District of Michigan in In re Rosenberger, a decision occurring after the passage of BAP-CPA, and several pre-BAPCPA decisions, that the Debtor’s Home Court is the proper venue for preference and other avoidance actions. The pre-BAPCPA decisions include the United States Bankruptcy Court for the Northern District of Ohio’s 1987 decision in In re Van Huffel Tube Corp., the United States Bankruptcy Court for the Northern District of New York’s 1996 decision in In re Guilmette and the United

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States Bankruptcy Court for the District of New Mexico’s 2007 unreported decision in In re Nashmy. These courts, like the Rosenberger court, held that Section 1409(b)’s venue limitation provision omits and, therefore, does not apply to, small preference actions because they “arise under the Bank-ruptcy Code” and do not “arise in or relate to a case under the Bankruptcy Code” to which Section 1409(b)’s venue limitation applies.

The court also concluded that Section 1409’s legislative his-tory does not support the conclusion that Congress had intended preference, fraudulent conveyance and other avoid-ance actions to be subject to the venue limit for small dollar claims contained in Section 1409(b). Congress’ reference to proceedings “arising under Title 11” in Section 1409(a) and its omission of these proceedings from Section 1409(b) showed Congress’ intention to designate the Debtor’s Home Court as the proper venue for preference, fraudulent conveyance and other avoidance claims, and exclude them from Section 1409(b)’s venue limit for small dollar claims.

The Excel Storage Products CaseIn Excel Storage Products, pending in the United States Bank-ruptcy Court for the Middle District of Pennsylvania, a credi-tor that was sued for recovery of an alleged preference claim in the amount of $3,987.06 in the Debtor’s Home Court, had also moved to dismiss the complaint based on improper venue. The creditor argued that the proper venue for the liti-gation was in the Central District of Illinois, where the credi-tor resided, because Section 1409(b)’s venue limit for small dollar claims applies to small preference claims. The trustee opposed the motion, arguing that Section 1409(a)’s venue provision applies and the Debtor’s Home Court in the Middle District of Pennsylvania is the proper venue for the preference litigation because it is a proceeding that “arises under the Bankruptcy Code” to which Section 1409(b)’s venue limit for small dollar claims does not apply.

The court denied the creditor’s motion to dismiss and held that venue was proper in the Debtor’s Home Court. The court concurred with the Sunbridge Capital court, and other courts reaching similar holdings, in deciding that a prefer-ence action “arises under the Bankruptcy Code” and, there-fore, does not fall within Section 1409(b)’s venue limitation for small dollar claims. Congress intended to exclude prefer-ence actions from Section 1409(b)’s venue exception by excluding proceedings “arising under the Bankruptcy Code,” such as preference claims, from Section 1409(b) and includ-ing them in Section 1409(a) that grants venue to the Debtor’s Home Court.2

The Nukote International CaseNukote International and affiliated entities filed their Chapter 11 cases with the United States Bankruptcy Court for the

Middle District of Tennessee on June 3, 2009. Nukote obtained court approval of its Chapter 11 plan on January 4, 2010. The plan created a creditor trust that was authorized to commence lawsuits to recover preference claims.

Prior to the commencement of Nukote’s bankruptcy case, Nukote had done business with Crown Packaging Corp., a supplier located in Missouri. The trust alleged that Nukote had made payments totaling $10,768.50 to Crown during the 90 days prior to Nukote’s bankruptcy filing. The trust com-menced a lawsuit against Crown for recovery of $10,768.50 as a preference.

Crown moved to dismiss the trust’s preference lawsuit based upon improper venue. Crown argued that the trust could commence suit against Crown only in Missouri, where Crown “resides,” because the trust was seeking to recover a claim that was less than $11,7253 and was, therefore, subject to the venue limits for small dollar claims contained in Section 1409(b). The Nukote court dismissed the lawsuit, holding that Section 1409(b)’s venue limit applies to preference cases. How can we square the Nukote court’s decision with the con-trary holdings of the Sunbridge Capital and Excel Storage Products courts? The Nukote court ruled that a preference claim “arises under the Bankruptcy Code” and “arises in a case under the Bankruptcy Code” and, as such, falls within Section 1409(b)’s venue limit for small dollar claims. A preference claim “arises under the Bankruptcy Code” because it invokes substantive rights created by bankruptcy law and also “arises in a bankruptcy case” since a preference claim is a clam that would not exist outside of a bankruptcy case.

The Nukote court relied on the Ninth Circuit Bankruptcy Appellate Panel’s decision, in In re Little Lake Industries, Inc. where the court also held that a small preference claim could be brought only where the creditor resides (which is not nec-essarily the Debtor’s Home Court). The court similarly con-cluded that a preference action both arises under the Bank-ruptcy Code and arises in a case under the Bankruptcy Code (the latter allowing Section 1409(b)’s venue limit for small dollar clams to apply).

The court also invoked Section 1409’s legislative history as additional support for subjecting preference claims to Sec-tion 1409(b)’s venue limits for small dollar claims. BAPCPA’s amendment to Section 1409(b), that increased the venue limit for small dollar claims, was based on the National Bank-ruptcy Review Commission’s report to Congress containing recommendations for changing bankruptcy law and proce-dure. The report sought to amend Section 1409 to require commencing a small preference action against a non-insider in the jurisdiction where the creditor has its principal place of business. That was supposed to deter trustees from pressur-ing creditors to pay small preference claims where the amount sought is less than the cost to defend such claims. In addition, numerous congressional reports between the Commission Report and the passage of BAPCPA’s amendment to Section 1409(b) described amended Section 1409(b) as increasing the dollar amount for small preference claims where the Debtor’s Home Court would not necessarily be the proper

The court denied the creditor’s motion to dismiss and held that venue was proper in the debtor’s Home Court.

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venue, and the claim would have to be pursued in the juris-diction where the creditor resides. The United States Bank-ruptcy Court in Delaware, in In re Dynamerica Manufactur-ing, relying on Section 1409(b)’s legislative history, also ruled that Section 1409(b)’s venue limit for small dollar claims applies to small preference claims.

ConclusionWell, Congress’ passage of a poorly drafted law sometimes leads to conflicting court decisions on an important issue. That is precisely what has occurred in determining whether the venue limit for small dollar claims applies to preference lawsuits. Congress’ mistake has led to conflicting court deci-sions, with some accepting and others rejecting the applica-bility of Section 1409(b)’s venue limitation to small prefer-ence claims. One easy fix is for Congress to amend Section 1409(b) to add “proceedings arising under the Bankruptcy Code” to its venue limitation provision that would assure its applicability to small preference actions. Only time will tell if Congress adopts this common sense legislative fix. ●

1. A proceeding “related to a bankruptcy case” is one that could have been commenced in federal or state court independently of the bankruptcy case, but whose outcome could impact the debtor and its estate. Preference and other bankruptcy avoidance actions are clearly not “related to a bankruptcy case” because they do not exist outside of a bankruptcy case.

2. Interestingly the Excel Storage Products court punted on another issue of statutory construction involving whether the creditor could invoke the small preference defense, contained in Section 547(c)(9) of the Bankruptcy Code, as a basis for dismissing the lawsuit. According to Section 547(c)(9), a creditor has a full defense to a preference claim for recovery of less than $5,850 in a case filed by a debtor whose debts are not primarily consumer debts. The creditor raised the small preference defense based on the $3,987.06 preference claim asserted by the trustee. The trustee argued that the small preference defense did not apply here because the case was started as an involuntary bankruptcy filing and Section 547(c)(9)’s small preference defense applies only to a case filed by a debtor, a voluntary bankruptcy filing, and not to involuntary bankruptcy filings. The court avoided addressing whether the small preference defense applies to bankruptcy cases commenced involuntarily by finding that the debtor had filed its own voluntary Chapter 7 petition following the involuntary filing.

3. In fact, Crown, the trust and the Nukote court relied on the wrong small dollar venue limit. Since the bankruptcy case was filed in 2009, the small dollar venue limit was $10,950, and not $11,725 as discussed in the court’s decision. However, since the trust’s preference claim of $10,768.50 against Crown was less than the correct small venue limit ($10,950), the mistake had no impact on the outcome of the preference litigation.

Bruce Nathan, Esq. is a partner in the New York City office of the law firm of Lowenstein Sandler PC. He is a member of NACM and is on the Board of Directors of the American Bankruptcy Institute and is a former co-chair of ABI’s Unsecured Trade Creditors Committee. He can be reached via email at bnathan@lowenstein.com.

*This is reprinted from Business Credit magazine, a publication of the National Association of Credit Management. This article may not be forwarded electronically or reproduced in any way without written permission from the Editor of Business Credit magazine.

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