Bankruptcy

Borders Improper Bankruptcy Venue

By Adam Levitin

Borders bankruptcy is demonstrating what an open joke bankruptcy venue has become.  Ironic given the company's name.  

Briefly, the US Code provides that venue is appropriate in bankruptcy cases "in the district court for the district in which the domicile, residence, principal place of business in the United States, or principal assets in the United States" of the debtor are located or "in which there is pending a case under title 11 concerning such [debtor]?s affiliate, general partner, or partnership."  As far as I can tell, Borders fails to meet any of these requirements for venue in the Southern District of New York where it filed for bankruptcy.  

I was using Borders' filings to teach my corporate reorganizations class today, and one of my bright students, Ankit Bhansali, inquired how it was possible that the holding company, Borders Group Inc., a Michigan corporation, headquartered in Ann Arbor, MI, had filed for bankruptcy in the SDNY.  (We had recently discussed venue).  BGI's filings emphasize that Borders has two flagship stores and several smaller stores in Manhattan (out of 632 stores in US/Puerto Rico).  But no other connection to SDNY was alleged.  

My assumption was initially that one of Borders other entities was a NY entity and that Borders had bootstrapped the affiliated group's filing on the NY entities' filing, much like Eastern Airlines (Ionosphere Club), Enron, GM, and Chrysler (Jeep-Saturn of Harlem, if I recall). Still, I went and looked at all of the Borders group filings.  There are only 8 entities that filed.  Not a single Borders entity that filed was a NY entity or had its headquarters in the Southern District of New York.  There were Michigan, Delaware, Colorado, and Virginia entities, but no NY entities.  As far as I can tell, Borders' only connection to SDNY is that it has a few stores there, much as it does in most major cities in the US.  In other words, venue is entirely improper in Southern District New York.

Improper venue, however, does not deprive the court of jurisdiction.  Instead, Bankruptcy Rule 1014 provides that "If a petition is filed in an improper district, the court, on the timely motion of a party in interest or on its own motion...may dismiss the case or transfer it to any other district if the court determines that transfer is in the interest of justice or for the convenience of the parties." 

Thus far, no creditor has objected to the venue.  Neither has the court.  Or the US Trustee.  The court or US Trustee might think it inappropriate to object to the venue if creditors don't raise the issue.  And I'm guessing most of Borders' creditors are NY based--financial institutions and publishing houses.  But there's also the possibility that creditors simply haven't noticed the venue problem.  In particular, smaller and perhaps less sophisticated creditors might not have noticed the venue flaw, and these creditors are the ones who might be most affected by improper venue (e.g., small suppliers for the corporate HQ in Ann Arbor).  These are precisely the parties that most need the court and the UST looking out for them.  

Now that I'm putting this venue issue out there, I hope that the court or UST will at least raise the issue, and if all the parties are happy to keep the case in SDNY, let them.  But seeing wholly improper venue like this does raise concerns about forum shopping and the corrosive effects of competition for large cases as described by Professor Lynn LoPucki.  (And the Delaware bar ought to be steamed, given that there could be proper venue there.) 

Full post as published by Credit Slips on February 28, 2011 (boomark / email).