Klein v. ODS Techs., LP (In re J & J Chem., Inc.)

• Decision Date: 11 January 2019
• Docket Number: Adversary Case No. 18-08029-JDP,Bankruptcy Case No. 17-40037-JDP
• Citation: 596 B.R. 704
• Parties: IN RE: J & J CHEMICAL, INC., Debtor. Wayne Klein, Plaintiff, v. ODS Technologies, LP, d/b/a/ TVG Network, Defendant.
• Court: U.S. Bankruptcy Court — District of Idaho

596 B.R. 704

IN RE: J & J CHEMICAL, INC., Debtor.

Wayne Klein, Plaintiff,

v.ODS Technologies, LP, d/b/a/ TVG Network, Defendant.

Bankruptcy Case No. 17-40037-JDP

Adversary Case No. 18-08029-JDP

United States Bankruptcy Court, D. Idaho.

Signed January 11, 2019

Jason Ronald Naess, Parson, Smith, Stone, Loveland, Shirley, Burley, ID, for Plaintiff.

Keely E. Duke, Duke Scanland and Hall, PLLC, Boise, ID, Dennis M. P. Ehling, Blank Rome LLP, Los Angeles, CA, for Defendant.

MEMORANDUM OF DECISION

Honorable Jim D. Pappas, United States Bankruptcy Judge

Introduction

This is a decision exploring whether venue of a trustee's fraudulent transfer action in the district where the bankruptcy case is pending against an out-of-district defendant is proper. While the amounts in controversy in this contest are modest, the legal issue is a knotty one, dividing the courts that have considered it, and requiring this lengthy decision. After reflection, the Court's solution to this venue contest is by no means a novel one: the Court will apply what it perceives to be the plain meaning of the venue statute as enacted by Congress.

Facts¹ and Procedural Status

J & J Chemical, Inc. ("Debtor"), is an Idaho corporation doing business supplying janitorial supplies to its Idaho customers. On January 19, 2017, Debtor commenced a Chapter 11² case in this District.³ Bk. Dkt. No. 1. On June 21, 2017, the Court granted the United States Trustee's motion to appoint R. Wayne Klein ("Plaintiff") to serve as the Chapter 11 Trustee in the case. Bk. Dkt. No. 90. On November 15, 2017, Plaintiff filed a Chapter 11 Plan of Reorganization, Dkt. No. 143, which was confirmed by this Court on February 26, 2018. Dkt. No. 178. That Plan named Plaintiff as the plan administrator and granted him the authority to pursue avoidance actions such as this one. Dkt. No. 143 at 10.

ODS Technologies, LP ("Defendant") is a Delaware limited partnership that operates an online horse race wagering service. Dkt. 1 at ¶¶ 2, 9. Defendant's corporate headquarters, and principal place of business is in Los Angeles. Dkt. No. 7-2 at 2. On May 2, 2011, Idaho's Secretary of State granted Defendant authority to conduct business in Idaho under the name "TVG Network." Dkt. 1 at ¶ 2; see Idaho Code §§ 53-2-101 et seq. (repealed 2015).⁴

Between April 2013 and May 2016, Debtor's president and sole owner, Jonathan Peirsol ("Peirsol"), on fifty-nine separate occasions, transferred funds to Defendant from Debtor's Idaho bank account to Defendant to place bets on horse races. Dkt. 1 at ¶¶ 6–8. All told, Debtor transferred $ 5,200 in the two years, and $ 11,100 in the four years, prior to the filing of Debtor's bankruptcy petition. Id. at ¶¶ 8, 11. On August 9, 2018, Plaintiff commenced this adversary proceeding against Defendant seeking to avoid these alleged fraudulent transfers of cash made by Debtor to Defendant between April 2013 and May 2016, and to recover the value of those transfers for the benefit of the bankruptcy estate. Dkt No. 1 at 8.

On October 4, 2018, Defendant filed a motion to dismiss Plaintiff's complaint for improper venue under Civil Rule 12(b)(3).⁵ Dkt. No. 7. On October 18, 2018, Plaintiff objected to the motion to dismiss. Dkt. No. 11. Defendant replied to the objection on November 6, 2018. Dkt. No. 13. The parties offered oral arguments at a hearing on November 13, 2018, and the Court took the issues raised by the motion to dismiss under advisement. Dkt. No. 21.⁶

This Memorandum disposes of the motion. Rules 7052; 9014.

Arguments

In his complaint, Plaintiff seeks to avoid the transfers of Debtor's funds to Defendant, and to recover them for distribution to the creditors in this bankruptcy case. Plaintiff alleges Debtor was insolvent at the time of each of the transfers and that Debtor, as compared to Peirsol, received less than reasonably equivalent value in exchange for the funds transferred. Dkt. 1 at ¶¶ 12, 13, 17, 18. In Count I, Plaintiff seeks to avoid the $ 5,200 in transfers made to Defendant in the two years prior to the petition filing under § 548(a). Id. at ¶¶ 8–14. In Count II, Plaintiff invokes § 544(b) and Idaho Code §§ 55-913(1)(b) and 55-914 to avoid the $ 11,100 transferred to Defendant during the four years prior to filing. Id. at ¶¶ 15–21. Under both Counts, Plaintiff also seeks to recover the transfers from Defendant as an initial transferee under § 550(a)(1). Id. at ¶ 22. Plaintiff alleges that venue of this adversary proceeding in the District of Idaho is proper under 28 U.S.C. §§ 1408 and 1409. Id. at ¶¶ 3–5.

Defendant's motion to dismiss under Civil Rule 12(b)(3) argues that the District of Idaho is an improper venue for this action under 28 U.S.C. § 1409(b). In relevant part, the venue statute provides:

(a) Except as otherwise provided in subsections (b) and (d), a proceeding arising under title 11 or arising in or related to a case under title 11 may be commenced in the district court in which such case is pending.

(b) Except as provided in subsection (d) of this section, a trustee in a case under title 11 may commence a proceeding arising in or related to such a case to recover a money judgment of or property worth less than $ 1,300 or a consumer debt of less than $ 19,250, or a debt (excluding a consumer debt) against a noninsider of less than $ 12,850, only in the district court for the district in which the defendant resides.

Defendant contends that since Plaintiff seeks to recover less than $ 12,850, this adversary proceeding must be prosecuted in the Central District of California, the district where the Defendant "resides." Dkt. No. 7-1 at 3.

Plaintiff challenges Defendant's position for three reasons. Dkt. No. 11. First, Plaintiff contends that 28 U.S.C. § 1409(a), not (b) controls, because this action "arises under" title 11, whereas 28 U.S.C. § 1409(b) requires venue in a defendant's home district only for actions "arising in" or "related to" Title 11. Id. at 2–7.

Second, even if the Court concludes that 28 U.S.C. § 1409(b) applies, Plaintiff insists its requirements are met. He alleges that this action is a proceeding to recover a money judgment or property worth more than $ 1,300, and it is not a proceeding to "recover a debt," so the $ 12,850 threshold in the venue statute for such proceedings does not apply to Plaintiff's claim. Id. at 7–8.

Finally, Plaintiff argues that even if the Court decides that the $ 12,850 threshold for actions to recover a debt does apply to his claims against Defendant, venue is still proper in this District because the Defendant is a "resident" of Idaho under the definition found in another federal venue statute, 28 U.S.C. § 1391. Id.

In reply, Defendant addressed each of Plaintiff's objections to dismissal. Dkt. No. 13. As to Plaintiff's first argument, Defendant acknowledges that the words "arising under" do not appear in 28 U.S.C. § 1409(b), but, it posits, this was an inadvertent omission by Congress in drafting the statute, and Congress did indeed intend actions "arising under" title 11 be subject to the same limits on venue as those "arising in" and "related to" title 11. Id. at 3–5. As to Plaintiff's second point, Defendant contends this avoidance action seeks to "recover a debt," and thus Plaintiff's claim of $ 11,100 claim does not satisfy the $ 12,850 threshold in 28 U.S.C. § 1409(b) to allow for venue here. Id. at 6–7. Finally, Defendant argues Plaintiff's third objection fails because Defendant "resides" in the Central District of California, not the District of Idaho. Id. at 7–9.

Analysis and Disposition

Put simply, the Court agrees with Plaintiff's positions in this contest in all respects. Thus, venue of this action is proper in this District, and Defendant's motion to dismiss will be denied. Here's why.

A. Venue for Bankruptcy Proceedings Under 28 U.S.C. § 1409

1. The Venue Statute

Plaintiff must establish that venue of this action in this District is appropriate. Ingalls v. Mobile Corral, Inc. , No. CV04-295-N-EJL, 2005 WL 2333827, at *1 (Bankr. D. Idaho Sept. 21, 2005) (instructing that "[o]nce challenged, the plaintiff bears the burden of proving both venue and personal jurisdiction are proper."); see also Piedmont Label Co. v. Sun Garden Packing Co. , 598 F.2d 491, 496 (9th Cir. 1979) (holding that plaintiff has burden of establishing venue in federal antitrust cases).

The general rule for venue in bankruptcy proceedings is supplied by 28 U.S.C. § 1409(a) : except as provided in subsections (b), an adversary proceeding asserting claims arising under title 11, or arising in or related to a case under title 11, may be commenced in the district in which the subject bankruptcy case is pending. In other words, subsection (a) applies to three discrete types of bankruptcy proceedings: those (1) "arising under"; (2) "arising in"; or (3) "related to."

But the general rule for venue of bankruptcy proceedings is subject to important exceptions which are at issue here. Under 28 U.S.C. § 1409(b), an action must be pursued in the district where the defendant resides if it is one "arising in" or "related to" title 11, and is either one to recover a money judgment or property worth less than $ 1,300, or if it seeks to recover a non-consumer debt against non-insider less than $ 12,850.⁷ But while subsection (b) protects defendants from remote actions for cases "arising in" or "related to" title 11, unlike subsection (a), it makes no mention of cases "arising under" title 11. In other words, though subsection (b) makes it clear enough that Congress intended to create special venue protections to prevent remote defendants from defending "small" trustee claims against them in foreign fora for certain actions, it is less clear exactly which kinds of lawsuits Congress intended to include within the sweep of the 28 U.S.C. § 1409(b).⁸

2. The Case Law

The Bankruptcy Appellate Panel for the Ninth Circuit has succinctly summarized the issue before this Court:

The question is whether the omission [of "arising under" from § 1409(b) ]

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