With courts divided on the interpretation of 28 U.S.C. § 1412 about transferring venue in bankruptcy cases, a district judge in Rochester, N.Y., has adopted the approach from the Southern District of New York by sending a lawsuit to Texas, since claims in the state court action would be core in bankruptcy court.

The debtor had signed an agreement with a contractor to build a manufacturing plant in upstate New York. In case of disputes, the contract called for venue in the New York county where the plant was located.

When the debtor didn’t pay more than $8 million of the amount that the contractor had billed, the contractor filed a lawsuit in New York state court. Several months later, the debtor filed a chapter 11 petition in Texas. The contractor filed a proof of claim for about the same amount being sought in the New York state court. The debtor confirmed a chapter 11 plan.

The debtor removed the suit in state court to the federal district court in Rochester, followed immediately by a motion to transfer venue to the Southern District of Texas for referral to the bankruptcy court.

The contractor responded with a motion to remand.

Chief District Judge Elizabeth A. Wolford of Rochester said in her March 7 opinion that she would be obliged to consider transferring venue only if she first were to deny the motion for remand.

Remand

Because federal courts are courts of limited jurisdiction, motions for remand must be strictly construed, and doubts are resolved in favor of remand, Judge Wolford said.

Contending there is no jurisdiction in federal court, the contractor argued that abstention was mandatory under 28 U.S.C. § 1334(c)(2).

In terms of jurisdiction, Judge Wolford said that federal courts have arising in and arising under jurisdiction where the matters are core proceedings. They also have related to jurisdiction where matters are noncore. Citing the Second Circuit, she said that “abstention is only mandatory for non-core matters.”

Judge Wolford denied the motion to remand, finding that the matter was core and not subject to mandatory remand. There being no other arguments for remand, she turned to venue.

Venue

The debtor was moving to transfer venue under 28 U.S.C. § 1412, which provides, “A district court may transfer a case or proceeding under title 11 to a district court for another district, in the interest of justice or for the convenience of the parties.”

“While the statute makes clear that it applies to proceedings ‘under’ Title 11,” Judge Wolford said “there is a split between district courts as to whether it applies to a proceeding that ‘arises in’ or is ‘related to’ a bankruptcy case.” Some courts believe that Section 1412 allows for transferring a matter that is “related to” a bankruptcy case, while others strictly construe Section 1412 to mean that “under title 11” only permits transfer of the main bankruptcy case or actions that are created by the Bankruptcy Code.

Judge Wolford adopted the “common practice” in the Southern District of New York, where transfer under Section 1412 depends upon whether the matter is core or noncore, citing Zohar CDO 2001-1, Ltd. v. Patriarch Partners, LLC, 620 B.R. 456, 462 (S.D.N.Y. 2020).

Citing the Second Circuit and Granfinanciera, S.A. v. Nordberg, 492 U.S. 33 (1989), Judge Wolford said that a bankruptcy court can have core jurisdiction over a claim, even one based on a prepetition contract arising under state law. Noting that the proof of claim by the contractor “mirrors” its claim in the state court, she held that the suit in state court was core.

Even if some claims in the suit were noncore, Judge Wolford said, “where . . . the core and non-core claims are inextricably intertwined, and proofs of claim are filed, the non-core claims become core.” She therefore held “that the claims in [state court] are core proceedings that arise under Title 11.”

Factors Under Section 1412

To close the loop, Judge Wolford examined whether the “interest of justice” or the “convenience of the parties” justified transferring venue under Section 1412. She noted that the section is written in the “disjunctive,” meaning that either ground can result in venue transfer.

Again, noting that the contractor’s proof of claim and the state court suit “mirror” one another, Judge Wolford found “that transfer of this action will promote efficient administration of the bankruptcy estate.” Furthermore, there were no “novel questions of New York law” to benefit from a decision by a New York court.

In terms of convenience of the parties, Judge Wolford said, “forum selection clauses are generally not enforceable in a core proceeding because public policy strongly favors hearing all core proceedings in the bankruptcy court.”

To promote efficiency in the litigation of the proof of claim and the suit in state court, and to avoid “inconsistent results,” Judge Wolford held that “transfer[ring] for convenience of the parties [is] appropriate.”

Judge Wolford denied the motion to remand and granted the motion to transfer venue to the Southern District of Texas “for referral to” the bankruptcy court.