A debtor’s non-bankrupt affiliates failed to persuade a district judge in New York that he should transfer venue to the bankruptcy court in Delaware, in light of a valid forum selection clause.
A company borrowed about $530 million from a group of banks. The borrower’s affiliates guaranteed the debt. After the company alone filed bankruptcy in Delaware, the banks sued the affiliates on their guarantees in state court in New York under a forum selection clause in the contract. The banks also filed a proof of claim in bankruptcy court.
The affiliates removed the suit to federal district court and then filed counterclaims for fraudulent inducement. Next, the affiliates filed a motion to transfer venue to district court in Delaware for automatic reference to the bankruptcy court.
District Judge Gregory H. Woods denied the venue motion in an opinion on Jan. 12.
Removing the suit was proper, Judge Woods said, because the affiliates had a right of subrogation against the debtor giving rise to “related to” jurisdiction. He held that the guarantors’ counterclaims were non-core because they arose from a pre-bankruptcy contract and asserted rights not created by bankruptcy law.
Transferring venue for a non-core proceeding is governed by 28 U.S.C. § 1404(a), while venue rules for core proceedings are contained in 28 U.S.C. § 1412, Judge Woods said. Any differences in the two are “largely inconsequential,” he said, because the “‘analysis under both statutes is substantially the same.’”
To transfer venue, the moving party must show “by clear and convincing evidence that transfer is warranted.” Transfer becomes even more difficult to obtain when there is a valid forum selection clause, Judge Woods said.
Having decided that the forum selection clause was mandatory and valid, Judge Woods said that venue cannot transfer except “‘in the most exceptional cases.’”
Judge Woods said his case was not exceptional because the banks were not attempting to “limit the conduct of the debtor, the creditors, or the committee members” in the Delaware bankruptcy.
He also held that judicial economy did not justify transfer to Delaware because the bankruptcy judge could not enter a final order. Consequently, any decision would end up in the lap of a district judge in either district.