Regardless of which change of venue statute applies, a chapter 11 debtor cannot change the venue of a regulatory action by the Consumer Financial Protection Bureau to bankruptcy court, according to District Judge Brian Morris of Great Falls, Mont.
On an issue where the courts are divided, Judge Morris concluded that the bankruptcy change of venue statute, 28 U.S.C. § 1412, should not apply to an action that is only “related to” a bankruptcy case.
The debtor provided software and collection services for consumer lenders. The CFPB alleged that the debtor assisted Native American tribes in collecting loans that were void and made in violation of Montana law. Three weeks after the debtor filed a chapter 11 petition in Dallas, the CFPB sued the debtor in district court in Montana, after settlement discussions terminated.
The CFPB sought an injunction, damages and disgorgement. The CFPB evidently conceded that it could not enforce monetary awards without a modification of the automatic stay. Otherwise, the CFPB took the position that the suit was a regulatory action falling under the exception to the automatic stay under Section 362(b)(4).
The debtor filed a motion to transfer venue to the Northern District of Texas, where the suit presumably would be referred to the bankruptcy court in that district where the chapter 11 case was pending.
Judge Morris said in his February 6 opinion that lower courts in the Ninth Circuit are divided on whether the bankruptcy change of venue statute, 28 U.S.C. § 1412, applies when the suit to be transferred is only “related to” a bankruptcy case. The distinction is significant because the general change of venue statute, 28 U.S.C. § 1404(a), is typically more restrictive in permitting change of venue.
Naturally, the debtor contended that Section 1412 applies. With regard to a “case or proceeding under title 11,” that statute more liberally permits a change of venue “in the interest of justice or for the convenience of the parties.” [Emphasis added.] Oversimplified, the moving party under the general statute, Section 1404(a), must show that a change of venue is both for the convenience of the parties and in the interest of justice.
Judge Morris concluded that the bankruptcy statute, Section 1412, does not apply to the CFPB case. He found no case where a court transferred venue using Section 1412 when the suit to be transferred was “a federal agency police or regulatory action.”
Focusing on the exception to the automatic stay with regard to police or regulatory actions, Judge Morris found an “inherent tension” between the policy underlying the exception to the automatic stay and the “public policy underlying the presumption of transfer in Section 1412.” Under Section 1412, he said, the most important consideration is the “economic and efficient administration of the estate.”
On the other hand, he said Congress found that police and regulatory actions present concerns more important than maximizing the bankrupt estate. Judge Morris therefore concluded that public policy combined with the plain language of the statute pointed to applying Section 1404, because Section 1412 “nowhere contains the more expansive words ‘related to.’”
Having decided to employ Section 1404, Judge Morris analyzed the traditional factors, concluding that the interest of justice and the convenience of the parties did not counsel for a change of venue.
From an “abundance of caution,” Judge Morris also analyzed what the result would be under Section 1412. Again, he said the debtor failed to show that the interest of justice would be served “by transferring CFPB’s regulatory action to the bankruptcy court.”