Courts Divided on Venue for Small-Dollar Avoidance Actions

When a trustee pursues an avoidance action for less than $12,850, is the debtor’s bankruptcy court the proper venue?

The courts are divided, but Bankruptcy Judges Jim D. Pappas of Pocatello, Idaho, and S. Martin Teel, Jr., of Washington, D.C., concluded that venue is proper in the debtor’s court, even if their conclusions were based on a drafting error that Congress may have committed in adopting 28 U.S.C. § 1409(b).

The facts in both cases were typical of a small-dollar avoidance actions. The trustees were seeking to recover about $11,000 and $12,000, respectively. In Idaho, the trustee was pursuing a constructively fraudulent transfer under Section 548 and Idaho law. In Washington, D.C., the trustee was after a preference under Section 547.

Claiming that venues in the debtors’ courts were improper under Section 1409(b), both defendants filed motions to dismiss under Rule 12(b)(3).

Saying that the courts do not agree, Judges Pappas and Teel relied on the plain meaning of Section 1409(b) in concluding that venue was proper in the debtors’ courts.

Section 1409 governs venue in bankruptcy cases. Subsection (a) says that “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.”

Subsection (b) provides that a trustee “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.”

The two subsections use notably different language. Subsection (a) applies to proceedings arising under, arising in, or related to a title 11 case. Subsection (b) only refers to proceedings “arising in or related to” a title 11 case. Is the distinction significant, or is the absence of “arising under” in subsection (b) a distinction without a difference?

Because the suits sought less than $12,850, the defendants contended that they could only be sued where they resided, not in the debtors’ home courts.

Like Judge Teel, Judge Pappas pointed out that subsection (b) “makes no mention of cases ‘arising under’ title 11.” For both judges, the distinction was important, given the parties’ concessions that the avoidance actions — based on Sections 547, 548, 544(b) and 550 — were proceedings arising under title 11. 

If subsection (a) alone was applicable, venue in the debtor’s bankruptcy court was proper because the proceedings arose under title 11. However, the defendants made several arguments contending that subsection (b) applied, but both judges knocked them all down.

Judge Pappas said that the “plain language interpretation” of subsection (b) “has led many courts to conclude that it applies only to claims ‘arising in’ and ‘related to’ under title 11, but not to those ‘arising under’ title 11.” Other courts, including the Bankruptcy Appellate Panel for the Ninth Circuit, held otherwise, he said, believing “that Congress unintentionally omitted ‘arising under’ from subsection (b).”

Citing Lamie v. U.S., 540 U.S. 526 (2004), both judges said that the Supreme Court nixed the idea that a court may disregard the plain language of a statute by presuming that Congress made a mistake. Even if the BAP opinion were binding, Judge Pappas said it was not good law because it preceded Lamie.

Finding no absurd result, Judge Pappas held that the monetary limitations of subsection (b) did not apply because the avoidance action arose under title 11. Because subsection (a) applied, Judge Pappas concluded that venue was proper in the debtor’s court.

Likewise, Judge Teel agreed with decisions concluding “that Section 1409(b) does not apply to a proceeding ‘arising under title 11.’”

Cases to the contrary, according to Judge Teel, were “unpersuasive.” Similarly, Judge Pappas declined to follow a pair of bankruptcy court decisions that had invoked the $12,850 threshold for avoidance actions, saying they gave “terse treatment” to the question.

Judge Teel pointed out several “odd results” that would occur if “arising under” cases were included in subsection (b). A trustee could avoid a transaction in the debtor’s home court under subsection (a) but then be forced to obtain a money judgment for the value of the property in the defendant’s hometown under subsection (b).

Judge Teel came up with another odd result: Subsection (b) only applies to trustees. Thus, a debtor could always sue in the debtor’s home court, but a trustee seeking the same relief on the same claim could not.

Another question: If subsection (b) did apply, which part governed? Was the suit (1) “a case to recover a money judgment of or property worth less than $1,300,” where venue would be proper in the debtor’s bankruptcy court, or was it (2) a case to recover “a debt . . . of less than $12,850,” in which event venue would be improper, Judge Pappas asked?

Employing a “practical reading” of the statute, Judge Pappas said that the “real effect” of the suit was “to recover money judgments or property” for more than $1,300, making the $12,850 threshold inapplicable and meaning that venue was proper.

Judges Pappas and Teel denied the motions to dismiss for improper venue.

The opinions are Klein v. ODS Technologies LP (In re J & J Chemical Inc.), 18-08029 (Bankr. D. Id. Jan. 11, 2019); and Webster v. Republic National Distributing Co. LLC (In re Tadich Grill of Washington DC LLC), 18-10029 (Bankr. D. D.C. March 12, 2019).