On a question where courts are divided, Bankruptcy Judge Robert E. Grossman of Central Islip, N.Y., came down emphatically on the side of plain language by holding that a trustee may bring a small-dollar preference suit in the debtor’s home court, even if Congress may have made a mistake in drafting 28 U.S.C. § 1409(b).
The debtor paid $11,400 to a supplier within 90 days of bankruptcy. The trustee sued for recovery of a preference under Sections 547 and 550.
The creditor was a Delaware corporation with a principal place of business in California. It had no connections with New York other than having sold goods to the debtor in New York. The creditor had filed a claim for more than $190,000.
The creditor filed a motion to dismiss based on improper venue. The creditor contended that the preference suit arose in the bankruptcy case, making venue improper under 28 U.S.C. § 1409(b).
The outcome turned on Section 1409. With exceptions provided in subsections (b) and (d), subsection (a) allows for venue of “a proceeding arising under title 11 or arising in or related to a case under title 11” in the district where the bankruptcy case is pending.
For a proceeding to recover a non-consumer debt of less than $25,000 owing by a noninsider, subsection (b) places venue in “the district in which the defendant resides” for “a proceeding arising in or related to” a bankruptcy case.
Notably, the language of subsection (b) does not place venue in the creditor’s district for small-dollar suits “arising under” title 11.
Did the preference action “arise in” the chapter 7 case, thus compelling suit in the creditor’s district, not in the debtor’s home court? Linguistically speaking, “arising in” and “arising under” might seem overlapping, synonymous or interchangeable.
Judge Grossman disagreed in his January 26 opinion. “The terms ‘arising under’ and ‘arising in’ are not interchangeable,” he said. On that score, he took issue with the Ninth Circuit Bankruptcy Appellate Panel. See Muskin, Inc. v. Strippit Inc. (In re Little Lake Indus.), 158 B.R. 478 (B.A.P. 9th Cir. 1993).
Judge Grossman paraphrased the B.A.P. and some other courts as believing “that Congress did not intend to exclude cases arising under title 11 from the restrictions in subsection (b).” He noted, however, that Congress left “arising under” out of subsection (b).
“It is beyond question,” Judge Grossman said, “that a preference action ‘arises under’ title 11. Thus, a plain reading of § 1409(a) and (b) compels the Court to conclude that venue of this proceeding is proper in the [the debtor’s home court].”
Judge Grossman said he appreciated “the thoughtfulness of courts who perceive an error that must be corrected.” Still, he said, “the language of § 1409 is unambiguous. It is apparent that the ‘arising under’ language is included in subsection (a) and omitted from subsection (b). See § 1409. Therefore, based on the lack of ambiguity, this Court will defer to the plain language of the statute as written by Congress.”
As support for his conclusion, Judge Grossman cited a June 2020 decision by District Judge Joanna Seybert of Central Islip, N.Y. Novak v. Parts Authority LLC, 20-2948 (E.D.N.Y. June 16, 2020). According to Judge Grossman, she “held that preference actions ‘arise under’ title 11 and therefore do not fall within the ambit of § 1409(b).” To read ABI’s report on Novak, click here.
On a question where courts are divided, Bankruptcy Judge Robert E. Grossman of Central Islip, N.Y., came down emphatically on the side of plain language by holding that a trustee may bring a small-dollar preference suit in the debtor’s home court, even if Congress may have made a mistake in drafting 28 U.S.C. § 1409(b).
The debtor paid $11,400 to a supplier within 90 days of bankruptcy. The trustee sued for recovery of a preference under Sections 547 and 550.
The creditor was a Delaware corporation with a principal place of business in California. It had no connections with New York other than having sold goods to the debtor in New York. The creditor had filed a claim for more than $190,000.
The creditor filed a motion to dismiss based on improper venue. The creditor contended that the preference suit arose in the bankruptcy case, making venue improper under 28 U.S.C. § 1409(b).
The outcome turned on Section 1409. With exceptions provided in subsections (b) and (d), subsection (a) allows for venue of “a proceeding arising under title 11 or arising in or related to a case under title 11” in the district where the bankruptcy case is pending.
For a proceeding to recover a non-consumer debt of less than $25,000 owing by a noninsider, subsection (b) places venue in “the district in which the defendant resides” for “a proceeding arising in or related to” a bankruptcy case.