In Re Dunmore Homes, Inc.
MEMORANDUM OPINION AND ORDER GRANTING MOTION FOR TRANSFER OF VENUE TO THE EASTERN DISTRICT OF CALIFORNIA, SACRAMENTO DIVISION
Pеnding before this court is a motion by creditors seeking an order transferring venue of this chapter 11 case pursuant to 28 U.S.C. § 1412 to the Eastern District of California, Sacramento Division. (ECF Doc. # 54.) The original moving parties were Cal Sierra Construction Inc., Pacific Paving Co., Inc., and Valley Utility Services, Inc. (Id.) The motion was joined by other creditors 1 of Dunmore Homes, Inc. (hereinafter “Debtor”), or its non-Debtor affiliates. The transfer venue motion has been opposed by the Debtor and two creditors, Bank of New York Trust Company, N.A. (“Bank of New York”) and KeyBank National Association (“KeyBank”). (ECF Doc. # 104, 114, 117.) For the reasons provided below, the motion to transfer venue is granted.
BACKGROUND
The Debtor filed its voluntary petition for relief under chapter 11 of the Bankruptcy Code in the Southern District of New York on November 8, 2007 (“Petition Date”). Prior to its filing, the predecessor to the Debtor, Dunmore Homes, a California corporation (“Dunmore California”) performed entitlement and land development work, prepared sites for homebuild-ing, and built single-family residential housing throughout Northern and Central California. (ECF Doc. # 2.) Beginning in September 2005, Dunmore California experienced declining home absorption and pricing levels and deteriorating financial performance. In response, Dunmore California and its subsidiaries halted nearly all home construction, land development operations and sales on August 1, 2007. (Id. at ¶ 14.) Additionally, beginning in August 2007, Dunmore California and the subsidiaries experienced a series of technical and non-technical defaults under many of its existing secured debt agreements.
The Debtor and its non-debtor affiliates (the “Dunmore Companies”) are developing 26 communities, organized into fourteen limited liability companies and one limited partnership (collectively, the “Subsidiaries”), all owned (in whole or in substantial рart) by the Debtor. 4 (Id. at ¶ 12.) The Dunmore Companies financed fifteen subsidiaries, representing twenty-five communities, with secured debt at the subsidiary level. The financing has been provided by nine different lenders (or lending groups). Many of the loans to the Subsidiaries are guaranteed by the Debtor (or the Debtor is a co-borrower). 5 The Subsidiaries are not currently debtors but are engaged in out of court restructuring. 6 (Id. at ¶ 12.)
The Debtor’s direct liabilities consist of approximately $2 million in debt, secured by a second lien on the assets of Dunmore Fullerton Ranch, LLC, Dunmore Highland, LLC, and Dunmore Montecito LLC, and $20 million of junior subordinated notes that mature in 2035. (Id. at ¶ 19.) Bank of New York is the indenture trustee for the subordinated notes. The Debtor also has significant indirect liabilities resulting from its obligations as guarantor or co-borrower of secured debts of various Subsidiaries held by RBC Builder Finance; Indymae Bank F.S.B.; Guaranty Bank; KeyBank; Wachovia Bank, N.A. (“Wacho-via”); Affinity Bank; Comeriea Bank; Franklin Bank; and United Commercial Bank. The total amount of secured debt to Subsidiaries for which the Debtor is a guarantor or co-borrower was approximately $195 million as of the Petition Date. In the first instance, the security for this debt is California real property owned at the subsidiary level.
In addition to the above debt, Travelers Casualty and Surety Company of America (“Travelers”) issued payment and performance bonds (“Bonds”) in favor of certain of the Subsidiaries. Dunmore California and Mr. Dunmore each executed a General Agreement of Indemnity in favor of Travelers for any loss incurred in connection with the Bonds. The Debtor assured Dun-more California’s obligations to Travelers in connection with the indemnity agreement. Travelers asserts a security interest in Dunmore California’s property to secure the indemnification obligation.
Pursuant to the Debtor’s Amended List of Creditors Holding Thirty Largest Unsecured Claims, the indirect institutional creditors listed above are geographically dispersed in California, Texas, North Carolina,
7
and Ohio.
8
(ECF Doc. # 115, 116.) Bank of New York, the indenture trustee of the $20 million of subordinated notes, is the only one of the top 30 creditors in New York. (ECF Doc. # 115.) There is no
The Moving Parties filed the change of venue motion pursuant to 28 U.S.C. § 1412 on November 26, 2007. (ECF Doc. # 54.) The motion was not based on allegations that the Southern District of New York was an improper venue pursuant to 28 U.S.C. § 1408 9 ; rather, the motion claimed that venue should be changed based on consideration of the interests of justice and the convenience of parties.
The Moving Parties alleged that they were listed in the Debtor’s schedule of top twenty unsecured creditors and that they were representative of most of the creditor classes that are California-based businesses. (Id.) The motion argues that the smaller creditors will suffer substantial burden and expense participating in this case in New York whereas the large institutional creditors loсated outside of California would incur no additional expense if the proceedings were transferred. The motion alleges that the Debtor has no other domestic business activity or presence outside of California. (Id.) The Debtor’s assets, employees, and pending litigations, among other things, are located in California. Dunmore New York was recently incorporated in New York to facilitate the purchase of Dunmore California for nominal consideration. As already mentioned, Dunmore New York has no office, employees, assets or bank accounts in New York. The motion alleges that the Debtor’s initial decision to file in New York was an attempt at forum shopping as a means to limit certain creditors access to the proceedings. Importantly, the Unsecured Creditors Committee supports the motion to transfer venue to the Eastern District of California.
The Debtor’s opposition relies on the weight given to the Debtor’s choice of venue, the percentage of the dollar amount of debt held by creditors located outside California, the familiarity of this Court with the facts versus the time and expense in familiarizing a new court with the case, and the focus of the restructuring on securing financing rather than operational issues. The Debtor argues that the largest creditors who are the most likely to be very active in the case are large national banks with headquarters outside of California and that the smaller creditors, like the trade creditors, would still be able to partiсipate telephonically and through the electronic filing of motions. (ECF Doc. # 114.) The Debtor argues that its direct debts are not principally held by California entities.
(See id.)
The Debtor also argues that this case is principally about finding funding for a sale or orderly wind-down of Debtor’s business and, as such, the chapter 11 case is not going to directly impact many of the trade creditors, who are not direct creditors of the Debtor but of the Subsidiaries. The Subsidiaries, who are not currently in bankruptcy, are still avail
DISCUSSION
A. Proper Venue under 28 U.S.C. § 1408
28 U.S.C. § 1408 states that a chapter 11 case may be commenced in the district court for the district in which “the domicile, residence, principal place of business in the United States, or principal assets in the United States ... have been located for a hundred and eighty days immediately preceding such commencement....” The statute is written in the disjunctive making venue proper in any of the listed locations.
In re Segno Commc’ns, Inc.,
B. Change of Venue Pursuant to § 1412
Finding venue proper under § 1408, consideration of the transfer venue motion must then turn to the discretionary power granted courts pursuant to 28 U.S.C. § 1412. After a case or proceeding has commenced in a proper district, it can be transferred to another district court if the court finds the transfer would be in the interest of justice or for the convenience of parties. 28 U.S.C. § 1412;
In re B.L. of Miami,
In
CORCO,
the court affirmed the bankruptcy court’s denial of a transfer motion seeking to transfer the chapter 11 cases of an oil refining company debtor and eleven of its subsidiaries from Texas to Puerto Rico. CORCO’s principal office and management were located in Texas; most of its assets and creditors were located in Puerto Rico. The parties seeking the transfer to Puerto Rico argued that Puerto Rico had the greatest interest in the case because CORCO was a major supplier of petroleum products to Puerto Rico, its operations were located in Puerto Rico, and many of its creditors were located there. The Fifth Circuit rejected the argument, concluding that the bankruptcy court did not abuse its discretion in deciding to retain the case in Texas. The court concluded that thе venue was proper in Texas for several reasons, including that management of all aspects of the debtor’s business were handled in Texas, the debtor’s problems were financial rather than operational and the people who would work to solve those financial problems or would appear in court were based in Texas.
CORCO,
In
Manville,
the Second Circuit considered the benefits of the current court’s familiarity with the case and facts and the lag time of the receiving court’s learning curve.
In re Enron,
The interests of justice prong has been characterized as a broad and flexible standard.
In re Enron,
The convenience of parties prong has six factors: (i) proximity of creditors of every kind to the court; (ii) proximity of the debtor; (iii) proximity of witnesses necessary to the administration of the estate; (iv) location of the assets; (v) economic administration of the estate; and (vi) necessity for ancillary administration if liquidation should result.
In re B.L. of Miami,
Each prong identified above and its impact on the case will be discussed in turn below. The court concludes that the Moving Parties have met their burden under both the interests of justice and convenience of parties standards.
1. Interest of Justice
Courts evaluating the interests of justice have considered the following factors:
(1) whether transfer would promote the economic and efficient administration of the bankruptcy estate;
(2) whether the interests of judicial ecоnomy would be served by the transfer;
(3) whether the parties would be able to receive a fair trial in each of the possible venues;
(4) whether either forum has an interest in having the controversy decided within its borders;
(5) whether the enforceability of any judgment would be affected by the transfer; and
(6) whether the plaintiffs original choice of forum should be disturbed.
In re Enron Corp.,
Courts evaluating the economic and efficient administration of the case have looked at “the need to obtain post petition financing, the need to obtаin financing to fund reorganization, and the location of the sources of such financing and the management personnel in charge of obtaining it.”
In re Enron,
The Debtor in opposition relies on the
Enron
and
CORCO
courts’ ultimate decisions to retain venue based on the location of the financial restructuring of the debtors in those cases rather than the physical location of their assets. However, the Debtor’s reliance on these cases is misplaced because the assets and business models in
Enron
and
CORCO
were fundamentally different than those involved in this case. The majority of the Debtor’s significant assets consist of real property in residential developments in the state of California. As stated in
Enron,
“where a debtor’s assets consist solely of real property cases have hеld that transfer of venue is proper because matters concerning real property have always been of local concern and traditionally are decided at the situs of the property.”
In re Enron,
In
Mcmville,
in affirming the denial of a transfer of an adversary proceeding, the court relied on the bankruptcy court’s substantial “learning curve” and the likelihood that a transferee court would have delayed the final resolution of the bankruptcy case.
Manville,
In
CORCO,
the court emphasized the interest of the receiving venue in the outcome of the case.
CORCO,
In
In re B.L. of Miami,
a case granting the transfer motion, the court identified the need for creditors to obtain local counsel to participate in the case as an additional difficulty and expense that would be incurred by parties if venue was not transferred.
In re B.L. of Miami,
In considering the rеmaining factors under the interest of justice prong, while the Debtor’s selection of venue is accorded great weight it does not appear that the Debtor’s interests will be harmed or that the estate will suffer a diminution in value if venue is transferred to the Eastern District of California. In this case, the Debt- or’s employees, including management that would be needed to testify, assets, and the Subsidiaries are located in California. Debtor’s professionals (lawyers, financial advisors and investment bankers) are also located in California or Arizona. The Creditors Committee supports transfer of the case to California, and the Creditors Committee’s counsel, Morrison & Foer-ster, LLP, has offices in New York and California. In addition, considering the jurisdictional issues of potentiаl judgments and subpoenas in this case, all parties would be subject to the jurisdiction of California courts by virtue of either their domicile in the case of the trade creditors or sufficient contacts in the case of the institutional investors that conduct business there on a regular basis. As a result, while the Debtor’s selection is valid under § 1408 and accorded great weight, the overall circumstances of the case show by a preponderance of the evidence that transfer of venue is in the interest of justice in this case. Indeed, the thin nexus of the Debtor to the Southern District of New York, and the overwhelming contacts between the Debtor and Eastern District of California, combined with no overriding factors making it substantially more likely that the Debtor’s prospects for а successful reorganization would be enhanced if this Court were to retain jurisdiction, raise serious questions whether the Court would abuse its discretion if it denied the motion
2.Convenience of the Parties
Under the prong “convenience of the parties,” the six factors most commonly analyzed by bankruptcy courts under § 1412 are:
1. proximity of creditors of every kind to the court;
2. proximity of the debtor;
3. proximity of witnesses necessary to the administration of the estate;
4. location of the assets;
5. economic administration of the estate; and
6. necessity for ancillary administration if liquidation should result.
In re B.L. of Miami,
Consideration of the proximity and convenience of creditors must include the number of creditors as well as the amounts owed. Id. at 345. In this case the Debtor is a co-borrower or guarantor of loans from approximately ten large institutional national lenders representing over $200 million in debt. The remaining creditors in the Debtor’s top thirty creditors list, save one, are located in California and represent over $12 million in debt. (ECF Doc. # 116.) Considering the number of creditors and the amounts owed, this factor does not favor changing venue unless consideration is given to the quality of participation available to the creditors. The largest bank creditors in this case are often participants in California cases and only Bank of New York, the indenture trustee, is headquartered in New York. (ECF Doc. # 114 at Exhibit 1) (showing majority of dollar amount of debt is based in Texas). A California venue would not be more inconvenient to these creditors as most would have to travel to appear in New York or California. However, the majority of trade creditors would not have to travel very far if venue was transferred to California. While the court has already provided for telephone participation at hearings, for parties who cannot travel to New York, or for whom travel is financially burdensome, the ability to advocate for them is impaired.
In
Enron,
the court also stressed the statutory role that the Creditors Committee fills as a fiduciary to creditors and as a representative body of the unsecured creditors.
In re Enron,
While the Debtor is incorporated in New York, all of its remaining employees, sole shareholder, and the majority of its professionals are located in California. While the number of hearings at which its employees may be required to testify — either called as witnesses by the Debtor or by creditors — is uncertain, it will certainly be more convenient for them to appear in Sacramento and compulsory process can also issue to require their appearance. 10
The Court has already discussed the economic administration of the estate.
See In re Enron,
As a result of the above and the totality of the circumstances in this case, the Court concludes that the Moving Parties have met their burden for transfer of the case under the convenience of the parties prong as well.
CONCLUSION
The Moving Parties have shown by a preponderance of the evidence thаt the Court should order the transfer of venue of this case to the Eastern District of California in the interests of justice and for the convenience of the parties. For the reasons stated, the motion is GRANTED. The Clerk of the Court is directed to transfer this case to the United States District Court for the Eastern District of California, Sacramento Division.
IT IS SO ORDERED.
Notes
. These other moving parties are Teichert Construction, Inc., Aleco Corp., Granite Construction Co., DeSilva Gates Construction, L.P., Travelers Bond, Weyerhaeuser Realty Investors, Inc., Hemington Landscape Services, Inc., SGN Construction, Inc. and the Official Unsecured Creditors Committee. (ECF Doc. #66, 84, 99, 107, 109, 110, 130.)
. It seems clear that the sale was designed so that Mr. Dunmore could obtain a tax refund, use it to reduce his debt to the company, and enаble the company to pay down some of the debt on which Mr. Dunmore is a guarantor. Dunmore New York benefited from the transaction to the extent that the previously unsecured obligation from Mr. Dunmore became at least partially secured.
. During the January 11, 2008 omnibus motion hearing, the Debtor disclosed that only seventeen employees and two independent contractors remain.
. The Subsidiaries are: Dunmore Canterbury LLC; Dunmore Country Vilas, LLC; Dun-more Fullerton Ranch, LLC; Dunmore Highland, LLC; Dunmore Laguna Reserve, LLC; Dunmore Orchard LLC; Dunmore-Provi-dence LLC; Dunmore Stone Creek, LLC; Fahrens Park LP; Dunmore Viscaya LLC; Dunmore Diamond Ridge LLC; Dunmore Croftwood LLC; Dunmore Westport, LLC; Dunmore Sycamore Ranch LLC; and Dun-more Montecito LLC. The Debtor wholly owns all of the Subsidiaries except Dunmore Croftwоod, LLC, Dunmore Diamond Ridge, LLC, Dunmore Highlands, LLC and Dunmore Viscaya, LLC, all of which are operated as joint ventures with Weyerhauser Realty Investors. The Debtor also has an interest in the following inactive subsidiaries: Dunmore Brown Estates, LLC; Dunmore Reflections II, LLC; Dunmore Wildhawk, LLC; Fairways, LLC; Dunmore Sierra, LLC; Dunore Delano, LLC; Dunmore Wildhawk North LP; and the Dunmore Homes Statutory Trust 1.
. All of Dunmore California's guarantees or obligations as co-obligor with the Subsidiaries were assumed by Dunmore New York as part of the sale.
. Foreclosure proceedings are ongoing in California against several of the Subsidiaries’ properties, with the earliest foreclosure possi
. Wachovia is headquartered in North Carolina but the Debtor’s loans are administered by Wachovia’s Philadelphia, Pennsylvania office. (ECF Doc. # 115 at ¶ 13.)
. KeyBank is headquartered in Ohio, but the Debtor's loans are administered in Bellevue, Washington. (ECF Doc. # 117 at ¶ 6.)
. In the motion and at oral argument, the Moving Parties recognized that the incorporation of the Debtor, Dunmore New York, in New York provides a sufficient nexus to the state to confer venue. (ECF Doc. # 54 at ¶ 23 n. 2.)
. The importance of the availability of compulsory process cannot be underestimated in light of the Debtor's substantial reduction in the number of employees. Former employees who worked for the Debtor or its Subsidiaries in California are more likely to be subject to compulsory process if the case is pending in Sacramento.