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Background of In re Dunmore Homes, Inc.

In In re Dunmore Homes, Inc., Case No. 07-13533 (MG), the debtor's predecessor was called Dunmore Homes and was a California corporation ('Dunmore California'). It performed entitlement and land development work, prepared sites for homebuilding, and built single-family residential housing throughout Northern and Central California. In the fall of 2005, due to a decline in demand for housing, Dunmore California began experiencing financial difficulties. Those difficulties became so severe that, in August 2007, Dunmore California halted nearly all home construction, land development operations and sales. In September 2007, Dunmore California sold all of its assets to the debtor, Dunmore Homes, Inc., a New York corporation ('Dunmore New York' or the 'Debtor'), which was wholly owned by Michael Kane, a resident of California. Mr. Kane, through Dunmore New York also assumed all of Dunmore California's obligations, including approximately $11.2 million of unsecured debt owed by Sidney B. Dunmore, the 100% owner of Dunmore California. On Nov. 8, 2007, 59 days after the sale, Dunmore New York filed its Chapter 11 petition with the U.S. Bankruptcy Court for the Southern District of New York (the 'court'). In its petition, the Debtor disclosed that it had no office, employees or bank accounts in New York (they were all in California) and that it owned (in whole or in substantial part) 15 non-debtor subsidiaries (the 'Subsidiaries'), which were organized to develop 26 communities ' all in California. Its only presence in New York was its recent incorporation in the state.

On Nov. 26, 2007, three trade creditors ' all located in California and appearing on the Debtor's 'List of Creditors Holding 20 Largest Unsecured Claims' ' filed a motion for transfer of venue, claiming that venue should be changed 'in the interests of justice and for the convenience of the parties.' Over the subsequent two weeks, eight more creditors, six of whom were also California companies on the Debtor's 'Top 20 List,' and ('importantly,' the court noted) the Official Committee of Unsecured Creditors, joined the motion. Meanwhile, the motion was opposed by the Debtor and two institutional creditors holding more than five times the amount of debt held by the nine 'Top 20 List' creditors, who supported the motion, combined. (In essence, the dispute became a contest between the larger number of California creditors versus the greater dollar amount owed to the fewer non-California creditors.)

The Court's Analytical Framework

The criteria that a court considers in deciding whether transfer of venue is in the 'interests of justice' are whether: 1) transfer would promote the economic and efficient administration of the bankruptcy estate; 2) the interests of judicial economy would be served by the transfer; 3) the parties would be able to receive a fair trial in each of the possible venues; 4) either forum has an interest in having the controversy decided within its borders; 5) the enforceability of any judgment would be affected by the transfer; and 6) the plaintiff's original choice of forum should be disturbed.

As for the 'convenience of parties' prong, there are also six factors: 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 case; and 6) necessity for ancillary administration if liquidation should result. These factors were articulated in the two seminal circuit court cases of In re Manville Forest Prod. Corp., 896 F.2d 1384 (2d Cir. 1990) and In re Commonwealth Oil Refining Co., Inc., 596 F.2d 1239 (5th Cir. 1979) ('CORCO').

The 'Interests of Justice' Prong

The Court, citing its decision in Enron Corp. v. Arora (In re Enron Corp.), 317 B.R. 629 (Bankr. S.D.N.Y. 2004) ('Enron'), noted that the factor given most weight in the 'interests of justice' prong is the economic and efficient administration of the estate, which is exemplified by, among other things, the need to obtain postpetition financing, the location of the sources of such financing and the management personnel in charge of obtaining it. In Dunmore Homes, the court concluded that this factor weighed heavily in favor of transfer, because, among other things: 1) postpetition financing was just as likely to come from California as New York, since the Debtor's main assets were the California real estate owned by its Subsidiaries; 2) anyone purchasing or financing the business would have to conduct due diligence in California; 3) the Debtor's only offices, management and employees were located in California; 4) the Debtor's sole shareholder resided in California; 5) Debtor's counsel was based in California; and 6) Debtor's financial adviser and its investment banker were based in California and Arizona, respectively.

Importantly, the court distinguished Enron and CORCO ' two cases in which the court retained jurisdiction ' based on the difference in assets and business models. In Enron, the court faced the reorganization of a complex global energy conglomerate, and the sophistication of the financial markets was an essential factor in the successful financing and reorganization of the company. In CORCO, the bankruptcy court in Texas confronted the reorganization or sale of an oil refining company that was conducting business in Puerto Rico, while its executive management was primarily in Texas. The court there concluded that the expertise of CORCO's management and greater availability of financing in Texas were more important than the location of its physical assets or the largest number of its creditors. Conversely, in Dunmore Homes, the court (citing Enron once again) held that real property has 'always been of local concern and traditionally decided at the situs of the property.' Moreover, the Debtor had no New York offices or employees (or, indeed, any operations in any state), unlike Enron, which had an operating subsidiary in New York, and CORCO, which had its executive offices and management in Texas.

As to the issue of judicial economy, the court found that the existence of pending California state court lawsuits against the Subsidiaries (and stayed proceedings against the Debtor), as well as the many potential issues that would likely be governed by California law argued in favor of transfer. Also, the court noted that the case was being transferred at an early stage and therefore no substantial learning curve for the California bankruptcy court was present to deter transfer.

As to the issue of which state had the greater interest in the outcome of the case, the court found that, clearly, it was California, because: 1) the Debtor's assets were homes and properties in California, and therefore California had a substantial interest in the impact of the disposition of those assets; and 2) the majority of the trade creditors ' several of whom were plaintiffs in the aforementioned California state court lawsuits ' were local California businesses. The court distinguished the CORCO case, in which, despite the fact that the majority of creditors resided in Puerto Rico, the bankruptcy court retained jurisdiction in Texas, by noting once again the different issues in financing. In CORCO, Texas was ultimately favored, because the court held that maintaining close proximity between the debtor's management and the sources of financing served to benefit all creditors, including the majority located in Puerto Rico. Here, because the sources of financing were likely to come from California (as well as other states besides New York), the Debtor's attempts to analogize the facts to CORCO were unconvincing.

In sum, the court held that, because it did not appear that the Debtor's interests would be harmed, that the estate would suffer a diminution in value, and that there were no overriding factors which would make it substantially more likely that the Debtor's prospects for a successful reorganization would be enhanced if the court were to retain jurisdiction, it would 'raise serious questions whether the court would abuse its discretion if it denied the motion to transfer venue in the interests of justice.'

The 'Convenience of the Parties' Prong

The court stated that the proximity and convenience of the creditors must include not only the number of creditors and the amounts owed, but also the quality of participation by the creditors. To that end, the court found that the Debtor's ten institutional creditors (including the two that opposed the transfer venue motion) held over $200 million in debt, and the majority of the Debtor's trade creditors (located in California) held only $12 million in debt. As to the quality of participation issue, the court ruled that, despite its permissive rules governing pro hac vice admission and telephonic appearances for out-of-state attorneys, for California-based creditors who were the moving parties for motions under consideration or who desired the more general benefits associated with attending hearings in person (e.g., ability to observe the court, witnesses and other parties in interest), there was a limit on the quality of participation if they did not incur the additional expense of New York counsel or have their California counsel travel to New York for hearings. Such expense, the court held, was more justifiably assumed by the ten institutional creditors who were more often participants in California cases.

The court further emphasized the joinder of the Committee in favor of the motion to transfer venue as a strong distinguishing factor from Enron, in which the Committee favored retention of jurisdiction in New York. Other factors the court found under this prong that favored transfer included: 1) the convenience to the Debtor's employees, sole shareholder and professionals ' all of whom resided in California ' should they be required to testify; and 2) the familiarity possessed by a California bankruptcy court with the community (i.e., the physical location of the assets) and the local real estate market (given the liquidating nature of the case).

Trends and Conclusion

This is case is reminiscent of the 2005 Winn-Dixie Stores Chapter 11 cases, which were also transferred by the Bankruptcy Court for the Southern District of New York for substantially the same reasons as in Dunmore Homes. It is arguable, however, that the forum shopping in that case was even more apparent than in Dunmore Homes. In Winn-Dixie, a non-operating shell subsidiary of the parent company debtor was created 12 days before the filing of the petition. (It is notable, however, that in Winn-Dixie, the debtor consented to the transfer of venue and the SDNY bankruptcy court found that absent that consent, it would have retained the case because of a variety of connections that made the SDNY a suitable forum.)

Conclusion

Dunmore Homes is certainly not the first ' nor will it be the last ' decision by the court to transfer venue to a bankruptcy court in a jurisdiction with a greater interest in and perhaps greater familiarity with the facts of the case. Conversely, there will be many cases where venue is not transferred despite otherwise tenuous connections. It is notable that the court distinguished precedent such as Enron, signaling that, under the right circumstances, venue/jurisdiction would have been retained. For debtors, what Dunmore Homes does is serve as an important reminder that venue requires more than a review of the three criteria for a valid filing (i.e., state of incorporation), but also a careful analysis and planning of the basis for a court to retain venue. For creditors, the Dunmore Homes decision provides further ammunition to undercut a debtor's tenuous connection for filing 'far from home.'

Adam C. Rogoff, a member of this newsletter's Board of Editors, is a Partner in the Bankruptcy & Restructuring Department of Cooley Godward Kronish LLP. His practice focuses on the representation of a wide variety of corporate debtors, creditors (including DIP lenders), and other parties in Chapter 11 restructurings and out-of-court workouts.

Attention, forum shoppers! The Bankruptcy Court for the Southern District of New York, long known for its ability and willingness to handle large and complex business reorganizations with (even tangential) connections to New York as the 'financial capital of the world,' recently granted a motion filed by a group of creditors to transfer venue to California.

Ask any debtor's counsel, and s/he will tell you that venue is one of the most strategic decisions that a company can make in its bankruptcy planning. It can affect everything from precedent in the Circuit on fundamental issues in the case to ease of access to the court. The venue provisions themselves are fairly broad and, so, for the modern company with (inter)national reach, its options are myriad. Should it file in the district where its headquarters are located? Where its principal assets are located? Where it is incorporated? Or where one of its affiliates has filed for bankruptcy?

Familiarity with large business bankruptcies have made the bankruptcy courts in Manhattan; Wilmington, DE; and Chicago most attractive to distressed
businesses. Not every company, however, has a long-standing nexus to these (or other favored) courts. In some instances, pre-bankruptcy planning can takes months; other times, mere weeks. One option favored by debtor's counsel has been to (re)incorporate the main entity or an affiliate in the chosen forum, i.e., New York. That is what Dunmore Homes, Inc. did. As the decision to transfer venue instructs, however, sometimes merely creating a debtor entity for filing purposes is not sufficient.

Background of In re Dunmore Homes, Inc.

In In re Dunmore Homes, Inc., Case No. 07-13533 (MG), the debtor's predecessor was called Dunmore Homes and was a California corporation ('Dunmore California'). It performed entitlement and land development work, prepared sites for homebuilding, and built single-family residential housing throughout Northern and Central California. In the fall of 2005, due to a decline in demand for housing, Dunmore California began experiencing financial difficulties. Those difficulties became so severe that, in August 2007, Dunmore California halted nearly all home construction, land development operations and sales. In September 2007, Dunmore California sold all of its assets to the debtor, Dunmore Homes, Inc., a New York corporation ('Dunmore New York' or the 'Debtor'), which was wholly owned by Michael Kane, a resident of California. Mr. Kane, through Dunmore New York also assumed all of Dunmore California's obligations, including approximately $11.2 million of unsecured debt owed by Sidney B. Dunmore, the 100% owner of Dunmore California. On Nov. 8, 2007, 59 days after the sale, Dunmore New York filed its Chapter 11 petition with the U.S. Bankruptcy Court for the Southern District of New York (the 'court'). In its petition, the Debtor disclosed that it had no office, employees or bank accounts in New York (they were all in California) and that it owned (in whole or in substantial part) 15 non-debtor subsidiaries (the 'Subsidiaries'), which were organized to develop 26 communities ' all in California. Its only presence in New York was its recent incorporation in the state.

On Nov. 26, 2007, three trade creditors ' all located in California and appearing on the Debtor's 'List of Creditors Holding 20 Largest Unsecured Claims' ' filed a motion for transfer of venue, claiming that venue should be changed 'in the interests of justice and for the convenience of the parties.' Over the subsequent two weeks, eight more creditors, six of whom were also California companies on the Debtor's 'Top 20 List,' and ('importantly,' the court noted) the Official Committee of Unsecured Creditors, joined the motion. Meanwhile, the motion was opposed by the Debtor and two institutional creditors holding more than five times the amount of debt held by the nine 'Top 20 List' creditors, who supported the motion, combined. (In essence, the dispute became a contest between the larger number of California creditors versus the greater dollar amount owed to the fewer non-California creditors.)

The Court's Analytical Framework

The criteria that a court considers in deciding whether transfer of venue is in the 'interests of justice' are whether: 1) transfer would promote the economic and efficient administration of the bankruptcy estate; 2) the interests of judicial economy would be served by the transfer; 3) the parties would be able to receive a fair trial in each of the possible venues; 4) either forum has an interest in having the controversy decided within its borders; 5) the enforceability of any judgment would be affected by the transfer; and 6) the plaintiff's original choice of forum should be disturbed.

As for the 'convenience of parties' prong, there are also six factors: 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 case; and 6) necessity for ancillary administration if liquidation should result. These factors were articulated in the two seminal circuit court cases of In re Manville Forest Prod. Corp., 896 F.2d 1384 (2d Cir. 1990) and In re Commonwealth Oil Refining Co., Inc., 596 F.2d 1239 (5th Cir. 1979) ('CORCO').

The 'Interests of Justice' Prong

The Court, citing its decision in Enron Corp. v. Arora (In re Enron Corp.), 317 B.R. 629 (Bankr. S.D.N.Y. 2004) ('Enron'), noted that the factor given most weight in the 'interests of justice' prong is the economic and efficient administration of the estate, which is exemplified by, among other things, the need to obtain postpetition financing, the location of the sources of such financing and the management personnel in charge of obtaining it. In Dunmore Homes, the court concluded that this factor weighed heavily in favor of transfer, because, among other things: 1) postpetition financing was just as likely to come from California as New York, since the Debtor's main assets were the California real estate owned by its Subsidiaries; 2) anyone purchasing or financing the business would have to conduct due diligence in California; 3) the Debtor's only offices, management and employees were located in California; 4) the Debtor's sole shareholder resided in California; 5) Debtor's counsel was based in California; and 6) Debtor's financial adviser and its investment banker were based in California and Arizona, respectively.

Importantly, the court distinguished Enron and CORCO ' two cases in which the court retained jurisdiction ' based on the difference in assets and business models. In Enron, the court faced the reorganization of a complex global energy conglomerate, and the sophistication of the financial markets was an essential factor in the successful financing and reorganization of the company. In CORCO, the bankruptcy court in Texas confronted the reorganization or sale of an oil refining company that was conducting business in Puerto Rico, while its executive management was primarily in Texas. The court there concluded that the expertise of CORCO's management and greater availability of financing in Texas were more important than the location of its physical assets or the largest number of its creditors. Conversely, in Dunmore Homes, the court (citing Enron once again) held that real property has 'always been of local concern and traditionally decided at the situs of the property.' Moreover, the Debtor had no New York offices or employees (or, indeed, any operations in any state), unlike Enron, which had an operating subsidiary in New York, and CORCO, which had its executive offices and management in Texas.

As to the issue of judicial economy, the court found that the existence of pending California state court lawsuits against the Subsidiaries (and stayed proceedings against the Debtor), as well as the many potential issues that would likely be governed by California law argued in favor of transfer. Also, the court noted that the case was being transferred at an early stage and therefore no substantial learning curve for the California bankruptcy court was present to deter transfer.

As to the issue of which state had the greater interest in the outcome of the case, the court found that, clearly, it was California, because: 1) the Debtor's assets were homes and properties in California, and therefore California had a substantial interest in the impact of the disposition of those assets; and 2) the majority of the trade creditors ' several of whom were plaintiffs in the aforementioned California state court lawsuits ' were local California businesses. The court distinguished the CORCO case, in which, despite the fact that the majority of creditors resided in Puerto Rico, the bankruptcy court retained jurisdiction in Texas, by noting once again the different issues in financing. In CORCO, Texas was ultimately favored, because the court held that maintaining close proximity between the debtor's management and the sources of financing served to benefit all creditors, including the majority located in Puerto Rico. Here, because the sources of financing were likely to come from California (as well as other states besides New York), the Debtor's attempts to analogize the facts to CORCO were unconvincing.

In sum, the court held that, because it did not appear that the Debtor's interests would be harmed, that the estate would suffer a diminution in value, and that there were no overriding factors which would make it substantially more likely that the Debtor's prospects for a successful reorganization would be enhanced if the court were to retain jurisdiction, it would 'raise serious questions whether the court would abuse its discretion if it denied the motion to transfer venue in the interests of justice.'

The 'Convenience of the Parties' Prong

The court stated that the proximity and convenience of the creditors must include not only the number of creditors and the amounts owed, but also the quality of participation by the creditors. To that end, the court found that the Debtor's ten institutional creditors (including the two that opposed the transfer venue motion) held over $200 million in debt, and the majority of the Debtor's trade creditors (located in California) held only $12 million in debt. As to the quality of participation issue, the court ruled that, despite its permissive rules governing pro hac vice admission and telephonic appearances for out-of-state attorneys, for California-based creditors who were the moving parties for motions under consideration or who desired the more general benefits associated with attending hearings in person (e.g., ability to observe the court, witnesses and other parties in interest), there was a limit on the quality of participation if they did not incur the additional expense of New York counsel or have their California counsel travel to New York for hearings. Such expense, the court held, was more justifiably assumed by the ten institutional creditors who were more often participants in California cases.

The court further emphasized the joinder of the Committee in favor of the motion to transfer venue as a strong distinguishing factor from Enron, in which the Committee favored retention of jurisdiction in New York. Other factors the court found under this prong that favored transfer included: 1) the convenience to the Debtor's employees, sole shareholder and professionals ' all of whom resided in California ' should they be required to testify; and 2) the familiarity possessed by a California bankruptcy court with the community (i.e., the physical location of the assets) and the local real estate market (given the liquidating nature of the case).

Trends and Conclusion

This is case is reminiscent of the 2005 Winn-Dixie Stores Chapter 11 cases, which were also transferred by the Bankruptcy Court for the Southern District of New York for substantially the same reasons as in Dunmore Homes. It is arguable, however, that the forum shopping in that case was even more apparent than in Dunmore Homes. In Winn-Dixie, a non-operating shell subsidiary of the parent company debtor was created 12 days before the filing of the petition. (It is notable, however, that in Winn-Dixie, the debtor consented to the transfer of venue and the SDNY bankruptcy court found that absent that consent, it would have retained the case because of a variety of connections that made the SDNY a suitable forum.)

Conclusion

Dunmore Homes is certainly not the first ' nor will it be the last ' decision by the court to transfer venue to a bankruptcy court in a jurisdiction with a greater interest in and perhaps greater familiarity with the facts of the case. Conversely, there will be many cases where venue is not transferred despite otherwise tenuous connections. It is notable that the court distinguished precedent such as Enron, signaling that, under the right circumstances, venue/jurisdiction would have been retained. For debtors, what Dunmore Homes does is serve as an important reminder that venue requires more than a review of the three criteria for a valid filing (i.e., state of incorporation), but also a careful analysis and planning of the basis for a court to retain venue. For creditors, the Dunmore Homes decision provides further ammunition to undercut a debtor's tenuous connection for filing 'far from home.'

Adam C. Rogoff, a member of this newsletter's Board of Editors, is a Partner in the Bankruptcy & Restructuring Department of Cooley Godward Kronish LLP. His practice focuses on the representation of a wide variety of corporate debtors, creditors (including DIP lenders), and other parties in Chapter 11 restructurings and out-of-court workouts.