By: Donald L Swanson
Debtor files Chapter 7 in the Eastern New York Bankruptcy Court. The Chapter 7 Trustee sues Defendant in that same Bankruptcy Court to recover an $11,408.55 preference.
Defendant resides in California, not New York, and is not an insider. So, Defendant contends that the preference suit should have been filed in California, not New York. That’s because 28 U.S.C. § 1409(b) says a trustee can sue a non-insider for less than $25,000 “only in” the bankruptcy court where the defendant resides.
The Bankruptcy Court disagrees and keeps the preference lawsuit in New York. [Fn. 1]
The Court’s reasoning is based on the words “arising under,” as used and omitted in 28 U.S.C. § 1409(a)(b)&(d). [Fn. 2] Specifically (emphasis added):
- § 1409(a) uses the words “arising under title 11 or arising in or related to” in identifying suits that can be filed in the debtor’s bankruptcy court;
- § 1409(b) uses the words “arising in or related to” in identifying cases under $25,000 that must be filed in defendant’s home district (note: the words “arising under” do not appear here); and
- § 1409(d) uses the words “arising under title 11 or arising in or related to” in addressing claims that accrue after the bankruptcy filing.
The Bankruptcy Court then declares:
- “preference actions fall within the Court’s ‘arising under’ jurisdiction”;
- “arising in or related to” claims do NOT include preference lawsuits;
- the § 1409(b) requirement that a defendant be sued in defendant’s home district applies only to “arising in or related to” claims; and
- therefore, the Trustee properly sued Defendant in New York.
The Bankruptcy Court’s reasoning concludes like this:
“It is apparent that the ‘arising under’ language is included in subsection (a) and omitted from subsection (b) [of § 1409]. Therefore, based on the lack of ambiguity, this Court will defer to the plain language of the statute as written by Congress.”
The Court notes that other courts “have employed linguistic ‘workarounds’” to make the $25,000 limit apply to preference actions as well. For example:
- The Bankruptcy Appellate Panel for the 9th Circuit held that the terms “arising under” and “arising in” are not mutually exclusive for purposes of § 1409(b). In re Little Lake Indus., 158 B.R. 478, 484 (BAP 9th Cir. 1993).
- Other courts look to legislative intent of § 1409(b), suggesting that it exists to “prevent unfairness to distant debtors of the estate, when the cost of defending would be greater than the cost of paying the debt owed.” In re Dynamerica Mfg., LLC, Nos. 08–11515 (KG), 10–50759 (KG), 2010 WL 1930269 at *2 (Bankr. D. Del. May 10, 2010).
- Another court relies on the reasons above, plus commentary in the National Bankruptcy Review Commission Final Report, which recommends that § 1409 be amended to require that small-dollar preference actions against non-insider defendants be brought in the defendant’s home court. In re Nukote Intern., Inc., 457 B.R. 668, 682-83 (Bankr. M.D. Tenn. 2011).
The Court rejects the rationale of each of these opposing opinions.
The common practice of bankruptcy trustees bringing small preference claims against far-away and non-insider defendants remains alive and well in the Bankruptcy Court for Eastern New York.
It will be interesting to see how other bankruptcy courts receive this opinion and its rationale.
Footnote 1: The opinion is Mendelsohn, Trustee v. Central Garden & Pet Co. (In re Petland Discounts, Inc.), Adv. Pro. No. 20-08088 in the Eastern New York Bankruptcy Court (decided January 26, 2021, Doc. 22).
Footnote 2: 28 U.S.C. § 1409(a)-(d) is titled, “Venue of proceedings arising under title 11 or arising in or related to cases under title 11,” and provides (emphasis added): “(a) Except as otherwise provided in subsections (b) and (d), 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. (b)Except as provided in subsection (d) of this section, a trustee in a case under title 11 may commence a proceeding arising in or related to such case to recover a money judgment of or property worth less than $1,000 or a consumer debt of less than $15,000, or a debt (excluding a consumer debt) against a noninsider of less than $25,000, only in the district court for the district in which the defendant resides. (c) . . . (d) A trustee may commence a proceeding arising under title 11 or arising in or related to a case under title 11 based on a claim arising after the commencement of such case from the operation of the business of the debtor only in the district court for the district where a State or Federal court sits in which, under applicable nonbankruptcy venue provisions, an action on such claim may have been brought.”
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