$10,950 Threshold for Bankruptcy Preference Venue Impediment to Claims
At the same time as Congress established a threshold requirement for bringing a preference claim, it also established a dollar-amount-in-controversy restriction on where small claims arising in a bankruptcy case may be brought. If a preference claim is made for an amount less than $10,950, and depending on where the bankruptcy case is pending, there may be a requirement that a collection action be brought where the creditor does business, and not necessarily where the bankruptcy case is pending. The applicability of this “local venue” requirement on preference actions varies from jurisdiction to jurisdiction. (The dollar threshold is going to be adjusted on April 1, 2010 based on changes in the Consumer Price Index for the preceding 3 years.)
How Does the Bankruptcy Preference Claim Threshold Requirement for Venue Work?
Your customer files bankruptcy in California. Your company never has done business in California and does not have an office or salesperson in California. Your now-bankrupt customer paid your company $9,000 within 90 days prior to the bankruptcy filing (i.e. within the preference period). One day your company gets a demand letter from a lawyer who tells you that he or she intends to bring a preference action against your company in California to recover the $9,000 as an avoidable preference. The lawyer generously offers to settle the claim for $7,000. What do you do?
One option is to tell the lawyer that you are ready to defend the preference claim vigorously, and by the way, your company has no connections with California so any action to collect a preference claim needs to be brought where your company does business. This could effectively put the ball back in the opposing lawyer’s court. He or she will need to consider if it’s worth it to sue your company in another state, before another judge.
The odds could weigh in your company’s favor that the preference claim will be dropped. Why? It is just too expensive to bring a small-dollar preference claim in a court other than the court where the bankruptcy is already pending.
Of course, the venue defense does no good if your company does business in Georgia and the bankruptcy was filed in Georgia. By virtue of “residing” in the state, your company is already subject to the jurisdiction of the Georgia bankruptcy courts.
Not Uniformly Applicable; Not a Defense; Tactics are Important
Remember that bankruptcy courts in some jurisdictions have decided that the dollar threshold venue requirement does not apply to preference actions. Also remember that, where applicable, it’s not an absolute defense to a bankruptcy preference action. Rather, it’s a factor that may discourage pursuit of a preference claim. So even if the “local venue” requirement protects you from having to defend in an inconvenient location where the bankruptcy case was filed, it’s not a defense and the bankruptcy preference claimant can still come after your company where it does business.
Tactics become an important part of the bankruptcy preference defense strategy. Experienced bankruptcy preference counsel can help in developing this strategy. Where the initial bankruptcy preference demand is slightly above $10,950 and the bankruptcy case is in a jurisdiction where the “local venue” requirement applies, it might be better to first attack other aspects of the preference claim, get the preference claimant to recognize that the claim is less than the threshold, and then raise the venue defense.
The Multi-Debtor Ploy
On a final note, we are seeing increasing instances where bankruptcy preference claimants are trying to mask the potential venue defense where there are multiple affiliated debtors.
For example, if your company did work for 5 different affiliated companies that are all part of the same bankruptcy brought in a jurisdiction that recognizes the “local venue” requirement, remember that the venue requirement applies to each of these companies separately. So if your company got paid $7,000 by Bloomers Limited, $6,000 by Bloomers US Inc, and $9,000 by Bloomers International Inc, your company should be able to demand that any bankruptcy preference actions be brought on your company’s turf. The total claims equal $22,000 (well in excess of the threshold) but each separate debtor’s claim is less than the threshold. As long as the different bankruptcies have not been substantively consolidated, the “venue defense” should still work.
