Houghton Mifflin Files for $1 Billion Bankruptcy

by Mike Mintz on July 19, 2012 · 1 comment

in Legal News and Trends,Litigation,martindale.com

In the recent bankruptcy case Houghton Mifflin Harcourt Publishing Co., Ch. 11 Case No. 12-12171 (Hon. Gerber, U.S. Bankruptcy Ct., S.D.N.Y.), the famed publisher of textbooks filed a $1 billion bankrutpcy petition in the bankruptcy court for the Southern District of New York.  The case arose out of the debtors’ filing of a pre-packaged plan of reorganization which had the unanimous support of their creditors.  The “prepack” was designed to speed up the bankruptcy process in court.

However, the  US Trustee threw a monkey wrench into the proceedings when it moved to transfer venue.  The Trustee’s motion was opposed by all of the creditors. The US Trustee contended that venue in the Southern District of New York was never proper because the requirements of 28 USC Section 1408 were never satisfied. The Trustee contended that transfer of venue was mandatory under Section 1406.  The added expense of transferring venue of a pre-packaged bankruptcy is, according to the Trustee, immaterial.  It is unclear from the case, and the court seemed puzzled by, the Trustee’s insistence in transferring venue where all the main issues had already been agreed to by the parties and the resultant transfer would cause significant hardship to the creditors.  The court’s position is even stronger when looked at in light of the possibility that the Trustee and the creditors can waive improper venue, something the Trustee refused to do, without offering any plausible explanation for its refusal. Concerns over venue choice are traditionally raised if they are prejudicial to the creditors.  However, in the instant case, the creditors wanted the subject venue.  Moreover, if not for the Trustee’s motion to transfer, the whole case would be completed in a month.  Every single interested party was opposed to the Trustee’s motion, yet the Trustee went ahead with its motion anyway.

Notwithstanding the Court’s reservations, it performed the requisite analysis required by Section 1406 which does not allow the court any discretion in these matters.  After the court performed its analysis of prevailing law and the facts of the case, it concluded that the requirements of venue were not satisfied and that the Trustee’s motion had to be granted, subject only to determining when to transfer the case and to which venue.  Although the court had no choice but to transfer venue, it noted that it could still reduce the prejudice to the creditors that an immediate venue transfer would cause.  Section 1406 does not provide deadlines for transferring venue, nor does it prohibit the court from taking steps to protect the creditors from the harm caused by a venue transfer.  The court decided to transfer the case at a time to minimize prejudice to creditors and debtors’ employees.

Facts

The debtors are well-known publishers, most notably in the area of textbooks for grade school and high schools.  At the time of the bankruptcy filing, the debtors’ assets totaled $2.68 billion and their liabilities totaled $3.54 billion.  Their combined revenues were around $1.3 billion for 2011.  As can be seen from these numbers, their troubles lay in their excessive debt which was coupled with a sharp decrease in demand for their product at a time that local and state governments, their primary customers, were feeling the financial pinch and were unable to continue purchasing their publications.

Before filing a bankruptcy petition, the debtors entered into negotiations with their creditors which lead to a pre-petition agreement and a consensual reorganization plan.  The creditors accepted the pre-packaged plan of reorganization before the debtors filed Chapter 11.  The “prepack”, as it is popularly called, is designed to speed up the bankruptcy system.

The Plan Support Agreement, which embodied the points that formed the basis of the prepack, required that the Chapter 11 case be filed in the Southern District of New York.  The reason for the choice of New York was that key parties, including Citibank and senior creditors who were parties to the Plan Support Agreement were located in New York.  Transferring venue would increase the professional fees and expenses.  While the Trustee did not deny this point, it claimed that it was irrelevant.  The prepack provided for the conversion of billions of dollars of secured debt into equity.  The general unsecured claims were left unimpaired.  The creditors unanimously accepted the plan.  No creditors committee was formed because, given the prepack, there was no interest in forming one.

About two months ago, 25 debtors commenced the subject Chapter 11 cases, one after another in quick succession.  The fourth of such debtors was Houghton Mifflin Holding Co.  None of the debtors were organized under the laws of New York.  Many of the debtors had their principal place of business in Massachusetts and most were Delaware corporations.  The “nerve center” of the debtors’ business was located in Boston, Massachusetts.

Procedure of the Case

With less than a month before the scheduled confirmation of the prepack, the Trustee moved to transfer the cases to a different venue pursuant to Section 1408.  That section provides, inter alia, for a case to be commenced in the district court for the district in which the domicile, residence, principal place of business or principal assets of the subject entity/person have been located for 180 days immediately preceding the commencement of the case or in a district where there is already pending a case concerning the person’s/entity’s affiliate, general partner or partnership.  Sometimes, a case is filed in a district where none of these parameters are met.  There are other cases where the case does fall under one of the parameters of the venue statute, but the venue is less convenient for the parties or otherwise less than optimum for the interests of justice.

Where the statutory requirements for venue have not been satisfied and where there is a timely objection to the venue and where the requirements were not waived, either a dismissal of the case or a transfer to another venue is mandatory.  The court expressed reluctance in following this rule, but noted that the majority opinions require it.  After finding that the debtors did not have their principal place of business, domicile, or principal assets in New York, nor that they were organized under the laws of New York, the court concluded that the debtors did not satisfy the requirements of Section 1408.  Since none of the parameters of Section 1408 were satisfied, the court had no choice but to transfer the case.  The related section, Section 1406, does not give the court discretion to decide whether transferring venue is in the parties’ best interests or whether it serves justice.

As for when the transfer has to be affected, the statute is mute on that issue.  There was no statute or case that set out a particular timetable for transferring the case.  The overall goal of the court is to protect the creditors and other stakeholders.  Hence, the court decided to implement the venue change pursuant to a schedule that minimizes the harm to the creditors and other stakeholders.  The court refused to stay the bankruptcy plan’s effective date because of the Trustee’s venue transfer request.  Delaying the confirmation hearing would have prejudiced the creditors.  This is especially true in this case where the court was dealing with a prepack whose main goal is to speed up the bankruptcy process in court.

Once the court determined that it had to transfer the case, it had to decide where the case belonged.  The court ordered the parties to consult with each other and agree to an alternative venue.  If they cannot agree, they were to submit the matter to the court for further consideration.  It looks like the court made the best of a bad situation which was created by the Trustee’s inexplicable insistence on transferring venue, notwithstanding the great inconvenience to the parties and the resultant failure to serve the interests of justice.  Hopefully, the lion’s share of the bankruptcy proceeding will be completed before the actual transfer goes through.

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