Opinion ID: 365630
Heading Depth: 1
Heading Rank: 3

Heading: Venue in Chapter XI proceedings

Text: 18 A history of the Chapter XI venue provision is essential to an understanding of the meaning of principal place of business. Prior to the adoption of the current Chapter XI venue provision in 1973, Section 2(a)(1) of the Bankruptcy Act, 11 U.S.C. § 11(a)(1), limited venue for Chapter XI cases to the corporation's principal place of business. 14 Chapter X of the Bankruptcy Act, on the other hand allowed for venue in both the district where the corporation maintains its principal place of business or its principal assets. 15 Rule 116(a)(2) changed the Chapter XI venue provision to conform to Chapter X's standards. 16 The change is significant for at least two reasons. First, it sheds some doubt on the validity of old case law construing Chapter XI's prior venue statute. Second, the change indicates an intent to expand the districts where a Chapter XI debtor may file by appreciating the fact that a debtor's principal place of business is not necessarily at the same location as its principal assets. 19 Prior to the adoption of Rule 116, the courts were divided on the question whether a debtor's principal place of business is located in the district where the debtor maintains its general executive offices or in the district where the debtor operates its production facilities. Compare Dryden v. Ranger Refining & Pipe Line Co., 280 F. 257 (CA5), Cert. denied, 260 U.S. 726, 43 S.Ct. 89, 67 L.Ed. 483 (1922), and Continental Coal Corp. v. Roszelle Bros., 242 F. 243 (CA6, 1917), With Shearin v. Cortez Oil Co., 92 F.2d 855 (CA5, 1937), and Burdick v. Dillon, 144 F. 737 (CA1, 1906). Although all courts agreed that the location of a debtor's principal place of business is a question of fact, either production or management facts were emphasized, depending on the circuit's preference. 20 This circuit has to some extent been inconsistent in its treatment of this issue. In Dryden, the debtor maintained its general office in Kansas City, Missouri. The debtor was in the business of producing, refining, and selling oil and gas. Most of its refineries and producing wells were located in the Northern District of Texas. Most of the debtor's contracts were made and filled in the Northern District. Money owed the debtor on these contracts was also collected in the Northern District. On these facts the court concluded that the debtor's principal place of business was located in the Northern District. In the later case, Shearin, this court expressed a preference for locating a debtor's principal place of business in the district where the debtor manages its affairs. In Shearin, the debtor's oil wells and the place where it delivered its product was in the Southern District of Texas. The place from where the debtor managed its business, however, was in the Northern District of Texas. The court chose the Northern District as the principal place of business. 21 Dryden and Shearin are inconsistent in the language they use in reaching their conclusion on the location of the debtor's principal place of business, but they are reconcilable on their individual facts. Dryden ruled out the situs of production as a litmus test for locating a corporation's principal place of business. The court recognized that in an appropriate case the place from which general supervision of (the debtor's) business is exercised, may be properly held to be the principal place of business. 280 F. at 263. Shearin was an appropriate case. All of the debtor's business was managed from its offices in the Northern District. The emphasis in Shearin was on the place where the debtor deals with the public. 22 Since the adoption of Rule 116 it is no longer necessary to choose between the places of production and management. The emphasis of earlier decisions on the location of the debtor's production facilities is no longer appropriate because the location of the debtor's principal assets is now an independent basis of venue. Although relevant to an inquiry into a debtor's principal place of business, the change in Rule 116 has greatly diminished its significance. The case law developed under Chapter X's venue provision, which has always contained Rule 116's alternative basis for venue, is now relevant to venue under Chapter XI. We agree with the court's conclusion in In re Portex Oil Co., 30 F.Supp. 138 (D.Or.1939), Aff'd sub nom. Clark Bros. Co. v. Portex Oil Co., 113 F.2d 45 (CA9, 1940), that 23 A distinction must have been intended between the two points where jurisdiction could be founded, although often the principal assets will be at the principal place of business. The intent must have been to permit a corporation which habitually transacted its corporate business at some point to bring proceedings there. 24 (T)he distinction noted in the statute permits administration if the petition is filed in the district where the principal place of business is located, for the very purpose of allowing the internal administration of a company to be settled at the point where those interested in it chose primarily to conduct its business. 25 Id. at 140. 26 Allowing venue in the district where a debtor manages its business is particularly appropriate in both Chapter X and XI cases. A corporate arrangement or reorganization is primarily a financial proceeding. The debtor is maintained as a going enterprise and its finances are put back in order. See Note, 52 N.Y.U.L.Rev. 362, 362 n.5 (1977). Where the corporation transacts its corporate business is a logical place for venue in such proceedings. 27 Our review of CORCO's corporate structure demonstrates that it manages most of its affairs from San Antonio. The feedstocks for its facilities are purchased by people working out of the San Antonio office. The transportation of the raw product to Puerto Rico is arranged from San Antonio. The operation of the refineries is directed from San Antonio. The sale of its refined products is managed from Virginia, and the sale of petrochemicals is managed from San Antonio. The people who deal with the Department of Energy and other federal agencies are stationed in San Antonio. On these facts, we conclude that the bankruptcy court was not clearly erroneous in locating CORCO's principal place of business in San Antonio. 28 The district court relied exclusively on this court's opinion in Dryden for reversing the bankruptcy court's conclusion that CORCO's principal place of business is in San Antonio. The court stated that the facts compel the conclusion that application of the tests set forth in Dryden . . . fix the debtor's principal place of business in Puerto Rico. In a footnote the court listed the following facts in support of its conclusion: 29 all of its assets are there; all of its production takes place there; 95% Of its employees live there; 70% Of its refined products sales and 88% Of its petrochemical sales are made in Puerto Rico to entities physically located on the island (some of the entities are headquartered elsewhere and the contracts for the sales may be negotiated off-island); invoices are prepared and distributed from Puerto Rico; all original records are kept in Puerto Rico by virtue of Puerto Rican law; the debtor's data processing center is located in Puerto Rico; its audits are conducted in Puerto Rico; stockholders' and directors' meetings are held on the island; most of CORCO's current litigation, which is extensive with regard to both the number of suits and the dollar amounts involved, is going on in Puerto Rican courts (the next most utilized forum is New York); the majority in number of its creditors are in Puerto Rico; and Puerto Rico is its place of incorporation. 30 As already indicated, the location of a debtor's assets is not particularly significant since the adoption of Rule 116. The location of employees is, of course, tied to the location of assets. Many more workers are needed to run a refinery than to manage one. The district court mentions the physical location of CORCO's customers but does not give sufficient consideration to where the sales are negotiated and who in the corporate structure is charged with sales responsibility. Where the invoices are prepared is significant, but where CORCO pays its bills is of equal importance. The office of the comptroller and treasurer is located in San Antonio. The other factors mentioned by the district court, location of records, where audits are performed, directors' and stockholders' meetings are held, and the location of CORCO's current litigation are all relevant factors, but the inquiry should not have stopped there. Although the district court's citation to Dryden is somewhat cryptic, the lower court must have proceeded on the understanding that the location of a debtor's principal assets is its principal place of business. Dicta in Dryden might support such an assumption, but adoption of Rule 116 has vitiated whatever validity that dicta once had. Moreover, the Dryden court eschewed any attempt to set a firm rule and recognized that general supervision of a corporation's business can constitute a corporation's principal place of business. The district court should have considered that management of all aspects of CORCO's business emanates from San Antonio. 31 For the district court to reverse the bankruptcy court's conclusion that San Antonio is CORCO's principal place of business it had to conclude that the bankruptcy court's finding was clearly erroneous. Guarantee Acceptance Corp. v. Fidelity Mortgage Investors, 544 F.2d 449, 459 (CA10, 1976); Clark Bros. Co. v. Portex Oil Co., 113 F.2d 45, 47 (CA9, 1940). Our review of the facts and the relevant legal principles convinces us that the bankruptcy court's finding was not clearly erroneous. 17