In Re: Rehoboth Hospitality LP, C.A. No. 11-12798(KG) (Bankr. D. Del. Oct. 19, 2011). Read opinion here.

Issue Addressed

Whether a bankruptcy proceeding commenced by an entity whose primary asset is a hotel located in Abilene, Texas should be transferred to the Bankruptcy Court for the Northern District of Texas pursuant to 28 U.S.C. § 1412?

Short Answer: Judge Gross of the Bankruptcy Court transferred venue.

This summary was prepared by Tara Lattomus of Eckert Seamans.

Background

Rehoboth Hospitality, LP filed for bankruptcy protection on September 5, 2011. The debtor’s primary assets are a hotel and approximately twelve acres located in Abilene, Texas. All employees are located in Texas and day to day responsibilities are handled by an on-site manager. Rehoboth Hospitality, LP was formed under Delaware law and is governed by a limited partnership agreement that provides that the principle place of business is Philadelphia, Pennsylvania. The debtor purchased the hotel from First National Zions Bank in February of 2005. Beginning at April 2011, the debtor defaulted on its mortgage payments and Zions scheduled a non-judicial foreclosure sale of the hotel. Just prior to the foreclosure sale, Zions sold the mortgages to a newly formed entity called Abilene Holdings, LLC (“Holdings”). Shortly thereafter the debtor commenced its chapter 11 case. On September 13, 2011, Holdings filed a motion seeking to transfer the bankruptcy proceedings to the Northern District of Texas. Holdings argued that the debtor’s actual principle place of business is in Texas and that transfer of venue would promote judicial economy and prevent economic harm to the parties. The debtor argued that the Court must give preference to the debtor’s chosen venue.

Legal Analysis

Whether to transfer venue of a bankruptcy proceeding is a matter within the discretion of the bankruptcy court. However, there is a presumption in favor of maintaining the debtor’s choice of forum. The burden of proof is on the moving party, but if it establishes the burden by a preponderance of evidence, the case may be transferred in the interest of justice or for the convenience of the parties. When determining whether to transfer venue, bankruptcy courts generally consider eight factors: the location of the party, the ease of access to evidence, the subpoena power of the court, the expense of traveling witnesses, enforceability of a judgment, the ability to receive a fair trial, local interest and the economics of a state administration. Judge Gross held that the balance of the factors favored transfer.

The factors favoring transfer included the location of the parties. Although the debtor’s official principle place of business is in Pennsylvania, all day to day operational and managerial decisions are handled in Texas. A prospective purchaser for the debtor’s assets is also located in Texas and an overwhelming majority of creditors are located in Texas. The Court also found that a number of potential witnesses are beyond the subpoena power of the Court including the hotel’s employees. The expense associated with flying employees and potential real estate appraisers from Texas was an additional factor that weighed in favor of transfer. The Court also found that there is no reason to believe that the debtor would not receive a fair trial in Texas.

Furthermore, that the Bankruptcy Court in Texas has greater familiarity with the locale and physical property at issue lead Judge Gross to conclude that the Texas Court would be better able to make a valuation determination based upon a local valuation expert’s testimony. The property is important to the community and the case involves the interpretation and application of Texas real estate law. Judge Gross also noted that the familiarity of the Texas Court would save the estate time and money, and would remove some of the burden from the Delaware Court’s docket.

Finally, Judge Gross noted his agreement with a number of other courts in the circuit that have held that the estate of a real estate partnership is most efficiently administered in the district where the principle asset is located and in this case, that would be Texas. Although not officially a single asset case, it is close enough.