In re Blixseth, 484 B.R. 360 (9th Cir. BAP Dec. 17, 2012)
Reversing the Bankruptcy Court, the U.S. Bankruptcy Appellate Panel of the Ninth Circuit Court of Appeals (the "BAP") has ruled that even though the law generally provides that intangible assets have no physical location or are located where their owner resides, for purposes of determining the proper venue of an involuntary chapter 7 petition against a Washington resident whose principal assets were intangibles comprising interests in Nevada entities, those assets were located in Nevada.
Facts and Procedural Background
The debtor, a Washington state resident, held his principal assets through a Nevada limited liability company and a Nevada limited partnership (the "Nevada Entities"). The Nevada Entities owned other entities that owned real estate around the country, none of which was located in Nevada. Other than existing in Nevada, the Nevada Entities did no business in Nevada. In addition, the Nevada Entities’ offices and books and records were located in Idaho. Nevada law provides that a creditor seeking to execute against an interest in a Nevada entity must proceed in Nevada courts and that a person seeking to dissolve a Nevada entity must likewise proceed in Nevada courts.
Three non-Nevada state tax agencies filed an involuntary petition against the debtor in Nevada upon learning that he had transferred substantially all his assets to the Nevada Entities. Noticing the debtor’s Washington residence address in the involuntary petition, the bankruptcy court raised the issue of whether venue was proper sua sponte, and the debtor later filed a motion to dismiss the petition on the grounds of improper venue.
Under 28 U.S.C. section 1408, venue of a bankruptcy case is proper where the debtor (1) resides, (2) is domiciled, (3) has his principal place of business or (4) has his principal assets. Clearly the first three locations would not support venue of the involuntary petition in Nevada, leaving the location of the debtor’s principal assets as the only venue candidate. According to the bankruptcy court, intangible assets, such as the debtor’s interests in the Nevada Entities, generally have no physical location or are located where the owner resides or is domiciled. Thus, the bankruptcy court found that venue in Nevada was improper because the debtor’s principal assets, the Nevada Entities, were not located in Nevada and dismissed the involuntary petition. It is not clear why the bankruptcy court did not exercise its discretion under Bankruptcy Rule 1014(a)(2) to transfer the case to a proper venue rather than ordering dismissal. One of the petitioning creditors appealed.
The BAP’s Ruling and Analysis
The BAP reversed. According to the BAP, the purpose of the venue statute is to identify a jurisdiction that is both convenient for parties in interest and to enhance effective administration of the case. The BAP acknowledged that intangible property generally either has no location or is located (by a fiction) at the owner’s residence or domicile. However, it observed that "courts frequently have ascribed a location to intangible assets for various purposes." Blixseth, 484 B.R at 366-67. The BAP noted that there were no cases on the issue for purposes of bankruptcy venue.
Citing Office Depot, Inc. v. Zuccarini, 596 F.3d 696, 702 (9th Cir. 1010) the BAP ruled that an analysis of the location of intangibles for venue purposes involves a "’context specific’" inquiry. Id. at 367. The court likened a chapter 7 involuntary petition to a collection action by creditors. In light of that fact and the rules regarding execution against an interest in or dissolution of Nevada entities, it reasoned that Nevada would be the "location" of the debtor’s interests in the Nevada Entities for purposes of the chapter 7 trustee. Accordingly, it held that Nevada was a proper venue for the involuntary petition.
One member of the BAP panel dissented, arguing that the majority has engaged in a "case specific" (emphasis added) rather than a "context specific" exercise.
Commentary
The dissent’s "case specific" vs. "context specific" comment is justified. The Office Depot opinion distinguishes context by the nature of the proceeding, not by the specific facts of a particular case. By focusing on what may serve a case well based on its particulars, the BAP may open a Pandora’s box. For example, the court’s reliance on the notion that an involuntary chapter 7 petition is like a collection action suggests that the result could be different if the facts were the same except that the debtor filed a voluntary chapter 7. What if Nevada law authorized out-of-state execution but only in-state dissolution? While the opinion may be justified as supporting jurisdiction in the venue most convenient for this debtor’s chapter 7 trustee to function, it is less compelling as standard for determination of where the debtor’s principal assets are located.