Plaintiff Successfully Obtains Venue Transfer Given Change in Circumstances; District Court Sua Sponte Transfers Venue of Related Cases

Zazzali v. Wavetronix LLC (In re DBSI, Inc.), No. 12-cv-1211 (GMS), et al. (D. Del. Sept. 25, 2014)

This Memorandum Opinion issued by Judge Sleet of the Delaware District Court relates to multiple bankruptcy and securities proceedings pending in Delaware stemming from the alleged Ponzi scheme perpetrated by directors of the DBSI entities.  The bankruptcy actions (collectively, the “Bankruptcy Cases”) at issue are: (i) a declaratory action commenced by several parties, including Wavetronix LLC, (collectively, the “Moving Parties”) related to investments, promissory notes and membership interests in or made by a DBSI debtor; and (ii) an adversary proceeding commenced by the DBSI post-confirmation liquidating trustees against Wavetronix seeking to enforce certain promissory notes.  While the Moving Parties initially chose to file the declaratory action in Delaware, Wavetronix allegedly discovered several affirmative defenses implicating the federal RICO statute while preparing its answer to the liquidating trustees’ complaint.  The Moving Parties then sought to withdraw the reference and transfer both Bankruptcy Cases to the District of Idaho.  Ultimately, the District Court granted their requests.  In doing so, the Court also sua sponte transferred related actions commenced in the District Court by the liquidating trustee against hundreds of defendants, alleging violations of the Securities Exchange Act, breaches of contract, common law fraud, negligence, and breach of fiduciary duties (the “Securities Cases”).

In the first instance, the District Court found that withdrawal of the reference with respect to the Bankruptcy Cases was mandatory under 28 U.S.C. § 157(d) because they involve consideration of not only bankruptcy laws but also the RICO Act, which is a non-bankruptcy federal law affecting interstate commerce.  Alternatively, the District Court found that “cause” existed for discretionary withdrawal.  While permissive withdrawal requires considerations of the nature of the proceedings (i.e. core or non-core), the District Court refrained from doing so, and instead relied on basic judicial economy in light of the existence of related cases that were already pending and moving forward in the District of Idaho.

Turning next to the venue determination, the District Court determined that the Moving Parties met their burden under 28 U.S.C. § 1404(a) and the leading venue cases of Jumara v. State Farm Insurance Co., 55 F.3d 873 (3d Cir. 1995) and Shutte v. Armco Steel Corp., 431 F.2d 22 (3d Cir. 1970).  First, it was undisputed that the Bankruptcy Cases could have originally been brought in the District of Idaho.  Second, the Court held that the balance of convenience and justice strongly favored the Moving Parties.  In the Third Circuit, this requires an individualized analysis accounting for the various private and public interests taking into consideration the non-exclusive list of factors set forth in Jumara, 55 F.3d at 879-80.  Because Delaware is not the “home turf” (i.e. physical location) of the liquidating trustees (the plaintiffs in one Bankruptcy Case), the Court gave their forum selection some degree of deference, but did not consider it “paramount.”  Moreover, the District Court found several compelling reasons to transfer venue to the District of Idaho, including (i) the existence of many material witnesses and defendants located in and near Idaho, who are outside the subpoena power of the Delaware District Court and who would be inconvenienced by travel to Delaware; (ii) the existence of ongoing and related proceedings in the District of Idaho, which could be consolidated with the transferred cases and resolved more expeditiously without the chance of conflicting outcomes; (iii) the importance of the proceedings to Idaho residents and lawmakers given that the alleged bad acts occurred in Idaho and would require interpretation of Idaho law; and (iv) the state law familiarity of the Idaho district judge who has the opportunity to more frequently consider it.

Interestingly, while the Moving Parties in the Bankruptcy Cases proved successful on their motions to transfer venue, the District Court also sua sponte transferred venue of the Securities Cases and explained its reasoning in a footnote.  In addition to relying upon the factors supporting venue transfer of the Bankruptcy Cases, the Court also held that a transfer of the related Securities Cases would best serve the interests of convenience and justice.  Recognizing that it has limited, if any, authority to transfer the non-moving defendants under 28 U.S.C. § 1404(a)-(b), the District Court transferred the Securities Cases under its “inherent authority to manage its own docket.”

For our readers waiting for rulings from the Delaware District Court, it is likely that you will keep waiting.  The motions here were filed in September 2012 and fully briefed by the following May.  The Court’s decision was rendered almost one and a half years later and in it the Court noted that, as of June 2014, the District of Delaware had the second highest number of weighted filings in the country.  According to the statistics, Delaware is second only to the Southern District of West Virginia.