UNITED STATES BANKRUPTCY COURT

EASTERN DISTRICT OF KENTUCKY

LEXINGTON DIVISION

IN RE:

RUSSELL CAVE COMPANY, INC. f/k/a

The J. Peterman Company

DEBTOR CASE NO. 99-50142

CHAPTER 11

THE OFFICIAL COMMITTEE OF

UNSECURED CREDITORS PLAINTIFF

VS. ADV. NO. 01-5034

APPAREL DESIGNERS ZONE, INC. DEFENDANT

MEMORANDUM OPINION AND ORDER

This matter is before the Court on the Motion for Change of Venue and for Jury Trial filed by the defendant on July 2,2001, the plaintiff=s response and the defendant=s reply. The plaintiff alleged in its First Amended Complaint filed herein on March 2, 2001, that this Court has jurisdiction of this matter pursuant to 28 U.S.C. ' 1334(b), that it is a core proceeding pursuant to 28 U.S.C. ' 157(b)(2)(O), and that venue is proper in this Court pursuant to 28 U.S.C. ' 1409(a). The defendant denied these allegations of jurisdiction and venue in its Answer and requested trial by jury. The defendant then filed its motion as set out above, and upon the filing of the response and reply, the Court took the matter under submission for decision

The record before the Court shows that the debtor and the defendant entered into an agreement on December 29, 1998, which provided that the defendant would conduct a liquidation or clearance sale of excess merchandise of the debtor. The agreement was to be governed by California law. Before any sales were conducted the debtor filed its Chapter 11 petition in this Court on January 25, 1999. On January 29, 1999, this Court entered its Order (A) Approving Clearance Sale to be Conducted by Apparel Designers Zone, Inc. (AADZ@), and (B) Approving Agreement Between Debtor and ADZ. Pursuant to the terms of the order ADZ guaranteed a recovery of at least 45% of the debtor=s cost of clearance inventory whether sold or unsold. There is no evidence in the record that the defendant objected to the entry of this order, or that it ever attempted to have it set aside.

The plaintiff=s amended complaint alleges that the defendant breached the agreement in that it paid the debtor only a fraction of the money owed from the sale. According to the allegations of the complaint, the cost of inventory provided to the defendant by the debtor was $2,289,687.20, and pursuant to the terms of the Order the debtor was owed $1,030,359.24. The amount actually paid was $160,000.00. The plaintiff claims damages for breach of contract in the amount of $870,359.24 and further alleges unjust enrichment in the same amount. The defendant=s Answer denied the allegations of the complaint.

The defendant filed a Counterclaim with its Answer, alleging that the debtor had breached the agreement by failing to disclose its precarious financial condition and implicitly representing that it was solvent, and by inaccurately representing that a party only identified as AGordon Brothers@ had agreed to buy the inventory to be sold at liquidation for at least 55% of the debtor=s costs. The defendant alleges that by this representation the debtor and its lender induced it to agree to the Arevision@ of the agreement, i.e, the guaranteed recovery of 45% of the debtor=s cost of inventory.

In its motion the defendant set out that its request for change of venue was made on the grounds that proper venue does not exist in the Eastern District of Kentucky under 28 U.S.C. ' 1409(d), in that the claims asserted by the plaintiff in this proceeding arose after the commencement of the Chapter 11 case from the operation of the debtor=s business. It further contended that venue would be proper in the Southern District of California pursuant to 28 U.S.C. ' 1391 in that the defendant resides in the Southern District of California and a substantial part of the events giving rise to the plaintiff=s claims arose there. Change of venue was also requested on the grounds that under 28 U.S.C. ' 1412, this matter may be transferred to the Southern District of California in the interests of justice and for the convenience of the parties. Finally, the defendant reiterated its request for a jury trial, contending that it is constitutionally entitled to a jury trial because this matter arises in a breach of contract action.

The basis of the defendant=s challenge to venue in the Eastern District of Kentucky is its contention that the agreement governing the liquidation sale came into being postpetition in the conduct of the debtor=s business, thus making 28 U.S.C. ' 1409(d) applicable here rather than ' 1409(a). That statute provides in pertinent part:

(a) Except as otherwise provided in subsections (b) and (d), a proceeding arising under title 11 or arising in or related to a case under title 11 may be commenced in the district court in which the case is pending.

. . . . . .

(d) A trustee may commence a proceeding arising under title 11 or arising in or related to a case under title 11 based on a claim arising after the commencement of such case from the operation of the business of the debtor only in the district court for the district where a State or Federal court sits in which, under applicable nonbankruptcy venue provisions, an action on such claim may have been brought.

The defendant refers to the agreement of December 29, 1998 as the AOriginal Agreement.@ It then contends that after the filing of the petition it was Aforced@ to agree to pay the debtor at least 45% of the cost of its inventory, resulting in what the defendant refers to as the AModified Agreement@ which it states arose on January 29, 1999. As set out above, the memorialization of the transactions between the debtor and the defendant are found in the December 29, 1998 agreement and the Court=s order of January 29, 1999, approving that agreement. This Court finds that the plaintiff=s claim herein arose out of the prepetition contract which was modified by the postpetition addition of a 45% recovery requirement. Every other aspect of the relationship between the debtor and the defendant is embodied in the December 29, 1998 agreement. In a case similar to this one, the court in Nutri/System, Inc. v. Carma, Inc., et al. (In re Nutri/System, Inc.), 159 B.R. 725 (E.D.Pa. 1993) held that where an adversary proceeding involved allegations of postpetition breach of a prepetition contract, venue was proper in the district where the bankruptcy case was filed. Here there are allegations of postpetition breach of a prepetition contract, as well. The only difference is that the prepetition contract was modified by court order postpetition here.

The leading case in which the court applied ' 1409(d) is Continental Airlines, Inc. v. Hillblom (In re Continental Airlines, Inc.), 61 B.R. 758 (S.D.Tex. 1986). In that case the Chapter 11 debtor attempted a postpetition takeover of an entity situated in a different district, and with whom it had no prepetition dealings, and then tried to Aforce the complaining shareholders of the target corporation to litigate their claims in the home bankruptcy court, thousands of miles from the situs of the takeover and the residence of the corporation....@ At 761-62. This is not the situation here, and this Court therefore holds that venue is proper in this district pursuant to 28 U.S.C. ' 1409(a). The Court further declines to grant a change of venue pursuant to 28 U.S.C. ' 1412.

The Court therefore concludes and ORDERS that the defendant=s motion for change of venue is overruled, and that venue is proper in this district. The Court declines to rule on the defendant=s motion for jury trial at this time and will afford the defendant a jury trial (by recommendation of withdrawl of the reference of this adversary proceeding) pursuant to its demand if it is entitled to one at the time of trial. This matter will proceed on the Court=s regular trial docket, and will be set for trial by separate order.

Entered this day of September, 2001.

By the Court -

Judge William S. Howard

Copies to:

W. Timothy Miller, Esq.

James W. Gardner, Esq.

Ali M.M. Mojdehi, Esq.