Houghton Mifflin Bankruptcy Nearly Derailed by U.S. Trustee, Saved by Judge

Posted on June 21, 2012

Houghton Mifflin has only been in a Chapter 11 bankruptcy proceeding for one month, but it's already looking at an exit from bankruptcy. Before it filed, the company lined up all its creditors who agreed to vote for its plan. Financing is arranged, the creditors are as happy as they get in these kinds of cases and all is well. Except for one little thing.

The U.S. Trustee Tracy Hope Davis objected to the plan, but was finally satisfied with some minor changes. Then she threw a real monkey wrench into the case, demanding that the case be moved from Manhattan to Boston. Bankruptcy attorneys like to be in Manhattan bankruptcy court because of the judges' sophistication and experience in dealing with large Chapter 11 cases. All the parties want the case to stay in Manhattan, but the Trustee is determined to move the case to Boston and filed a motion to transfer venue.

The judge reluctantly granted the order, but grumped that the motion was "very troublesome" to him. He said the motion was troubling, "not because it was in any way improper but as a matter of prosecutorial discretion." He noted that "Here the venue choice was exactly what the creditors wanted. The case, if not slowed down by the U.S. trustee's motion, would be over in 30 days, and the U.S. trustee's motion was opposed by every party in the case with money on the line."

The judge ruled that the case is going to Boston, but only after the major financing is in place. The judge circumvented the Trustee by ruling the case will be moved either on the date the plan becomes effective or three weeks after his confirmation order is entered, whichever comes first. So by the time it gets moved, the case will effectively be over.

We have no idea why the Trustee got such a bee in her bonnet, but she could have derailed the entire $500 million financing, thrown many people out of work and called into question creditors' rights to get paid. We have seen this before, and it's usually because the Trustee is either trying to make a name for himself, or one of the attorneys on the case has done something to tick off the Trustee's office.