September 15, 2015

USA Discounters Ltd., a retailer that has been accused of scamming U.S. service members, is defending its decision to file for chapter 11 in Delaware despite having roots elsewhere.

Judge Christopher Sontchi, a nine-year veteran of the bench in one of the nation’s busiest bankruptcy courts, ordered the retailer to appear at a hearing Friday to defend its filing in the Wilmington, Del., court over “some other appropriate venue.”

A company has wide latitude to choose a court to oversee its restructuring, as bankruptcy laws allow filings in districts where a company is incorporated, has assets or has a presence. As a result, the Delaware and New York courts tend to get a sizable portion of significant chapter 11 filings, a practice that frequently comes under fire (including by judges in other, less-busy courts).

USA Discounters has its headquarters in Norfolk, Va., and faces litigation related to its business practices in Colorado, two possible venues that Judge Sontchi’s order cited. But the company says there is no dispute that its chapter 11 filing, made last month, complies with bankruptcy laws, as two of the three entities that filed were incorporated in Delaware.

Like other companies that face challenges to their choice of venue, the company cited customers and creditors (plus its hired guns) who are located around the U.S., arguing there is no concentration of stakeholders in one location who would be inconvenienced by the Delaware location.

“Put simply, this court is a sensible, centralized nexus in which the cases properly can and should proceed. The court accordingly should not transfer the cases to any other district,” the company’s lawyers said in court papers.

Joining USA Discounters in its defense of sticking in Delaware is the official committee of unsecured creditors, which argued that moving the case now would require a new judge to get up to speed and could threaten creditors’ ability to recover what they’re owed.

Also speaking up in favor of Delaware is Wells Fargo Bank, the agent for USA Discounters’ lenders.

USA Discounters sold furniture, appliances, jewelry and electronics at stores located near military bases, often financing such purchases with its own credit program. Last year, ProPublica reported that the easy credit the company offered military customers provided a launch pad for it to bring thousands of collections suits against them. Without admitting or denying wrongdoing, USA Discounters later agreed to a $50,000 civil penalty related to its charging military customers a fee to obtain financial protections to which they were already entitled.

The company, which says it’s cooperating with an ongoing multistate investigation into its business practices, recently shut down its USA Living stores and continues to operate seven Fletcher’s Jewelers Stores. It aims to use the breathing room of chapter 11 to wind down its business.