Header graphic for print

Delaware Bankruptcy Litigation

Information on Corporate Bankruptcy Proceedings in Delaware and Throughout the United States

Involuntary Bankruptcy Actions Discussed

Posted in Bankruptcy Law Basics

Can a financially distressed be “forced” into bankruptcy by its creditors?  In other words, is it possible for creditors to subject a distressed entity into an involuntary bankruptcy proceeding?

The answer is yes.  Under Section 303 of the Bankruptcy Code, a debtor can be “forced” into an involuntary bankruptcy.  11 U.S.C.§ 303(b)(1).  If a company has 12 or more creditors, an involuntary petition requires three or more creditors whose claims are not contingent as to liability or subject to a bona fide dispute as to either liability or amount to file the petition.

If the company timely objects to the involuntary filing, for the company to be placed in bankruptcy, the company also must: generally not be paying its debts as they become due unless those debts are subject to a bona fide dispute as to liability or amount, or have had a custodian appointed within the past 120 days to take possession or control of substantially all of its assets.

Stay tuned for additional posts regarding involuntary bankruptcy proceedings under Section 303 of the Bankruptcy Code.

Carl D. Neff is a bankruptcy attorney with the law firm of Fox Rothschild LLP.  Carl is admitted in Delaware and regularly practices before the United States Bankruptcy Court for the District of Delaware. You can reach Carl at (302) 622-4272 or at cneff@foxrothschild.com.

DEB Stores Holding LLC files for Bankruptcy under Chapter 11

Posted in Bankruptcy Case Summaries

DEB Stores Holding LLC and certain of its affiliated companies (“DEB” or the “Debtors”) filed for bankruptcy under Chapter 11 of the Bankruptcy Code on December 4, 2014 in the United States District Court for the District of Delaware.

According to the Declaration of Dawn Robertson, Chief Executive Officer of the Debtors, in Support of the Debtors’ First Day Motions (the “Robertson Declaration”), DEB is a mall-based retailer operating 295 retail store locations.  In 2011, the predecessor company to DEB, which operated the retail stores under the same name, filed a bankruptcy petition.  In that prior bankruptcy, DEB’s current equity holders purchased substantially all the assets of the predecessor company with a credit bid in a 363 sale.

Events Leading to Bankruptcy

According to the Robertson declaration, DEB’s recent performance has suffered due to weakness in the Juniors space and unfavorable mall traffic trends.  In October, 2013, DEB began working to reduce costs in an effort to return to profitability.  In August and September, DEB attempted to obtain additional cash infusions from its equity holders, without avail.  DEB also sought to locate a buyer of the company or its assets.  With its continually shrinking liquidity, and unable to locate any entities interested in purchasing DEB as a going-concern, DEB has filed for bankruptcy protection.

Objectives in Bankruptcy

According to the Robertson Declaration, the goal of DEB’s bankruptcy is to liquidate the assets of the company.  The company has engaged in discussions with a potential stalking horse bidder in an effort to maximize recoveries to creditors.  The potential stalking horse bidder is a joint venture comprised of two retail liquidators. DEB intends to pursue an auction of its assets and to begin conducting store closings sales to liquidate their inventory through a liquidator.

As provided by the Robertson Declaration, DEB’s last audited financial statements, current as of December 31, 2013, reflected assets totaling approximately $90.5 million and liabilities of approximately $120.1 million.  It’s revenues in 2013 were $296 million.  DEB employs approximately 4,000 individuals and orders product from approximately 11,000 vendors.  This large bankruptcy is another in a growing body of retail operators who have failed, in part, due to the reduction of traffic to traditional brick-and-mortar retailers – presumably due to the competition from internet retailers.  I’m interested to see what other businesses go the way of the newspaper in the continually growing pressure created by internet competition.

DEB is represented by the law firm Pachulski, Stang, Ziehl & Jones LLP.  DEB’s bankruptcy proceeding is before the Honorable Kevin Gross of the Delaware Bankruptcy Court, proceeding under case no. 14-12676.  The next omnibus hearing is scheduled for December 17, 2014 at 2:30 p.m.

John Bird is a bankruptcy attorney with the law firm of Fox Rothschild LLP.  John is admitted in Delaware and regularly practices before the United States Bankruptcy Court for the District of Delaware. You can reach John at (302) 622-4263 or at jbird@foxrothschild.com.

Motions for Reconsideration – A Lesson from Worldspace

Posted in Opinions

The efficient manner of speech which Judge Walsh employs during hearings shines through in this opinion released December 5, 2014 in the Worldspace bankruptcy (Bank. D. Del. 08-12412).  In 3-1/2 pages of his opinion, Judge Walsh explains the requirements of a motion for reconsideration and illustrates the weakness of the movant’s position.  Judge Walsh’s opinion is available here (the “Opinion”).

Background

The Movant was the plaintiff in a lawsuit brought against the Chapter 7 Trustee in this case as well as other defendants.  In response to the complaint, the defendants moved to dismiss, claiming that the Movant had no standing as he was not an employee of a Debtor.  After Judge Walsh granted the motion to dismiss, the Movant filed his motion for reconsideration.

Judge Walsh’s Ruling

Judge Walsh cites to his own opinion, In re Fruehauf Trailer Corp., 2012 WL 604145 (Bankr. D. Del. Feb. 17, 2012), to provide the elements required for a motion to reconsider to be granted.  “A party seeking reconsideration must establish at least one of the following grounds: (1) an intervening change in the controlling law; (2) newly available evidence; or (3) the need to correct a clear error of law or fact to prevent manifest injustice.”  Opinion at *3-4.

Because the Movant did not make any of these three arguments, Judge Walsh summarily reviews the facts that led to his original decision, closing with a summary of his prior decision “The dispute here raises an issue of contract interpretation. I conclude that [Movant’s] interpretation has no merit. Consequently, the motion for reconsideration is denied.”

A lawyer needs to gain familiarity with the required elements of a motion prior to filing it.  It is particularly important to take the time to review any writings of the judge before whom the argument is being made.  Not investing this time is understandable in routine motions, but as Judge Walsh said, a motion for reconsideration isn’t a routine motion, rather, it is “an extraordinary means of relief in which the movant must do more than simply reargue the facts of the case.”  Opinion at *3.

Judge Walsh is retiring soon.  His succinct writing and speaking style is a rarity in the legal world and it will be missed.  I look forward to reading any other opinions that he has the opportunity to issue prior to his departure from the bench.  Even if my summary ends up being nearly as long as the opinion itself.

John Bird is a bankruptcy attorney with the law firm of Fox Rothschild LLP.  John is admitted in Delaware and regularly practices before the United States Bankruptcy Court for the District of Delaware. You can reach John at (302) 622-4263 or at jbird@foxrothschild.com.

Trump: Delaware Bankruptcy Court Confirms Secured Nature of Tax Firm’s Claim against Trump Debtors

Posted in Bankruptcy Case Summaries

In the recent decision of In re Trump Entertainment Resorts, Inc., Case No. 14-12103 (Bankr. D. Del. December 5, 2014), the Delaware Bankruptcy Court adjudicated the motion of Staller, Sklar, Chan & Brown, P.A. (“SSC&B” or “Firm”) to fix the value and priority of its claim and to allow its claim to be deemed secured in full.  SSC&B served as tax counsel to the Trump Debtors prior to their filing for bankruptcy.  This case is a good read for any law firm attempting to enforce a claim for pre-petition services provided to a debtor.

Background

SSC&B was retained in 2008 to file tax appeals in the Tax Court of New Jersey for casino hotel properties owned by Trump Debtors.  SSC&B achieved a settlement in 2012 which resulted in a $50.5 million reduction in tax liabilities, plus additional tax reduction assessments in the future.

The Firm was retained on a contingency basis, receiving a 17.5% contingency fee.  Because the Debtors were financially distressed, SSC&B agreed to a delayed payment of their fees to accommodate Debtors.  Thereafter, the Firm entered into various amendments of their agreement, and Trump Debtors acknowledged the Firm’s Charging Lien.  In addition, the Firm obtained an order from the Tax Court perfecting its Charging Lien.

In July 2014, Trump Debtors advised SSC&B that it would not pay the final $1.25 million installment to the Firm.  SSC&B filed a motion to enforce its perfected Charging Lien with the Tax Court, which was opposed by Trump.  However Debtors acknowledged that they owed the money to the Firm, and did not oppose the existence of the Charging Lien.  The Tax Court then issued a Writ of Execution directing the Sheriff of Atlantic County, New Jersey to satisfy the $1.25 million judgment by levying on a Trump account.

Analysis

In light of the prior proceedings before the Tax Court, and the significant decrease in tax liability, the Court found the Debtor’s challenge to the Firm’s lien and their disparagement of the Firm and its fees to be “unsettling.”  Slip. op. at 6.  The Court found no basis to reverse the findings of the Tax Court, which would be precluded under the “Rooker-Feldman Doctrine”.

Moreover, the Court rejected the argument of the Debtors and Ichan Entities that because the refund was not segregated, and that the funds were spent, the Charing Lien attaches to nothing.  Instead, the Court ultimately found that the SSC&B’s Charging Lien attaches to all of the Debtors’ cash, subject to priority liens.

Finally, the Court denied the Firm’s request that the Charging Lien be applied retroactively and before the date of the liens of the Ichan Entities.  The Court would not agree to prime a pre-existing lien, applying the common law rule that “first in time is first in right”.  Slip op. at 9.

This case should serve as a clear reminder to law firms or other professionals that when providing services to a financially distressed company, in the event the company files for bankruptcy, significant efforts may need to be taken in order to protect such claim.  Therefore, service providers should engage the assistance of bankruptcy counsel to determine how best to insulate their claims from attack during the bankruptcy process.

Carl D. Neff is a bankruptcy attorney with the law firm of Fox Rothschild LLP.  Carl is admitted in Delaware and regularly practices before the United States Bankruptcy Court for the District of Delaware. You can reach Carl at (302) 622-4272 or at cneff@foxrothschild.com.

Satcon Technology Corp. Preference Actions Update

Posted in Preference Litigation

On October 17, 2014, Charles M. Forman, the Chapter 7 Trustee of the Satcon Technology Corp. bankruptcy estate, filed a number of complaints seeking the avoidance and recovery of alleged preferential transfers pursuant to Sections 547 and 550 of the Bankruptcy Code.  To review a prior post concerning the filing of these complaints, click here.

Since the filing of these adversary actions, the Court has scheduled a pretrial conference for January 8, 2015 at 11:00 a.m.  At the pretrial conference, the Court will enter a scheduling order to govern relevant timelines of the litigation.  For a link to a standard scheduling order that can be found on the Bankruptcy Court’s website, click here.

Preference defendants should review any proposed scheduling order circulated by plaintiff’s counsel to determine to what extent the proposed order differs from the Court’s standard scheduling orders, and be prepared to object to the inclusion of any terms that materially differ.

For preference defendants looking for an analysis of defenses that can be asserted in response to a preference complaint, below are several articles on this topic:

Preference Payments: Brief Analysis of Preference Actions and Common Defenses

Minimizing Preference Exposure: Require Prepayment for Goods or Services

Minimizing Preference Exposure (Part II) – Contemporaneous Exchanges

Carl D. Neff is a bankruptcy attorney with the law firm of Fox Rothschild LLP.  Carl is admitted in Delaware and regularly practices before the United States Bankruptcy Court for the District of Delaware. You can reach Carl at (302) 622-4272 or at cneff@foxrothschild.com.

You Don’t Get Three Strikes when Filing a Complaint – Lessons from Tropicana

Posted in Opinions

In a 28 page opinion released November 25, 2014 in the Tropicana Entertainment bankruptcy (Bank. D. Del. 08-10856), Judge Carey of the Delaware Bankruptcy Court provided an opinion regarding a defendant’s motion to dismiss an amended complaint.  Judge Carey granted the majority of the motion to dismiss, denying a second request for leave to amend because “The Trustee has now had ample opportunity to present a properly pled complaint.”  This ruling illustrates the importance of providing all the necessary details and required allegations in a complaint, particularly if the Court has already provided you with one “do-over”.  Judge Carey’s opinion is available here (the “Opinion”).

Background

Pursuant to the confirmed plans in the Tropicana bankruptcy cases, Lightsway Litigation Services, LLC was appointed as the trustee of a Litigation Trust (the “Trustee”) tasked with pursuing claims against insiders of the Debtors. On February 17, 2010, the Trustee filed a complaint against Yung, Wimar, Columbia and others asserting claims for breach of fiduciary obligations, breach of contract, breach of the implied covenant of fair dealing, and equitable subordination. The defendants filed a motion to dismiss the complaint and, after a hearing, the Court entered an Order denying the motions to dismiss, but directing the Trustee to file an amended complaint.  On February 9, 2011, the Trustee filed the First Amended Complaint against Yung, Wimar and Columbia (the “Defendants”).  Opinion at *3.

The Defendants filed another motion to dismiss.  After briefing and oral argument, the Court entered the Opinion and corresponding Order granting the motion in part and denying it in part.

Judge Carey’s Ruling

While the amended complaint contains five claims, all of which are addressed in the motion to dismiss and the Opinion, the only claim this post will discuss is the Trustee’s amended claim that “[Defendant] Yung breached fiduciary duties owed to the Debtors based upon his equity ownership and control of the management, operation, and finances of the Debtors.”  Opinion at *17 (internal quotations omitted).

This section of the Opinion spans pages 17-21, providing a detailed analysis of who is owed fiduciary duties, and when.  Beginning when a company is healthy, and all duties are owed to the equity holders, in this case the parent company, and ending when a company is distressed and all duties are owed to the creditors, at the individual company level.  As stated by the Court, “[t]he solvency or insolvency of the corporation determines which constituency has the right to pursue a derivative claim based on a breach of fiduciary obligation.”  Opinion at *20.

Citing the Delaware Chancery Court’s decision Production Resources Group, L.L.C. v. NCT Group, Inc., 863 A.2d 772, 792 (Del. Ch. 2004), the Opinion states that “To meet the burden of pleading insolvency, a plaintiff must plead facts showing that the debtor-corporation has either 1) a deficiency of assets below liabilities with no reasonable prospect that the business can be successfully continued in the fact thereof, or 2) an inability to meet maturing obligations as they fall due in the ordinary course of business.”  Opinion at *20-21.  In this case, the Trustee failed to plead specific facts, alleging only that “[the Defendant's] misconduct propelled the Debtors into insolvency, which ultimately led to the filing of the bankruptcy cases in the Spring of 2008.”  Opinion at *20.

While there is no doubt that the Debtors filed for bankruptcy, “[the complaint contains] no facts to provide a basis from which [the Court] can infer whether any or all of the Debtors were insolvent or when insolvency occurred.”  Opinion at *21.  And although the Defendants did not raise insolvency in their motion to dismiss the original complaint, the Defendants are not required to defend against claims that were not included in the complaint.  This led to the Court’s ruling that “The Trustee has now had ample opportunity to present a properly pled complaint. The request for leave to again amend the complaint is denied.”  Opinion at *21.

In this case, the failures of the Trustee in crafting a complaint that satisfied the standards of the Delaware Bankruptcy Court, even with two bites at the apple, led to the Court’s dismissal of a cause of action that could have resulted in significant damage awards for the Trustee.  If you read no other parts of this decision, make sure to carefully review pages 17-21 before filing any amended complaints in the Delaware Bankruptcy Court.

John Bird is a bankruptcy attorney with the law firm of Fox Rothschild LLP.  John is admitted in Delaware and regularly practices before the United States Bankruptcy Court for the District of Delaware. You can reach John at (302) 622-4263 or at jbird@foxrothschild.com.

Quantum Foods Preference Actions Update

Posted in Preference Litigation

In a prior post, we discussed the commencement of approximately 72 preference actions filed in the Quantum Foods bankruptcy proceeding by the Creditors Committee.  In the preference actions at issue, the Creditors Committee seeks to avoid and recover purported preferential transfers under Sections 547 and 550 of the Bankruptcy Code, and purported fraudulent transfers under Section 548 of the Bankruptcy Code.

Since the filing of these adversary actions, the Court has scheduled a pretrial conference for December 9, 2014 at 2:00 p.m.  The purpose of a pretrial conference, among other things, is to enter a scheduling order to govern relevant timelines of the litigation.  It is therefore important for any preference defendant to fully review any proposed scheduling order in advance with counsel to determine whether such deadlines and provisions are consistent with scheduling orders commonly entered by the Delaware Bankruptcy Court.

For a link to a standard scheduling order that can be found on the Bankruptcy Court’s website, click here.  The Court has routinely expressed concerns over scheduling orders proposed by plaintiff’s counsel that materially differ from the terms of the Court’s standard scheduling orders.

Carl D. Neff is a bankruptcy attorney with the law firm of Fox Rothschild LLP.  Carl is admitted in Delaware and regularly practices before the United States Bankruptcy Court for the District of Delaware. You can reach Carl at (302) 622-4272 or at cneff@foxrothschild.com.

Unitek Global Services Files a Prepack Chapter 11 Bankruptcy in Delaware

Posted in Bankruptcy Case Summaries

Unitek Global Services, Inc. (“Unitek” or the “Debtor”) filed for bankruptcy under Chapter 11 of the Bankruptcy Code on November 3, 2014 in the United States District Court for the District of Delaware.

According to the Declaration of Andrew J. Herning, Chief Financial Officer and Treasurer of the Debtor, in Support of the Debtors’ Chapter 11 Petitions and First Day Motions (the “Herning Declaration”), the Debtors are a “full service provider of technical services to customers in the wireless telecommunications, public safety, satellite television and broadband cable industries in the United States and Canada.”  While Unitek may not be a common household name, their customers are.  They include, among others, DIRECTV, AT&T, Comcast, Sprint, T-Mobile, and Time Warner Cable.

Events Leading to Bankruptcy

The Debtor is a in an extremely competitive market in which there are a small number of large customers.  This means that Unitek and its competitors are engaged in intense competition for the business.  While Unitek was operating successfully, it discovered in April, 2013, that certain employees had engaged in fraudulent activities, which impacted its revenue recognition.  Not only did this cost Unitek roughly $9 million to resolve, but it necessitated restating several years of financial statements and constituted events of default with some of Unitek’s creditors.  Unitek has suffered continual losses since that time.

Objectives in Bankruptcy

Unitek has filed for bankruptcy in an effort to: (a) reduce its total operating company funded debt by approximately $90 million, excluding original issue discount costs; (b) obtain commercially reasonable, long term financing and access to incremental commitments that will enable it to support its future business needs; and (c) continue its relationship with DIRECTV, LLC, its largest customer.

To that end, prior to filing for bankruptcy protection, Unitek engaged in extensive negotiations with its lenders and created a fully consensual restructuring transaction to be implemented swiftly through a prepackaged chapter 11 plan of reorganization, or “Prepack”.  As this case is a Prepack, it will move much more quickly than an ordinary case.  Of note, on the same day as the bankruptcy petitions were filed, Unitek filed its Plan of Reorganization (the “Plan”).

The Plan provides for the following, among other things, to occur: (i) portions of Unitek’s secured debt will be converted into a new first lien debt facility; (ii) portions of Unitek’s secured debt will be converted into 100% of the equity in the reorganized Debtors; and (iii) allowed general unsecured claims will be paid or assumed by the reorganized debtor.   Copies of the Plan are available on the Debtors’ restructuring website: http://dm.epiq11.com/UniTek.

Unitek is represented by the law firms Morgan, Lewis & Bockius LLP and Young Conaway Stargatt & Taylor, LLP.  Unitek’s bankruptcy proceeding is before the Honorable Peter J. Walsh of the Delaware Bankruptcy Court, proceeding under case no. 14-12471.  The next omnibus hearing is scheduled for December 3, 2014 at 11:00 a.m.  The Confirmation Hearing is scheduled for December 12, 2014 at 9:30 a.m. and confirmation objections must be filed by December 5, 2014 at 4:00 p.m.

John Bird is a bankruptcy attorney with the law firm of Fox Rothschild LLP.  John is admitted in Delaware and regularly practices before the United States Bankruptcy Court for the District of Delaware. You can reach John at (302) 622-4263 or at jbird@foxrothschild.com.

NOLs – A Recoverable Transfer?

Posted in Opinions

In a 27 page opinion released October 23, 2014 in the Conex Holdings case (Bank. D. Del. 11-10501), Judge Sontchi of the Delaware Bankruptcy Court provided his analysis of the ability of a debtor to recover the value of NOLs used by its parent within consolidated tax returns.  This ruling has implications for any debtor whose parent company uses its NOLs in a consolidated filing.  Judge Sontchi’s opinion is available here (the “Opinion”).

Background

CopperCom (the “Defendant”) included the Debtor’s tax returns in its consolidated tax returns.  As the Debtor had a net loss, the Defendant included $7.79 million of net operating losses (or NOLs) in its tax return.  This created a net benefit to the Defendant of $2.64 million.  Conex Holdings’ chapter 7 trustee (the “Trustee” or “Plaintiff”) sued CopperCom to recover what he claimed was a preferential transfer of the net tax benefit.  The Defendant eventually filed a motion to dismiss.  In deciding the motion to dismiss, Judge Sontchi issued this Opinion.

This case was very fact intensive and the Opinion’s discussion includes numerous references to the Internal Revenue Code and the tax treatment of single member LLCs.  A full discussion of the implications would take numerous pages of detail.  Given that the order was 27 pages, one can easily imagine the hundreds of pages that the parties’ briefs and legal argument span.  In that vein, I’d encourage anyone with an interest in the intersection of tax and bankruptcy to read the Opinion.

NOLs are lost when a company liquidates and closes shop following a chapter 7 bankruptcy.  As the Opinion makes clear on page 23, when you have no future business, it is impossible to have any future income that can be offset.  This was one of the factors that appears to be dispositive.  If a debtor (or the chapter 7 trustee) could never use the NOL, then it has no value which can be recovered by a debtor in preference litigation.

Additionally, following the requirements of the Internal Revenue Code, as the Defendant did, will generally shield you from preference liability.  As demonstrated in pages 25-26 of the Opinion, the policy behind avoidance actions is not implicated when a party has no discretion in how it complies with federal regulation.  When the policy underlying the preferential transfer statutes is not implicated, it is unlikely that a party will be required to repay a transfer.

For both of these reasons, Judge Sontchi granted the Defendant’s summary judgment motion, allowing it to retain the tax relief it received by using NOLs created by the Debtor.  I wouldn’t feel too bad for the Debtor though.  Remember, as a single member LLC, every dollar the Debtor lost was a dollar received from its parent company — in this case, the Defendant.

John Bird is a bankruptcy attorney with the law firm of Fox Rothschild LLP.  John is admitted in Delaware and regularly practices before the United States Bankruptcy Court for the District of Delaware. You can reach John at (302) 622-4263 or at jbird@foxrothschild.com.

Dots, LLC Preference Actions Filed

Posted in Preference Litigation

On November 7, 2014, in the neighboring jurisdiction of the United States Bankruptcy Court for the District of New Jersey, Dots, LLC, et al. (“Debtors” or “Dots”) filed approximately 70 complaints seeking to avoid and recover alleged preferential transfers pursuant to Sections 547 and 550 of the Bankruptcy Code, to disallow claims of the defendants pursuant to Section 502(d), and seeking attorneys’ fees.

By way of background, the Debtors filed petitions for bankruptcy in the District of New Jersey on January 20, 2014.   The Debtors are operating their businesses and managing their properties as debtors-in-possession.

The law firm of Trenk, DiPasquale, Della Fera & Sodono, P.C. are special counsel to the Debtors in these various preference cases.  The pretrial conference has been scheduled for January 22, 2015 at 10:00 a.m.  These adversary actions, as well as the Debtors’ bankruptcy proceeding, are before the Honorable Donald H. Steckworth.

For readers looking for more information concerning preference litigation, including an analysis of defenses that can be asserted, below are several articles on this topic:

Preference Payments: Brief Analysis of Preference Actions and Common Defenses

Minimizing Preference Exposure: Require Prepayment for Goods or Services

Minimizing Preference Exposure (Part II) – Contemporaneous Exchanges

Carl D. Neff is a bankruptcy attorney with the law firm of Fox Rothschild LLP.  Carl is admitted in Delaware and regularly practices before the United States Bankruptcy Court for the District of Delaware. You can reach Carl at (302) 622-4272 or at cneff@foxrothschild.com.