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Delaware Bankruptcy Litigation

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

Section 503(b)(9): “Receipt” of Goods Discussion

Posted in Bankruptcy Law Basics

Under Section 503(b)(9) of the Bankruptcy Code, creditors may receive administrative-expense priority for the value of goods “received” by the debtor within 20 days before the debtor’s bankruptcy filing in which the goods have been sold to the debtor in the ordinary course of business. 11 U.S.C. § 503(b)(9).

The question becomes: when are goods considered to be received” under Section 503(b)(9) of the Code?

The majority of Courts construing the word “received” have relied upon the Uniform Commercial Code (“UCC”). For example, in the decision of In re Circuit City Stores Inc., 432 B.B. 225 (Bankr. E.d. Va. 2010), the United States Bankruptcy Court for the Eastern District of Virginia ruled that “received” was the functional equivalent of “receipt” under the UCC, and indicated that the terms should be construed identically.

The Court ruled that “received” means “having taken into physical possession” the goods and should be applied as a “federal definition” for purposes of interpreting Section 503(b)(9). This analysis was subsequently applied by the U.S. Bankruptcy Court for the District of New Hampshire which also applied the UCC’s definition of “receipt” to the term “received” contained in Section 503(b)(9). See In re Momenta Inc., 455 B.R. 353, 358-59 (Bankr. D. N.H. 2011).

For creditors seeking to assert a Section 503(b)(9) claim, below are several additional articles on this topic:

Section 503(b)(9) Claims: Timing of Payments

What Constitutes “Goods” Under Bankruptcy Section 503(b)(9)?

Bankruptcy Code Section 503(b)(9): Goods Shipped Within 20 Days

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.

 

Chapter 15 Sale of U.S. Assets of Foreign Debtor Must be Reviewed by U.S. Bankruptcy Court

Posted in Bankruptcy Case Update

In the decision of In re Fairfield Sentry Ltd., 2014 WL 4783370, *4-5 (2d Cir. Sept. 26, 2014), the U.S. Court of Appeals for the Second Circuit ruled that a U.S. Bankruptcy Court was required to review a foreign debtor’s sale of property within the territorial jurisdiction of the United States, relying upon the language of Section 1520(a)(2) of the Bankruptcy Code.  While this decision was rendered by the Second Circuit, it may have an impact on decisions within the Third Circuit, including the District of Delaware.

Moreover, the Second Circuit held that the bankruptcy court erred when it gave deference to a foreign court’s approval of the asset sale.  According to the opinion, regardless of what the foreign (BVI) court did, the U.S. bankruptcy court had an obligation to approve only the “best possible bid.”  Id. at 19.  It had no “good business reason” and no valid legal reason for deferring to the BVI court’s misjudgment. Id. at 10.

This opinion should be considered by any purchaser of U.S. assets of a foreign debtor in a Chapter 15 proceeding. Chapter 15 of the Bankruptcy Code is relatively new (adopted in 2005), and there is a dearth of case law interpreting its provisions.

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.

Barry Mukamal, Trustee in Southern Air Holdings Bankruptcy, Files Preference Actions

Posted in Preference Litigation

Introduction

Earlier this month, Barry E. Mukamal, in his capacity as Litigation Trustee (the “Trustee”) of the SAI Litigation Trust, began filing complaints to recover what the Trustee contends are avoidable preferences.  The Trustee filed the preference actions in the Delaware Bankruptcy Court and argues that the transfers, or payments, received by various defendants are avoidable and subject to recovery under 11 U.S.C. § 547 and 548 of the United States Bankruptcy Code. This post will look at the Southern Air Holdings bankruptcy proceeding, why the company filed for bankruptcy as well as key developments during the course of the bankruptcy proceeding.  In October, 2012, Jason Cornell published a summary of the Southern Air bankruptcy filings in this post.

Background

On September 28, 2012, Southern Air Holdings (“Southern Air” or “Debtor”), along with various related entities, filed chapter 11 petitions in the United States Bankruptcy Court for the District of Delaware.  As stated in its Declarations in Support of Chapter 11 Petitions and First Day Relief (the “Declaration” or “Decl.”), Southern Air describes itself as a “long-haul, wide-body air cargo” provider for governments and commercial users.  Going in to bankruptcy, the company employs 611 full-time employees.  Southern Air is part of the United States government’s “Civil Reserve Air Fleet.”  Pursuant to agreements with the U.S.  Department of Defense, Southern receives air cargo contracts from the government and in turn agrees to pledge its aircraft in times of national emergency.  Southern Air also has air cargo contracts with the United Kingdom Ministry of Defense.

The Bankruptcy Proceeding

On January 18, 2013, just four months after filing for bankruptcy, Southern Air filed its Second Amended Chapter 11 Plan (the “Plan”).  The Delaware Bankruptcy Court confirmed the Plan on March 18, 2013.  On April 15, 2013, Southern Air satisfied the conditions precedent to the Plan becoming effective.

Included in the Southern Air Plan is a Litigation Trust Agreement.  The Litigation Trust Agreement vests the Litigation Trust with the authority to evaluate, prosecute and settle various litigation claims, including avoidable preference claims.  Acting under the Litigation Trust Agreement, the Trustee commenced the recently filed preference actions.

The Preference Actions

The Southern Air bankruptcy, as well as the preference actions, are before the Honorable Christopher S. Sontchi.  The Trustee/Plaintiff prosecuting the NewPage preference actions is represented by the Cole, Schotz, Meisel, Forman & Leonard, P.A. and Brinkman Portillo Ronk, APC.

Defenses to a Preference Action

The Bankruptcy Code provides creditors with many defenses to preference actions. Included among these are the “ordinary course of business defense” and the “new value defense.” For reader’s looking for more information concerning claims and defenses in preference litigation, attached is a booklet I prepared on the subject: “A Preference Reference: Common Issues that Arise in Delaware Preference Litigation.”

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 Entertainment Resorts Files for Chapter 11 Bankruptcy Protection in Delaware

Posted in Bankruptcy Case Summaries

Trump Entertainment Resorts, along with its affiliated debtors (“Trump Resorts” or “Debtors”), filed for bankruptcy under Chapter 11 of the Bankruptcy Code on September 9, 2014 (the “Petition Date”) in the United States Bankruptcy Court for the District of Delaware.

According to Declaration of Robert Griffin, Chief Executive Officer of the Debtors in Support of Chapter 11 Petitions and First Day Motions and Applications (the “Griffin Declaration”), the Debtors “own and operate two casino hotels located in Atlantic City, New Jersey: the Trump Taj Mahal Casino Resort and the Trump Plaza Hotel and Casino.”  Griffin Declaration, ¶ 5.  According to the Petition, the Debtors’ assets are valued at $100 million to $500 million, and their debts are estimated at $100 million to $500 million.   Debtors owe about $286 million to Carl Icahn-owned funds.

Events Leading to Bankruptcy

The Griffin Declaration provides a grim picture: since emerging from Trump Reports’ prior bankruptcy cases in 2010, the Debtors continued to face significant challenges due to the Rouletteprolonged economic downturn, increased competition from within the Atlantic City market and from neighboring states, and the lingering effects of Superstorm Sandy, all of which contributed to declining revenues.  These factors, coupled with the seasonal and capital-intensive nature of the Debtors’ businesses, high debt load, significant labor costs and double-digit real estate tax increases, hindered the Trump Resorts’ ability to operate successfully and negatively impacted the Debtors’ liquidity position.

Like much of Atlantic City, the two Trump properties have suffered from a decline in gambling revenue and falling occupancy at their hotel rooms.

Donald Trump sued Trump Entertainment last month to have his name taken off the two casinos, saying the company let the casinos fall into “an utter state of disrepair.”

Trump Resorts has filed for bankruptcy twice before.  It currently has about 2,800 full-time employees, and 1,800 seasonal employees.

Trump Resorts is represented by the law firm of Young Conaway.  The Trump Resorts bankruptcy proceeding is before the Honorable Kevin Gross of the Delaware Bankruptcy Court, proceeding under case no. 14-12103.  The Debtors’ first day hearing was held today, September 10th at which time various first day orders were entered. The next omnibus hearing is scheduled for October 6, 2014 at 10:00 a.m.

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.

Proposed Amendments Published for Public Comment

Posted in Uncategorized

The Judicial Conference Advisory Committees on Appellate, Bankruptcy, Civil, and Criminal Rules have proposed amendments to their respective rules and forms, and requested that the proposals be circulated to the bench, bar, and public for comment.

The following proposed amendments were approved for publication by the Judicial Conference Committee on Rules of Practice and Procedure in May 2014.

To view the proposed amendments, click here.

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.

Reclamation Rights to Recover Goods from a Debtor under Section 546(c) of the Bankruptcy Code

Posted in Bankruptcy Law Basics

What remedies do you have to recover goods shipped to a company in the weeks leading up to its bankruptcy?  As to those goods shipped 45 days prior to a debtor’s filing, Section 546(c) of the Bankruptcy Code provides a reclamation right to creditors to recover such goods.  This may provide you with the ability to recover your goods directly from the debtor.

There are several requirements under Section 546(c).  The goods must have been sold in the “ordinary course” of the vendor’s business and the debtor must have received the goods while insolvent.  Also, the reclamation demand must be in writing and made within 45 days of the receipt of the goods by the customer (now the debtor in bankruptcy).

If the 45-day period expires after the bankruptcy case is filed, the vendor must make the reclamation demand within 20 days after the bankruptcy filing.  As with pre-bankruptcy demands under the UCC, the demand should identify the goods being reclaimed, include a general statement reclaiming all goods received by the debtor from the vendor during the 45-day period, and demand that the goods be segregated. Often times, vendors will file a notice of reclamation with the bankruptcy court.

Conclusion

If you or your company shipped goods to a debtor prior to its filing for bankruptcy, then you should act quickly to file a reclamation claim against the debtor.  It may provide you with the ability to recover your goods from the debtor.

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.

Analysis Regarding Third-Party Releases in Bankruptcy

Posted in Opinions

In the recent decision of In re Genco Shipping & Trading Ltd., the United States Bankruptcy Court for the Southern District of New York approved certain non-consensual third-party releases granted by unimpaired creditors and equity holders, to the extent that they complied with the US Court of Appeals for the Second Circuit’s standard for approval of these releases.

Background and Analysis

The prepackaged plan presented by Genco included:

  • Releases granted by the Debtors and exculpation for released parties.
  • An injunction provision to implement the releases, exculpation and discharge provided under the plan.
  • Releases granted by non-debtor third parties (Third-party Releases).

The US Trustee and the Equity Committee objected to the Third-party Releases on various grounds.  The Court held that the Third-party Releases were permissible if they satisfied the standard set out by the Second Circuit in Deutsche Bank AG v. Metromedia Fiber Network, Inc. The Metromedia standard considers whether:

  • The releases are important to a debtor’s plan.
  • The claims are channeled to a settlement fund rather than extinguished.
  • The enjoined claims would indirectly impact the debtor’s reorganization by way of indemnity or contribution.
  • The released party has provided substantial contribution.
  • The plan otherwise provides for full payment of the enjoined claims.

The Court agreed with the US Trustee’s argument that simply classifying a party as unimpaired does not automatically mean that a third-party release is permissible and does not need to satisfy the Metromedia standard. In this vein, the Court approved (i) consensual releases, (ii) third party releases for claims that would trigger indemnification or contribution claims against the debtors, (iii) releases to parties who provided substantial consideration to the reorganization. The Court declined to grant releases for indemnification obligations that arose out of the debtor’s restructuring support agreement or the plan, reasoning that it would enable parties to create indemnification obligations merely to gain the protection of a third party release.

Key Takeaway

This decision clarifies that non-consensual third-party releases are not automatically granted by unimpaired parties solely because of their status as unimpaired, but must satisfy the same standard that applies to impaired parties. If this standard is met, unimpaired parties can be required to grant a third-party release without voting on the plan or otherwise consenting to, or having the opportunity to opt out of, granting the release. However, it is unlikely that a non-consensual third-party release will be granted arising out of a restructuring support agreement or plan negotiations.

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.

Third Circuit Rules that Failure to Disclose Third-Party Release Proves Fatal

Posted in Opinions, Recent Developments in Bankruptcy Law

In the recent Third Circuit decision of In re Lower Bucks Hospital, No. 13-1311 (3d Cir. July 3, 2014), the Third Circuit upheld the ruling of the Bankruptcy Court for the Eastern District of Pennsylvania that non-consensual releases were not part of the debtor’s plan of reorganization due to failure to adequately disclose the same to the Court.  In the bankruptcy case, bondholders objected to the release in favor of The Bank of New York Mellon Trust Company, N.A., in its capacity as indenture trustee, on the basis that adequate notification was not provided.

Only a single paragraph in the disclosure statement referenced the third-party release, with no use of distinguishing font, and the debtor’s plan was even less direct.

The third-party release was deemed by the Court to be an injunction that must be described in “specific and conspicuous language” in both the plan and disclosure statement pursuant to Fed. R. Bankr. P. 3016(c).  This would allow a hypothetical investor to be able to make an informed judgment about the plan.  See 11 U.S.C. § 1125(a)(1).  The Third Circuit agreed with the Bankruptcy Court that the pleadings failed on both “presentation and placement.”  Accordingly, a finding of inadequate disclosure and the resulting denial of the third-party release was warranted.

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.

MCG Preference Actions Update

Posted in Preference Litigation

In a prior post, we discussed that a number of preference actions were filed in the MCG Limited Partnership, et al. bankruptcy proceeding by the Chapter 7 Trustee.  Since this post, an additional 93 preference complaints were filed, bringing the total to 131.

Click here for an example of a preference complaint filed in these cases.

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.

Preference Actions Filed in MCG Limited Partnership Bankruptcy

Posted in Preference Litigation

On August 1, 2014, the Chapter 7 Trustee of MCG Limited Partnership, et al., filed approximately 38 complaints seeking to avoid and recover alleged preferential transfers pursuant to Sections 547 and 550 of the Bankruptcy Code, and to disallow claims of the defendants pursuant to Section 502(d).

By way of background, MCG Limited Partnership, and various affiliated entities (the “Debtors”) filed petitions for bankruptcy in the District of Delaware on November 7, 2012 under Chapter 11 of the Bankruptcy Code.  On August 5, 2013, the Bankruptcy Court entered an order converting the Debtors’ Chapter 11 cases to cases under Chapter 7 of the Bankruptcy Code.

The law firm of Cooper Levenson, P.A. represents the Trustee in these various preference cases.  The pretrial conference has not been scheduled.  These adversary actions, as well as the Debtors’ bankruptcy proceeding, are before the Honorable Christopher Sontchi.

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.