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Delaware Bankruptcy Litigation

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

DE Bankruptcy Court Denies Canadian Employees’ Motion to File Late Proof of Claim in Nortel

Posted in Opinions

In the case of In re Nortel Networks, Inc. et al., Case No. 09-10138 (KG) (Del. Bankr. Ct. May 21, 2015), Judge Gross considered a motion filed by the “Ad Hoc Committee of Canadian Employees Terminated Pre-Petition” seeking leave to file proofs of claim after the expiration of the Bar Date applicable to Nortel’s U.S. Debtors.

Background

The Canadian Employees are a self-styled “Ad Hoc Committee” of approximately 1705 former employees of the Canadian Debtors.  They were not employees of any of the U.S. Nortel debtors.  Prior to the Petition Date, each of the Canadian Debtors terminated the employment of the Canadian Employees who received a termination letter from the Canadian Debtors which, as is relevant here, proposed a severance payment in return for releases benefiting the Nortel Entities.

The Canadian employees were exempt from the Canadian claims process, but not the U.S. Debtors claims process.  The applicable bar date against the U.S. Debtors was in 2009, however it was not until 2012 that they believed they may have a claim against the U.S. Debtors when their law firm advised that they should file a claim against the same.

Analysis

The Canadian employees asserted, in support of their motion, that a) notice of the bar date of the U.S. Nortel debtors was defective, given that the publication was confusing, and b) even if they received proper notice, they should be allowed to file claims based upon the theory of excusable neglect.

The Court found that the publication of the Bar Date was not intentionally misleading or confusing.  Because the Court viewed the Canadian Employees as unknown creditors, it also found that publication was effective, and satisfied the requirements of due process with respect to unknown creditors.

Further, the Court found the Canadian Employees’ excusable neglect assertion unavailing.  As stated by the Court: “[s]imple ‘[i]gnorance of one’s own claim does not constitute excusable neglect.’” Jones v. Chemetron Corp., 212 F.3d  199, 205 (3d Cir. 2000).

Key Takeaway

This decision is important for any party seeking to file an untimely proof of claim against a debtor’s estate.  As demonstrated by this decision, parties and counsel should act quickly to identify which debtors – whether U.S. debtors or otherwise – they possess claims, and to timely file the claims in advance of the applicable bar date.

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.

Orchard Supply – The Trouble With Motions to Dismiss

Posted in Opinions

Summary

In a 14 page decision released May 12, 2015, Judge Sontchi of the Delaware Bankruptcy Court illustrated why even perfect motions to dismiss may not be worth filing.  Judge Sontchi’s opinion is available here (the “Opinion”).  The Opinion was issued in the adversary proceeding Alamo Group, LLC and Kirin Alamo, LLC v. A&G Realty Partners, LLC, et al., Case No. 14-50103.  In this adversary proceeding the plaintiffs alleged fraudulent misrepresentation, but failed to allege materiality, a necessary element of a Delaware common law fraud claim.  Opinion at *2.  Because the plaintiffs failed to plead materiality, Judge Sontchi held that “there [was] no need to detail the remaining elements of a Delaware common law fraud claim.  Plaintiffs’ Complaint fails on these grounds.”  Opinion at *14.  Yet, even with what amounted to a perfect motion to dismiss, Judge Sontchi concluded his Opinion with a statement that “Plaintiffs will be given an opportunity to amend the Complaint within 30 days…”  Opinion at *14.

Background and Ruling

This adversary proceeding was filed on March 26, 2014.  On May 19, 2014 the motion to dismiss was filed.  Nearly one year later, the Opinion was released.  While the motion to dismiss was not the most heavily litigated motion I have seen, there are currently only 44 docket entries in the adversary proceeding including the Opinion, I don’t doubt that it was still relatively expensive to have heard.  Additionally, it delayed reaching a final resolution in this case by approximately one year.  Because the Plaintiffs has 30 days to amend their complaint to correct this deficiency, it will have taken more than one year to litigate and resolve this single motion, and the parties are in almost the exact same position they were in prior to the filing of the motion to dismiss.  If that was part of the Defendants’ strategy, then it was a job well done.

As we have seen numerous times, opinions issued pursuant to a motion to dismiss, in this Bankruptcy Court, almost always contain a provision allowing the plaintiff an opportunity to amend their complaint.  By way of example, please review these posts:

Tri-Valley Corp. Bankruptcy – Preference Complaint Dismissed – Leave to Amend Granted

Decision in Ultimate Acquisition Grants Motion to Dismiss, But Also Grants Leave to Amend the Preference Complaint

But lest you think a motion to dismiss is entirely pointless, plaintiffs need to make sure they get it right when they have a do-over.  The second motion to dismiss can work:

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

John Bird practices with the law firm Fox Rothschild LLP in Wilmington, Delaware. You can reach John at 302-622-4263, or jbird@foxrothschild.com.

Court Reiterates that Debtor’s Setoff Rights Trump those of Claimant

Posted in Opinions

In the bankruptcy case of ADI Liquidation, Inc. (f/k/a AWI Delaware, Inc.), Bankr. No. 14-12092 (KJC), the Court considered a motion by creditor Western Family Foods, Inc. (“WFFI”) for relief from the automatic stay to exercise its setoff rights against its general unsecured claim against ADI Liquidation, Inc., et al. (the “Debtors”).  Meanwhile, the Debtors asserted that they also hold certain setoff rights, and have asked for Court approval of the exercise of their setoff rights against claimants who, like WFFI, have asserted administrative priority claims under Bankruptcy Code § 503(b)(9).

In the opinion, the Court found that WFFI requested that its setoff rights trump those of the Debtors.  In denying this request, Judge Carey provided that “there is no basis in the Bankruptcy Code or applicable case law to conclude that a claimant’s setoff rights should trump a debtor’s setoff rights.” Citing In re Circuit City Stores, Inc., 2009 WL 4755253, *4 (Bankr. E.D. Va. Dec. 3, 2009), the Court provided:

The Court, in evaluating setoff, should favor an application that is most likely to result in equal distributions to the Debtors’ creditors as a whole. See In re Colonial Realty Co., 229 B.R. 567, 575 (Bankr. D.Conn. 1999) (holding that the right to setoff is not absolute and must be balanced against the debtor’s duty to maximize assets of the bankruptcy estate and equitable treatment of other creditors.)

At bottom, the Court reiterated that the Bankruptcy Code does not treat a debtor’s and creditor’s right to setoff equally.

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.

Corinthian Colleges, Inc. – Warn Class Action Lawsuit Filed

Posted in Bankruptcy Case Update

On May 5, 2015, Outten & Golden LLP and Loizides, P.A. filed a class action adversary proceeding complaint for violation of the WARN Act in the Corinthian Colleges bankruptcy.  The Corinthian Colleges bankruptcy is case number 15-10952 and this adversary proceeding is number 15-50309.

The Delaware Bankruptcy Court has previously published opinions concerning the WARN Act, as can be seen in our prior posts:

Decision in Powermate Holding Corp. Declines to Grant Administrative Claim Status to Employee WARN Act Claims

Decision in Tweeter Opco, LLC., Holds Non-Debtor Controlling Company Liable for Debtor’s Violation of the WARN Act

The WARN Act provides qualified employees up to sixty (60) days of back pay and benefits due to an employer’s failure to provide proper notice of a potential termination. Congress passed the WARN Act in 1988 following two decades which many workers were terminated without notice as a result of mergers, acquisition and closings.  Exceptions to the WARN Act include terminations due to shut downs that were not reasonably foreseeable, natural disasters or situations where notice to employees might interfere with an employer’s efforts to secure outside investments.

As the Delaware Bankruptcy Court held in Powermate, WARN Act awards are unsecured claims against the bankruptcy estate.  Administrative expense claims are those which either preserve the estate in a reorganization or facilitate the winding-down in a liquidation.  Congress amended § 503(b)(1)(A) in 2005, extending administrative claim status to “(ii.) wages and benefits awarded pursuant to a judicial proceeding or a proceeding of the National Labor Relations Board as back pay attributable to any period of time occurring after commencement of the case under this title.”  Looking at the plain meaning of the statute, § 503 grants administrative status to wages that vest post-petition, [so that] the back pay is attributable to the time occurring after the commencement of the case and therefore it is an administrative expense claim.

Citing In re First Magnus Fin. Corp., 390 B.R. 667, 673 (Bankr. D. Ariz. 2008) the Powermate Court held that rights of employees discharged in violation of the WARN Act accrued upon their termination. In reaching this conclusion, the Court relied upon other opinions that consistently hold that WARN damages are specifically like payment at termination in lieu of notice.  The Powermate employees were terminated prior to the filing of the bankruptcy petition. Because the employees’ claims vested pre-petition, they were not entitled to administrative expense status. Instead, the employees’ damage claims were governed under § 507(a)(4)-(5) granting unsecured claim status to wages.

While any employees of Corinthian Colleges should certainly pursue a recovery based on the WARN Act, they should do so with their eyes open to their likely recovery.  The recovery will be in post-bankruptcy dollars, so the total recovery depends on the percentage recovery of unsecured creditors.  The recovery will also be reduced by the attorneys’ fees earned in pursuing this recovery.  Based on my experience, litigants should try to temper their expectations.  Even if they hit a litigation home run, litigants should keep in mind that the Debtors were required to give them 60-days of notice, and after fees, expenses, and the award of an unsecured claim, they are likely to receive significantly less than 60 days of their salary.

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.

CPI Corp. Preference Actions Filed

Posted in Preference Litigation

From April 24 to 27, 2015, Charles A. Stanziale, Jr., as the Chapter 7 Trustee of CPI Corp., et al., filed preference 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, CPI Corp., et al. (the “Debtors”) filed petition for bankruptcy in the District of Delaware on May 1, 2013 under Chapter 7 of the Bankruptcy Code.  By order dated May 28, 2013, the Debtors’ Chapter 7 cases were consolidated for procedural purposes only and therefore are being jointly administered under Case No. 13-11158 pursuant to Bankruptcy Rule 1015(b).

The law firm of Ciardi Ciardi & Astin represents the Chapter 7 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 Brendan L. Shannon.

Defenses to a Preference Action

Preference actions are a form of litigation specifically provided for by the Bankruptcy Code which are intended to recover payments made by the Debtor within the 90 days prior to declaring bankruptcy.  The presumption is that the Debtor knew it was going to file bankruptcy, so any payments it made during this 90-day window went to friends and people it wanted to keep happy, and stiffed those the Debtor’s management didn’t like.   Recognizing that these payments aren’t always made for inappropriate reasons, 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 that we have prepared on the subject: “A Preference Reference: Common Issues that Arise in Delaware Preference Litigation.”

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.

 

RadioShack to Auction Customer Data

Posted in Bankruptcy Case Update

Recently in the RadioShack Corp. case, the Delaware Bankruptcy Court granted the debtor’s bid procedures motion allowing the debtor to auction certain of its assets, including trademarks and collection of customer data, while directing RadioShack to provide more information in terms of what personal information has been collected by the company and is to be sold.  The Texas Attorney General, among others, made requests that further information be disclosed in order for the Bankruptcy Court to determine whether certain information should be sold at auction.

According to debtor’s counsel, RadioShack’s assets to be auctioned include U.S. trademarks, patents, customer data, Asian sourcing operations and franchise networks.  Prospective suitors can bid on the assets individually or combine them.  To date, there is presently no stalking horse bidder for the assets.

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.

Frederick’s of Hollywood Formation Meeting and Section 341 Meeting Scheduled

Posted in Bankruptcy Case Update

In the Frederick’s of Hollywood bankruptcy proceeding, a formation meeting has been scheduled for Wednesday, April 28, 2015 at 10:00 a.m. (ET) at the J. Caleb Boggs Federal Building, 844 King St., Room 5209, Wilmington, DE 19801.  Click Here for a copy of the Notice of Formation Meeting for Official Committee of Unsecured Creditors issued by the Office of the United States Trustee.  If you want to be considered for Committee membership, you MUST complete a questionnaire and return it to the U.S. Trustee no later than April 27, 2015 at 10:00 a.m. (ET).

In addition, the U.S. Trustee has requested that a Section 341 Meeting of Creditors be scheduled for Thursday, May 27, 2015 at 10:00 a.m. (ET) at the J. Caleb Boggs Federal Court House, 844 N. King Street, 2nd Fl., Room 5209, Wilmington, DE 19801.

My colleague, Carl Neff, provided an overview of the Frederick’s of Hollywood bankruptcy here. Continue Reading

Filene’s Basement Decision Interprets Lease Rejection Damages Statute

Posted in Opinions

Summary

In a 22 page decision released April 20, 2015, Judge Carey of the Delaware Bankruptcy Court provided guidance as to the calculation of lease rejection damages.  Judge Carey’s opinion is available here (the “Opinion”).  The interpretation of 11 U.S.C. Section 502(b)(6) differs depending on the court which is addressing the issue.  This is an issue that the Third Circuit has not ruled on and, as far as I am aware, the first time the Delaware Bankruptcy Court has published an opinion directly addressing the issue.  The dispute: The statute caps a landlord’s rent claim at “the greater of one year, or 15 percent.”  So, what is the 15% referring to: The total amount of payment due under the lease, or 15% of the remaining lease period?  Because many leases include increasing rent payments, the total amount due calculation will typically be larger than the amount due over the next 15% of the lease term.  The quick answer of Judge Carey’s Opinion?  15% refers to the time remaining, not the amount remaining.
Continue Reading

Frederick’s of Hollywood Files Chapter 11 Bankruptcy in Delaware

Posted in Bankruptcy Case Summaries

On April 19, 2015, Frederick’s of Hollywood, Inc., and its affiliated companies (the “Debtors” or “Frederick’s”) filed chapter 11 bankruptcy petitions in the United States Bankruptcy Court for the District of Delaware.  At the time of the bankruptcy filing, the Debtors held assets in the amount of $36.5 million, and debts in the amount of $106 million.

According to the Declaration of William Soncini, the Chief Operating Officer of the Debtors, Frederick’s sells high quality women’s apparel and related products under their proprietary Frederick’s of Hollywood brand. Decl. ¶ 8.  The Debtors’ major merchandise categories are foundations, lingerie, ready-to-wear, and accessories (including shoes, handbags, jewelry, personal care products, and novelties).  Id.  The Debtors’ target consumer base is women aged 18-45, and their exclusive product offerings and collections include Seduction by Frederick’s of Hollywood and the Hollywood Exxtreme Cleavage® bra.  Id.

According to the Soncini Declaration, the Debtors have commenced these chapter 11 cases to effectuate a sale of substantially all of their assets to a stalking horse purchaser, subject to higher or better offers received in connection with the proposed sale process.  Decl. ¶ 47.

The Debtors filed various “first-day” motions, including, among others, a motion to pay pre-petition wages to their employees, a utilities motion, a bid procedures motion in connection with the sale of substantially all of the Debtors’ assets, and a post-petition financing motion.  The first-day hearing will take place today, April 21st, at 10:00 a.m.

The law firms of Richards Layton & Finger LLP, and Milbank, Tweed, Hadley & McCloy LLP represent the Debtors in these actions.  The Honorable Kevin Gross will be presiding over this bankruptcy proceeding.

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.

Furniture Brands International – Preference Litigation has Begun

Posted in Preference Litigation

On September 9, 2013, Furniture Brands International (“Furniture Brands”) and various related entities filed chapter 11 petitions for bankruptcy in the United States Bankruptcy Court for the District of Delaware.  We initially published a blog post about the filing here: Furniture Brands Files for Bankruptcy in Delaware Seeking to Sell Assets

On August 1, 2014, the Debtors’ confirmed chapter 11 plan became effective, thereby creating the FBI Wind Down, Inc. Liquidating Trust (the “Trust”) and appointing Alan D. Halperin as the Trustee.  We recently were informed that the Trustee has begun sending out preference demand letters, informing recipients that if they do not settle their liability, he will bring a preference lawsuit.  The Trustee will argue 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.

Defenses to a Preference Action

Preference actions are a form of litigation specifically provided for by the Bankruptcy Code which are intended to recover payments made by the Debtor within the 90 days prior to declaring bankruptcy.  The presumption is that the Debtor knew it was going to file bankruptcy, so any payments it made during this 90-day window went to friends and people it wanted to keep happy, and stiffed those the Debtor’s management didn’t like.   Recognizing that these payments aren’t always made for inappropriate reasons, 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.”

If you have received one of these demand letters and would like to discuss your options, feel free to give us a call.  Note that until we are retained, however, we can only provide general advice as our conversation will not be protected by the attorney client privilege.

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.