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Delaware Bankruptcy Litigation

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

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.

IPC International: Transfer of Venue Granted in Adversary Proceeding

Posted in Opinions

Any defendant to a bankruptcy adversary proceeding seeking to transfer venue of their case should read the recent opinion dated November 3, 2014, in which the Honorable Mary F. Walrath granted Defendant’s motion to transfer venue in the case styled as: IPC Int’l Corp. v. Milwaukee Golf Shopping Center LLC, et al. (In re IPC Int’l Corp.), Adv. No. 14-50333 (MFW) (Bankr. D. Del. Nov. 3, 2014).  The Court transferred the case to the U.S. District Court for the Northern District of Illinois.

Analysis

In granting the motion, the Court was persuaded that the “interests of justice and convenience of the parties favors transfer”.  (Slip op. at 1.)  The Court found that each of the claims asserted by the Debtor IPC Int’l Corp. (“Debtor” or “IPC”) were non-core claims, despite the fact that IPC asserted a claim for turnover under Section 542 of the Bankruptcy Code.

While a turnover claim is generally considered a “core” claim (slip op. 4-5), the Court found that IPC’s turnover claim was without merit.  This is so because a “debtor may not use Section 542(b) to recover a debt if the debt is a bona fide dispute.” (Slip op. at 6.)  Here the Court found that a bona fide dispute existed regarding the debt, rendering a turnover action inappropriate.  In addition the Court found that the debt was “unmatured”, and that the requested turnover of post-petition debt was also non-core.

Finding that the claims asserted were non-core, the Court then analyzed the traditional factors for transfer of venue, including (i) plaintiff’s choice of forum, (ii) defendant’s choice of forum, (iii) location where claims arose, (iv) location of books and records, (v) convenience of the parties and witnesses, (vi) the enforceability of any judgment rendered, (vii) practical considerations, (viii) relative administrative difficulty, (ix) public policy of the for a, (x) familiarity with applicable state law, and (xi) local interest.  The Court found that most of these factors weighed in favor of transfer, or were neutral.  Therefore, the Court granted Defendant’s motion to transfer venue to the Northern District of Illinois.

Key Takeaway

This case is significant for any defendant in a bankruptcy adversary proceeding seeking to transfer venue of their case.   In determining whether the causes of action are core or non-core, the Court will not be convinced that a matter is “core” simply because it is formally pled as a traditional core matter, such as turnover under Section 542(b).  Instead, the Court will “look under the hood” of the actual allegations raised to determine whether a core action has legitimately been raised by a debtor or trustee.

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.

Quantum Foods: Committee Files Preference Actions

Posted in Preference Litigation

Introduction

On October 28, 2014, The Official Committee of Unsecured Creditors of Q v. AB Foods LLC (the “Committee”), the committee in the Quantum Foods, LLC bankruptcy, began filing complaints to recover what it contends are avoidable preferences.  The Committee filed the preference actions in the Delaware Bankruptcy Court and 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. This post will look at the Quantum Foods, LLC bankruptcy proceeding, why the company filed for bankruptcy as well as key developments during the course of the bankruptcy proceeding.

Background

On February 18, 2014, Quantum Foods LLC (“Quantum” or “Debtor”), along with various related entities, filed chapter 11 petitions in the United States Bankruptcy Court for the District of Delaware.  The main Quantum Bankruptcy case is Case Number 14-10318-KJC.  As stated in its Declarations in Support of Chapter 11 Petitions and First Day Relief (the “Declaration” or “Decl.”), Quantum described itself as a “leading further-processor of proteins, including beef, pork and poultry.”  Going into bankruptcy, the Debtors employed approximately 1,100 employees, all based in the Debtors’ facilities in Bolingbrook, Illinois.  The Debtors primary objective in commencing its chapter 11 cases was to pursue a prompt sale of their assets in order to maximize value for stakeholders, preserving jobs, minimizing supply disruptions for the Debtors’ customers and ensuring an uninterrupted supply chain for the Debtors’ vendors.  Decl. at * 2.

The Bankruptcy Proceeding

On multiple dates since the bankruptcy petition was filed, including May 16, 2014, June 13, 2014, July 11, 2014, and July 15, 2014 the Debtors file motions for the sale of assets.  These sales have disposed of a majority of the Debtors’ assets.

On July 14, 2014, the Court entered an order authorizing the Committee to prosecute causes of action on behalf of the Debtors and granting the Committee standing to pursue such claims. The causes of action include all litigation pursuant to Section 5 of the Bankruptcy Code.  This includes the recently filed preference actions.

The Preference Actions

The Quantum bankruptcy, as well as the preference actions, are before the Honorable Kevin J. Carey.  The Committee prosecuting the Quantum preference actions is represented by the Cross and Simon, LLC.

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.

Charles M. Forman, Trustee in Satcon Bankruptcy, Files Preference Actions

Posted in Preference Litigation

Introduction

On October 17, 2014, Charles M. Forman, the Chapter 7 Trustee (the “Trustee”) for the bankruptcy estate of Satcon Technology Corp., began filing complaints to recover what he contends are avoidable preferences.  The Trustee filed the preference actions in the Delaware Bankruptcy Court and argued 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 Satcon Technology Corp. 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 Satcon Technology Corporation bankruptcy filings in this post.

Background

On October 17, 2012, Satcon Technology Corporation and various of its subsidiaries (collectively, “Satcon”) filed chapter 11 petitions for bankruptcy in the United States Bankruptcy Court for the District of Delaware.  As stated in its Declaration filed in support of its Chapter 11 petitions (the “Declaration” or “Decl.”), Satcon attributes its bankruptcy, in part, to the elimination by European governments of solar power subsidies.  In North America and Asia, Satcon has been forced to deal with greater competition and a drop in prices.  Decl. at *3.  Typical Satcon customers include developers of large-scale solar farms.  Decl. at *7.

The Bankruptcy Proceeding

On February 7, 2013, just four months after filing for bankruptcy, Satcon’s bankruptcy case converted to Chapter 7.  As Satcon is a debtor under Chapter 7 of the Bankruptcy Code, the Trustee is responsible for administering the liquidation of Satcon’s assets.  Additionally, the Trustee is responsible for prosecuting litigation intended to increase the assets available to distributeto the company’s creditors.  This includes filing and prosecuting preference actions.

The Preference Actions

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 Satcon bankruptcy, as well as the preference actions, are before the Honorable Kevin Gross.  The Trustee/Plaintiff prosecuting the NewPage preference actions is represented by the Cole, Schotz, Meisel, Forman & Leonard, P.A.

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 – A Debtor’s Rejection of a Bargaining Agreement

Posted in Opinions

In a 28 page opinion released October 20, 2014 in the Trump Entertainment Resorts case (Bank. D. Del. 14-12103), Judge Kevin Gross of the Delaware Bankruptcy Court provided a thorough analysis of the ability of a debtor to reject a collective bargaining agreement pursuant to 11 U.S.C § 1113.  Judge Gross’s opinion is available here (the “Opinion”).

My colleague, Carl Neff, provided a summary of the Trump Entertainment Resorts bankruptcy here.

In this case, the debtors petitioned the Court to terminate the collective bargaining agreement (“CBA”) between UNITE HERE Local 54 (the “Union”) and Trump Taj Mahal Associates LLC, which operated the casino the Taj Majal.  The Opinion lays out a history of attempts by the debtors to engage the Union to revise the CBA in an effort to cut costs and keep the Taj Mahal open.  Opinion at *6-7.  In the Court’s words, the debtors “stood on their heads to negotiate and were rebuffed time and time again.”  Opinion at *26.

The Union argued that Section 1113 did not apply in this case because the CBA had expired by its own terms in early September, and was thus no longer an executory contract governed by Section 1113.  Opinion at 10.  As the Court discussed, the NLRA provides that the obligations of a CBA remain in effect after the expiration of a collective bargaining agreement, limiting an employers ability to unilaterally change the terms of employment for persons employed under a collective bargaining agreement.

Outside of bankruptcy, the NLRB has the exclusive jurisdiction to enforce and interpret the NLRA.  Opinion at *17.  However, once an employer has filed for bankruptcy, Bankruptcy Code Section 1113 grants a Bankruptcy Court, or District Court, jurisdiction to approve rejection of the terms of a collective bargaining agreement.  Even after a collective bargaining agreement has expired, Section 1113 continues to provide jurisdiction to the Bankruptcy Court.  This “avoids an absurd result and promotes consistency with the legislative purpose of the statute and the Bankruptcy Code as a whole.”  Opinion at *16.

While Judge Gross’ analysis is extensive, it can be summarized simply: because the CBA continued in effect after expiration and a failure to modify or reject the CBA would result in irreparable damage to the estate (the liquidation of the debtors and the loss of every job the CBA applied to), Section 1113 applied and the CBA would be unilaterally amended.

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.

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.