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Delaware Bankruptcy Litigation

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

Ordinary Course of Business Defense Further Examined – Burtch v. Revchem Composites, Inc.

Posted in Preference Litigation

In the recent opinion of Burtch v. Revchem Composites, Inc. (In re Sierra Concrete Design, Inc.), Adv. No. 10-52667 (CSS), 2015 WL 4381571 (Bankr. D. Del. July 16, 2015), the Delaware Bankruptcy Court issued a memorandum opinion following trial on claims asserted by Jeoffrey Burtch, Chapter 7 Trustee of Sierra Concrete Design, Inc. (“Sierra” or “Debtors”), seeking recovery against Defendant Revchem Composites, Inc. (“Revchem”) for alleged preferential transfers under Sections 547 and 550 of the Bankruptcy Code.

In the memorandum opinion, the Court found that Revchem successfully established at trial that each of the payments received by Revchem from Sierra during the 90 day preference period were made in the “ordinary course” of the parties’ business relationship, and were thus shielded from recovery pursuant to Section 547(c)(2) of the Bankruptcy Code.

This opinion is notable because Revchem was able to establish this defense even though it received payments from Sierra during the preference period at a much faster rate (a standard deviation of 27.9 days) than during the pre-preference period.

This is so because, as testified by Revchem, Sierra was engaged in a construction project with tight timelines and needed product at a faster rate than normal.  Because the Debtors were at their credit limit and had to pay previous invoices before receiving new product, the Debtors were paying at a faster rate during the preference period.  Thus, the Court found that the accelerated payments during the preference period were made in the ordinary course of business and granted judgment for Revchem.

This decision is a “must-read” for preference action defendants, as it dispels the notion that transfers made at a faster rate during the preference period (as compared to the pre-preference period) cannot be protected by the ordinary course of business defense.  It is clear that the Court will examine and consider circumstances between the parties which lead to changes in rates of payment in determining whether such transfers can be shielded by Section 547(c)(2).

Carl D. Neff is a partner 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 Deb Shops Bankruptcy

Posted in Preference Litigation

On July 29, 2015, Deb Shops SDFMC LLC, in its capacity as debtor in possession, filed 92 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, Deb Shops SDFMC LLC (“Deb Shops” or the “Debtors”) filed voluntary petitions for bankruptcy in the U.S. Bankruptcy Court for the District of Delaware on December 4, 2014 under Chapter 11 of the Bankruptcy Code.  By order dated December 5, 2014, the Debtors’ Chapter 11 cases were consolidated for procedural purposes only and therefore are being jointly administered pursuant to Bankruptcy Rule 1015(b).

The Rosner Law Group and ASK LLP represent the Debtors 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 Kevin Gross.

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 partner 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.

Nortel Opinion Interprets Supreme Court’s Wellness Opinion

Posted in Opinions

Summary

In a 12 page decision released June 2, 2015, Judge Gross of the Delaware Bankruptcy Court gives us our first Delaware specific insight into how the U.S. Supreme Court’s Wellness opinion will be interpreted.  Judge Gross’ opinion is available here (the “Opinion”).  The Opinion was issued in the adversary proceeding SNMP Research Int’l. v. Nortel Networks Inc., Case No. 11-53454.  For a review of the Supreme Court’s Wellness Opinion, please take a look at this blog post authored by Carl Neff:  United States Supreme Court Expands Power of Bankruptcy Courts- Wellness Int’l v. Sharif.

In this Opinion, the Court addressed the “narrow but complex issue” of whether it has “authority to enter judgments or orders with respect to the claims of the plaintiff, a non-debtor, against a non-debtor defendant for what are clearly non-core claims…”  Opinion at *1.

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U.S. Supreme Court Rejects Chapter 7 Debtor’s Stripping of Junior Liens

Posted in Opinions

Holding: A debtor in a Chapter 7 bankruptcy proceeding may not void a junior mortgage lien under § 506(d) when the debt owed on a senior mortgage lien exceeds the current value of the collateral if the creditor’s claim is both secured by a lien and allowed under § 502 of the Bankruptcy Code.

In the recent U.S. Supreme Court decision of Bank of America, N.A. v. Caulkett, No. 13-421, Slip. op. June 1, 2015, Bank of America, N.A. (“BoA”) objected to the stripping of junior liens of a Chapter 7 debtor, arguing that they should not be treated as unsecured loans. BoA asserted that because the bankruptcy code only “strips off” claims from property that are disallowed, the Supreme Court’s ruling in Dewsnup v. Timm, 502 U.S. 410 (1992), which disallowed the “stripping down” of primary liens to the value of the underlying property, should extend to this case.  Respondent debtor argued that second liens should be treated as unsecured, and hence disallowed.

In 1991, the Supreme Court, in Dewsnup, put a stop to lien-stripping in Chapter 7 cases, finding that, so long as an allowed claim is secured by a lien – even one worth less than the full amount of the claim – a debtor could not strip down the lien. Instead, the lien would survive the bankruptcy, and the lender could foreclose it even after the Chapter 7 debtor received a discharge of his or her debts.

In yesterday’s opinion, the High Court declined to limit Dewsnup to partially underwater liens, and held in a unanimous decision that bankruptcy courts may not “strip off” junior liens on property if the value of the property used as collateral is less than the amount the debtor owes to the senior lienholder — i.e, if the junior mortgage lien is “completely underwater.”  This decision is favorable to junior lienholders to collect on loans and the treatment of such debt in bankruptcy proceedings.

Carl D. Neff is a partner 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.

Powerwave Preferences – Trustee Obtains Relief Regarding Service of Foreign Defendants

Posted in Preference Litigation

Recently in the Powerwave Technologies Inc. bankruptcy action, the Chapter 7 Trustee filed in excess of 100 preference actions seeking to avoid and recover alleged preferential transfers pursuant to Sections 547 and 550 of the Bankruptcy Code.  To read a prior post on the filing of these actions, click here.

Earlier this month, the Chapter 7 Trustee filed a Motion to for an Order: (I) Further Extending Deadline to Effect Service of Original Process, (II) Waiving Requirement Of Local Rule 7004-1 For Clerk To Serve Foreign Defendants, (III) Setting A Timeline For Foreign Defendants To Answer Or Otherwise Respond Pursuant To Local Rule 7012-2, and (IV) Granting Related Relief Filed by Charles A. Stanziale Jr.  Additionally, the Chapter 7 Trustee filed a Motion for an Order Further Extending Deadline to Effect Service of Original Process.

On May 21, 2015, the Court entered an Order Approving Motion of Trustee for an Order Further Extending Deadline to Effect Service of Original Process (the “Extension Order”), along with an Order Approving Emergent Motion of the Chapter 7 Trustee for an Order (I) Further Extending Deadline to Effect Service of Original Process, (II) Waiving Requirement Of Local Rule 7004-1 For Clerk To Serve Foreign Defendants, (III) Setting A Timeline For Foreign Defendants To Answer Or Otherwise Respond Pursuant To Local Rule 7012-2, And (IV) Granting Related Relief (the “Service Order”).

Through the Extension Order, the Court extended the deadline for the Trustee to serve process on foreign defendants in these actions to September 24, 2015.  Through the Service Order, among other things, the Court waived Local Rule 7004-1 for the clerk to Serve foreign defendants, and set a deadline for foreign defendants to respond to the complaint to October 26, 2015.

Carl D. Neff is a partner 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.

United States Supreme Court Expands Power of Bankruptcy Courts- Wellness Int’l v. Sharif

Posted in Opinions

Holding: Article III permits bankruptcy judges to adjudicate Stern claims with the parties’ knowing and voluntary consent.  Consent by parties also need not be in writing but can be determined through conduct.

In the recent United States Supreme Court decision of Wellness International Network v. Sharif, the High Court entered a very significant decision which expanded the powers of Bankruptcy Courts to hear so-called Stern claims – claims that are core but for which the Bankruptcy Court does not have jurisdiction to enter a final ruling.

In Sharif, the Court overturned the Seventh Circuit decision in a 6-3 opinion, holding that parties may consent to the Bankruptcy Court exercising jurisdiction over so-called Stern claims, and that such consent need not be express, but may be through the parties’ conduct.

This opinion is significant in that it gives power back to the Bankruptcy Courts by allowing parties to waive their right to present their case before an Article III Judge.

Carl D. Neff is a partner 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.

IMRIS, Inc. Formation Meeting Scheduled

Posted in Bankruptcy Case Update

In the IMRIS, Inc. bankruptcy proceeding (Delaware Bankruptcy Case No. 15-11133), a formation meeting has been scheduled for Thursday, June 4, 2015 at 10:00 a.m. (ET) at the J. Caleb Boggs Federal Building, 844 King Street, Room 2112, 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 June 2, 2015 at 5:00 p.m. (ET).

According to the Declaration of Jay D. Miller in Support of First Day Pleadings (the “Declaration”), IMRIS came into existence after acquiring Innovative Magnetic Resonance Imaging Systems Inc. in 2005.  IMRIS trades on the NASDAQ under the ticker “IMRS”.  The Debtors design, manufacture and market image guided therapy systems that enhance the effectiveness of therapy delivery, which include multiple field strength Magnetic Resonance systems, X-Ray Fluoroscopy systems, and Computed Tomography (CT) systems.  The Debtors’ products are installed in leading neuroscience centers around the world.  Declaration at *4.

The Debtors had a complex billing cycle as the installation of their products required substantial capital contributions be made by their clients.  Ultimately, the Debtors turned to a financial facility during a slowdown of business, and were unable to comply with their debt covenants.  Declaration at *9-10.  The Debtors have filed for bankruptcy with the belief that that an expedited sale of their business is essential to not only preserving the underlying value of their operations by providing customers and employees with a clear path forward, but in satisfying the Company’s obligations to its creditors.  Declaration at *13.  Thus, it appears that this case, like many in the current bankruptcy environment, will likely involve a 363 sale of assets followed by the proposal and confirmation of a liquidating chapter 11 plan.

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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.

Boston Restaurant Associates, Inc. Formation Meeting and Section 341 Meeting Scheduled

Posted in Bankruptcy Case Update

In the Boston Restaurant Associates, Inc. bankruptcy proceeding (Delaware Bankruptcy Case No. 15-11101), a formation meeting has been scheduled for Tuesday, June 2, 2015 at 10:00 a.m. (ET) at the J. Caleb Boggs Federal Building, 844 King Street, 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 May 29, 2015 at 5:00 p.m. (ET).

In addition, the U.S. Trustee has requested that a Section 341 Meeting of Creditors be scheduled for Friday, June 19, 2015 at 12:00 p.m. (ET) at the J. Caleb Boggs Federal Building, 844 N. King Street, 2nd Fl., Room 5209, Wilmington, DE 19801. Continue Reading

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.