Delaware Bankruptcy Litigation : Delaware Bankruptcy Lawyer & Attorney : Fox Rothschild Law Firm : Financial Restructuring & Bankruptcy Litigation

Introduction

On April 24, 2013, Synagro Technologies ("Synagro") and various affiliates filed chapter 11 petitions for bankruptcy in the United States Bankruptcy Court for the District of Delaware.  Synagro recycles biosolid and organic materials generated by municipal and industrial waste water treatment centers.  The company describes its services to include "drying and pelletization, composting, incineration, alkaline stabilization, land application, collection and transportation, regulatory compliance, dewatering, facility cleanout services and product marketing."  See Synagro's Declaration in Support of Chapter 11 Petitions and First Day Pleadings (the "Decl.") at *3-4.

Operations

Synagro began in 1986 as RPM Marketing, Inc.  Although the company is currently headquartered in Houston, Texas, Synagro is moving its headquarters to White Marsh, Maryland.  Synagro operates four divisions - facilities, services, rail and drilling.  The facilities division provides waste water residuals management at fifteen different locations throughout the United States. Decl. at *4.  Synagro's services divisioin provides waste treatment services at facilities owned by individual customers.  Decl. at *5.  The company recently acquired a drilling division that provides waste management services to oil and gas production companies.  Finally, Synagro's rail division operates a fleet of rail cars and containers that dispose of over 500,000 tons of waste per year.  Decl. at *6.

Reasons for Bankruptcy

In April of 2007, Synagro entered into a $390 million first lien credit agreement and $150 million second lien credit agreement.  Decl. at *9-10.  In early 2012, the company realized it was unlikely to meet its debt ratio requirements under the first and second lien agreements.  Decl. at *15.  According to Synagro, its high debt ratios were the result of "a challenging operating environment in late 2011 and early 2012."  Id.  During the latter part of 2012, Synagro began negotiations with its lenders to see if an out of court restructuring was possible.  It was during these negotiations that the company realized that a traditional sale of assets would not satisfy its obligations under the second lien agreement and that a sale under section 363 of the Bankruptcy Code was necessary.  Decl. at *16.

Objectives in Bankruptcy

Synagro started the sale process in November of 2012.  Over one hundred potential purchasers were contacted to generate interest in purchasing the company.  Of those contacted, five provided written indications of interest.  Decl. at *17. On April 23, 2013, Synagro and EQT Infrastructure II Limited Partnership ("EQT") entered into an asset purchase agreement.  The EQT purchase agreement is subject to better and higher offers and must comport with section 363 of the Bankruptcy Code.  Decl. at *19.  The company hopes to sell substantially all of its assets through a court-approved bankruptcy sale. 

The Synagro bankruptcy is before the Honorable Brendan L. Shannon of the United States Bankruptcy Court for the District of Delaware.  This case is proceeding under case no. 13-11041(BLS).  Synagro is represented by the law firm Skadden, Arps, Slate, Meagher & Flom LLP.

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Jason Cornell is an equity partner with the law firm Fox Rothschild LLP.  Jason is a creditors' rights attorney who is admitted and practices before the United States Bankruptcy Court for the District of Delaware and the United States Bankruptcy Court for the Southern District of Florida.  You can reach Jason at 302 427 5512 or jcornell@foxrothschild.com. 

Below are some additional posts Jason has written on Delaware bankruptcy litigation:

  Ten Things Every Commercial Landlord Should Know About a Tenant in Bankruptcy.

  Seeking Relief from the Automatic Stay in Delaware.

  A Tale of Two Bankruptcy Auctions.

  What Information is Required in a Chapter 11 Disclosure Statement?

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Introduction

On Monday, April 22, 2013, Yarway Corporation filed a chapter 11 petition for bankruptcy in the United States Bankruptcy Court for the District of Delaware.  According to papers filed by Yarway with the Bankruptcy Court, the company's origins go back to 1908 when it started manufacturing pipe clamps, steam traps and valves.  See Yarway's Affidavit in Support of First Day Pleadings (the "Decl."), at *1.  The company was privately owned until 1986, when it was sold to Keystone International, Inc..  Keystone was purchased by Tyco International Ltd. in 1997.  Decl. at *2

Operations

According to its Declaration, Yarway "allegedly manufactured, distributed and/or sold asbestos-containing products, which ceased entirely by 1988."  Decl. at *2.  The company stopped its manufacturing operations entirely in 2003 when it sold its manufacturing facility to an unrelated third party.  Id.  Even after the company sold off its manufacturing assets, it remained in existence in order to "defend, process and satisfy asbestos-related claims asserted against it."  Id. It's these asbestos related claims which are the basis for Yarway filing for bankruptcy. 

Reasons for Bankruptcy

Yarway contends that its bankruptcy filing is the result of the continued flow of asbestos-related claims due to human exposure to the company's asbestos-containing products.  The company places the asbestos claims in two primary categories:  (1) claims stemming from exposure to Yarway's gaskets and packing that was manufactured between the 1920s to the 1970; and (2) claims relating to the manufacture of joint packing consisting of Teflon and asbestos from the 1940s to the 1970s. Decl. at *3.

Yarway is faced with a huge amount of asbestos-related litigation.  The company contends that it was first named as a defendant in a lawsuit in 1991.  In the last five years over 10,000 new asbestos-related claims have been asserted against the company.  Since the beginning of Yarway's fiscal year (October 1, 2012), Yarway has received over 1,000 new asbestos claims.  Decl. at *3. In the past five years, Yarway has paid over $128 million in settlement costs for asbestos claims.  That number reached $18 million for this fiscal year alone.  Id.

 Objectives in Bankruptcy

Yarway contends that in 2012 it settled the last of its insurance policies known to provide coverage for asbestos-related claims.  The company believes it has no additional insurance coverage for future claims.  Decl. at *3-4.  By filing for bankruptcy, Yarway hopes to "negotiate, obtain approval of, and consummate a plan for reorganization that establishes an appropriately funded trust to provide for the fair and equitable payment of legitimate current and future Yarway asbestos claims ..." Decl. at *4. 

The Yarway bankruptcy is before Judge Brendan L. Shannon, under case no. 13-11025(BLS).  Yarway is represented by the law firms Sidley Austin LLP and Cole Schotz Meisel Forman & Leonard.

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Jason Cornell is an equity partner with the law firm Fox Rothschild LLP.  Jason is a creditors' rights attorney who is admitted and practices before the United States Bankruptcy Court for the District of Delaware and the United States Bankruptcy Court for the Southern District of Florida.  You can reach Jason at 302 427 5512 or jcornell@foxrothschild.com. 

Below are some additional posts Jason has written on Delaware bankruptcy litigation:

  Ten Things Every Commercial Landlord Should Know About a Tenant in Bankruptcy.

  Seeking Relief from the Automatic Stay in Delaware.

  A Tale of Two Bankruptcy Auctions.

  What Information is Required in a Chapter 11 Disclosure Statement?

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Introduction

On Monday, April 15, 2013 (the "Petition Date"), The Scooter Store Holdings, Inc. (the "Scooter Store" or "Debtor"), and various related entities filed chapter 11 petitions for bankruptcy in the United States Bankruptcy Court for the District of Delaware.  Based in New Braunfels, Texas, Scooter Store is one of the nation's largest providers of power wheelchairs, scooters, lifts, ramps and other related equipment.  See Declaration in Support of Chapter 11 Petitions and First Day Motions (the "Decl.") at *3.  Scooter Store began its operations in 1991.  Since then, the company has served over 700,000 senior citizens and disabled persons through its equipment offerings and services.  Id.

Company Operations and Debt Structure

At the height of its operations, Scooter Store employed over 2,400 employees in 48 locations throughout the United States.  As of the Petition Date, however, the company had reduced its employees down to 300.  Decl. at *4.  In 2011, Sun Capital Partners purchased a majority voting interest in the company.  Sun owns debts, preferred stock and warrants that represent over 66% of the voting ownership interest in the company.  Decl. at *4-5. The company's debt includes a first lien loan agreement for $25 million, a second lien facility for $25 million and a third lien facility totaling $40 million.  Decl. at *6.

Events Leading to Bankruptcy

Prior to bankruptcy, Scooter Store defaulted on each of its three credit facilities.  Decl. at *7.  The company entered into forbearance agreements with its lenders in December of 2012 and again in March of 2013.  Id.  Debtor attributes in bankruptcy filing, in part, to changes in Medicare laws and regulations.  In 2011, Medicare changed the timing of its payments for mobility devices to a "13 month capped rental model."  Decl. at *8.  Under its business model, Scooter Store devoted significant amounts of cash to advertising, depriving it of the liquidity it needed to sustain the changes in timing and method of payment.  Id.

Besides the changes in the timing of payment, Scooter Store has also suffered due to government investigations which have harmed both the company's finances and goodwill.  The Debtor is the subject of a criminal investigation by the Department of Justice focusing on the company's former management.  Decl. at *8-9.  The company has also suffered from a civil investigation regarding its billing and reimbursement procedures. Decl. at *9. 

Objectives in Bankruptcy

Scooter Store filed for bankruptcy intending to sell substantially all of its assets pursuant to section 363 of the Bankruptcy Code.  Decl. at *10.  Under the company's "Reorganization Milestones," Scooter Store hopes to establish a bid deadline of July 23, 2013, with an auction on July 25, 2013 and a closing on the sale on or before July 30, 2013.  Decl. at *10. 

The Scooter Store bankruptcy is before Judge Peter J. Walsh of the Delaware Bankruptcy Court.  This bankruptcy is proceeding under Case No. 13-10904(PJW).  Scooter Store is represented by the law firm Young Conaway Stargatt & Taylor.

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Jason Cornell is an equity partner with the law firm Fox Rothschild LLP.  Jason is a creditors' rights attorney who is admitted and practices before the United States Bankruptcy Court for the District of Delaware and the United States Bankruptcy Court for the Southern District of Florida.  You can reach Jason at 302 427 5512 or jcornell@foxrothschild.com. 

Below are some additional posts Jason has written on Delaware bankruptcy litigation:

  Ten Things Every Commercial Landlord Should Know About a Tenant in Bankruptcy.

  Seeking Relief from the Automatic Stay in Delaware.

  A Tale of Two Bankruptcy Auctions.

  What Information is Required in a Chapter 11 Disclosure Statement?

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Introduction

Earlier today, Rotech Healthcare ("Rotech"), filed chapter 11 petitions for bankruptcy in the United States Bankruptcy Court for the District of Delaware.  According to a declaration filed by Rotech's President and CEO (the "Declaration" or "Decl."), Rotech describes itself as "one of the largest providers of home medical equipment and related products and services in the United States ..."  The numbers back it up ... Rotech provides medical equipment and services in all 50 states employing over 4,000 employees in 409 operating locations.  Decl. at *3.   Using the information provided in Rotech's court filings, this post will look at Rotech's business, why the company filed for bankruptcy and what Rotech's objectives are now that it is in bankruptcy. 

Business History and Operations

Rotech Healthcare, Inc., and various related entities are the "debtors in possession" in the present bankruptcy proceeding.  The Rotech entities that just filed for bankruptcy, however, are the successors to Rotech Medical Corporation ("RMC").  RMC started in the medical equipment industry in 1981.  In 1997, RMC was acquired by Integrated Helath Services, Inc. ("Integrated").  When Integrated filed for bankruptcy in Delaware in February of 2000, it took all of its subsidiaries into bankruptcy with it, including RMC.  Rotech was formed in March 2002 as part of the IHS plan of reorganization.  Decl. at *8. 

Over 87% of Rotech's revenues come from the respiratory therapy equipment and related services.  Patients that require respiratory services often suffer from long term breathing disorders that require extended treatment.  Patients that use Rotech products usually come to the company through hospital or doctor referrals. Once a patient is set up using the company's equipment, service technicians follow-up as proscribed by the doctor.  The company provides 24 hour support service through a call center it operates in Murray, Kentucky.  Decl. at *4.  

Events Leading to Bankruptcy

Rotech attributes its present bankruptcy to high debt and low revenue.  By that, in 2002 when the company formed as part of the Integrated bankruptcy, Rotech took on over $500 million in debt.  Decl. at *13.  The company emerged from the Integrated bankruptcy expecting to "services its debt with robust revenues from reimbursement by third-party payors."  Id.  Instead, Rotech has experienced over $1.2 billion in aggregate losses since 2005 due to permanent reductions in insurer reimbursement rates.  Decl. at *15.  According to Rotech, the drop in reimbursement rates stemmed frm The Medicare Prescription Drug, Improvement and Modernization Act of 2003; The Deficit Reduction Act of 2005; and, the Medicare Improvement for Patients and Providers Act of 2008. 

Objectives in Bankruptcy

Towards the end of 2012, Rotech retained Barclays Capital to determine the feasibility of an out of court restructuring.  According to Rotech, lenders were generally unwilling to provide the additional financing needed to reorganize outside of chapter 11. Once the company decided that it needed to file for bankruptcy, Rotech started seeking support for a plan of reorganization.  Decl. at *18.  Under a plan support agreement, Rotech hopes to restructure its debt through a pre-arranged chapter 11 plan.  Decl.  at *19.  According to Rotech, the proposed plan provides that "trade creditors and vendors who agree to maintain or reinstate payment terms as existing prior to the commencement date will be paid in full upon the effective date of a plan." 

The Rotech bankruptcy is before Judge Peter J. Walsh.  The main case is proceeding under case no. 13-10741(PJW).  Rotech is represented by Young, Conaway, Stargatt & Taylor. 

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Jason Cornell is an equity partner with the law firm Fox Rothschild LLP.  Jason is a creditors' rights attorney who is admitted and practices before the United States Bankruptcy Court for the District of Delaware and the United States Bankruptcy Court for the Southern District of Florida.  You can reach Jason at 302 427 5512 or jcornell@foxrothschild.com. 

Below are some additional posts Jason has written on Delaware bankruptcy litigation:

  Ten Things Every Commercial Landlord Should Know About a Tenant in Bankruptcy.

  Seeking Relief from the Automatic Stay in Delaware.

  A Tale of Two Bankruptcy Auctions.

  What Information is Required in a Chapter 11 Disclosure Statement?

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Introduction

On March 24, 2013, NAMCO, LLC ("NAMCO") filed a chapter 11 petition for bankruptcy in the United States Bankruptcy Court for the District of Delaware.  Based in Manchester, Connecticut, NAMCO sales swimming pool accessories and equipment throughout the Northeast and Mid-Atlantic United States.  See Declaration of Lee Diercks in Support of Chapter 11 Petition and First Day Motion (the "Declaration" or "Decl.") at *2.  In addition to selling pool supplies, NAMCO owns and operates a chemical repackaging center which allows the company to sell and distribute chemicals through its website.  Id.

Operations

Going in to bankruptcy, NAMCO operates thirty-seven (37) stores in ten states. The company's stores range anywhere in size from 11,000 to 60,000 square feet.  In addition to its retail stores, NAMCO operates in 190,000 square feet of office and distribution space and 40,000 square feet for its chemical repackaging center.  Id. at *3. 

NAMCO presently employs approximately 280 employees, none of whom are represented by unions.  Sales for fiscal year 2011 reached $92 million, however, annual sales in 2012 dropped to $82 million.  Decl. at *4.  NAMCO attributes its declining sales to weakened demand in the pool and patio industry.  According to NAMCO, the drop in demand, in turn, stems from "a poor housing market, an overall weak U.S. economy, complicated by unfavorable weather conditions ..."  Id. 

Objectives in Bankruptcy

In June of 2012, NAMCO entered into a debt agreement with Salus Capital Partners LLC.  NAMCO has approximately $18.6 million in pre-bankruptcy secured debt.  Of this amount, $9.3 million is drawn down on a revolver agreement with Salus.  Decl. at *6.  NAMCO is also a borrower under secured notes with a principal balance of $9.3 million.  Id.  The notes and revolving debt agreement are secured by substantially all of NAMCO's assets.

NAMCO defaulted on its debt agreements in December of last year.  Since learning of the default, NAMCO has been working with its lenders regarding a potential sale of a portion of the company in exchange for an infusion of additional cash.  Decl. at *9.  Through negotiations, NAMCO and Salus were able to agree on a debtor in possession financing agreement which would provide the company with much needed cash while going through bankruptcy. Id. at *9.  While in bankruptcy, NAMCO intends to use the Salus debtor in possession facility to either pursue a sale of the business or successfully reorganize.  Id. at *15. 

The NAMCO bankruptcy is before Judge Peter J. Walsh under case no. 13-10610(PJW).  NAMCO is represented by the law firm Olshan Frome Wolosky LLP. 

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Jason Cornell is an equity partner with the law firm Fox Rothschild LLP.  Jason is a creditors' rights attorney who is admitted and practices before the United States Bankruptcy Court for the District of Delaware and the United States Bankruptcy Court for the Southern District of Florida.  You can reach Jason at 302 427 5512 or jcornell@foxrothschild.com. 

Below are some additional posts Jason has written on Delaware bankruptcy litigation:

  Ten Things Every Commercial Landlord Should Know About a Tenant in Bankruptcy.

  Seeking Relief from the Automatic Stay in Delaware.

  A Tale of Two Bankruptcy Auctions.

  What Information is Required in a Chapter 11 Disclosure Statement?

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Summary

In an 8 page decision signed February 21, 2013, Judge Gross of the Delaware Bankruptcy Court denied a Motion for Enlargement of Administrative Claim, holding that the movant failed to prove excusable neglect. Judge Gross’s opinion is available here (the “Opinion”).

The Opinion analyzes the motion pursuant to the excusable neglect factors provided in Pioneer Investment Services Co. v. Brunswick Assocs. Ltd. Partnership, 507 U.S. 380, 395 (1993) (“These include, as the Court of Appeals found, the danger of prejudice to the debtor, the length of the delay and its potential impact on judicial proceedings, the reason for the delay, including whether it was within the reasonable control of the movant, and whether the movant acted in good faith.”).

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Summary

In a 25 page opinion published February 7, 2013, Judge Sontchi applied black-letter contract interpretation principles in conjunction with the bankruptcy rules in holding that a landlord was not entitled to damages resulting from a debtor's breach of its lease. Judge Sontchi’s opinion is available here (the “Opinion”).

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Background

On February 25, 2013 (the "Petition Date"), Ormet Corporation and various related entities filed chapter 11 petitions for bankruptcy in the United States Bankruptcy Court for the District of Delaware.  As stated in the company's Declaration in Support of First-Day Motions and Applications (the "Decl.") at *4, Ormet began in 1956 as an aluminum manufacturer at a facility along the Ohio River in Hannibal, Ohio.  By 2004, the company had grown to eight facilities in six states with operations that included aluminum production, rolling, recycling and coating.  Id. 

Low prices for aluminum and high energy costs forced the company to file for bankruptcy protection in Ohio in January of 2004.  The Bankruptcy Court for the Southern District of Ohio confirmed Ormet's plan of reorganization in December of 2004.  Decl. at *5.  As the company enters bankruptcy a second time, this time in Delaware, Ormet operates an aluminum smelter facility in Hannibal Ohio (256 acres) and a refinery in Burnside, Louisiana (1,100 acres).  Decl. at *7.  In the weeks leading up to bankruptcy, Ormet employed over 1,100 individuals, 977 of which are represented by the United Steel, Paper and Forestry, Rubber, Manufacturing, Energy, Allied Industrial and Service Workers International Union.  Decl. at *8.

Reasons for Filing Bankruptcy

According to the company's Declaration, Ormet "is seeking the protections of chapter 11 of the Bankruptcy Code to provide breathing room to facilitate a sale of the Company's assets, maintain operations and maximize the value for the benefit of the Company, its estates, and the parties-in-interest."  Decl. at *17.  Ormet saw a substantial rise in the price of aluminum in 2010 and 2011.  Based on the increase in prices, the company decided to re-start its Burnside Refinery in order to produce alumina, a key ingredient in aluminum production.  Id.  Since April of 2011, however, the company has watched aluminum prices drop over $900 per metric tonne.  Id.  For each $100 per tonne drop in the price of aluminum, Ormet experiences a $27 million drop in annual revenue.  Id.

Aside from a drop in aluminum prices, Ormet is also experiencing a rise in costs for electricity, raw materials and employee related (pension) expenses. Decl. at *17.  The company describes its financial situation over the last six months as a "perfect storm" that has resulted in a drop in liquidity.  Id.

Objectives in Bankruptcy

Prior to filing for bankruptcy, Ormet implemented a program to improve liquidity by delaying payments for electricity and pension benefits.  Decl. at *18.  The company also embarked on a marketing campaign looking for a potential buyer of Ormet's assets or equity.  Decl. at *19.  Despite contacting 21 potential purchasers, none were willing to provide terms or conditions for a potential sale. Instead, Ormet received a single offer from an affiliate of its secured lender.  That lender has put together an offer pursuant to a stalking horse purchase agreement.  Id. Under the purchase agreement, Ormet's lender has agreed to purchase substantially all of the company's assets subject to higher and better offers.  The lender will also provide an additional $30 million in new money which will provide the company with the postpetition financing needed to run a chapter 11 auction and seek related relief through the bankruptcy court.  Decl. at *21.

The Ormet bankruptcy is before Judge Mary F. Walrath.  Ormet is represented by the law firm Morris, Nichols, Arsht & Tunnell LLP.  The case is proceeding under case no. 13-10334(MFW). 

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Jason Cornell is an equity partner with the law firm Fox Rothschild LLP.  Jason is a creditors' rights attorney who is admitted and practices before the United States Bankruptcy Court for the District of Delaware and the United States Bankruptcy Court for the Southern District of Florida.  You can reach Jason at 302 427 5512 or jcornell@foxrothschild.com. 

Below are some additional posts Jason has written on Delaware bankruptcy litigation:

  Ten Things Every Commercial Landlord Should Know About a Tenant in Bankruptcy.

  Seeking Relief from the Automatic Stay in Delaware.

  A Tale of Two Bankruptcy Auctions.

  What Information is Required in a Chapter 11 Disclosure Statement?

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Background

On January 11, 2013, Handy Hardware Wholesale, Inc. ("Handy" or the "Debtor") filed a chapter 11 petition for bankruptcy in the United States Bankruptcy Court for the District of Delaware.  As stated in Handy's court filings, the company is a wholesale purchaser of hardware supplies which it in turn sells to its members at a discount.  See Declaration of Thomas J. Schifanella, Jr. in Support of Chapter 11 Petition and First Day Pleadings (the "Decl.") at *4.  The company's members operate over 1,300 retail stores, lumber yards and home centers in 14 states in the United States, Mexico, South America and Puerto Rico.  Id..  In order to purchase inventory for its members, Handy Hardware buys from over 1,300 vendors.  By purchasing in bulk, the company is able to purchase inventory at a reduced cost and pass the savings on to its members.  Id.

Events Leading to Bankruptcy

Handy Hardware began purchasing for its members in 1961.  Over the years the company continued to add more members.  In 1986, Handy began an expansion project wherein it expanded its Houston warehouse from 100,000 square feet to 560,000 square feet and built a second warehouse in Meridian, Mississippi.  Decl. at *15.  Whereas the Houston expansion was funded with cash, Handy funded the Meridian warehouse facility through a $20 million bond.  Decl. at *9. 

Handy took on the debt from the Meridian whereas as the country entered into a recession.  As a result of poor economic conditions, the company was unable to grow at levels necessary to sustain operations of the Meridian facility.  Decl. at *15.  Although sales reached $240 million in 2011, increased operational costs and debt service generated an $8.4 million loss. Id.

Objectives in Bankruptcy

Given the loss associated with the Meridian warehouse, Handy decided to close that facility and re-route deliveries to its Houston warehouse.  Decl. at *16.  In November, Handy notified its employees at the Meridian warehouse that their positions would be eliminated effective January 31, 2013.  Decl. at *15.  Through bankruptcy, the company intends to restructure its debt with its lenders and emerge from chapter 11 proceedings with a consensual plan of reorganization.  Decl. at *16.   Handy is represented by the Delaware law firm of Ashby & Geddes, P.A..

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Jason Cornell is an equity partner with the law firm Fox Rothschild LLP.  Jason is a creditors' rights attorney who is admitted and practices before the United States Bankruptcy Court for the District of Delaware.  You can reach Jason at 302 427 5512 or jcornell@foxrothschild.com. 

Below are some additional posts Jason has written on Delaware bankruptcy litigation:

  Ten Things Every Commercial Landlord Should Know About a Tenant in Bankruptcy.

  Seeking Relief from the Automatic Stay in Delaware.

  A Tale of Two Bankruptcy Auctions.

  What Information is Required in a Chapter 11 Disclosure Statement?

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Summary

When a company files for bankruptcy, they gain a number of protections under federal law.  One of these protections is the “automatic stay” provided by 11 U.S.C. § 362. The automatic stay makes it illegal to continue prosecuting, or to initiate, an action against the debtor who is in bankruptcy.  Even if that debtor has injured you, it means that you cannot try to recover from them without getting the automatic stay lifted.  As more large bankruptcy cases are filed in Delaware, it becomes increasingly important that persons injured by debtors understand the legal hoops that they have to jump through in order to recover for their injuries.

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Introduction

On January 28, 2013 (the “Petition Date”), School Specialty, Inc, (“School Specialty” or “Debtor”), along with various affiliated entities, filed chapter 11 petitions for bankruptcy with the Delaware Bankruptcy Court. According to the Declaration of School Specialty’s Chief Administrative Officer, the company is one of the largest suppliers of educational products, equipment and curriculum for public school systems in the United States. See Declaration of Gerald T. Hughes in Support of Chapter 11 Petitions and First Day Motions (the “Decl.”) at *3. This post will look at School Specialty’s business and finances, why the company filed for bankruptcy as well as what the company’s objectives are while in bankruptcy.

Business Operations

Based in Greenville, Wisconsin, School Specialty’s business falls in to two segments – school supplies and curriculum based products. Decl. at *3-4. The company’s school supplies segment includes “commodity-based” supplies, furniture and supplemental learning items such as classroom technology products. Decl. at *4. School Specialty generates over 70% of its revenue from its school supply business, offering both its own proprietary products and “branded products.” Decl. at *3. At the curriculum level, the company develops and publishes products used by educators in teaching a particular subject such as math, reading or science. Decl. at *4.

As of its Petition Date, School Specialty employed over 2,000 employees, a quarter of which are sales professionals and administrative support staff. Decl. at *5. In addition to its sales force, the Debtor’s marketing program relies on the publication of over 12 million copies of its catalog and sales through various websites.   Id.

Debtor’s Financials

According to its Declaration, School Specialty generated revenues of $489 million in the first half of fiscal year 2013. Decl. at *6. The company’s revenues are extremely diverse. By that, no particular state or product offering accounts for a significant percentage of revenues. Instead, revenues are generated from school districts spread out across the country which purchase varying degrees of the Debtor’s products. Going in to bankruptcy, School Specialty has $193.6 million in outstanding secured debt under a revolving credit facility and term loan. Decl. at *8-9. The company also has $157 million in outstanding subordinated debentures which come due in 2026. Decl. at *11. 

Events Leading to Bankruptcy

Despite its diverse revenue base, School Specialty must operate within a cyclical business cycle that is tied to the academic school year. Decl. at *13. This results in profitable months from May through October (when schools place orders for products), followed by months where the company operates at a loss. The cyclical nature of its business complicates School Specialty’s cash flow, budgeting and general finances. Id. Given that School Specialty sells primarily to public schools, the company’s revenues are correlated to a large degree to state and local budgets. Since the recession in 2008, state and local governments have delayed or suspended implementing new curriculum guidelines. This, in turn, has resulted in schools purchasing less instructional materials from the Debtor. Decl. at *14. 

In the years leading up to bankruptcy, School Specialty implemented various programs geared toward reducing costs or improving business performance. Decl. at *14. Such measures included consolidating its call centers, reducing its workforce by 30% and renegotiating portions of its debt instruments. Decl. at *14-15. Despite these efforts, by January 4, 2013, the Debtor reported that it was not in compliance with the liquidity requirements of certain loan agreements. Soon after School Specialty filed for bankruptcy protection. Decl. at *17-18. 

Objectives in Bankruptcy

In order to proceed in a chapter 11 bankruptcy proceeding, School Specialty would need to obtain postpetition financing. Leading up to bankruptcy, the company began negotiations with its prepetition lenders regarding bankruptcy financing. Eventually, a proposal was reached wherein the Debtor’s prepetition lender agreed to debtor financing of $144.7 million. Decl. at *19. This financing, however, was conditioned on Debtor’s agreement to conduct a sale of substantially all of its assets under section 363 of the Bankruptcy Code. Id.

As part of their negotiations with the lenders, School Specialty has agreed to an asset purchase agreement which will allow the lenders to credit bid a portion of their debt toward the purchase price of the company. Decl. at *20. The lenders bid, of course, is subject to higher and better offers pursuant to bid procedures and an auction that must be approved by the Bankruptcy Court. 

The School Specialty bankruptcy proceeding is before Judge Kevin J. Carey. This case is proceeding under case no. 13-10125. School Specialty is represented by the law firm Young Conaway Stargatt & Taylor. 

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Jason Cornell is an equity partner with the law firm Fox Rothschild LLP.  Jason is a creditors' rights attorney who is admitted and practices before the United States Bankruptcy Court for the District of Delaware.  You can reach Jason at 302 427 5512 or jcornell@foxrothschild.com. 

Below are some additional posts Jason has written on Delaware bankruptcy litigation:

  Ten Things Every Commercial Landlord Should Know About a Tenant in Bankruptcy.

  Seeking Relief from the Automatic Stay in Delaware.

  A Tale of Two Bankruptcy Auctions.

  What Information is Required in a Chapter 11 Disclosure Statement?

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Introduction

On January 21, 2013, Carl’s Patio, Inc., and various related entities, filed chapter 11 petitions for bankruptcy in the United States Bankruptcy Court for the district of Delaware. Carl’s Patio started in 1993 and describes itself in court filings as “one of the leading retailer merchandisers of upscale outdoor furniture and accessories in the country.” See Declaration in Support of Chapter 11 Petitions (the “Decl.”) at *2.  At the height of operations, the company operated retail locations in both California and Florida. However, prior to filing for bankruptcy, the Debtor closed five of its underperforming stores in California and four in Florida. The company currently operates ten retail stores and a warehouse in South Florida. Decl. at *4. Aside from retail locations, Carl’s Patio also sells its products online. Decl. at *5. 

Events Leading to Bankruptcy

Carl’s Patio sells products under its own private label – the “Fifth and Shore line,” as well as offering nationally branded merchandise. Although Carl’s sells national brands at a higher price point, the company enjoys a greater profit margin from its recently introduced private label. According to the company, it was the introduction of its private label which attributed to its net loss in sales for 2012. Specifically, in fiscal year 2011, Carl’s Patio generated a net income of $912,324 against sales of $34.3 million. In fiscal year 2012, however, the company generated a net loss of $1.8 million against sales of $29.9 million. This loss, according to the Declaration, was due “primarily to launching more collections in the Debtors’ Fifth & Shore private brand line than were necessary.” Decl. at *6.

In addition to excessive inventory, the Debtor also attributes its bankruptcy filing to the economic downturn in general as well as “unsuccessful strategic initiatives” aggravated by poor marketing and increased competition. Decl. at *10. In order to keep their doors open, the Debtor has had to rely on existing debt facilities and extending trade payables. Id. It was under these circumstances in which the company decided to hire outside restructuring professionals.

Marketing Efforts

As part of its restructuring efforts, Carl’s Patio approached potential purchasers who might be interested in buying the company.  In October, Weinberg Capital submitted a letter of intent to purchase the company as a going concern.  Decl. at *12. The parties executed a draft purchase agreement in December of 2012 wherein they agreed to a "stalking horse" purchase price of $4.1 million.  Decl. at *13. As stated in its Declaration, Carl’s Patio believes the company cannot continue with operations without either a sale of its business or other restructuring. Decl. at *15. 

The Carl's Patio bankruptcy is before Judge Kevin Gross.  Judge Gross is Chief Judge of the Delaware Bankruptcy Court.  Carl's Patio is represented by the law firm Bayard, P.A.

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Jason Cornell is an equity partner with the law firm Fox Rothschild LLP.  Jason is a creditors' rights attorney who is admitted and practices before the United States Bankruptcy Court for the District of Delaware.  You can reach Jason at 302 427 5512 or jcornell@foxrothschild.com. 

Below are additional posts Jason has written on Delaware bankruptcy litigation:

  Ten Things Every Commercial Landlord Should Know About a Tenant in Bankruptcy.

  Seeking Relief from the Automatic Stay in Delaware.

  A Tale of Two Bankruptcy Auctions.

  What Information is Required in a Chapter 11 Disclosure Statement?

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Introduction

On January 11, 2013, Penson Worldwide ("Penson"), a clearing and settlement provider for the investment trading industry, filed chapter 11 petitions for bankruptcy in the United States Bankruptcy Court for the District of Delaware.  In papers filed with the Bankruptcy Court, Penson describes itself as a company that provides "execution, clearing, custody, settlement, and technology products and services to financial firms."  See Declaration of Bryce Engel in Support of Chapter 11 Petitions (hereinafter, the "Decl." ), at *3.  After its start in 1995, Penson grew to become one of the largest independent securities clearing brokers in the United States.  Through its subsidiaries, Penson also became one of the largest independent clearing brokers in Canada, Australia and the United Kingdom.  Id.

Reasons for Bankruptcy

Penson attributes its need for bankruptcy protection to lower investor volume in the public markets, which in turn led to less commission fees and increased regulatory capital requirements.  Decl. at *17.  Penson's earnings and profitability are highly correlated to the strength and performance of global investment markets.  The last couple of years have created "substantial economic uncertainty and prolonged volatility in the world's financial markets."  Decl. at *16.  In 2010, average daily trading volume in the stocks dropped by 5% and again fell by 8% in 2011.  Decl. at *17.  Less market participation means less revenue for Penson.  The company's problems were compounded by increased competition and the loss of one of the company's largest institutional customers.  Id.

Penson's Financials

Penson's revenues for 2011 totaled $217.3 million. Decl. at *3.  A little under half of the company's revenues for 2011 came from clearing and commission fees, a quarter from interest income, 10% from technology products and 14% from other sources.  Id.  Penson's debt obligations include a $50 million revolving credit agreement, secured notes maturing in 2017 with a face value of $200 million and convertible notes maturing in 2014 with a face value of $60 million.  The company is also party to various inter company notes.  Decl. at *8-9.

Objectives in Bankruptcy

Prior to filing bankruptcy, Penson began negotiations with its note holders.  Those negotiations resulted in a consensual agreement for the liquidation of Penson's business.  Penson filed for bankruptcy with the intentions of implementing the previously agreed to "Joint Plan of Liquidation of Penson Worldwide, Inc., and Its Affiliated Debtors."  Decl. at *23.  The Penson bankruptcy proceeding is before Judge Peter J. Walsh.  Penson is represented by the Delaware law firm Young Conaway Stargatt & Taylor.

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Jason Cornell is a creditor's rights attorney and partner with the law firm Fox Rothschild LLP.  Jason is admitted and practices before the United States Bankruptcy Court for the District of Delaware.  You can reach Jason at 302 427-5512 or jcornell@foxrothschil.com. 

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Introduction

Earlier this week, RG Steel Sparrows Point, LLC ("RG Steel"), began filing complaints to avoid and recover what it contends are preferential transfers under sections 547 and 548 of the United States Bankruptcy Code.  For those not familiar with this bankruptcy proceeding, RG Steel originally filed chapter 11 petitions for bankruptcy in the Delaware Bankruptcy Court on May 30, 2012.  At the time the company filed for bankruptcy, RG Steel was the fourth largest flat-rolled steel company in the United States. Operating at full capacity, RG Steel produced over 8 million tons of steel per year.  This post will look at RG Steel's original business, why the company filed for bankruptcy and what are recent developments since the company has filed for bankruptcy protection.

Business Formation and Bankruptcy

At the time RG Steel and its affiliates filed for bankruptcy, the company operated steel production facilities in West Virginia, Maryland and Ohio.  The company was formed in 2011 as a result of a stock purchase agreement with Severstal U.S. Holdings II, Inc., and various related entities.  According to court filings, after RG Steel acquired Severstal it discovered a "working capital shortfall" resulting in liquidity problems and the company's ultimate bankruptcy filing.  The company also attributed its bankruptcy to declining steel prices while its costs for raw materials continued to rise.

Objectives in Bankruptcy

Once in Bankruptcy, RG Steel filed various motions seeking authority to sell substantially all of its assets.  After receiving approval from the Bankruptcy Court, the company commenced bidding procedures and bankruptcy auctions which allowed it to sell the majority of its assets.  The asset sales allowed RG Steel to payoff its debtor in possession financing and first lien debt.  With the sales out of the way, the company shifted its focus to attempting to recover assets through preference actions.

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."

Jason Cornell is a partner and bankruptcy attorney with the law firm Fox Rothschild LLP.  Jason is admitted and practices before the United States Bankruptcy Court for the District of Delaware.  You can reach Jason at 302 427-5512 or jcornell@foxrothschild.com. 

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