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Delaware Bankruptcy Litigation

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

Trump Wins Relief From Stay – No More Trump Casino in AC?

Posted in Opinions

In a 21 page opinion (the “Opinion”) released February 20, 2015, in the Trump Entertainment Resorts, Inc bankruptcy (Case No. 14-12103), Judge Gross, granted the motion of Trump AC Casino Marks, LLC (“Trump AC”) to modify the automatic stay to allow litigation to proceed, which could result in termination of their license with the Debtors.  The Opinion is available here.  Seeking relief from the automatic stay is a topic which frequently appears on this blog.  A couple of posts written by my colleagues that summarize the law are here:

Seeking Relief from the Automatic Stay in Delaware

How does the “automatic stay” of the bankruptcy code apply to landlords?

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What are the landlord’s rights when the debtor-tenant decides to assume the lease?

Posted in Commercial Landlords

Assumption of the lease is permissible even if the terms of the lease expressly prohibit assumption.  Section 365 of the Bankruptcy Code requires a debtor-tenant to meet certain criteria in order to “assume” a lease.  First, and most importantly, the tenant must cure any and all existing defaults, both monetary and non-monetary.  Second, the debtor-tenant must provide “adequate assurance” to the landlord that the debtor will be able to perform under the lease going forward.  The tenant’s obligation to cure defaults includes the payment of late charges or similar charges that arise under the lease.  As discussed in section 8 below,  the landlord may be able to recover attorney’s fees in limited circumstances.

The Bankruptcy Code requires the tenant to demonstrate its ability to provide “adequate assurance of future performance.”  Though this term is not defined within the Code, it has generally been interpreted to require the tenant to demonstrate its ability to meet its financial obligations under the terms of the lease going forward.

A debtor-tenant must serve the landlord with notice of its intention to assume the lease.  Tenants often list the cure amount within a motion to assume the lease.  However, the Code also allows the debtor-tenant to provide notice of the Landlord’s intent to assume the lease as part of the debtor’s plan of reorganization.  Regardless of the method the debtor selects,  under either approach the landlord has only a limited amount of time to review and file an objection to the assumption of its lease and/or the proposed cure amount. If the landlord chooses to object to the assumption of its lease, it needs to file a written objection with the court.

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.

Altegrity Formation Meeting and Section 341 Meeting of Creditors Scheduled

Posted in Bankruptcy Case Update

In the Altegrity, Inc. bankruptcy proceeding, a formation meeting has been scheduled for Tuesday, February 24, 2015 at 10:30 a.m. (ET) at the Doubletree Hotel, 700 N. King Street, 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.

In addition, The U.S. Trustee has requested that a Section 341 Meeting of Creditors be scheduled for Wednesday, March 18, 2015 at 3:00 p.m. (ET) at the J. Caleb Boggs Federal Court House, 844 N. King Street, 2nd Fl., Room 2112, Wilmington, DE 19801.

One way in which creditors can assert their interests is to attend the Formation Meeting and become a part of the creditors’ committee.  The creditors’ committee is one of the most active participants in a corporate bankruptcy, and has access to a significant amount of information not available to normal creditors.  There are, naturally, trade-offs to gaining access to this information (limitations on a company’s ability to trade in securities of the debtor), but you will be far better informed of what occurs in the bankruptcy proceeding.

Another way creditors can assert their interests is to attend the Section 341 Meeting of Creditors, in order to depose the debtor’s representative regarding the assets and liabilities of the bankruptcy estate.  Creditors may retain counsel to conduct such an examination of the debtor’s representative.  The Section 341 meeting of creditors is an integral component of a bankruptcy proceeding.  Creditors often want to know what information is made available, and what procedures are followed, during a typical meeting of creditors.

General topics that are discussed during a Section 341 meeting can include the following issues:

  • The nature of scope of a debtor’s assets and liabilities;
  • The amount of accounts receivable and accounts payable;
  • To what extent the debtor is able to repay its creditors;
  • Whether insurance remains active;
  • The condition and location of goods received in the 20 days before bankruptcy;
  • The condition and location of goods received in the 45 days before bankruptcy;
  • The debtor’s or trustee’s plan to reorganize its debt or liquidate its assets;
  • The debtor’s plan after it emerges from bankruptcy (not applicable to a Chapter 7 debtor);
  • Whether the debtor experienced any changes in revenue since filing for bankruptcy; and
  • Potential avoidance actions to be commenced by the debtor or trustee

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.

Tales of the GM Bankruptcy: Erroneous UCC-3 Termination Statement Results In Loss of Secured Interest on $1.5 Billion Term Loan

Posted in Bankruptcy Case Summaries, Recent Developments in Bankruptcy Law

This post was originally published in the American Bar Association Young Lawyer Division Bankruptcy Committee Winter 2015 Newsletter. (c) 2015 by the American Bar Association.


The Second Circuit Court of Appeals recently determined that JPMorgan released its security interest on a $1.5 billion term loan by virtue of the mistaken filing of a UCC-3 termination statement.  After concluding that both the borrowers and lenders had reviewed drafts, including review by their counsel, the Second Circuit concluded that erroneous termination statement was filed with actual authority.  Official Committee of Unsecured Creditors v. JPMorgan Chase Bank, N.A. (In re Motors Liquidation Co.), Appeal  No. 13-2187 (2d Cir. Jan. 21, 2013)(Second Circuit Decision).  A copy of the decision can be found here.

In October 2011, General Motors (GM) entered into a “synthetic lease financing transaction” (the Synthetic Lease) by which it obtained approximately $300 million of financing from a syndicate of lenders for which JPMorgan was the administrative agent and secured party of record listed on the UCC-1 financing statements.  The Synthetic Lease was secured by liens on real property.   Id. at 3.  Five years later, GM entered into an unrelated term loan facility (the Term Loan) for approximately $1.5 billion in financing from a syndicate of lenders for which JPMorgan was again the administrative agent and secured party of record.  The Term Loan was secured by a large number of GM’s assets, including its equipment and fixtures.  Id. at 3-4.  In connection with the Term Loan, twenty-eight UCC-1 financing statements were filed across the country to perfect the lenders’ security interests, including one filed with the Delaware Secretary of State (the Main Term Loan UCC-1). Id. at 4.

In September 2008, GM contacted Mayer Brown LLP, its counsel for the Synthetic Lease, in order to facilitate repayment of the Synthetic Lease and release of the lenders’ interest in the GM collateral.  Id. at 4.  A paralegal at Mayer Brown performed a search and prepared a list of financing statements for termination that inadvertently included the Main Term Loan UCC-1 despite that it was not related to repayment of the Synthetic Lease and should not be terminated.  Id. at 5.

Copies of the closing checklist and draft UCC-3 termination statements were circulated to GM, Mayer Brown, JPMorgan and JPMorgan’s counsel Simpson Thatcher & Bartlett LLP, but the error went unnoticed.  On October 30, 2008, GM repaid the Synthetic Lease and the erroneous UCC-3 identifying the Main Term Loan UCC-1 was filed with the Delaware Secretary of State.  Id. at 6.  The mistake was not uncovered until GM filed for bankruptcy in 2009 in the U.S. Bankruptcy Court for the Southern District of New York (the Bankruptcy Court).  After GM filed its chapter 11 petition, JPMorgan informed the Unsecured Creditors Committee that a UCC-3 termination statement was inadvertently filed in October 2008, but termination of the security interest was unauthorized and therefore ineffective.  Id.  The Committee then initiated litigation against JPMorgan seeking a determination that the UCC-3 termination was effective, and JPMorgan was therefore an unsecured creditor. Id. at 6-7.

On cross motions for summary judgment, the Bankruptcy Court found the termination statement unauthorized and not effective to terminate JPMorgan’s Term Loan security interest.  Id. at 7. See Official Committee of Unsecured Creditors v. JPMorgan Chase Bank, N.A. (In re Motors Liquidation Co.), 486 B.R. 596, 647-48 (Bankr. S.D.N.Y. 2013).  The Committee appealed directly to the Second Circuit, and on appeal, the parties offered competing views of UCC § 9-509(d)(1), under which a termination statement is effective if “the secured party of record authorizes the filing.”  Second Circuit Decision at 7.

The Second Circuit certified a question to the Delaware Supreme Court regarding whether the filing of a termination statement is effective to terminate the security interest regardless of the filer’s intent.  In October 2014, the Delaware Supreme Court provided its answer: “it is enough that the secured party authorizes the filing to be made . . . the Delaware UCC contains no requirement that a secured party that authorizes filing subjectively intends or otherwise understands the effect of the plain terms of its own filing.”  Id. at 9-10 (quoting Official Committee of Unsecured Creditors of Motors Liquidation Co. v. JPMorgan Chase Bank, N.A., __ A.3d __, 2014 WL 5305937, *5 (Del. Oct. 17, 2014) (the Delaware Decision)).  The Delaware Supreme Court reasoned that “[i]f parties could be relieved from the legal consequences of their mistaken filings, they would have little incentive to ensure the accuracy of the information contained in their UCC filings.”  Second Circuit Decision at 10 (quoting Delaware Decision, 2014 WL 5305937 at *3-4).

Having heard from the Delaware Supreme Court, the Second Circuit considered the remaining question, “Did JPMorgan authorize the filing of the UCC-3 termination statement that mistakenly identified for termination the Main Term Loan UCC-1?”  Second Circuit Decision at 11.  Although JPMorgan argued that Mayer Brown must have exceeded the scope of its authority and that JPMorgan “never instructed anyone to file the UCC-3 in question, and the termination statement was therefore unauthorized and ineffective,” the Second Circuit considered the facts at issue – namely that both JPMorgan and Simpson Thatcher received copies of the draft UCC-3 termination statement at issue and neither party expressed any concerns about it or the closing checklist.  Id. at 11-13.  Moreover, JPMorgan’s counsel had approved an Escrow Agreement providing that once GM repaid the Synthetic Lease, the escrow agent would forward the termination statements to GM’s counsel for filing.  Id. at 13-14.

With these facts, the Court cited only the Restatement (third) of Agency to find that actual authority existed here, where “JPMorgan and its counsel knew that, upon the closing of the Synthetic Lease transaction, Mayer Brown was going to file the termination statement that identified the Main Term Loan UCC-1 for termination and that JPMorgan reviewed and assented to the filing of that statement.”  Id. at 14.

Often, when a secured loan is paid off, the lenders rely on the borrower’s counsel to prepare and file UCC termination statements.  The Second Circuit’s decision in this case illustrates the importance of a detailed review of draft termination statements by lenders prior to filing as well as the importance of the Creditors’ Committee’s post-petition review of secured liens which can reveal errors or issues with the liens or their perfection.  In this case, the mistaken filing of the termination statement resulted in JPMorgan and the syndicate of lenders for the $1.5 billion Term Loan releasing their security interests.  Time will tell the full scope of damages to these lenders and whether further litigation will ensue.

What are a Landlord’s “Rejection Damages?”

Posted in Commercial Landlords

If the debtor-tenant seeks to terminate and surrender the lease, that is “reject it”, the landlord may be entitled to a “rejection damage” claim.  A landlord is not entitled to the full amount of unpaid obligations for the balance of the lease.  Instead, Section 502(b)(6) limits the recovery a landlord may receive for “rejection damages.” Under Section 502(b)(6) of the Bankruptcy Code, the landlord is entitled to rent due under the rejected lease for the greater of (i.) one year’s rent, or (ii.)  fifteen percent (15%) of the rent due under the lease, not to exceed three years’ rent.  Unlike the administrative rent claim, a rejection damage claim is a general non-priority unsecured claim paid only after all other claims.

The landlord’s rejection damage claim is capped under Section 502(2)(b)(6), but the landlord is entitled to include all amounts that constitute “rent” under the lease.  Items that may include “rent” include utility fees, common area maintenance charges and taxes.

The Bankruptcy Code views a rejected lease as one that is in breach by the tenant.  To preserve its rejection damage claim, the landlord needs to prepare and file a proof of claim.  This differs from the procedure for administrative rent claims, which generally requires the landlord to file a motion for allowance and payment of the administrative rent claim.  Once the rejection damage claim is properly filed with the court, the claim is deemed allowed unless the debtor-tenant, or another interested party, files an objection to the claim.  Only claims that are “allowed” are eligible for payment, and again, only if funds are available.

Carl D. Neff is a bankruptcy attorney with the law firm of Fox Rothschild LLP.  Carl is admitted in Delaware and regularly practices before the United States Bankruptcy Court for the District of Delaware. You can reach Carl at (302) 622-4272 or at cneff@foxrothschild.com.

Preference Actions filed in CPI, Corp.

Posted in Preference Litigation

On February 6, 2015, Charles A. Stanziale, Jr., as the Chapter 7 Trustee (the “Trustee”) of CPI, Corp., et al. (“CPI” or the “Debtors”), filed approximately 44 preference complaints seeking to avoid and recover alleged preferential transfers pursuant to Sections 547 and 550 of the Bankruptcy Code, to disallow claims pursuant to Section 502(d), for attorneys’ fees, and prejudgment interest.

Background

By way of background, CPI filed petitions for bankruptcy in the District of Delaware on May 1, 2013 under Chapter 7 of the Bankruptcy Code.  CPI was an operator of more than 2,000 U.S. portrait studios in locations such as Wal-Mart and Sears stores.  CPI was forced to liquidate its assets after receiving a fourth forbearance agreement from its lenders.

McCarter & English, LLP represent the Trustee in these various preference cases.  The pretrial conference has not been scheduled.  These adversary actions, as well as the Debtors’ bankruptcy proceeding, are before the Honorable Brendan Shannon.

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 that we prepared on the subject: “A Preference Reference: Common Issues that Arise in Delaware Preference Litigation.”

In addition, an analysis of defenses that can be asserted in response to a preference complaint, below are several articles on this topic:

Preference Payments: Brief Analysis of Preference Actions and Common Defenses

Minimizing Preference Exposure: Require Prepayment for Goods or Services

Minimizing Preference Exposure (Part II) – Contemporaneous Exchanges

Carl D. Neff is a bankruptcy attorney with the law firm of Fox Rothschild LLP.  Carl is admitted in Delaware and regularly practices before the United States Bankruptcy Court for the District of Delaware. You can reach Carl at (302) 622-4272 or at cneff@foxrothschild.com.

RadioShack Pulls the Plug

Posted in Bankruptcy Case Summaries

In an unsurprising move, RadioShack has become the latest retailer to file for relief under Chapter 11 of the Bankruptcy Code.  RadioShack filed on February 5, 2015 along with 17 of its affiliates.  The cases are jointly administered under Case Number 15-10197 and presided over by Judge Shannon.  The emergency first day motion was held on February 6, 2015, and a further first day hearing will occur at 9:30 on February 9, 2015.

Pursuant to the Declaration of Carlin Adrianopoli in Support of First Day Pleadings (D.I. 17) (the “Declaration”), RadioShack has over 21,000 employees, 4,400 stores, and 100 million shares of stock.  The goal of this bankruptcy is to “promptly reduce costs by closing up to 2,100 underperforming stores”.  Declaration at *7.  As a part of my practice is the defense of preference actions, I couldn’t help but notice that the Declaration contains a statement that “merchandise vendors reduced or declined to extend trade credit and/or offered less favorable payment terms.”  Declaration at *13.  One of the strongest defenses in a preference action is the “Ordinary Course” defense.  As its name implies, the payment recipient must have acted in the ordinary course of the parties dealings.  If you’d like to know more about how this, or any other, defense may apply to your situation, feel free to contact us.

If you want to stay up-to-date on the filings in this case, I’d recommend you keep an eye on the website created by RadioShack’s claims and noticing agent, Prime Clerk.  The website contains a complete copy of the bankruptcy docket, free to download and view.  The website is located at https://cases.primeclerk.com/radioShack/.

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What is the Status of a Tenant’s Rental Obligations While Landlord is in Bankruptcy?

Posted in Commercial Landlords

Section 365(d) of the Bankruptcy Code requires the debtor-tenant to satisfy all the terms under the lease during the post petition period until the tenant either rejects the lease, or assumes and assigns it to a third-party.  The landlord’s claim for unpaid rent receives “administrative claim” status, which is a higher priority of claim than many of the other claims against the debtor.  Creditors holding an administrative claim against the debtor will receive payment on their claims before “unsecured creditors,” to the extent funds are available.

Should the debtor-tenant fail to pay the rent as provided under the lease, the landlord should file a motion for payment of post-petition rent with the bankruptcy court and/or a motion for relief from automatic stay.  The rent motion in some instances can be heard within thirty to sixty days from the date in which it was filed.  However, if an evidentiary hearing is needed to resolve issues pertaining to the administrative rent claim,  the motion could require several months before the court issues a decision.

Instead of seeking payment of rent, landlords may file a motion for relief from the automatic stay.  With this alternative, the landlord seeks an order from the court allowing the landlord to enforce its rights under the lease due to the tenant’s breach (such as evicting the defaulting tenant).

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.

A Default is a Default, no Matter the Size?

Posted in Opinions

In an 11 page opinion issued January 30, 2015 in the TPOP bankruptcy (13-11831), Judge Shannon held that GM did not lose the ability to enforce its contracted right to repayment just because the default was “immaterial” according to the Debtor.  The Opinion is available here.

Background

The Debtor, Metavation (the case name was later changed to TPOP), borrowed a significant sum of money from GM under a Sale Support Agreement (“SSA”) that provided for GM to forego repayment of the loan if the Debtor complied with the obligations under the SSA.  Opinion at *2.

As is clear from the issuance of this opinion, the Debtor defaulted and GM sued for payment of its loan, which was secured by valid properly perfected first priority liens on all of TPOP’s assets and proceeds.  Opinion at *4.  The Debtor argued that it complied with all material obligations of the SSA, and because its defaults were minor and did not cause GM any damages, GM should not be entitled to repayment.

The Opinion

Judge Shannon cited to Rory v. Continental Ins. Co., 703 N.W.2d 23 (Mich. 2005) for the principle that “the judiciary is without authority to modify unambiguous contracts or rebalance the contractual equities struck by the contracting parties because fundamental principles of contract law preclude such subjective post hoc judicial determinations of ‘reasonableness’…”  Opinion at *5.  Judge Shannon then inserted the entire disputed contract provision, holding that it was not ambiguous, and he was therefore unable to rule against GM on this issue.

After further analysis, Judge Shannon ruled that the SSA contained the condition precedent to loan forgiveness “that no event of default has occurred.”  Opinion at *10.  Judge Shannon did, however, state in footnote 13 of the Opinion that a default as minor as a one-week variance from the DIP Budget, which was a default under the SSA, “would likely yield a result different from the Court’s ruling today.”  Opinion at *10.  However, as the Debtor’s failure to meet certain milestones was much greater, the Court “need not reach this argument”.  Id.

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.

How does the “automatic stay” of the bankruptcy code apply to landlords?

Posted in Commercial Landlords

The automatic stay is one of the most powerful protections provided to debtors in a bankruptcy proceeding.  The stay acts as an injunction that prohibits creditors (including landlords) from commencing or continuing any proceeding against the debtor which could have been commenced prior to the bankruptcy.  Applied to landlords, the automatic stay prohibits efforts to collect unpaid rent, or seek eviction, setoff, lease termination or foreclosure, among others.

It is important for landlords to realize that the automatic stay becomes effective without notice or a hearing.  Were a landlord (or any creditor) to be found in violation of the automatic stay, the debtor-tenant may be able to recover actual damages from the landlord, including attorneys’ fees.  If the violation is found to be intentional, the debtor-tenant may recover punitive damages.

In order to avoid the consequences resulting from violating the automatic stay,  landlords should seek relief from the stay by filing a motion with the bankruptcy court.  Under Section 362 of the Bankruptcy Code, creditors can seek relief from the automatic stay “for cause.” An example of “cause” includes the tenant’s failure to pay rent.

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.