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Delaware Bankruptcy Litigation

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

CPI Corp. Preference Actions Filed

Posted in Preference Litigation

From April 24 to 27, 2015, Charles A. Stanziale, Jr., as the Chapter 7 Trustee of CPI Corp., et al., filed preference complaints seeking to avoid and recover alleged preferential transfers pursuant to Sections 547 and 550 of the Bankruptcy Code, and to disallow claims of the defendants pursuant to Section 502(d).

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

The law firm of Ciardi Ciardi & Astin represents the Chapter 7 Trustee in these various preference cases.  The pretrial conference has not been scheduled.  These adversary actions, as well as the Debtors’ bankruptcy proceeding, are before the Honorable Brendan L. Shannon.

Defenses to a Preference Action

Preference actions are a form of litigation specifically provided for by the Bankruptcy Code which are intended to recover payments made by the Debtor within the 90 days prior to declaring bankruptcy.  The presumption is that the Debtor knew it was going to file bankruptcy, so any payments it made during this 90-day window went to friends and people it wanted to keep happy, and stiffed those the Debtor’s management didn’t like.   Recognizing that these payments aren’t always made for inappropriate reasons, the Bankruptcy Code provides creditors with many defenses to preference actions. Included among these are the “ordinary course of business defense” and the “new value defense.” For reader’s looking for more information concerning claims and defenses in preference litigation, attached is a booklet that we have prepared on the subject: “A Preference Reference: Common Issues that Arise in Delaware Preference Litigation.”

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

 

RadioShack to Auction Customer Data

Posted in Bankruptcy Case Update

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

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

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

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

Posted in Bankruptcy Case Update

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

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

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

Filene’s Basement Decision Interprets Lease Rejection Damages Statute

Posted in Opinions

Summary

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

Posted in Bankruptcy Case Summaries

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

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

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

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

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

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

Furniture Brands International – Preference Litigation has Begun

Posted in Preference Litigation

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

On August 1, 2014, the Debtors’ confirmed chapter 11 plan became effective, thereby creating the FBI Wind Down, Inc. Liquidating Trust (the “Trust”) and appointing Alan D. Halperin as the Trustee.  We recently were informed that the Trustee has begun sending out preference demand letters, informing recipients that if they do not settle their liability, he will bring a preference lawsuit.  The Trustee will argue that the transfers, or payments, received by various defendants are avoidable and subject to recovery under 11 U.S.C. § 547 and 548 of the United States Bankruptcy Code.

Defenses to a Preference Action

Preference actions are a form of litigation specifically provided for by the Bankruptcy Code which are intended to recover payments made by the Debtor within the 90 days prior to declaring bankruptcy.  The presumption is that the Debtor knew it was going to file bankruptcy, so any payments it made during this 90-day window went to friends and people it wanted to keep happy, and stiffed those the Debtor’s management didn’t like.   Recognizing that these payments aren’t always made for inappropriate reasons, the Bankruptcy Code provides creditors with many defenses to preference actions. Included among these are the “ordinary course of business defense” and the “new value defense.” For reader’s looking for more information concerning claims and defenses in preference litigation, attached is a booklet I prepared on the subject: “A Preference Reference: Common Issues that Arise in Delaware Preference Litigation.”

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

John Bird is a bankruptcy attorney with the law firm of Fox Rothschild LLP.  John is admitted in Delaware and regularly practices before the United States Bankruptcy Court for the District of Delaware. You can reach John at (302) 622-4263 or at jbird@foxrothschild.com.

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

Posted in Commercial Landlords

With several significant recent bankruptcy filings such as RadioShack and Saladworks, tenant bankruptcies become a greater risk for commercial landlords. Yet some landlords are not familiar with the rights provided to them under the Bankruptcy Code, nor are they aware of the protections provided to a tenant in bankruptcy. For example, certain lease provisions are unenforceable once a tenant files for bankruptcy. Should a landlord attempt to exercise its rights under the lease without first seeking approval from the bankruptcy court, the landlord may be subject to strong sanctions. The purpose of this article is to provide landlords with the questions and answers they should consider when a commercial tenant files for bankruptcy.

1. What effect does a tenant’s bankruptcy have on the lease?

Once a tenant files for bankruptcy, it has three options regarding the lease: it can assume the lease and continue performing all obligations, or assume and assign the lease to a third party, or reject the lease and surrender the premises and terminate performance. The Bankruptcy Code gives the debtor-tenant 120 days to decide whether to assume or reject the lease. During this period, the tenant can request one 90 day extension to decide what to do with the lease.

If the debtor-tenant fails to assume or reject the lease within the 120 day period, and no extension is granted, the lease is deemed rejected. This is a significant provision for landlords. To be proactive, landlords should review all pleadings filed in the tenant’s bankruptcy proceeding to see if the debtor-tenant sought an extension of time to assume or reject. Additionally, landlords should review the tenant’s motions to assume, motions to assume and assign, as well as motions to reject leases. The exhibits to these motions often contain schedules identifying the leases affected by the motion.

2. How does the “automatic stay” of the Bankruptcy Code apply to 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. Before a landlord seeks to enforce its rights under the lease (such as through eviction, termination or foreclosure), the landlord should seek “relief” from the automatic stay by filing a motion with the bankruptcy court.

It is important for landlords to realize that the automatic stay becomes effective without notice or a hearing. Were a landlord 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.

3. What is the status of the tenant’s rental obligations while in bankruptcy?

While in bankruptcy, the Bankruptcy Code requires the debtor-tenant to satisfy all terms under the lease 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 administrative rent with the bankruptcy court. 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 the motion, several months could pass before the court issues a decision.

4. What are the landlord’s “rejection damages”?

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 rent due under the lease. Instead, the Bankruptcy Code limits the recovery a landlord may receive for rejection damages. The landlord’s rejection damage claim is capped at the greater of one year’s rent, or 15% of the rent due under the lease, not to exceed three years’ rent.

To determine the amount of the rejection damage claim, the landlord should first determine the amount of damages it is entitled to under lease, regardless of the Bankruptcy Code’s cap on rejection damages. If the total amount of the landlord’s claim is less than the amount of the cap, the Code’s limitation on damages does not apply.

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

Assumption of the lease is permissible even if the terms of the lease expressly prohibit assumption. Before a debtor-tenant can “assume” a lease, the tenant must cure all monetary and non-monetary defaults. Additionally, the debtor-tenant must provide the landlord with adequate assurance that the tenant will be able to perform under the lease going forward.

A debtor-tenant must serve the landlord with notice of its intention to assume the lease. The debtor may provide notice of its intent to assume in either a motion to assume, or a plan of reorganization. Regardless of the method, 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.

6. What are the landlord’s rights when the tenant assumes and assigns the lease to a third-party?

In conjunction with assuming the lease, the Bankruptcy Code allows the debtor- tenant to assign the lease to a third party. The party who is assigned the lease must provide the landlord with adequate assurance that it can meet the financial obligations of the lease. If the party who is assuming the lease cannot provide the landlord with adequate assurance, the landlord can object to the assignment.

Bankruptcy courts often apply the “business judgment” standard when considering whether to allow a tenant to assume and assign a lease. Under this standard, a debtor-tenant can assign a lease provided it can show the transfer of the lease is a reasonable business decision. Although courts provide debtor-tenants with broad discretion on the decision of whether to assume and assign a lease, the debtor-tenant must still demonstrate the assigned party’s ability to cure defaults under the lease and make future payments.

7. How does a landlord recover its administrative rent claim?

The Bankruptcy Code requires the debtor-tenant to timely perform all obligations under the lease until such time that the tenant assumes or rejects the lease. If a tenant files for bankruptcy and maintains possession and use of the property, yet fails to pay rent, the landlord should consider filing a motion for an administrative claim.

Although the landlord is entitled to the fair market value for purposes of determining the amount of its claim, the rental amount provided in the lease is presumed to be the fair market value. If the tenant believes it is entitled to pay an amount less than the rate provided for in the lease, the tenant must show why the contract rate is not fair market value.

8. When can a landlord recover attorneys’ fees from a tenant in bankruptcy?

Landlords may be able to recover attorneys’ fees incurred when a debtor-tenant seeks to assume the lease, or assume and assign the lease to a third party. To recover attorneys fees, however, the landlord must meet several criteria. First, the lease must expressly state that the landlord is entitled to recover attorneys’ fees as additional rent or in connection with the collection of rent. Next, the landlord must have prevailed in the proceedings in which it seeks to recover attorneys’ fees. “Prevailing” in a bankruptcy proceeding may include filing an objection to a motion of the debtor-tenant and receiving a favorable decision (i.e., objecting to the cure amount proposed by the tenant).

The matter in which the landlord seeks attorneys’ fees must be in pursuit or enforcement of the landlord’s rights under the lease, not matters where the landlord challenges the debtor-tenant’s rights under the Bankruptcy Code. Finally, the attorneys’ fees must be reasonable. To determine whether fees are reasonable, courts will consider factors such as the amount in dispute relative to the fees requested, the debtor-tenant’s good faith efforts to resolve the dispute and compliance with the Bankruptcy Code.

9. Can the landlord apply the tenant’s security deposit to the landlord’s claims?

Security deposits are considered property of the bankruptcy estate, and as such, are generally required to be returned to the debtor. Even so, landlords are permitted in some instances to setoff their claim against the security deposit. This benefits a landlord in two ways. First, instead of returning the deposit to the debtor-tenant, a landlord can setoff its claim against the deposit, and thus reduce the amount of the deposit that must be returned. Second, the landlord’s rejection damage claim is a general unsecured claim, meaning it gets paid after all other types of claims under the Bankruptcy Code. However, by applying the security deposit, the landlord is more likely to receive payment ahead of other unsecured creditors.

Landlords should not setoff any claims they have against a debtor-tenant’s deposit without first seeking permission from the bankruptcy court. If the parties reach an agreement as to the amount of the claim to be applied to the deposit, the debtor-tenant may consent to the landlord’s use of the deposit.

10. How can a landlord protect itself prior to and during a bankruptcy?

Requiring a third-party guarantor is one way in which a landlord may obtain better creditor protection when entering into a lease. The Bankruptcy Code does not prevent a landlord from taking action against a guarantor to a corporate debtor-tenants’ lease, provided the lease guarantor is not in bankruptcy.

Landlords can also seek protection through letters of credit. Using a properly drafted letter of credit allows a landlord to draw on the proceeds of the letter of credit should the tenant default under the lease. Letters of credit are generally not considered property of the tenant’s bankruptcy estate.

Once a tenant files for bankruptcy, it is important that the landlord stay informed regarding the status of the proceedings. This is especially true regarding claims bar dates and objection deadlines. If a landlord misses the deadline in which to file a claim, it may be barred from recovering on its claim. Similarly, if the debtor files a motion to assume the lease and assign it to a third party, landlords have a very limited amount of time to file an objection to the assumption. This deadline is also significant as a landlord may dispute whether the party assigned to the lease is capable of complying with the terms of the lease.

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.

Opinion Rules that Shareholder Meetings Continue During Bankruptcy

Posted in Opinions

In an 19 page opinion issued April 1, 2015 in the SS Body Armor I, Inc. Bankruptcy (10-11255), Judge Sontchi held that an action to compel a shareholder meeting is not barred by the automatic stay of 11 U.S.C. 362.  The Opinion is Available Here.

Background

This case if full of drama; the Debtors’ former CEO was found guilty of fraud, and his brother is the shareholder who is pushing for the shareholders’ meeting to be held.  While the drama is addressed in the Opinion, it does not appear to affect the final ruling, so it won’t be addressed in this blog post.  The pertinent facts are simple:  SS Body Armor (the “Debtors”) filed for bankruptcy in April, 2010;  The Debtors last held a shareholder meeting in 2009.  The Movant (Jeffrey Brooks) is seeking a court order allowing him to commence an action in Chancery Court to force a shareholders’ meeting to occur.

The Opinion

The Movant argues that the automatic stay does not bar an action to compel a meeting of shareholders, and the Debtors agreed that, as a general ruled, shareholders have the right to compel a shareholders’ meeting.  Opinion at *11.  The Debtors add the caveat that in the event of “clear abuse” the shareholders lose that right.

The Court begins its analysis with the subject heading “The Automatic Stay Is Not Applicable to an Action in the Chancery Court to Summarily Order a Shareholder Meeting.”  Opinion at *12.  This heading summarizes the Court’s ruling in this case.  The Court cited to a number of cases in its decision, primarily Manville Corp. v. Equity Security Holders Committee (In re Johns-Manville Corp.), 801 F.2d 662 (2d Cir. 1935), In re Potter Instrument Co., 593 F.2d 470 (2d Cir. 1979), Official Bondholder Committee v. Chase Manhatten [sic] Bank (In re Marvel Entm’t Grp., Inc.), 209 B.R. 832 (D. Del. 1997), and Minter v. Directors of Concrete Products (Matter of Concrete Products, Inc.), 110 B.R. 997 (Bankr. S.D. Ga. 1989).

The Opinion adopts the holdings of Johns-Manville and Marvel Entertainment.  Opinion at *17.  Judge Sontchi held that the right of a shareholder to compel a shareholder’s meeting . . . continues during bankruptcy and the automatic stay is inapplicable.  Opinion at *17.  The Bankruptcy Court may, however, enjoin the shareholder meeting when there is a “clear abuse.”  Clear abuse is determined to occur when there is a showing of delay and real jeopardy to a debtor’s reorganization.  Opinion at *18.

While Judge Sontchi held that there is an argument that clear abuse is present in this case, Rule 7001 requires that a proceeding to obtain an injunction or other equitable relief is an adversary proceeding.  Opinion at *18.  Because the Debtors did not initiate an adversary proceeding to enjoin the Movant’s requested relief, their opposition was procedurally improper and the Motion would be granted.

My $.02

Bankruptcy Rule 7001 provides tight bounds around what relief can be requested in a main bankruptcy case.  When dealing with a Judge who has been known to require parties to strictly adhere to the Rules, it is best to keep in mind the mantra of many lawyers and act out of an “abundance of caution”.

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.

RadioShack Corp. Bankruptcy: How can a landlord protect itself prior to and during bankruptcy?

Posted in Commercial Landlords

With the RadioShack Corporation bankruptcy action affecting the rights of many commercial landlords, it is important to determine ways that landlords can protect themselves during the course of the bankruptcy action.

First, requiring a third-party guarantor is one way in which a landlord may obtain better creditor protection when entering into a lease. The automatic stay does not prevent a landlord from taking action against a guarantor to a corporate debtor-tenants’ lease, provided the lease guarantor is not in bankruptcy.

Landlords can also seek protection through letters of credit. Using a properly drafted letter of credit allows a landlord to draw on the proceeds of the letter of credit from a third party (the lender) should the tenant default under the lease.  Letters of credit are generally not considered property of the tenant’s bankruptcy estate.  Some of the drawbacks to letters of credit include their complexity, both during lease preparations, as well as execution after default.

Once a tenant files for bankruptcy, it is important that the landlord stay informed regarding the status of the proceedings.  This is especially true regarding claims bar dates and objection deadlines.  If a landlord misses the deadline in which to file a claim,  whether for rejection damages,  administrative claims, or any other related expenses,  the landlord may be barred from recovering on its claim. Similarly,  if the debtor files a motion to assume the lease and assign it to a third party,  landlords have a very limited amount of time to prepare and file an objection to the assumption.  This deadline is also significant as a landlord may dispute the amount of cure provided by the landlord, or the landlord could dispute whether the party assigned to the lease is capable of complying with the terms of the lease.

Specifically, in the RadioShack Corp. bankruptcy case, various pleadings have been filed of consequence to commercial landlords, including a “first day” rejection procedures order, which authorizes the Debtors to implement procedures to reject certain of its leases.

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.

Karmaloop, Inc. Formation Meeting and Section 341 Meeting Scheduled

Posted in Bankruptcy Case Update

In the Karmaloop, Inc. bankruptcy proceeding, a formation meeting has been scheduled for Wednesday, April 1, 2015 at 10:30 a.m. (ET) at the DoubleTree Hotel, 700 King St., Salon C, 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 March 30, 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 Thursday, April 16, 2015 at 10:30 a.m. (ET) at the J. Caleb Boggs Federal Court House, 844 N. King Street, 2nd Fl., Room 2112, Wilmington, DE 19801. Continue Reading