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Delaware Bankruptcy Litigation

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

Sixth Circuit Rejects Bad Faith Cram Down

Posted in Opinions

In the recent decision of Village Green I, GP v. Fed. Nat’l Mortgage Ass’n (In re Village Green I, GP), 2016 WL 325163 (6th Cir. Jan. 27, 2016), the U.S. Court of Appeals for the Sixth Circuit held that the contrived nature of the impairment will cause the plan to fail Section 1129(a)(3)’s good faith requirement.

The debtor’s proposed plan at issue crammed down secured debt by paying it over ten years, and impaired unsecured claims by paying them over sixty days.  After the district court vacated and remanded twice, the case was appealed to the Sixth Circuit, which affirmed the ruling of the district court.

On the issue of impairment, the Sixth Circuit found that:

[T]he plan undisputedly would alter the minor claimants’ rights, because these claimants are legally entitled to payment immediately rather than in two installments over 60 days.  That this impairment seems contrived to create a class to vote in favor of the plan is immaterial.  Section 1124(1) by its terms asks only whether a plan would alter a claimant’s interests, not whether the debtor had bad motives in seeking to alter them.

However, on the issue of good faith, the Sixth Circuit stated that Section 1129(a)(3) mandates that “the plan has been proposed in good faith and not by any means forbidden by law.”  11 U.S.C. § 1129(a)(3).  The Sixth Circuit found this element had not been met, stating that the debtor’s own projections for feasibility purposes “render[ed] dubious at best [its] assertion that it could not safely pay off the minor claims (total value: less than $2,400) up front rather than over 60 days.”

Moreover, because certain of the creditors were “closely allied” with the debtor “only compounds the appearance that impairment of their claims had more to do with circumventing the purposes of § 1129(a)(10) than with rationing dollars.”

Finally, the fact that the secured lender offered to pay the unsecured claims in full up front, and the creditors’ refusal to accept, doomed the rationing rationale.  “On this record, the minor claims’ impairment was transparently an artifice to circumvent the purposes of § 1129(a)(10),” and therefore failed section 1129(a)(3)’s requirement of good faith.

This decision is an important read and should be taken into account by any debtor seeking to cram down claims, or any creditor, secured or unsecured, affected by such cram-down.

Carl D. Neff is a partner with the law firm of Fox Rothschild LLP.  You can reach Carl at (302) 622-4272 or at cneff@foxrothschild.com.

Hancock Fabrics, Inc. Files for Bankruptcy

Posted in Bankruptcy Case Summaries

On February 2, 2016, Hancock Fabrics, Inc. and 6 affiliates filed for relief under chapter 11 of the Bankruptcy Code.  The cases are jointly administered under Case Number 16-10296 and presided over by Judge Shannon.  The first day hearing was held on February 3, 2016.  The second day hearing is scheduled for February 22, 2016 at 1:00 p.m.

The majority of the information available about the Debtors comes from the Declaration of Dennis Lyons in Support of Chapter 11 Petitions and Request for First Day Relief (D.I. 4) (the “Declaration”).  On March 21, 2007, Hancock and its affiliates filed for bankruptcy for the first time.  Since that time, the Debtors have experienced a challenging business environment and have been burdened by significant legacy debt.  Declaration at *5.  The Debtors state that their intent in filing for bankruptcy is to “(i) gain access to liquidity, (ii) reduce pension and operational costs, (iii) realign its store locations and format and (iv) execute on one or more options to create value for stakeholders.”  Declaration at *6.  Pursuant with these goals, the Debtors have planned to undergo a very accelerated sales process, with a goal of having a final sale hearing on March 14, 2016.  Declaration at *7.

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 the claims and noticing agent, Kurtzman Carson Consultants LLC.  The website contains a copy of the bankruptcy docket, free to download and view.  The website is located at http://www.kccllc.net/hancockfabrics.  If you are a creditor of the Debtors, you may want to consider participating in the formation meeting, which has not yet been scheduled.  The formation meeting is the meeting at which the United States Trustee appoints a committee of unsecured creditors.  Being on the creditors’ committee is the best way for an unsecured creditor to stay involved in, and an active participant in, the bankruptcy proceedings.

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.

Objections to Applications Which Include Indemnification for Defense of Fees Sustained

Posted in Opinions

In the recent opinion of In re Boomerang Inc., et al., Case No. 15-11247 (Bankr. D. Del. Jan. 29, 2016), the Delaware Bankruptcy Court considered the United States Trustee’s (“UST”) objections to retention applications of several law firms seeking to represent the Official Committee of Unsecured Creditors (the “Committee”) of Boomerang Tube, LLC (the “Debtor”).

The UST objected to the applications because they include a provision indemnifying them for expenses incurred in any successful defense of their fees.

The Court sustained the UST’s objection.  The Court concluded that section 328 of the Bankruptcy Code, like section 330, does not provide an exception to the American Rule and cannot support the fee defense provisions at issue under the Supreme Court’s ruling in Baker Botts L.L.P. v. ASARCO LLC, 135 S. Ct. 2158, 2169 (2015).

Moreover, the Court found that the retention agreements were not contractual exceptions to the American Rule requiring each party to pay their own attorneys’ fees.  The Court also found that the retention agreements could not bind the estate, which is not a party to them.  Finally, the Court agreed with the UST that the fee defense provisions do not fit the scope of Section 328(a).

This is an important read for any party to a bankruptcy action considering a retention agreement that attempts to provide indemnification to the retained professionals for defending their fees.

Carl D. Neff is a partner with the law firm of Fox Rothschild LLP.  You can reach Carl at (302) 622-4272 or at cneff@foxrothschild.com.

Money Center of America – Motion to Intervene Granted

Posted in Uncategorized

In a 16 page opinion released January 28, 2016 in the Casino Caribbean, et al. v. Money Centers of America adversary proceeding (Bank. D. Del. Adv. No. 14-50437), Judge Christopher S. Sontchi of the Delaware Bankruptcy Court granted the motion of Quapaw Casino to intervene in the adversary proceeding.  Judge Sontchi’s opinion is available here (the “Opinion”).

Plaintiffs in the adversary proceeding had obtained a court order requiring the Debtors’ to maintain a cash balance of $900,000 or more, in order to compensate the Plaintiffs if it should be determined that the Debtors were holding funds as a ‘mere conduit’ to which the Plaintiffs were entitled.  Opinion at *2.  Quapaw claimed that the Debtors were likewise holding funds to which it was entitled, and moved to intervene in the adversary proceeding, in order to obtain the same relief.  Plaintiffs opposed the motion, fearing that the set-aside funds would be insufficient to compensate them and Quapaw.  Opinion at *2.

The Debtors had entered into an agreement with Quapaw to provide ATM and other cash advance services to Quapaw’s customers, and that any funds advanced to a customer by Quapaw would be reimbursed by the Debtors.  Quapaw is listed on the Debtors’ schedules and filed a proof of claim for $502,018.  Opinion at *4.

The adversary complaint was filed on July 7, 2014.  Quapaw filed its motion to intervene on January 21, 2015.  As of that time, the Debtors had not yet filed an answer in the adversary proceeding.  Pursuant to Fed. R. Civ. P. 24(a) “A movant has an unconditional right to intervene when its motion is timely filed and either (A) a federal statute grants an unconditional right to intervene or (B) the movant claims an interest that is related to the property or transaction that is the subject of the adversary proceeding and disposing of the proceeding impairs or impedes the movant’s ability to protect its interest as a practical matter, unless the parties adequately represent that interest.”  Opinion at *7.  Ultimately, Judge Sontchi found that Quapaw satisfied this requirement.  Opinion at *8.

Judge Sontchi then examined the case under the permissive intervention standard of Fed. R. Civ. P. 24(b), finding that Quapaw also satisfied those requirements.  Opinion at *16.

As this Opinion illustrates, it is difficult to prevent another party from following the path you create and obtaining the same relief, when their claims are practically identical to your own.  In cases like this one, where a finite quantity of funds are available, it may be worth your time to investigate whether your relief would be diminished if another party received identical treatment.  If it would, then you may want to spend a bit more time investigating whether those similarly situated parties exist and take them into account in the relief you seek.

The Court held that QCA had a right to intervene under both Fed. R. Civ. P. 24(a)(1) and (a)(2), and that permissive intervention was warranted under Fed. R. Civ. P. 24(b)(1)(B).  Rule 24(a) has 4 requirements,


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.

Noble Logistics – $61 Million Class Claim Survives Summary Judgment

Posted in Bankruptcy Case Update

On January 26, 2016, the Delaware Bankruptcy Court denied Debtors Noble Logistics Inc., et al.’s (“Debtors” or “Noble Logistics”) motion for summary judgment on their objections to the claims filed by Richard Maximo individually, and on behalf of the Putative Class.  The claims were filed in the amounts of $188,014.13, and $61,292,607.17, respectively (the “Maximo Claims”). A link to the opinion can be found here.

The Maximo Claims are based upon a complaint alleging that Maximo and other members of the Putative Classes were working or had previously worked for Aspen (one of the Debtors’ affiliates) as “Delivery Drivers.” It further alleges that Maximo and other class members were mischaracterized as “independent contractors” by Aspen, and, therefore, were deprived of “premium overtime compensation,” minimum wages, and other protections and benefits to which they would have been entitled if treated as traditional employees.  Maximo asserts Aspen committed multiple violations of the California Labor Code and the California Business and Professions Code.

The Court walked through the analysis of explaining the shifting burdens of proof both on a summary judgment motion, and for establishing proofs of claim in general.  The Court found that genuine issues of material fact clearly existed regarding the Maximo Claims:

[I]ncluding whether the Class members had the right to control and the discretion as to the manner of performance of their services, whether the Class members could complete the route without the Debtors’ direction or supervision, what skills were required, the length of time for which the services were performed, and whether the work was part of the Debtors’ regular business, among other things. Based on the record before the Court, it would be impossible to make such factual determination without developing the evidentiary record.

Accordingly, the Court denied Debtors’ motion for summary judgment as to the Maximo Claims, without prejudice.

Carl D. Neff is a partner with the law firm of Fox Rothschild LLP.  You can reach Carl at (302) 622-4272 or at cneff@foxrothschild.com.

Trump Decision – Claims of Unite Here Health are not Administrative

Posted in Opinions

In a 5 page opinion released January 21, 2016 in the Trump Entertainment Resorts case (Bank. D. Del. 14-12103), Judge Kevin Gross of the Delaware Bankruptcy Court denied the motion of Unite Here Health (“UHH”), the health care provider to employees who were members of union, Unite Here Local 54 (the “Union”).  Judge Gross’s opinion is available here (the “Opinion”).  Judge Gross has issued a number of opinions in this bankruptcy, and we have published several posts about the issues which have been decided.  Please review our prior posts for the background of the dispute between the Union and the Debtors:

Trump Entertainment Resorts Files for Chapter 11 Bankruptcy Protection in Delaware

Trump Entertainment – A Debtor’s Rejection of a Bargaining Agreement

Third Circuit Affirms Bankruptcy Opinion – Trump Entertainment

UHH claimed that because it was not served the Debtors’ motion to reject the CBA, it should be entitled to an administrative claim for health care benefits it provided through October 31, 2014.  The Debtors objected, arguing that because the Court granted its prior motion to reject the CBA nunc pro tunc to September 26, 2014, UHH is not entitled to an administrative claim for benefits it provided.

The Debtors conceded that it did not serve the motion to reject the CBA on UHH, but that UHH had actual notice of the Debtors’ motion to reject the CBA.  Opinion at *3.  The Court agreed that UHH had actual notice and thus was subject to the relief granted in the Court’s order allowing the rejection of the CBA.  The Court then cited Calpine Corp. v. O’Brien Envtl. Energy, Inc. (In re O’Brien Envtl. Energy, Inc.), for the proposition that “The burden of establishing an entitlement to an administrative claim is on the claimant to prove that the expense (1) arises from a post-petition transaction and (2) is beneficial to the debtor in operating its business.”  Opinion at *4 (citing 181 F.3d 527, 532-33 (3d Cir. 1999)).

Judge Gross held that UHH failed to meet the “heavy burden of demonstrating that the costs and fees for which it seeks payment provided an actual benefit to the estate and that such costs and expenses were necessary to preserve the value of the estate assets.”  Opinion at *4-5.  Judge Gross thus held that UHH was subject to the order allowing rejection of the CBA and was not entitled to an admin claim for the purported value of any health benefits it provided.

My primary takeaway from this Opinion is that actual notice “trumps” arguments of inadequate service.

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.

DE Bankruptcy Court Abstains from Determining Altegrity’s Tax Liability

Posted in Opinions

In the recent opinion issued by Judge Laurie Selber Silverstein of the Bankruptcy Court for the District of Delaware, In re Altegrity, et al., Case No. 15-10226 (LSS) (D. Del. Bankr. Ct. Jan. 15, 2016), the Court considered a motion filed by the Altegrity, et al. (“Altegrity” or “Debtors”) under Section 505 of the Bankruptcy Code to determine its tax liability owed to the State of Oklahoma for the fiscal year ending  Sept. 30, 2011, even though the Debtors have a tax protest proceeding pending before the Oklahoma Tax Commission.

The Debtors are privately held information services companies that serve commercial and governmental entities.

In denying Debtors’ motion, the Court noted that Debtors, in making this request, “ignore well-established law that a court – including this Court – should not rule on constitutional issues unless such adjudication is unavoidable.”

After the filing of Debtors’ chapter 11 petitions, the Oklahoma Tax Commission filed a proof of claim against Debtor TOIC in the amount of $24,710,008 asserting a $1.7 million general unsecured claim, and a $23 million priority unsecured claim under 11 U.S.C. § 507(a)(8).

The Court first found that it does have jurisdiction under Section 505(a)(1) to determine the Debtors’ tax liability.  The Court then found that it was appropriate to exercise its discretion to abstain from ruling on the issue.   Per the Court, adjudication of the tax dispute before the Oklahoma Tax Commission would not delay the administration of the bankruptcy case, nor protect creditors from dissipation of the estate’s assets via an uncontested tax assessment.  The Court noted that Altegrity’s Plan has already gone effective, and the Debtors have been contesting the tax assessment in the appropriate forum since 2012.  Finally, the Court found that it is not in a position to more efficiently adjudicate the tax assessment than the presiding administrative law judge.

Accordingly, the Court denied Altegrity’s motion to determine tax liability under Section 505 and abstained from determining the Debtors’ tax liability.

Carl D. Neff is a partner with the law firm of Fox Rothschild LLP.  You can reach Carl at (302) 622-4272 or at cneff@foxrothschild.com.

Third Circuit Affirms Bankruptcy Opinion – Trump Entertainment

Posted in Opinions

On January 15, 2016, the Third Circuit Court of Appeals issued a precedential opinion (the “Opinion”) affirming the October 20, 2014 opinion of Judge Gross.  The Opinion is available here.  My blog post about Judge Gross’ opinion is available here: Trump Entertainment – A Debtor’s Rejection of a Bargaining Agreement.  Note, this was a direct appeal from the Bankruptcy Court to the Third Circuit.

The Third Circuit, in affirming Judge Gross’ opinion, uses nearly identical reasoning.  It finds “the intent of Congress here also to be clear but that intent was to incorporate expired CBAs in the language of [Section] 1113.”  Opinion at *26.  “To hold that a debtor may reject an expired CBA or its continuing obligations as defined by the expired CBA is also consistent with the purpose of the Bankruptcy Code, which gives debtors latitude to restructure their affairs.”  Opinion at *27.

The Appellate Court concludes by stating that “[I]n light of Chapter 11’s overarching purposes and the exigencies that the Debtors faced, we conclude that the Bankruptcy Court did not err in granting the Debtors’ motion.”  Opinion at *30.

John Bird is a bankruptcy attorney with the law firm of Fox Rothschild LLP.  John is admitted in Delaware and the Third Circuit 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.

Professional Fee Issues in Tropicana Entertainment

Posted in Opinions

In a 10 page opinion released January 5, 2016 in the Tropicana Entertainment bankruptcy (Bank. D. Del. 08-10856), Judge Carey of the Delaware Bankruptcy Court provided  a critical opinion concerning the handling of a dispute arising from two debtors’ division of professional payments.  Judge Carey’s opinion is available here (the “Opinion”).


In May of 2009 both the OpCo and LandCo debtors in the Tropicana bankruptcy had their plans confirmed.  The plans became effective June 30, 2009.  The two entities cases were procedurally consolidated, but not substantively consolidated.  Because they were unable to reach an agreement on the issue it became necessary for the Court to decide what percentage of professional fees should be charged to each estate.  In his Allocation Decision, Judge Carey determined that “professional fees incurred through June 30, 2009 should be allocated 75% to the OpCo Debtors and 25% to the LandCo Debtors.”  Opinion at *2.  As the bankruptcy cases had been jointly handled through OpCo’s bankruptcy case, and all payments of professional fees had been made with funds OpCo understood to be part of its bankruptcy estate, it sought reimbursement from LandCo for 25% of all professional fee payments.  LandCo argued that the Allocation Decision was narrower than OpCo’s interpretation, and only provided that 25% of fees unpaid at the time of the effective dates would be paid by LandCo.  Opinion at *2-3.

Judge Carey’s Ruling

While the dispute between the two entities is real, this issue is not in touch with reality.  If LandCo was required to pay 25% of all the profession fees in the Tropicana bankruptcy, it would be required to pay approximately $11.3 million to OpCo.  Opinion at *9.  Thus, LandCo alleges, it would have been cash flow insolvent on the day its plan became effective.  Opinion at *9.

The last thing any bankruptcy judge wants to see happen is for a recently reorganized debtor to immediately slip back into bankruptcy.  As he has had a front-row seat to the entirety of the Tropican restructuring, with regular information about the liquidity and budget of the debtors, this is not a result Judge Carey would have approved.  As the Opinion makes clear, the Allocation Decision was meant to address a split only of those professional fees unpaid as of the effective date.  Opinion at *3.  In what I would think is an act of impressive restraint, Judge Carey limits his criticism to a short statement that “the OpCo Debtors’ inclusion of a claim for Professional Fees under the post-confirmation Intercompany Agreement is overreaching, inequitable and inconsistent with the confirmed Plans.”  Opinion at *9.

Judge Carey finishes his critique by stating that “there is no reason to allow the OpCo Debtors to drive a truck through the small back door that they argue the LandCo Debtors left open.”  Opinion at *9.  While the Tropicana bankruptcy is nearing the end, after the irritation Judge Carey doubtless feels with this dispute, I would not envy the Debtors’ principals if they have to appear before Judge Carey again in the near future.

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.

Capsule International Holdings Preference Actions UPDATE

Posted in Preference Litigation

By way of update to the Capsule International Holdings preference action filings (see original post here), the Official Committee of Unsecured Creditors (the “Committee”) recently filed a Motion for Authority to Settle Classes of Preference Claim Controversies Pursuant to Bankruptcy Rule 9019(b) and to Modify Compromise Procedures (the “Motion”).  For a copy of the Motion, click here.

Through the Motion, the Committee seeks the authority to settle certain classes of claims without seeking Court approval under Section 9019(b) of the Bankruptcy Code.  Per the motion, the Committee has filed approximately 80 claims, seeking the recovering of approximately $21 million for the Debtors’ estate.

The deadline to object to the Motion is February 9th at 4:00 p.m. (ET), and the hearing date on the Motion is scheduled for February 16, 2016 at 1:00 p.m. (ET) at the United States Bankruptcy Court, 824 Market St., 5th Fl., Courtroom #6, Wilmington, Delaware.

Carl D. Neff is a partner with the law firm of Fox Rothschild LLP.  You can reach Carl at (302) 622-4272 or at cneff@foxrothschild.com.