On April 24, 2013, Robert S. Bernstein, Plan Administrator for the Berkline/BenchCraft bankruptcy estates, began filing complaints with the Delaware Bankruptcy Court seeking to recover what he contends are preferential transfers. For those not familiar with preference actions, Bernstein contends that certain payments, or "transfers", made to creditors in the months prior to the Berkline bankruptcy are subject to avoidance and recovery pursuant to sections 547 and 550 of the Bankruptcy Code. According to court papers filed by Bernstein, a pretrial conference is scheduled for July 9, 2013 at 10:30 a.m..
Berkline and various related entities filed chapter 11 petitions for bankruptcy on May 2, 2011. According to the Declaration of Berkline's Chief Restructuring Office (the "Decl."), Berkline was a "leading North American designer and manufacturer of upholstered and reclining furniture." Decl. at *2. Berkline manufactured home theater seating, sofas, love seats and sectionals which were sold in furniture stores, department stores, "big box" stores and on the internet. Two of the company's brands included the "Berkline" and "Benchcraft" lines of furniture. Id.
Reasons for Bankruptcy
Berkline attributes its bankruptcy to the recent economic recession and decline in the housing market, both of which caused the company to experience a significant decline in sales. As a result of the economic downturn, Berkline began streamlining operations through cost reductions and trimming underperforming units. Although the company's management believed they had implemented a successful reorganization plan, their efforts were not enough to overcome Berkline's tremendous debt. Decl. at *6.
Objectives in Bankruptcy
Prior to filing for bankruptcy, Berkline hired a Chief Restructuring Officer to locate a buyer of the company's assets. However, without the ability to obtain needed financing, the company was unable to complete an out of court restructuring. Decl. at *6. In March of 2011, Berkline's Board of Directors decided that the most effective way to maximize value for creditors was through a liquidation through chapter 11 bankruptcy proceedings. Decl. at *6-7. Once the company filed for bankruptcy, it eventually received approval of its Second Amended Chapter 11 Plan of Liquidation.
The Berkline bankruptcy and preference actions are before Judge Mary F. Walrath under lead case no. 11-11369 (MFW). The Berkline Plan Administrator, as plaintiff in the preference actions, is represented by the law firms Pachulski Stang Ziehl & Jones LLP and Bernstein-Burkley, P.C..
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 firstname.lastname@example.org.