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Delaware Bankruptcy Litigation

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

Sanctions? In Delaware Bankruptcy Court? Yes

Posted in Opinions

– But they weren’t as oppressive as my subject line may imply.

In a 13 page decision, released April 22, 2016, Judge Gross of the Delaware Bankruptcy Court granted a motion to dismiss an adversary proceeding and sanctioned the Plaintiff – disallowing any further litigation against the defendants in the Bankruptcy Court.  Judge Gross’ opinion is available here (the “Opinion”).

This is a relatively benign holding, despite the knee-jerk reaction I had when I saw Judge Gross (about the nicest person you could ever hope to meet) grant a request for sanctions.  In summary, the plaintiff, Michael T. Kennedy, filed a complaint against Skadden Arps and several other parties associated with the Radnor bankruptcy, alleging, in essence, that the defendants conspired together to take the assets away from equity holders.

Unfortunately for the plaintiff, the Radnor bankruptcy and sale hearing, both occurring in 2006, were the last possible date by which he became aware of the facts alleged in the complaint.  At the time his complaint was filed, all applicable statutes of limitation had lapsed.  Opinion at *9.  In addition, he had already raised all of the claims contained in his complaint in prior proceedings in the Bankruptcy Court, and res judicata prohibited him from litigating the issues again.  Opinion at *10.  Further, as an equity holder, the plaintiff lacked standing to pursue the claims alleged in the complaint.  Opinion at *11.

Judge Gross concluded his Opinion by addressing Skadden’s request for sanctions.  Judge Gross determined that while the litigation was beyond reason, it was not meant to harass; so he did not issue a monetary sanction, but instead enjoined the plaintiff from filing further pleadings against the defendants.  Opinion at *12.

I have little doubt that Judge Gross’ Opinion, and the leniency therein, resulted in part because the plaintiff was a pro-se litigant.  Few and far between are individuals willing to spend their precious time to advance a legal case without the benefit of an attorney.  It takes a tremendous amount of self confidence to stand opposite professionals who spend thousands of hours each year diligently pursuing this craft.  In point of fact, nearly every attorney I know will quickly hire an attorney if involved personally in a legal issue outside of their practice.

John Bird practices with the law firm Fox Rothschild LLP in Wilmington, Delaware. You can reach John at 302-622-4263, or jbird@foxrothschild.com.

Pacific Sunwear Bankruptcy Update – Utilities Motion

Posted in Bankruptcy Case Updates

As referenced in a prior post, on April 7th, Pacific Sunwear of California, Inc. (aka PacSun, aka Pacific Sunwear) filed for chapter 11 protection in the United States Bankruptcy Court for the District of Delaware.

On April 8th, the Court entered an Interim Utilities Order (click here), which among other things sets forth deadlines for utility providers to object to the proposed adequate assurance procedures or the amount of adequate assurance.  The exhibits to the Interim Utilities Order (click here), set forth a proposed final order which establishes the proposed amount of adequate assurance of payment to each utility provider of the Debtors under Section 366 of the Bankruptcy Code.  The adequate assurance amount proposed by the Debtors represents the average amount owed to such utility provider over a two-week period.

Any Pacific Sunwear utility provider looking to object to the proposed adequate assurance amount or the procedures should act quickly.  By way of brief background, Section 366 of the Bankruptcy Code was enacted to balance a debtor’s need for utility services from a provider that holds a monopoly of such services, with the need of the utility to ensure for it and its rate payers that it receives payment for providing these essential services.  See In re Hanratty, 907 F.2d 1418, 1424 (3d Cir. 1990). The amount of adequate assurance required is made on a case-by-case determination and, in making such a determination, it is appropriate for the Court to consider “the length of time necessary for the utility to effect termination once one billing cycle is missed.”  In re: Begley, 760 F.2d 46, 49 (3d Cir. 1985).

Per the interim order, a final hearing on the Debtors’ utilities motion has been scheduled for May 3, 2016 at 3:00 p.m.  Objections to the proposed final order must be filed on or before April 25th at 4:00 p.m.  This bankruptcy case is pending before Judge Laurie Selber Silverstein.

Carl D. Neff is a partner 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.

THQ v. Starcom – Preference Action Dismissed

Posted in Opinions, Preference Litigation

Summary

In yet another straight-forward 15 page decision signed April 18, 2016, Judge Walrath of the Delaware Bankruptcy Court granted a defendant’s motion to dismiss a preference complaint, but granted the plaintiff leave to amend. Judge Walrath’s opinion is available here (the “Opinion”).  Numerous posts on this blog discuss other opinions issued by the Delaware Bankruptcy Court dealing with preference payments, as can be seen here. PREFERENCE OPINION POSTS

Background

My colleague, Carl Neff, published a blog post when THQ first started filing preference actions.  You can read it here: THQ Inc. Preference Actions Filed

THQ was a publisher of video games, including such franchises as Saints Row and Darksiders.  Unfortunately for fans of those series, however, THQ was unable to keep pace with its secured debt.  After it failed to make a loan payment, it filed for bankruptcy.  Prior to bankruptcy, THQ had engaged the Starcom defendants to provide media and marketing services.  On December 19, 2014, THQ, Inc., the Plaintiff, filed its Complaint seeking recovery of certain transfers as preference and/or fraudulent transfers from the Starcom Defendants.  The Defendant filed its Motion to Dismiss and after a complete briefing, the Court issued the Opinion.  Opinion at *3.

The Opinion

The motion to dismiss was made pursuant to Rule 12(b)(6).  In Delaware the primary precedents for motions to dismiss are Iqbal, 129 S. Ct. 1937 (2009)  and Twombly, 550 U.S. 544 (2007), both of which are cited by the Opinion at *4.  The Third Circuit has expanded on these precedents in its opinion Fowler v. UPMC Shadyside, 578 F.3d 203 (3d Cir. 2009).  The Third Circuit has articulated a two-part analysis to be applied in evaluating a complaint.  First, the court “must accept all of the complaint’s well-pleaded facts as true, but may disregard any legal conclusions.”  Second, the court must determine “whether the facts alleged in the complaint are sufficient to show that the plaintiff has a ‘plausible claim for relief.’” Opinion at *5 (quoting Fowler at 210-211).

The motion to dismiss argues that the Trustee failed to make any of the factual allegations required.  Judge Walrath  agreed “with the Movants that the Complaint does not adequately identify the transferors and the transferees, the nature of the antecedent debt, and the dates of the alleged transfers to the Additional Defendants. There are no specific allegations of what transfers were actually made to the Additional Defendants and by whom.”  Opinion at *8.

Judge Walrath then quickly granted the Motion to Dismiss and held that “the Plaintiff is not allowed to engage in discovery until it has properly pled its Complaint.”  Opinion at * 9.

My $.02

As was the case in prior opinions granting a motion to dismiss a preference complaint, the plaintiff’s request to allow an amended complaint to be filed was granted.  Considering that most of the plaintiffs handling preference litigation have filed hundreds of prior preference cases, I wonder if a time will come when the Court will begin to require mass-filing preference plaintiffs to pay the litigation costs of the defendants.

While this motion to dismiss may have only delayed the process, it succeeded in denying the Plaintiff an opportunity to go on a fishing expedition of discovery.  I don’t know whether this case will continue through to a trial or will be finalized through a settlement.  But I can say with certainty that for most preference litigants, most of the time, it makes financial sense to settle before incurring significant legal costs.  For a quick primer on preference litigation, please take a look at the Preference Reference which I co-authored.

John Bird practices with the law firm Fox Rothschild LLP in Wilmington, Delaware. You can reach John at 302-622-4263, or jbird@foxrothschild.com.

Devonshire PGA Holdings Opinion – Payments for Prior Representation

Posted in Opinions

In a 21 page decision released April 15, 2016, Judge Sontchi of the Delaware Bankruptcy Court ruled on summary judgment regarding a claim submitted by attorneys related to previous litigation.  Judge Sontchi’s opinion is available here (the “Opinion”).  The Opinion was issued in Devonshire PGA Holdings LLC, Case No. 13-12460.  In this case, Potter Anderson & Corroon represented the Debtors in litigation in the Chancery Court prior to the Debtors’ bankruptcy filing.  Prior to the conclusion of the litigation, the Debtors filed for bankruptcy protection, just six days prior to the voluntary dismissal of the Chancery litigation.  Opinion at *8-9.

The following day, the Debtors and the other parties to the Chancery litigation entered into a settlement agreement.  The settlement agreement was approved by the Bankruptcy Court one month later.  The Debtors’ cases were administratively consolidated and their schedules were filed less than a week later.  In their filings, the Debtors listed Potter Anderson as a creditor holding a non-disputed claim for $225 thousand.  The Debtors’ plan was confirmed later that year, December 2013.  On March 14, 2014, the Debtors amended their schedule to list Potter’s claim as disputed.  Opinion at *9.  Potter filed a claim, to which the Debtors objected and regarding which the Debtors filed a motion for summary judgment.

The Debtors presented four alternate theories for why Potter should not recover on account of its claim.  However, Judge Sontchi takes 10 pages of the Opinion to explain why each and every theory advanced by the Debtors fails.  Ultimately, Judge Sontchi held that ELP did not show that any applicable law renders Potter’s claims unenforceable and the Court must therefor deny the request for summary judgment.  Opinion at *21.

It will be interesting to see if this issue goes to trial, and whether there will be any impact in the Debtors’ having reported these claims as allowed in their Schedules.  Regardless of how the other legal issues play out, it seems that such an admission would greatly inhibit their argument that the claims should now be disallowed.  It also makes me wonder how the treatment of Potter’s claim may have affected the voting on the Plan.

John Bird practices with the law firm Fox Rothschild LLP in Wilmington, Delaware. You can reach John at 302-622-4263, or jbird@foxrothschild.com.

Pacific Sunwear Files Chapter 11 Bankruptcy in Delaware – Commercial Landlords Beware

Posted in Bankruptcy Case Summaries, Commercial Landlords

On April 7, 2016, Pacific Sunwear of California, Inc. (aka PacSun, aka Pacific Sunwear) filed for chapter 11 protection in the United States Bankruptcy Court for the District of Delaware.

Through the bankruptcy, Pacific Sunwear is seeking bankruptcy protection in order to get rid of two thirds of its debt and restore its balance sheet, according to CEO Gary Schoenfeld in a statement. Pacific Sunwear is also looking to reduce the cost of running its stores, either by negotiating with landlords or getting out of leases.

Landlords need to pay close attention to this bankruptcy.  Pacific Sunwear has approximately 600 retail store locations across the country.  Not surprisingly, the Debtors have already filed a motion to establish procedures for rejecting executory contracts and unexpired leases.

Whether Pacific Sunwear rejects store leases, or assumes the leases, the rights of Pacific Sunwear’s commercial landlords will invariably be impacted.  Below is a link to a previous post titled “Ten Things Every Commercial Landlord Should Know About a Tenant in Bankruptcy.”  This link provides a brief summary of some of the issues landlords should consider when a commercial tenant such as Pacific Sunwear files for bankruptcy.

Carl D. Neff is a partner 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.

Renewable Energy Solar Company Abengoa Files for Bankruptcy

Posted in Bankruptcy Case Summaries

The Spanish renewable energy solar company giant, Abengoa SA and its American affiliates, have filed for bankruptcy protection before the U.S. Bankruptcy Court for the District of Delaware.  The Spanish energy company continues talks with its banks and bondholders to agree on its plan to restructure billions of dollars in debt.

Background

Abengoa is one of the world’s top builders of power lines transporting energy across Latin America and a top engineering and construction business, making large renewable-energy power plants in places from Kansas to the United Kingdom.

Additionally, on March 28, 2016, Abengoa S.A., the parent company of the debtors, and approximately twenty affiliated Spanish companies (the “Chapter 15 Debtors”), filed petitions for relief under chapter 15 of the Bankruptcy Code in this Court.

Debtors’ Utilities Motion

The furnishing of utilities to the Abengoa Debtors will become an issue of import in this case.  According to the Declaration of William H. Runge, III in support of the Abengoa Debtors’ first day pleadings:

Uninterrupted Utility Services are essential to the Debtors’ business operations during the pendency of these cases. Should any Utility Company alter, refuse or discontinue service, even for a brief period, the Debtors’ business operations could be severely disrupted, and such disruption would jeopardize the Debtors’ efforts. It is essential that the Utility Services continue uninterrupted.

Along these lines, at the first day hearing, the Debtors obtained an interim utilities order, which among other things approved: (i) the Debtors’ proposed form of adequate assurance, (ii) establishing procedures for resolving objections by utility companies, (iii) prohibiting utility companies from disconnecting service, and (iv) scheduling a final hearing.

Under the interim utilities order, a final hearing on the Debtors’ utility motion is April 27th at 10:00 a.m., and the objection deadline is 7 days prior.

Carl D. Neff is a partner 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.

AE Liquidation Opinion Narrows New Value Defense

Posted in Opinions, Preference Litigation

In an 11 page decision signed March 29, 2016, Judge Walrath of the Delaware Bankruptcy Court revised a calculation of new value pursuant to an order from the District Court remanding the case. Judge Walrath’s opinion is available here (the “Opinion”).  Numerous posts on this blog discuss other opinions issued by the Delaware Bankruptcy Court dealing with preference payments, as can be seen here.  PREFERENCE OPINION POSTS.

This matter was remanded from the District Court on the appeal of the Bankruptcy Court’s decision dated July 17, 2013.  In that opinion, Judge Walrath had ruled that (i) $781,702.61 of pre-petition transfers to Prudential (the Defendant) were preferential; (ii) Prudential had a new value defense totaling $128,379.40; and (iii) the Trustee was not entitled to prejudgment interest.

After both parties appealed, the District Court ruled that post-petition new value was not protected and that the Plaintiff was entitled to pre-judgment interest.  Both parties rested after argument and without presenting any additional All that was left for Judge Walrath to do in this Opinion was to determine the total transfers protected pursuant to the new value defense and how much interest to award the Plaintiff.

This Opinion illustrates the careful deference that the District Court and Bankruptcy Court pay to the Opinions of the Third Circuit.  In particular in this case, the Bankruptcy Court cites to Hechinger Investment v. Universal Forest Products (In re Hechinger), 489 F.3d 568, 580-81 (3d Cir. 2007).  For a quick primer on preference litigation, please take a look at the Preference Reference which I co-authored.  As expected, we have paid particular attention in the Preference Reference to the opinions of the Third Circuit.

John Bird practices with the law firm Fox Rothschild LLP in Wilmington, Delaware. You can reach John at 302-622-4263, or jbird@foxrothschild.com.

Sports Authority – Consignment Actions Have Begun

Posted in Bankruptcy Case Updates

On March 15 and 16, 2016, the Debtors in the Sports Authority bankruptcy, Case No. 16-10527, filed approximately 161 adversary complaints against consignment vendors.  The purpose of these complaints is to determine the priority and validity of the consignment vendors’ claims of title and their claim to a security interest in the consigned goods.

For any vendors who failed to file a UCC-1 security statement within 30 days of sending goods to Sports Authority, this could prove to be a painful lesson.  According to the Debtors’ argument, the consignment vendors do not have title to the goods: “The retention or reservation of title by a seller of goods notwithstanding shipment or delivery to the buyer under § 2-401 is limited in effect to a reservation of a ‘security interest.’” Del. Code Ann. tit. 6, § 1-201(35).

If Judge Walrath agrees with this argument, then consignment vendors will have only a security interest, governed by the Uniform Commercial Code as enacted in Delaware and the principles of bankruptcy law.  Pursuant to the Post-Petition Financing order entered in these bankruptcies, the Debtors have given their DIP Lenders a first-lien security interest in all assets not otherwise encumbered by a perfected lien.  This means that for any shipments that were not properly perfected (by filing a UCC-1 statement within 30 days of shipment), the consignment vendors may not have a 1st priority lien.

The Debtors have argued that any attempts at perfection after the 30-day period provided by the UCC is considered a preferential transfer (if made within the 90 days preceding bankruptcy), and should thus be avoidable.

It’s a tricky situation for any vendors who allowed their diligence to wane over the course of a long relationship with Sports Authority.  Whether you are affected directly by this bankruptcy filing or not, you should use this as an opportunity to re-commit to filing UCC-1 financing statements regardless of how good your relationship is with a contract counter-party.  It’s not a matter of whether you trust your counterparty, its a matter of how much you trust their bankers and attorneys…

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.

Coldwater Creek Inc. Preference Actions Filed

Posted in Preference Litigation

In the United States Bankruptcy Court for the District of Delaware, Peter Kravitz, as the Liquidating Trustee of the CWC Creditors Liquidating Trust, filed approximately 106 preference actions on March 15, 2016 seeking the avoidance and recovery of allegedly preferential and fraudulent transfers under Sections 547, 548 and 550 of the Bankruptcy Code, along with the disallowance of claims under Section 502(d) and (j).

CWC Liquidating Inc. (f/k/a Coldwater Creek Inc.) (the “Debtors”) filed voluntary petitions for bankruptcy in the U.S. Bankruptcy Court for the District of Delaware on April 11, 2014 under Chapter 11 of the Bankruptcy Code.  By order dated September 17, 2014, the Court entered an order (the “Confirmation Order”) confirming the Modified Third Amended Joint Plan Of Liquidation Of Coldwater Creek Inc. And Its Debtor Affiliates Pursuant To Chapter 11 Of The Bankruptcy Code (the “Plan”), which became effective on September 26, 2014 (the “Effective Date”).

In accordance with the Plan and the Confirmation Order, the Trust was established on the Effective Date of the Plan. Also on the Effective Date, as contemplated by the Plan and Confirmation Order, the Debtors and the Liquidating Trustee entered into that certain CWC Creditors’ Liquidating Trust Agreement (the “Liquidating Trust Agreement”)

The law firm of ASK Financial represents the Liquidating Trustee in these various preference cases.  The pretrial conference has not yet been scheduled.

For preference defendants looking for 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 partner 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.

Simplexity, LLC Preference Actions Filed

Posted in Preference Litigation

On March 14, 2016, Charles A. Stanziale, Jr., as the Chapter 7 Trustee of Simplexity, LLC, et al. (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, and to disallow claims of the defendants pursuant to Section 502(d).

By way of background, the Debtors filed petitions for bankruptcy in the U.S. Bankruptcy Court for the District of Delaware on March 16, 2014 under Chapter 11 of the Bankruptcy Code.  By order dated January 7, 2015, the Debtors’ Chapter 11 cases were converted to cases under Chapter 7 of the Bankruptcy Code, currently administered under Case No. 14-10569.

The law firm of ASK Financial represents the Chapter 7 Trustee in these various preference cases.  The pretrial conference is set for May 4, 2016 at 10:00 a.m.  These adversary actions, as well as the Debtors’ bankruptcy proceeding, are before the Honorable Kevin Gross.

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 partner 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.