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Delaware Bankruptcy Litigation

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

Pretrial Conference Scheduled in the AFA Investment Inc. Preference Actions

Posted in Preference Litigation

In the AFA Investment Inc. preference litigation, a summons has been issued scheduling the Pretrial Conference for June 30, 2014 at 11:30 a.m.  The hearing will be held before Judge Walrath in courtroom no. 4 on the 5th floor at the Bankruptcy Courthouse for the District of Delaware.  To view one of the summons issued in these preference cases, click here.

In pretrial conferences held before the United States Bankruptcy Court for the District of Delaware, the Court will enter a scheduling order governing the pending preferences actions.  This order will generally include deadlines to issue discovery, take depositions, file dispositive motions, along with the scheduling of trial and other relevant dates.  A template scheduling order that has been approved by the Court can be found on the Court’s website, or by clicking here.

It is important that preference defendants review a proposed scheduling order with counsel in order to determine whether the plaintiff’s proposed order comports with the standard terms of such orders approved by the Court in the District of Delaware.

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.

AFA Investment Preference Actions Filed

Posted in Preference Litigation

On March 28, 2014, AFA Investment Inc. filed approximately 125 complaints seeking to avoid and recover alleged preferential transfers pursuant to Sections 547 and 550 of the Bankruptcy Code, to disallow claims of the defendants pursuant to Section 502(d), and seeking attorneys’ fees.  AFA Investment Inc., and various affiliated entities (the “Debtors”) filed petitions for bankruptcy in the District of Delaware on April 2, 2012.

By way of background, on July 2, 2013, the Court approved an Order approving the formation of an Advisory Committee for the purposes of management of prosecution of avoidance actions.  The Court confirmed the Debtors’ First Amended Joint Chapter 11 Plan of Liquidation on March 7, 2014.

The law firm of ASK LLP represents the Debtors 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 Mary Walrath.  To review one of the complaints filed in these actions, click here.

For readers looking for more information concerning preference litigation, including an analysis of defenses that can be asserted, 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.

Minimizing Preference Exposure (Part II) – Contemporaneous Exchanges

Posted in Preference Litigation

In this prior post, a discussion was provided in connection with requiring a company to prepay for its goods or services in order to limit potential preferential exposure.  If a company heading into bankruptcy cannot prepay for its goods or services, however, another measure which can be taken by vendors to minimize their preferential exposure is to require that payment be made “substantially contemporaneous” with the goods or services provided to the company.

Under Section 547(c)(1) of the Bankruptcy Code, a debtor or trustee may not avoid and recover transfers that are (a) intended by the debtor and defendant to be a contemporaneous exchange for new value given to the debtor, and (b) are in fact a substantially contemporaneous exchange.  What this means is that even if a payment made by a debtor during the 90 day Preference Period is not a prepayment, a creditor can defend itself from liability for such transfer if the parties intended for the debtor’s payment, and the goods or services provided, to be contemporaneous exchanges, and the exchanges were in fact made close to the same time.

Therefore, if your company is providing goods or services to a company in financial distress, it is prudent to require the company to prepay for its goods or services, or at a minimum, to require that payment be made as close as possible to the time that goods or services are provided.

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.

Minimizing Preference Exposure – Require Prepayment for Goods or Services

Posted in Preference Litigation

One question that clients often ask is what measures can be taken to reduce preferential exposure when dealing with a company that is sliding into financial insolvency.  Under Section 547 of the Bankruptcy Code, a debtor or trustee can seek to avoid and recover payments made to a vendor that provided goods or services to the debtor in the 90 days prior to the filing of bankruptcy.

It is important to take into account the fact that in order to demonstrate that a payment is “preferential”, the elements of Section 547(b) of the Bankruptcy Code must be met.  One of the elements that must be satisfied, among others, is that the transfer was made “for or on account of an antecedent debt owed by the debtor before such transfer was made”.  11 U.S.C. Section 547(b).

What this means is that the transfer must be in payment of goods or services previously provided to the debtor.  Accordingly, any transfer from the debtor to your company that is a prepayment cannot qualify as a preferential transfer by statute.  Therefore, in dealing with a company that is close to filing for bankruptcy, a good practice is to require that it pay up front for any goods or services.  Not only will this limit your preferential liability, but it will also allow your company to avoid having a large unpaid balance at the time of the debtor’s filing of bankruptcy, for which you may receive pennies on the dollar.

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.

Optim Chapter 11 Bankruptcy Case: 341 Meeting Scheduled for March 18, 2014

Posted in Bankruptcy Case Update

In the Optim Energy, LLC bankruptcy proceeding, the 341 Meeting of Creditors has been scheduled for March 18, 2014.  The Section 341 Meeting will be held at the J. Caleb Boggs Federal Building, 844 King Street, Room 5209, Wilmington, DE 19801, at 1:00 p.m.  Click here for a copy of this notice.

One way in which 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, among other things, the following:

  • 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 a debtor filed bankruptcy (which impacts Section 503(b)(9) claims);
  • The condition and location of goods received in the 45 days before a debtor filed for bankruptcy (which can impact Section 546(c) reclamation claims);
  • 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.

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 Payments: Brief Analysis of Preference Actions and Common Defenses

Posted in Preference Litigation

It’s your worst nightmare: you provided goods and services to a financially struggling company, only to find out that it filed for bankruptcy, leaving your company with a large unpaid balance.  Worst yet, after the debtor filed for bankruptcy, you receive a demand letter in the mail threatening a lawsuit if you do not return payments that you received from the debtor, even though you earned that money by providing goods or services to that entity.  What sense does that make?

Unfortunately, this is the reality that many companies face when transacting business with an entity in the months prior to its bankruptcy filing.  Section 547 of the Bankruptcy Code allows a debtor to avoid and recover transfers that it made in the 90 days prior to its bankruptcy filing, regardless of whether it received anything in return. This section was enacted to preclude a debtor from paying off its favorite creditor(s), while leaving nothing for the rest of the debtor’s creditors.  Hence the term preference payment.

Where does this leave your company after receiving a demand letter or complaint in the mail for the return of such alleged preferential transfers?  Rest assured, the Bankruptcy Code also provides numerous defenses that you can raise in response to such a demand.  This post provides a brief summary of the elements of, and common defenses to, preference claims.

Elements of a Preference Claim

To establish that a defendant received a preferential transfer under Section 547 of the Bankruptcy Code, plaintiff must prove the elements of 11 U.S.C. §547(b).  These elements include that payments were received by a creditor on account of an “antecedent debt”, and that the preferential payments must be made (i) while the debtor was “insolvent”, (ii) made within 90 days before the debtor filed for bankruptcy, and (iii) the payments provide the creditor with more payments than it would receive if the debtor had liquidated under a chapter 7 liquidation.  11 U.S.C. § 547(b).

An antecedent debt arises when a party receives a right to payment from the debtor for goods or services provided to the debtor.  This means that transfers which were “prepayments” do not qualify as preferential transfers under Section 547. To determine whether a payment falls within the 90 day preference period,  count back ninety days from the date the debtor filed for bankruptcy (the petition date).  For preference claims against “insiders” of the debtor, the preference period extends back one year prior to the petition date.

Finally, the plaintiff must show that the creditor received more than it would have received had it not received the payment, but instead received a distribution in a chapter 7 liquidation. This means that in order to show that a creditor received “preferential” treatment by the debtor,  the plaintiff must prove that the creditor’s payment was greater than what the creditor would have received had the debtor liquidated its assets under chapter 7 of the Bankruptcy Code.

Affirmative Defenses to Preference Litigation: Ordinary Course of Business, New Value and Contemporaneous Exchange

Even if the plaintiff can establish that the debtor made a preferential transfer as defined under the Bankruptcy Code, there are several affirmative defenses available to creditors under Section 547(c).  The more common defenses include the subsequent new value defense, ordinary course of business defense, and the contemporaneous exchange of new value defense, which are discussed below.

  • Ordinary Course of Business Defense – Section 547(c)(2)

The party receiving the payment may still avoid returning the money by proving the payment was made in the “ordinary course of business.” The ordinary course of business defense is the most widely used defense to a preference claim. Congress created the ordinary course defense in order to protect recurring, customary credit transactions that are incurred and paid in the ordinary course of business of the debtor and the debtor’s customers.

Under the 2005 amendments to the Bankruptcy Code, it is now easier for creditors to prove payments were made in the ordinary course of business. Under the amended provisions of the Code, a creditor that receives preferential payments must prove that payment was received in the ordinary of business of the debtor and creditor (the “subjective test”). Alternatively, if the creditor cannot prove that the payments were made according to ordinary business terms between the parties, it can still prevail by showing that the payments were made according to ordinary business terms (the “objective test”). Prior to the 2005 amendments, the creditor had to satisfy both the subjective and objective tests in order to satisfy the ordinary course of business defense.

  • Subsequent New Value Defense – Section 547(c)(4)

Exposure to a preference action can be reduced by the amount of “new value” provided by the defendant to the debtor subsequent to receipt of the preferential payment. To establish a new value defense, the creditor must show that it received a preference payment, the creditor then provided the debtor with new value in the form of subsequent goods or services.

  • Contemporaneous Exchange of New Value Defense – Section 547(c)(1)

Creditors can also defend against a preference claim by showing that the payment(s) received from the debtor were contemporaneous exchanges for subsequent new value.  The contemporaneous exchange defense requires the creditor who received the payments from the debtor provide the debtor with “new value” after receiving payment, which can include the value of goods or services.  Additionally, the creditor and debtor must intend for the payments to be a contemporaneous exchange.  Finally, the payments received by the creditor and the exchange of new value must actually be substantially contemporaneous.

Conclusion

The above is a brief introduction to the elements and core defenses of Section 547 preference actions.  Subsequent posts will explore in greater detail the various components of preference claims.  Besides looking at substantive legal issues, however, it is also important to understand the Local Rules and General Orders that govern the procedural flow of these cases from beginning to end.

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.

Tuscany Bankruptcy: No Unsecured Creditors’ Committee Formed

Posted in Bankruptcy Case Update

In the Tuscany International Drilling bankruptcy action, filed in the United States Bankruptcy Court for the District of Delaware, the United States Trustee recently filed a Statement that the Unsecured Creditors’ Committee Has Not Been Formed.  The Statement indicates that there was “insufficient response to the United States Trustee’s communications/contact for service on the committee.”

In Chapter 11 cases, an Official Committee of Unsecured Creditors is not uncommonly formed to collectively represent the interests of unsecured creditors.  Without a creditors committee, each unsecured creditor must represent their own interests in Court.

One way in which 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.  As discussed in a prior post, the Section 341 meeting of creditors in the Tuscany bankruptcy action is scheduled for March 13, 2014 at 10:30 a.m.

To review prior articles related to the Tuscany bankruptcy, click on the following links:

Tuscany International Drilling Inc. Files for Bankruptcy: Seeks to Reorganize Debt in Chapter 11

Tuscany International Drilling’s “First Day” Motions Granted; Section 341 Meeting of Creditors Scheduled

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.

 

Optim Energy, LLC Files for Chapter 11 Bankruptcy Protection in Delaware

Posted in Bankruptcy Case Summaries

Optim Energy, LLC and its subsidiaries and affiliates (“Optim” or the “Debtors”) filed for bankruptcy under Chapter 11 of the Bankruptcy Code on Wednesday, February 12, 2014 (the “Petition Date”) in the United States District Court for the District of Delaware.

According to Declaration of Nick Rahn, Chief Executive Officer of Optim Energy, LLC in Support of Chapter 11 Petitions and First Day Pleadings (the “Rahn Declaration”), the Debtors “are power plant owners principally engaged in the production of energy in Texas’s deregulated energy market.”  Rahn Declaration, ¶ 5.  The Debtors own and operate three power plants in eastern Texas.  Two of the plants are fueled by natural gas, and the third is coal fired.  See id.  According to the Petition, the Debtors’ assets are valued at $100 million to $500 million, and their debts are estimated at $500 million to $1 billion.

Events Leading to Bankruptcy

According to the Rahn Declaration, The current depressed economic environment of the electric power industry and the Debtors’ liquidity constraints have resulted in continuing losses that have left the Debtors without alternatives.  Specifically, the Debtors carried $713 million in outstanding principal indebtedness related to a credit agreement with Wells Fargo Bank, N.A. and were unable to continue to borrow additional funds before the Petition Date.

Objectives in Bankruptcy

Optim’s main goal is to reorganize their debt through the chapter 11 bankruptcy filing, including the restructuring of the Debtors’ obligations and pursuing strategic alternatives that will maximize the value of their power producing assets.  Rahn Declaration, ¶ 5.

First Day Hearing

The Court held a “first day” hearing on Friday, February 14, 2014, at which time the Court entered the following “first day” orders: (i) interim order authorizing the Debtors to continue to operate their cash management system; (ii) interim order determining adequate assurance of payments for future utility services, prohibiting utility providers from altering, refusing or discontinuing utility service, and establishing adequate assurance procedures; and (iii) interim authorizing the debtors to (a) maintain prepetition insurance policies and b) continue financing insurance premiums.

The next omnibus hearing in this matter is scheduled for March 6, 2014 at 10:00 a.m.

Optim is represented by the law firm of Morris Nichols Arsht & Tunnell LLP.  Optim’s bankruptcy proceeding is before the Honorable Brendan Shannon of the Delaware Bankruptcy Court, proceeding under case no. 14-10262.  Stay tuned for more updates on this bankruptcy matter.

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.

Tuscany International Drilling’s “First Day” Motions Granted; Section 341 Meeting of Creditors Scheduled

Posted in Bankruptcy Case Update

As discussed in the prior post, Tuscany International Drilling Inc., and its subsidiary, Tuscany International Holdings (U.S.A.) Ltd. (“Tuscany” or the “Debtors”) filed for bankruptcy on February 2, 2014 with the United States District Court for the District of Delaware.  On February 4, 2014, the Court held a “First Day” hearing to hear a number of preliminary motions filed by Tuscany.

At the hearing, the Court entered the First Day motions filed by the Debtors.  Among other things, the Court entered the following relief: (i) order authorizing the Debtors to pay pre-petition claims of certain critical vendors; (ii) order authorizing the Debtors’ continued use of existing cash management system; (iii) order approving the Debtors’ post-petition financing and authorizing use of cash collateral; and (iv) order authorizing payment of certain of the Debtors’ pre-petition workforce obligations.

In addition, the Court scheduled a Section 341 Meeting of Creditors to take place on March 13, 2014 at 10:30 a.m. (EST).  The Section 341 Meeting will be held at the J. Caleb Boggs Federal Building, 844 King Street, Wilmington, DE 19801.  Click here for a copy of this notice.

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.

Tuscany International Drilling Inc. Files for Bankruptcy: Seeks to Reorganize Debt in Chapter 11

Posted in Bankruptcy Case Summaries

Tuscany International Drilling Inc. (“TID”) and its subsidiary, Tuscany International Holdings (U.S.A.) Ltd. (“TIH”; collectively with TID, “Tuscany” or the “Debtors”) filed for bankruptcy under Chapter 11 of the United States Bankruptcy Code late on Sunday, February 2, 2014 (the “Petition Date”) in the United States District Court for the District of Delaware.

According to the Declaration of Deryck Helkaa, Chief Restructuring Officer of the Debtors in Support of Chapter 11 Petitions and First Day Pleadings (the “Helkaa Declaration”), the Debtors “provide onshore drilling and workover services to oil and gas companies to support the exploration, development, and production of oil and gas.” Helkaa Declaration, ¶ 6. The Debtors have a strong competitive position in the key onshore drilling markets of Ecuador, Brazil and Colombia where they contract their fleet of technologically advanced onshore drilling rigs to customers.

As of the Petition Date, the Debtors owned 26 rigs, of which 12 are located in Colombia, nine in Brazil and five in Ecuador, with 15 of the rigs being contracted and operational, and five being directly owned by the Debtors.

In April of 2010, TID was listed on the Toronto Stock Exchange under the symbol TID, and in December 2011, was listed on the Colombian Stock Exchange under the symbol TIDC. As of January 27, 2014, TID had 375.2 million common shares outstanding, of which approximately 159.2 million are held by insiders. TID has 12.9 million stock options outstanding. See Helkaa Declaration, ¶ 15. According to the Petition filed on February 2, 2014, Tuscany maintains $100 to $500 million in assets, and $100 to $500 million in debts. To view a creditor matrix filed by the Debtors, click here.

Events Leading to Bankruptcy

Beginning in late 2012, Tuscany began to experience significant revenue, cash flow and liquidity challenges, mainly due to low rig utilization, non-payment by certain customers on large overdue accounts, and underperforming acquisitions in Brazil and Africa. See Helkaa Declaration, ¶ 19. As of the Petition Date, seven of their nine Brazilian oil rigs were not being utilized. As a result, the Tuscany Brazilian affiliates incurred a negative EBITDA of $6.7 million from January to October 2013. In addition, Tuscany suffered financial losses in connection with a series of unprofitable acquisitions.

Objectives in Bankruptcy

Tuscany’s main goal in bankruptcy is to restructure their balance sheet through a consensual plan of reorganization supported by their pre-petition lenders, who have connections to the United States.  The Debtors received debtor-in possession financing of $35 million that will help carry out operations during the restructuring process.

First Day Pleadings

The Debtors have filed various “first day” motions with the Court. These motions include, among others: (i) motion to pay pre-petition claims of certain critical vendors; (ii) motion for continued use of existing cash management system; (iii) motion to approve post-petition financing and authorizing use of cash collateral; and (iv) motion authorizing payment of certain pre-petition workforce obligations.

The Court has scheduled a “first day” hearing in connection with the above-referenced motions and others for today, February 4, 2014 at 1:00 p.m. (EST). Click here for the Notice filed by the Debtors regarding today’s hearing.

Tuscany is represented by the law firm of Young Conaway Stargatt & Taylor, LLP. Tuscany’s bankruptcy proceeding is before the Honorable Kevin Gross of the Delaware Bankruptcy Court, proceeding under case no. 14-10193.

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.