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Delaware Bankruptcy Litigation

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

Furniture Brands International – 93 Additional Preference Claims Filed

Posted in Bankruptcy Case Update

Since the time of my last post, Alan D. Halperin, the Trustee of the FBI Wind Down, Inc. Liquidating Trust has filed 93 more preference complaints.  Because the Debtor filed for bankruptcy on September 9, 2013, the Trustee has only two more weeks to file any additional preference complaints.

While we cannot be certain that these are the final preference complaints that will be filed in this case, the clock is ticking.

Prior posts about FBI:

Furniture Brands Files for Bankruptcy in Delaware Seeking to Sell Assets

Furniture Brands International – Preference Litigation has Begun

Furniture Brands International – Preference Litigation Update

For reader’s looking for more information concerning claims and defenses in preference litigation, linked is a booklet I co-authored on the subject: “A Preference Reference: Common Issues that Arise in Delaware Preference Litigation.”

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.

Boomerang Systems, Inc. Formation Meeting Scheduled

Posted in Bankruptcy Case Update

In the Boomerang Systems, Inc. bankruptcy proceeding (Delaware Bankruptcy Case No. 15-11729), a formation meeting has been scheduled for Thursday, August 27, 2015 at 10:00 a.m. (ET) at the J. Caleb Boggs Federal Building, 844 King Street, Room 2112, 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 August 25, 2015 at 5:00 p.m. (ET). Continue Reading

Furniture Brands International – Preference Litigation Update

Posted in Preference Litigation

As explained in a prior post, the Liquidating Trustee had sent out demand letters, the first step towards preference litigation.  The prior post is here: Furniture Brands International – Preference Litigation has Begun.

On August 13, 2015, Alan D. Halperin, the Trustee of the FBI Wind Down, Inc. Liquidating Trust began filing preference actions.  In what is almost certainly the first of many waves of complaints, he has filed complaints against 9 companies alleging they received preferential transfers.

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.”

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.

Priority Status Given to Claims of Landlords Against Involuntary Debtors

Posted in Commercial Landlords

On August 11, 2015, the Bankruptcy Court for the Northern District of California ruled on an issue “of apparent first impression” that claims for unpaid rent brought by landlords for office space leased to the former law firm of Howrey LLP should be given priority status under the Bankruptcy Code.  The case is styled as In re Howrey LLP, C.A. No. 11-31376 (Bankr. N.D. Ca. Aug. 11, 2015), and is an important read for all landlords providing ongoing services to involuntary debtors.

The Court found that consistent with Congress’s intent to protect parties that deal with involuntary creditors, priority status must be provided to so-called “gap claims”.

The Court also rejected the arguments of the Creditors Committee, which opposed priority status, ruling that “[g]ap priority provides an inducement and a protection for parties who deal with involuntary debtors[]”, and that “there is no hint that Congress meant to exclude landlords (or others who have ongoing contractual relationships with debtors when involuntary petitions in bankruptcy are filed against them).”

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 or at cneff@foxrothschild.com.

Assumption/Assignment of Contracts – Preference Defense

Posted in Preference Litigation

Many preference defendants are not aware of the fact that if their pre-petition contract with the debtor is assumed or assigned in the course of the bankruptcy, then such assumption/assignment will generally serve as a bar to recovery for receipt of alleged preferential transfers.

Under established Third Circuit law, the assumption or assignment of a contract prohibits recovery for pre-petition transfers made to such creditor during the 90 day preference period.  See Kimmelman v. Port Authority of New York and New Jersey (In re Kiwi Int’l Air Lines, Inc.), 344 F.3d 311, 321 (3d Cir. 2003) (holding that Section 547(b)(5) could not be satisfied if the executory contract at issue was assumed pursuant to a court order because “had the creditors not received the payments prepetition, they would have received amounts reflecting those sums, in any event, when the Bankruptcy Court approved the cures of assumed agreements.”).

Accordingly, a preference defendant should consult with counsel to determine if its pre-petition contract with the debtor has been assumed or assigned by court order, which may in turn serve as a complete defense to a threatened or pending preference action.

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 or at cneff@foxrothschild.com.

Ordinary Course of Business Defense Further Examined – Burtch v. Revchem Composites, Inc.

Posted in Preference Litigation

In the recent opinion of Burtch v. Revchem Composites, Inc. (In re Sierra Concrete Design, Inc.), Adv. No. 10-52667 (CSS), 2015 WL 4381571 (Bankr. D. Del. July 16, 2015), the Delaware Bankruptcy Court issued a memorandum opinion following trial on claims asserted by Jeoffrey Burtch, Chapter 7 Trustee of Sierra Concrete Design, Inc. (“Sierra” or “Debtors”), seeking recovery against Defendant Revchem Composites, Inc. (“Revchem”) for alleged preferential transfers under Sections 547 and 550 of the Bankruptcy Code.

In the memorandum opinion, the Court found that Revchem successfully established at trial that each of the payments received by Revchem from Sierra during the 90 day preference period were made in the “ordinary course” of the parties’ business relationship, and were thus shielded from recovery pursuant to Section 547(c)(2) of the Bankruptcy Code.

This opinion is notable because Revchem was able to establish this defense even though it received payments from Sierra during the preference period at a much faster rate (a standard deviation of 27.9 days) than during the pre-preference period.

This is so because, as testified by Revchem, Sierra was engaged in a construction project with tight timelines and needed product at a faster rate than normal.  Because the Debtors were at their credit limit and had to pay previous invoices before receiving new product, the Debtors were paying at a faster rate during the preference period.  Thus, the Court found that the accelerated payments during the preference period were made in the ordinary course of business and granted judgment for Revchem.

This decision is a “must-read” for preference action defendants, as it dispels the notion that transfers made at a faster rate during the preference period (as compared to the pre-preference period) cannot be protected by the ordinary course of business defense.  It is clear that the Court will examine and consider circumstances between the parties which lead to changes in rates of payment in determining whether such transfers can be shielded by Section 547(c)(2).

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 or at cneff@foxrothschild.com.

Preference Actions filed in Deb Shops Bankruptcy

Posted in Preference Litigation

On July 29, 2015, Deb Shops SDFMC LLC, in its capacity as debtor in possession, filed 92 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, Deb Shops SDFMC LLC (“Deb Shops” or the “Debtors”) filed voluntary petitions for bankruptcy in the U.S. Bankruptcy Court for the District of Delaware on December 4, 2014 under Chapter 11 of the Bankruptcy Code.  By order dated December 5, 2014, the Debtors’ Chapter 11 cases were consolidated for procedural purposes only and therefore are being jointly administered pursuant to Bankruptcy Rule 1015(b).

The Rosner Law Group and ASK LLP represent 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 Kevin Gross.

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 or at cneff@foxrothschild.com.

Trump Entertainment – Automatic Stay v. Norris-LaGuardia Act

Posted in Opinions

In a 23 page opinion released July 21, 2015 in the Trump Entertainment Resorts case (Bank. D. Del. 14-12103), Judge Kevin Gross of the Delaware Bankruptcy Court opined upon the interaction of the Bankruptcy Code’s automatic stay and the Norris-LaGuardia Act (“NLA”).  Judge Gross’ opinion is available here (the “Opinion”).

We have previously posted about the Trump Bankruptcy and the conflict between the Debtors and UNITE HERE Local 54 (the “Union”) concerning the collective bargaining agreement (“CBA”):

Trump Entertainment Resorts Files for Chapter 11 Bankruptcy Protection in Delaware

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

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Nortel Opinion Interprets Supreme Court’s Wellness Opinion

Posted in Opinions

Summary

In a 12 page decision released June 2, 2015, Judge Gross of the Delaware Bankruptcy Court gives us our first Delaware specific insight into how the U.S. Supreme Court’s Wellness opinion will be interpreted.  Judge Gross’ opinion is available here (the “Opinion”).  The Opinion was issued in the adversary proceeding SNMP Research Int’l. v. Nortel Networks Inc., Case No. 11-53454.  For a review of the Supreme Court’s Wellness Opinion, please take a look at this blog post authored by Carl Neff:  United States Supreme Court Expands Power of Bankruptcy Courts- Wellness Int’l v. Sharif.

In this Opinion, the Court addressed the “narrow but complex issue” of whether it has “authority to enter judgments or orders with respect to the claims of the plaintiff, a non-debtor, against a non-debtor defendant for what are clearly non-core claims…”  Opinion at *1.

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U.S. Supreme Court Rejects Chapter 7 Debtor’s Stripping of Junior Liens

Posted in Opinions

Holding: A debtor in a Chapter 7 bankruptcy proceeding may not void a junior mortgage lien under § 506(d) when the debt owed on a senior mortgage lien exceeds the current value of the collateral if the creditor’s claim is both secured by a lien and allowed under § 502 of the Bankruptcy Code.

In the recent U.S. Supreme Court decision of Bank of America, N.A. v. Caulkett, No. 13-421, Slip. op. June 1, 2015, Bank of America, N.A. (“BoA”) objected to the stripping of junior liens of a Chapter 7 debtor, arguing that they should not be treated as unsecured loans. BoA asserted that because the bankruptcy code only “strips off” claims from property that are disallowed, the Supreme Court’s ruling in Dewsnup v. Timm, 502 U.S. 410 (1992), which disallowed the “stripping down” of primary liens to the value of the underlying property, should extend to this case.  Respondent debtor argued that second liens should be treated as unsecured, and hence disallowed.

In 1991, the Supreme Court, in Dewsnup, put a stop to lien-stripping in Chapter 7 cases, finding that, so long as an allowed claim is secured by a lien – even one worth less than the full amount of the claim – a debtor could not strip down the lien. Instead, the lien would survive the bankruptcy, and the lender could foreclose it even after the Chapter 7 debtor received a discharge of his or her debts.

In yesterday’s opinion, the High Court declined to limit Dewsnup to partially underwater liens, and held in a unanimous decision that bankruptcy courts may not “strip off” junior liens on property if the value of the property used as collateral is less than the amount the debtor owes to the senior lienholder — i.e, if the junior mortgage lien is “completely underwater.”  This decision is favorable to junior lienholders to collect on loans and the treatment of such debt in bankruptcy proceedings.

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 or at cneff@foxrothschild.com.