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Delaware Bankruptcy Litigation

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

What Effect Does a Tenant’s Bankruptcy Have on a Lease?

Posted in Commercial Landlords

Once a tenant files for bankruptcy, it has three options regarding the lease:

  1. Assume the lease and continue performing all obligations, or
  2. Assume and assign the lease to a third party, or
  3. Reject the lease and surrender the premises and terminate performance.

Section 365 of the Bankruptcy Code gives the bankrupt tenant 120 days to decide if it will assume or reject the lease. During this period, the tenant can request one 90 day extension of time to decide whether to assume or reject. After the extension period expires, any further extensions require written consent from the landlord.

If the debtor-tenant fails to assume or reject the lease within the 120 day period, and no extension is granted, the lease is deemed rejected by operation of law. This is a significant provision for landlords and one of several reasons why landlords should stay fully informed as to the debtor-tenant’s intentions regarding its lease.

To be proactive, landlords (or their counsel) should review all pleadings filed in the tenant’s bankruptcy proceeding to see if the debtor-tenant sought an extension of time to assume or reject. Additionally, landlords should review the tenant’s motions to assume, motions to assume and assign, as well as motions to reject leases. The exhibits to these motions often contain schedules identifying the leases affected by the motion.

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.

Lessons from Chapter 13 – When is 8% Not Really 8%

Posted in Opinions

In ruling on a very unfortunate situation (more on that below), Judge Shannon issued an opinion on July 24, 2014 in the Aro bankruptcy, holding that a state court decision concerning the validity of a lien cannot be challenged in Bankruptcy Court.  In the opinion in this case issued on January 22, 2015 (the “Opinion”), Judge Shannon analyzed the value of the lien and applicable interest rates.  The Opinion is available here.

Background

In 1989 Charles W. Aro signed a mortgage on his personal residence as security for a lease of commercial laundry equipment.  After falling on hard times, Aro filed for Chapter 13 bankruptcy in 1994.  The laundry equipment, originally purchased for $40,000, was sold for $28,000, leaving Aro’s lender with a secured deficiency claim of $12,000.

Aro filed a complaint in Delaware Superior Court to compel the satisfaction of the mortgage or to declare that a novation had occurred which satisfied the mortgage.  Following a bench trial, the Superior Court ruled against Aro, holding that his lender had a valid mortgage on his home. The lender filed a foreclosure action in Superior Court in 2011 to enforce the mortgage, and eleven months later Aro filed the present bankruptcy petition.  After Judge Shannon’s July 2014 opinion addressed the validity of the lien, another hearing was held to determine the value of the mortgage.

The Opinion

After quickly dismissing Aro’s argument that the lender had lost its claim by failing to file a proof of claim, Judge Shannon looked to the undisputed record to determine that as of 1994, the lender had a claim for $12,000.  The parties disagreed as to the appropriate interest rate to be charged, which leads to the most interesting part of this Opinion, at least to me.  While the rate of interest may not seem like a big deal, realize that the interest has been accruing for 20 years.

Aro argued that interest should not be applied since the mortgage contract lacked any interest rate terms (a mistake this lender will no-doubt never make again).  Examining the payments made and the term of the contract, however, the lender argued that the appropriate rate of interest was 14%.  As Judge Shannon states, it is “inconsistent with business realities” to have an interest rate of zero.  Opinion at *4.  However, because the lender drafted the lease and the mortgage, Judge Shannon construed the terms strictly against them, holding that the legal rate under Delaware law, 8%, is the appropriate rate.  Opinion at *4.

Here is the interesting piece:  Having determined that the lender should be awarded 8% interest, I note that over 20 years, compound interest (which is the interest of the real world) would create a total value of $55,931 based on an initial investment of $12,000.  However, Judge Shannon held that the principal of $12,000 would be awarded and interest would total only $19,200.  Calculating an interest rate of 8% using simple interest means that the lender was awarded a total of $31,200.  This equates to a compound interest rate of just 4.89%.

Because legal fees are capped at 20% of an award, this also reduced the legal fees awarded to the lenders.  In total, using a compound interest rate (and assuming attorneys’ fees still hit the 20% cap), the lenders would have been awarded $67,117 rather than the $37,440 they were awarded.   A compound interest rate would have nearly doubled the lender’s award, increasing its recovery nearly $30,000.

My $.02

The Delaware Supreme Court addressed the question of whether compound or simple interest rates were appropriate in the case Gotham Partners v. Hallwood Partners, 817 A. 2d 160 (Del. 2002).  That Court stated that “Delaware courts have traditionally disfavored compound interest.”  Id. at 173.  It continued, however, stating that “in Delaware, no rule of simple interest exists in the General Corporation Law and the rule or practice of awarding simple interest, in this day and age, has nothing to commend it — except that it has always been done that way in the past.”  Id. (citing Onti, Inc. v. Integra Bank, 751 A.2d 904, 929 (Del. Ch. 1999)).  For emphasis – it has “nothing to commend it”.

As the bankruptcy process continues to get more sophisticated, I am interested to see if courts will begin treating compound interest as the rule, rather than the exception.  It is my opinion that using simple interest obfuscates the true value of an award of interest.  As shown in the Aro case, the lender would have been far better off it it had been paid immediately and could have invested at a true 8% interest rate, rather than the 4.89% that it received pursuant to the Opinion.

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.

Caesars Bankruptcy: Illinois Bankruptcy Proceeding Stayed by Delaware Bankruptcy Court

Posted in Bankruptcy Case Summaries

On January 12, 2015, Appaloosa Investment LP and funds affiliated with Oaktree Capital and Tennenbaum Capital filed an involuntary bankruptcy petition against Caesars Entertainment Operating Company, Inc. (“Caesars”) with the United States Bankruptcy Court for the District of Delaware.  The petitioning creditors are junior noteholders of the debtor.

According to the Statement of Petitioning Creditors in Support of Involuntary Chapter 11 Petition Against Caesars Entertainment Operating Company, Inc.,  petitioning creditors asked the Court to appoint an examiner to investigate claims that Caesars’ insiders plundered the company, paying themselves hundreds of millions of dollars while moving assets out of the reach of second-lien holders.

Meanwhile, three days later, Caesars filed for bankruptcy in the Northern District of Illinois, case no. 15-01145 (ABG) (Bankr. N.D. Ill.) (“Illinois Bankruptcy”). The petitioning creditors filed a motion with the Delaware Bankruptcy Court seeking a stay of the Illinois Bankruptcy and finding that venue is proper in Delaware.  On January 15th, the Delaware Bankruptcy Court issued an Order staying the Illinois bankruptcy filing by Caesars while the Delaware Bankruptcy Court determines the proper venue in which the Caesars action shall proceed.

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.

Golden Guernsey Dairy – Preference Actions Filed

Posted in Preference Litigation

Introduction

On January 6, 2015, Charles A. Stanziale, Jr., the Chapter 7 Trustee (the “Trustee”) for the bankruptcy estate of Golden Guernsey Dairy, LLC (the “Debtor”), began filing complaints to recover what he contends are avoidable preferences.  The Trustee filed the preference actions in the Delaware Bankruptcy Court and argued that the transfers, or payments, received by various defendants are avoidable and subject to recovery under 11 U.S.C. § 547 and 548 of the United States Bankruptcy Code. This post will briefly cover the Debtor’s bankruptcy proceedings.

Background

On January 8, 2013, the Debtor filed its chapter 7 petition for bankruptcy in the United States Bankruptcy Court for the District of Delaware.  The Trustee was appointed on January 11, 2013.  As stated in the Motion For Sale of Property under Section 363(b) (the “Sale Motion”), filed on March 1, 2013, the Debtor operated a 170,000 square foot dairy manufacturing, bottling, and distribution plant located in Waukesha, Wisconsin.  The Debtor was unable to make required payments to is lenders, so although it was generating revenue, it was not sufficient to service its debt load.  The Chapter 7 Trustee’s goal in this bankruptcy proceeding was to find a “turn-key purchaser of the Wisconsin Plant.” Sale Motion at *4.  The Trustee was successful in his goal.  On May 14, 2013, an auction was held at which Lifeway Foods Inc. submitted a winning bid of $7,365,000 for substantially all the Debtor’s assets.

The Trustee is also responsible for prosecuting litigation intended to increase the assets available to distribute to the company’s creditors.  This includes filing and prosecuting preference actions.  On December 15, 2014, the Court entered the Order Authorizing the Establishment of Procedures to Compromise and Settle Certain Asserted Preference Claims, which provides authority for the Trustee to settle preference actions.  It is vital that defendants read the Order as it creates target settlement values for any given preference claim.

The Golden Guernsey Dairy bankruptcy, as well as the preference actions, are before the Honorable Kevin Gross.  The Trustee/Plaintiff prosecuting the preference actions is represented by McCarter & English, LLP.

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 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.

Tri-Valley Corp. Bankruptcy – Preference Complaint Dismissed – Leave to Amend Granted

Posted in Opinions

Summary

In a straight-forward 11 page decision signed January 7, 2015, 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.

Additionally, this opinion is very similar to that discussed in these prior posts:

Decision in Ultimate Acquisition Grants Motion to Dismiss, But Also Grants Leave to Amend the Preference Complaint

Decision in Everything But Water, LLC Requires Preference Claimants to Identify Transferees Specifically in Granting Motion to Dismiss.

Background

Tri-Valley Corporation and its affiliates (the “Debtors”) were crude oil and natural gas exploration, development, and production companies operating in California.  Opinion at *2.  They filed for bankruptcy relief on August 7, 2012.  On March 25, 2013, the case was converted to chapter 7 and Charles A. Stanziale, Jr. was appointed as the chapter 7 trustee (the “Trustee” or “Plaintiff”).  The Trustee filed a complaint seeking to avoid allegedly preferential transfers from the “Defendant” DMJ Gas-Marketing Consultants, LLC.  The Defendant filed its Motion to Dismiss and after a complete briefing, the Court issued the Opinion.

The Opinion

As we are now in the post-Stern v. Marshall world, the Opinion lays out the legal authority for its granting a motion to dismiss.  The main rationale is stated in the Trinsum case: In re Trinsum Grp., Inc., 467 B.R. 734, 739 (Bankr. S.D.N.Y. 2012) (“After Stern v. Marshall, the ability of bankruptcy judges to enter interlocutory orders in . . . proceedings has been reaffirmed . . . .”).

The motion to dismiss argues that the Trustee failed to state which debtor owed the antecedent debt to the Defendant and the nature of the antecedent debt. Opinion at *7.  Judge Walrath agreed.  “the Court finds that the Complaint fails to allege sufficient facts detailing the nature of the alleged antecedent debt.“  Opinion at *9.

Judge Walrath then quickly granted the Motion to Dismiss.  However, the Trustee asked for leave to amend the Complaint, and as Rule 15(a) of the F.R.C.P. provides that “leave to amend shall be freely given when justice so requires” Judge Walrath granted the Trustee 28 days to amend the Complaint.  Opinion at * 11.

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.  While I certainly believe that preference plaintiffs should be required to due the groundwork prior to filing a complaint, there is a cost in having an attorney file and prosecute a motion to dismiss.

In the Ultimate Acquisition case discussed in my prior post, the litigants ended up settling.  For those not aware, settlement is the typical resolution in preference litigation.  Was it worth the cost of prosecuting a motion to dismiss that was, effectively, just a delay tactic (given the Delaware Bankruptcy Courts interpretation of Fed. R. Civ. P. 15(a))?  Since I don’t know what the settlement stances of the litigants were, I cannot say.  I provide this information to illustrate one principle.  For most people, most of the time, it makes sense from a financial perspective 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.

Egenix Formation Meeting and Section 341 Meeting of Creditors Scheduled

Posted in Bankruptcy Case Update

In the Egenix bankruptcy proceeding, a formation meeting has been scheduled for Thursday, January 22, 2015 at 10:00 a.m. (ET) at the J. Caleb Boggs Federal Court House, 844 N. King Street, Fifth Fl., Room 5109, 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.

In addition, a Section 341 Meeting of Creditors has been scheduled for Tuesday, January 27, 2015 at 1:00 p.m. (ET) at the J. Caleb Boggs Federal Court House, 844 N. King Street, 2nd Fl., Room 2112, Wilmington, DE 19801.  Click here for the notice issued by the Bankruptcy 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.  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 the following issues:

  • 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 bankruptcy;
  • The condition and location of goods received in the 45 days before bankruptcy;
  • 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.

Capital Leases in Bankruptcies – A Lesson from Xchange Technology Group

Posted in Opinions

In a  9-page opinion released December 30, 2014 in the Xchange Technology Group bankruptcy (Bank. D. Del. 13-12809), Judge Gross provides a reminder that capital leases are not treated the same as a true lease (or operating lease).  Judge Gross’ opinion is available here (the “Opinion”).  The Opinion decided the motion (“Motion”) of Winthrop Resources Corporation (“Winthrop”) for an order directing the receiver to comply with the terms of a previously entered sale order.

The Opinion

Winthrop filed the Motion in an effort to collect past and future amounts due from the Debtor.  However, as argued by the Debtors and agreed to by Judge Gross, there were two issues with the movant’s arguments: “First … the Lease Agreement is not an operating lease but a capital lease. Second, the relief Winthrop seeks would lead to an inequitable forfeiture.”  Opinion at *7.

Determining if a lease is an operating lease, or a financing lease, the bankruptcy court looks to applicable state law.  Opinion at * 7.  Pursuant to Judge Gross’ analysis of Minnesota law (which governed pursuant to the lease agreement, Opinion at * 7), the lease in question had all the hallmarks of a financing lease.  Judge Gross does not expand on the result of the lease being a finance lease rather than an operating lease.  However, other Courts have provided extensive discussion of the difference.  For example, Bankruptcy Judge Wedoff provided extensive analysis in United Air Lines, Inc. v. HSC Bank USA (In re UAL Corp.), 307 B.R. 618 (Bankr. N.D. Ill. 2004).

The second of the Debtors’ arguments in these case carried the day even more strongly.  As the Debtors had already paid the lease in full, “if the Court were to grant the relief Winthrop seeks, Winthrop would receive a windfall, a forfeiture which Minnesota law does not countenance.”  Opinion at * 9.  For these reasons, Judge Gross ruled against Winthrop and in favor of the Debtors.

While the Bankruptcy Court is certainly sophisticated enough to sort through highly technical arguments like those presented by Winthrop, any party appearing before the Court should keep in mind that bankruptcy courts are courts of equity.   Thus, regardless of the strength of an argument under the law, if the result is inequitable, the Bankruptcy Court can turn to the fairly broad powers of 11 U.S.C. 105 to ensure that the most equitable argument wins the day.

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.

Egenix, Inc. First Day Hearing Scheduled for January 6, 2015

Posted in Bankruptcy Case Update

There have been several developments in the Egenix, Inc. (“Egenix” or “Debtor”) bankruptcy case pending in the District of Delaware.  To review the initial article posted about this bankruptcy action on December 28, 2014, click here.

Since the Debtor’s bankruptcy filing, Egenix has filed various motions, including a Motion (I) to Authorize Continued Use of Existing Bank Account and Business Forms, and (II) Waiving Requirements of 11 U.S.C. Section 345 on an Interim Basis.  In addition, the Debtor filed its creditor matrix and a list of its top 20 creditors, along with a motion to appoint Donlin, Recano and Company as claims agent to the Debtor.

Further, Egenix filed the Declaration of William T. Nolan in Support of Chapter 11 Petitions and First Day Pleadings (“Nolan Declaration”).  According to the Nolan Declaration, the Debtor seeks to reorganize its debt in bankruptcy.  As stated in the Nolan Declaration, “[t]he Debtor’s ultimate goal in this Chapter 11 Case is to create a sustainable capital structure for the future that maximizes the value of the Debtor’s estate for the benefit of all of the Debtor’s constituents.” (Nolan Decl., at 11).

The next hearing has been scheduled for Tuesday, January 6, 2015, at 1:30 p.m., at which time Egenix will present its pending motions to the Court for consideration.

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.

Egenix, Inc. files for Bankruptcy in Delaware

Posted in Bankruptcy Case Update

On December 28, 2014, Egenix, Inc. filed for bankruptcy with the United States Bankruptcy Court for the District of Delaware.  As of today’s date, the only document filed with the Court in this action is the petition itself.  According to the petition, Egenix has $500,000 to $1 million in estimated assets, and $1 million to $10 million in estimated debts.

Egenix is a privately held biotechnology company focused on developing innovative cancer therapeutics.  The company is based in LaGrangeville, New York.  Egenix is being represented in this bankruptcy action by the law firm of Cole, Schotz, Meisel, Forman & Leonard, P.A.  Stay tuned for further updates on this bankruptcy filing.

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.

Liberty Brands Opinion – Preference Litigation and the Bankruptcy Court’s Constitutional Limits

Posted in Opinions

In 6 pages of Findings of Fact and Conclusions of Law released December 19, 2014 in the Liberty Brands bankruptcy (Bank. D. Del. 09-50965), Judge Walrath’s ruling referenced Stern v. Marshall, 131 S.Ct. 2594 (2011).  Judge Walrath’s Findings of Fact and Conclusions of Law are available here (the “Opinion”).  Because of the continuing discussions caused by the Stern opinion, we wanted to touch briefly on the (very short) part of the opinion referencing Stern.  The Stern case was previously discussed in numerous posts on this site, including the following:

Judge Walsh Provides Analysis of Stern v. Marshall in DBSI Opinion

Stern v. Marshall: Effects on Delaware

Background

The Opinion ruled on the Motion of the Trustee for New Trial to Amend or Make New Findings of Fact and Conclusions of Law with respect to certain allegedly preferential transfers.  The motion sought reconsideration of the Court’s Proposed Findings of Fact and Conclusions of Law issued on September 25, 2014, arguing that certain transactions should be ruled preferences, despite the Trustee having failed to adequately argued that point.

The Opinion

Judge Walrath’s first analysis in the Opinion is contained in paragraph 6 in which she states “[t]he Bankruptcy Court does not have the constitutional authority to enter a final order on the preference action because DTW never filed a claim in this bankruptcy case.”  She then cited to the Stern holding that “a preferential transfer claim can be heard in bankruptcy when the allegedly favored creditor has filed a claim . . . . If, in contrast, the creditor has not filed a proof of claim, the trustee’s preference action does not ‘become[] part of the claims-allowance process’ subject to resolution by the bankruptcy court.” 131 S. Ct. 2594, 2617 (2011).

This is one of few recent opinions on how the Stern holding will affect preference litigation in Delaware.  It should be remembered, however, that while the Bankruptcy Court only has the power to issue Findings of Fact and Conclusions of Law, there has yet to be a Delaware District Court opinion ruling contrary to the Bankruptcy Court’s recommendations regarding preference litigation (in this post-Stern era).  This is just one more nuance to the defense (or prosecution) of preference actions that any lawyer in this practice area needs to be aware of.

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.