Delaware Bankruptcy Litigation : Delaware Bankruptcy Lawyer & Attorney : Fox Rothschild Law Firm : Financial Restructuring & Bankruptcy Litigation

On May 8, 2012, the U.S. Bankruptcy Court for the District of Delaware (the “Court”) entered its Order (the “Order”) Establishing Procedures to Assert Claims Arising under Section 503(b)(9) of the Bankruptcy Code (“503(b)(9) Claims”) in the chapter 11 cases of AFA Investment, Inc. and its affiliated debtors (collectively, the “Debtors”) (Bankr. D. Del. 12-11127 (MFW)). While unusual, it is not an extraordinary step taken by the Court; however, the claims procedures and timing established by the Order could seriously affect certain creditors’ rights in the Debtors’ cases.  A copy of the Order is available here .

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At approximately 10:15 this morning, Judge Walrath of the Delaware Bankruptcy Court made an oral ruling confirming Washington Mutual's chapter 11 plan of reorganization.

Over the last three and one-half years, hundreds of attorneys and other professionals have worked thousands of hours in an effort to help WAMU obtain a measure of relief from its debts so that it could emerge from bankruptcy protection with the ability to continue to operate.  What has emerged from the process is a smaller, leaner company with a greatly reduced debt load.

In its efforts to reach confirmation, WAMU reached agreements with every class of debtors, as well as the equity committee, providing that they would all vote to approve the plan.  Because there was no dissenting class, the absolute priority rule (which provides that no class of creditors, or equity, can receive any distributions until all classes ahead of them are paid in full) was not implicated.  This rule applies only when there is a dissenting class, so WAMU's broad agreements neatly sidestepped this issue.  This allowed WAMU to agree to provide current equity holders with approximately 95% of the equity of the new company.  While it is not worth nearly as much as it was pre-bankruptcy, the fact that equity holders are receiving a distribution of this magnitude is almost unheard of in the modern bankruptcy era.  Judge Walrath even referred to the substantial recovery equity holders would be receiving in her opinion, congratulating them on their efforts in the case.

It was a packed courtroom with chairs in the aisle and people standing near the door to be able to hear, but everyone involved in the case is happy to see an end to the intense litigation and a resolution that garnered an incredibly broad consensus.

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We have been getting a number of calls about the American Home Mortgage, Inc. bankruptcy, and since I don’t enjoy giving people bad news, I crafted this post to inform you of the worst of it.

On November 30, 2010, the bankruptcy Plan of American Home Mortgage became effective. The Plan is a thrilling page turner filled with Legal terminology and weighing in at over one hundred pages. A copy of the Plan is available here.

And now for the unhappy news: American Home Mortgage had insufficient assets to repay all of its debts. Under the Plan, holders of subordinated claims receive no distributions. Similarly, holders of equity will not be receiving any distributions. Most other classes of debt holders will receive a fraction of what they are owed, but nearly everyone is taking a haircut as a result of the failure of American Home Mortgage.

It is unfortunate, but in almost every bankruptcy, equity holders lose their entire investment. In some situations, however, equity holders are able to get concessions from lenders.  This can occur when the lenders are willing to pay the equity holders to settle potential causes of action. While it is very uncommon, this can happen when the equity holders form a committee and hire experienced bankruptcy counsel to negotiate with the lenders to obtain concessions.

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.

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Introduction

On January 19, 2011, Orchard Brands, also known as "Appleseed's Intermediate Holdings," filed petitions for bankruptcy in the United States Bankruptcy Court for the District Delaware.  According to the Declaration of T. Neale Attenborough, Orchard Brands' CEO, the company sells clothing and home goods under 17 different brands including Monterey Bay, Norm Thompson, Draper's & Damon's and Bedford Fair Lifestyles.  See Attenborough Declaration ("Declaration") at *5.    Prior to filing for bankruptcy, Orchard Brands negotiated a "Support Agreement" with many of its secured lenders.  Under the Support agreement, the company and its lenders agreed to undergo a restructuring or sale of all assets under the Bankruptcy Code.  Declaration at *2-3.  A copy of the Declaration is available here for review.

Orchard Brands' Business

Located in Beverly, Massachusetts, Orchard Brands employs (at the time of bankruptcy) over 4,000 employees, most of which work on a full-time basis.  Aside from Massachusetts, the company has brand headquarters in Arizona, Pennsylvania, California, New Jersey, Oregon and Wisconsin.  Under its various labels, Orchard Brands' offerings include clothing, footwear, and home and health products for men and women.  Net sales in 2010 totaled $881 million, down from $954 million in 2010.  Declaration at *4-5.

Events Leading to Bankruptcy

Orchard Brands filed for bankruptcy due to its inability to service is debt obligations and maintain its trade obligations with vendors.  By December of last year, the company's secured debt totaled $725.1 million.  The level of secured debt required Orchard Brands to make annual interest payments of approximately $52 million.  Declaration at *5.  Orchard Brands tried to restructure its debt outside of bankruptcy.  With these efforts unsuccessful, the company next began negotiations with its secured lenders for a restructuring under chapter 11 of the Bankruptcy Code.  Declaration at *6.

First Steps in Bankruptcy

Going in to bankruptcy, Orchard Brands seeks court approval of $140 million in postpetition financing.  As stated in its Declaration, Orchard Brands intends to use the DIP facility to cover critical expenses such as wages, critical vendor claims and customer programs.  Declaration at *7.  It is not exactly clear whether Orchard Brands will be able to secure the support necessary to confirm a "pre-negotiated" plan of reorganization.  By that,  the Support Agreement with the company's lenders provides for a "dual track" whereby it can seek to confirm a plan of reorganization as well as a sale of assets if a 363 sale becomes necessary.  Declaration at *22-23.  Whether this bankruptcy shifts from a reorganization to a sale of all of the company's assets, depends on whether Orchard Brands is able to satisfy certain "milestones" provided for in the Support Agreement.

This bankruptcy proceeding is before the Honorable Kevin Gross.  Orchard Brands is represented by the law firm  Kirkland and Ellis LLP.  The lead case in these proceedings is case no. 11-10160(KG).   A copy of Orchard Brands' Petition for Bankruptcy is available here for review.

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Jason Cornell practices with the law firm Fox Rothschild LLP in Wilmington, Delaware.  You can reach Jason at 302 427 5512, or jcornell@foxrothschild.com

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Introduction

Earlier this month, the chapter 11 trustee (the "Trustee") in the DBSI bankruptcy began filing adversary actions seeking the avoidance and recovery of alleged fraudulent transfers.  The Trustee filed the adversary actions against various defendants, some of whom the Trustee identifies as "John Doe 1 -10."  This post will look briefly at the DBSI bankruptcy proceeding, why DBSI filed for bankruptcy, as well as some of the events that have transpired since the compnay filed for bankruptcy.

Background

On November 10, 2008, DBSI, Inc. (“DBSI” or “Debtors”) filed petitions for chapter 11 bankruptcy in the United States Bankruptcy Court for the District of Delaware. As reflected in the Declaration of DBSI’s CEO, Douglas Swenson, (read the DBSI Declaration here), at the time it filed for bankruptcy, DBSI described itself as a conglomerate of real estate entities valued at over $2.65 billion. From its beginnings in 1980, to the date that it filed for bankruptcy, DBSI claimed to have  raised over $1.5 billion in capital, allowing it to operate numerous commercial real estate projects and businesses. At the time the company filed for bankruptcy, DBSI employed 131 employees.

Not Your Ordinary Chapter 11 Bankruptcy

According to the Debtors’ bankruptcy petition, DBSI’s 50 largest unsecured creditors hold claims ranging from $26.7 million to $2.4 million (read the DBSI bankruptcy petition here). In a more “typical” bankruptcy, these creditors would consist of large trade vendors of the debtor, or unsecured lenders and stakeholders in the bankrupt company. For DBSI, however, all fifty of its largest unsecured creditors are individuals, not corporations.

The reason individuals have such large stakes in DBSI, instead of corporations, has to do with the nature of its business. DBSI generated revenue through the creation of tenants-in-common real estate transactions. Under such transactions, DBSI acquired an interest in commercial or residential real estate and then sold off fractional interests of the real estate to investors as tenants-in-common. DBSI then entered into master leases with the tenants-in-common investors, subleasing the property to commercial tenants. DBSI collected rent from the tenants, paying the operating expenses for the venture, and keeping a management fee for itself and distribute the proceeds to investors.

The Slide Into Bankruptcy

DBSI provided four reasons for its bankruptcy filing: the credit crisis, rising costs, a weakening real estate market and various activities by stakeholders. Without lenders providing capital, DBSI could not continue its real estate purchase and sales operations. Additionally, with costs rising, many of DBSI’s master lease programs became unprofitable. Next, the drop in real estate values interrupted DBSI’s ability to market land collateral for its bond and note debtor-entities. Finally, some of the Debtors’ investors commenced actions in court seeking temporary restraining orders against DBSI. Combined, these events led DBSI to seek restructuring in bankruptcy court.

Appointment of the Chapter 11 Trustee 

On August 14, 2009, the Bankruptcy Court appointed the Trustee.  Prior to the Trustee's appointment, the bankruptcy was managed by DBSI as debtors in possession.  On October 26, 2010, the Bankruptcy Court confirmed the Second Amended Joint Chapter 11 Plan of Liquidation (the "Plan").  Under the Plan, the "DBSI Estate Litigation Trust" was created whereby the Trustee was granted the authority to prosecute and settle estate causes of actions.  Acting under this authority, the Trustee commenced the avoidance actions.

In some of the adversary complaints, the Trustee alleges DBSI engaged in fraudulent schemes.  According to the Trustee, DBSI's cost structure prevented it from operating at a profit. Starting in 2004, the Trustee alleges that DBSI "took on the characteristics of a Ponzi scheme" whereby its guaranteed returns to investors were maintained through the intake of new investors.  By 2006, the company was facing serious cash shortages.  By the Fall of 2008, DBSI quit making payments to its TIC investors and certain note and bond holders. 

Fraudulent Transfers

Through certain of the adversary complaints, the Trustee seeks to avoid and recover what he claims are fraudulent transfers.  Specifically, the Trustee claims that during the four years prior to DBSI filing for bankruptcy, the company made transfers to certain parties while DBSI was either insolvent or had assets that were "substantially small."  The Trustee brings these fraudulent transfer claims under both the Bankruptcy Code and applicable state law. 

The DBSI bankruptcy proceeding, including the adversary actions filed by the Trustee, are before the Honorable Peter J. Walsh. Judge Walsh previously served as Chief Judge of the Delaware Bankruptcy Court.  The Chapter 11 Trustee for DBSI is represented by the law firm Gibbons P.C.  Below are links to prior posts I have written regarding issues relevant to fraudulent conveyance actions and/or avoidance actions:

What is a Fraudulent Transfer? Decision in Elrod Holdings Explains

Defending Avoidance Actions: The "Settlement Payment" Safe Harbor Receives Broad Interpretation Under In re Elrod Holdings

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Jason Cornell is a bankruptcy attorney with the law firm Fox Rothschild LLP.  Jason practices in Fox Rothschild's Wilmington, Delaware office.  You can reach Jason at 302 427 5512 or jcornell@foxrothschild.com.

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Below is a post from Michael Temin, senior counsel with Fox Rothschild. 

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Bankruptcy Code § 365(d)(3) requires the trustee or the debtor in possession to "timely perform all the obligations of the debtor . . .arising from and after the order for relief under any unexpired lease of nonresidential real property, until such lease is assumed or rejected, notwithstanding section 503(b)(1)." In 2001 the Third Circuit construed this section to require the debtor to perform the lease in accordance with its terms. CenterPoint Properties v. Montgomery Ward Holding Corp. (In re Montgomery Ward Holding Corp.), 268 F.3d 205 (3d Cir. 2001).

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I am proud to introduce a contributing "blogger" to the Delaware Bankruptcy Litigation Blog.  As a frequent author and speaker on corporate bankruptcy, Michael Temin needs no introduction.  Michael is senior counsel with Fox Rothschild, a contributing author to Collier on Bankruptcy, Collier Bankruptcy Practice Guide and co-editor of the Pennsylvania Ethics Handbook (2008).  The following is Michael's summary of a recent Third Circuit decision in the Grossman's bankruptcy.  I want to thank Michael for sharing his work with us and look forward to his future posts on this blog.

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In 1984 a Third Circuit panel decided that the automatic stay did not apply to a right to payment which arose under applicable state law after a bankruptcy petition was filed. Avellino & Bienes v. M. Frenville Co., 744 F.2d 332 (3d Cir. 1984). The Third Circuit tradition is that the holding of a panel in a precedential opinion is binding on subsequent panels. Until this year Frenville remained good Third Circuit law notwithstanding universal rejection by other circuits.

In In re Grossman’s Inc., 607 F.3d 114 (3d Cir. 2010), the Third Circuit en banc overruled Frenville. After discussing the conduct test (a claim arises when the acts giving rise to the defendant’s liability were performed, not when the harm caused by the acts was manifested) and the pre-petition relationship test (a claim arises from a debtor’s pre-petition tortious conduct where there is also some pre-petition relationship between the debtor and the claimant), the Third Circuit held that a tort claim arises when an individual is exposed pre-petition to a product or other conduct giving rise to an injury which underlies a “right to payment” under the Bankruptcy Code.

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Introduction

American Safety Razor Company ("ASR"),  one of the largest manufacturers of shaving razors and blades, filed for bankruptcy protection in Delaware on July 28, 2010.  According to the  Declaration of ASR's Chief Financial Officer, Andrew Bolt (the "Bolt Declaration"), the company's net sales for 2009 totaled $330 million, down from the $351 million in sales achieved in 2008.  See Bolt Declaration, pgh. 11. 

Events Leading to Bankruptcy

Over 90% of ASR's earnings come from the sale of wet shave razors.  ASR markets its razors to retailers as a "value-priced alternative to more heavily advertised premium priced brands."  Bolt Dec., pgh. 13.  The company sells its razors under the trade names "Personna,"  "Matrix," "Magnum," "Mystique," "Solara" and "GEM."  Id. 

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Introduction

Earlier this week I wrote about the Specialty Products Holding Corp. ("SPHC" or the "Debtor") bankruptcy.  My prior post looked at the SPHC's business, the events leading to company's bankruptcy and what SPHC sought to achieve by filing for bankruptcy.  Simply stated, SPHC filed for bankruptcy in order control its costs arising from asbestos litigation. 

Whereas my first post relied upon SPHC's Declaration in Support of First Day Pleadings, this post will instead focus on SPHC's Informational Brief of the Debtors (the "Informational Brief"). The Informational Brief is worth review for a couple of reasons.  First, although chapter 11 debtors routinely file declarations in support of their first day bankruptcy filings, it is not often that a debtor files an "informational brief" that spells out the debtor's view of pending litigation and how it intends to respond to such litigation during bankruptcy.  The Informational Brief is also worth review as it outlines how the Debtor intends to bring their asbestos costs under control.  A copy of the Informational Brief is available here.

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Equipment maker, Xerium Technologies, filed chapter 11 petitions for bankruptcy on March 30th in the United States Bankruptcy Court for the District of Delaware.  According to the Declaration filed by Xerium's CEO (the "Declaration"),  the company filed for bankruptcy in order to trim its debt down from $640 million to $480 million.  To achieve this, Xerium filed a prepackaged plan of reorganization with the Bankruptcy Court at the same time that it filed for bankruptcy.  A copy of Xerium's proposed plan is available here.

Xerium began soliciting votes for its plan of reorganization almost one month prior to its filing for bankruptcy.  Under the proposed plan,  the company's lenders and certain creditors will receive approximately 83% of Xerium's stock in exchange for new debt totaling $410 million.  Existing shareholders of Xerium will receive pro rata shares of the remaining 17% of the reorganized company's newly issued stock. 

Xerium manufacturers equipment used in the paper industry.  According to its Declaration, Xerium is "a leading global manufacturer and supplier" of consumable products used in the production of paper products.  The company's customers include International Paper, MeadWestvaco Corp. and Smurfit-Stone Corporation (read more about the Smurfit-Stone bankruptcy here).  According to Xerium's Bankruptcy Petition, the company's assets total $693 million against debts of $813 million. 

This bankruptcy proceeding is before the Honorable Kevin J. Carey, Chief Judge of the United States Bankruptcy Court for the District of Delaware.

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Jason Cornell is a bankruptcy attorney with Fox Rothschild LLP in Wilmington, Delaware.  You may contact Jason at 302 427 5512, or jcornell@foxrothschild.com.

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Introduction

In January of this year, Judge Brendan L. Shannon of the United States Bankruptcy Court for the District of Delaware issued a decision addressing whether a debtor's lenders had aided and abetted the directors of debtor, Fedders North America, Inc. ("Fedders"), in breaching their duty of care (read the Fedders' Decision here).  The aiding and abetting claim was one of several claims brought through an adversary action filed by the Official Committee of Unsecured Creditors (the "Committee").  The Committee's complaint asserted sixteen causes of action against Fedders' lenders.  Of the sixteen, the only claim before the Court in the January decision was the one alleging the lenders aided and abetted Fedders' officers in their breach of the duty of care.  This post will look at the facts that gave rise to the Committee's claims against the lenders, as well as the Court's analysis in resolving the Committee's claims.

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Introduction

JL French Automotive ("JLF"), the Wisconsin-based automotive supplier, filed for bankruptcy on July 13, 2009.  JLF filed for bankruptcy in the United States Bankruptcy Court for the District of Delaware.  According to the Declaration in Support of First Day Motions (the "Declaration"), JLF previously filed for bankruptcy in Delaware in February of 2006. On April 17, 2009, less than three months before JLF commenced its current bankruptcy proceeding, the Delaware Bankruptcy Court entered final orders closing the bankruptcy proceeding that began in 2006. 

JLF's Business

As stated in its Declaration, JLF designs and produces high pressure, aluminum die-castings.  JLF began as a family-owned business in 1968, manufacturing die-castings at its facility in Sheboygan, Wisconsin.  Eventually,  JLF opened a second manufacuturing facility in Wisconsin and a third facility in Kentucky.  With the expansion of its operations, JLF's product offering grew to include engine blocks, oil pans, transmission cases, engine covers, bedplates and cam covers.

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 Introduction

On April 19, 2009, Dayton Superior Corporation filed for bankruptcy in the United States Bankruptcy Court for the District of Delaware.  According to Dayton's bankruptcy petition,  the Debtor has assets totaling $288 million and liabilities of $406 million.  As stated in Dayton's Declaration in Support of First Day Motions,  Dayton "manufactures, markets and distributes specialized products consumed in non-residential concrete construction."  Dayton offers over 1,700 products under various brand names including  Dayton/Richmon, Aztec, Symons, BarLock, among others.  Through its brand names, Dayton provides the concrete industry with wall-forming products, bridge deck products and bar supports. 

Events Leading to Bankruptcy  

Immediately prior to bankruptcy, Dayton's secured debt consisted of a term loan of $103 million, a revolving credit agreement of $110 million and a letter of credit totaling approximately $9 million.  Dayton also issued $161 million in senior secured notes that matured in 2009.  According to Dayton's Declaration,  towards the end of 2008 Dayton began negotiations with its lenders and noteholders in an effort to restructure its debt.  Although the parties agreed to extend the maturity dates on Dayton's obligations to April 20, 2009, the parties could not reach an agreement to extend the maturity dates any further.  Eventually, Dayton found itself with reduced trade credit and inadequate cash levels.  In order to remain operational, Dayton filed its bankruptcy petition. 

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The chapter 7 trustee for the Adva-Lite bankruptcy recently filed over 70 adversary complaints seeking to recover what the trustee considers avoidable transfers under sections 547, 548, 549 and 550 of the Bankruptcy Code.  The preference actions are before the Honorable Kevin J. Carey, Chief Judge of the Delaware Bankruptcy Court.  As reflected in the Adva-Lite complaints, the trustee seeks to "avoid and recover all transfers made by one or more of the Debtors of an interest of the Debtors in property and to or for the benefit of Defendant or any other transferee."  (Read an Adva-Lite preference complaint here).

According to Adva-Lite's declaration in support of its first-day bankruptcy motions,  prior to bankruptcy the debtors were "leaders in the $18 billion promotional products industry."  In 2005, Adva-Lite's sales reached over $83 million as a supplier of promotional flashlights, drinkware, tools and pens.  Now the trustee is seeking to recover many of the payments Adva-Lite paid to vendors during the ninety days prior to the petition date.  To review posts addressing defenses common to a preference action, click here.

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Should you have any questions regarding this, or any other matters discussed on the Delaware Bankruptcy Litigation Blog, please contact Jason Cornell, Esquire at (302) 427-5512 or jcornell@foxrothschild.com.
 

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Introduction

The Honorable Christopher S. Sontchi, presiding over the Goody's bankruptcy in the United States Bankruptcy Court for the District of Delaware, issued a decision recently regarding the scope of administrative claims under 11 U.S.C. 503(b)(9).  Section 503(b)(9) provides that after notice and a hearing, there shall be an allowed administrative expense claim for "the value of any goods received by the debtor within 20 days before the date of commencement of a case under this title in which the goods have been sold to the debtor in the ordinary course of such debtor's business."  The issue presented to the Court in Goody's was whether 503(b)(9)'s grant of administrative claim status extended to services provided to a debtor.  (Read the Goody's decision here).

Background

Goody's is a clothing retailer with 350 stores throughout the United States.  One of Goody's vendors, AVS, provided various services to Goody's, including inspecting, ticketing and repackaging apparel Goody's purchased from other vendors.  During the twenty days prior to the commencement of Goody's bankruptcy, AVS submitted invoices showing that it provided over $60,000 in services to Goody's.  After Goody's filed its bankruptcy petition, AVS sought allowance of an administrative claim for its services and Goody's objected, arguing that 503(b)(9) claims apply to goods, not services. 

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Introduction

The Bankruptcy Code allows for the setoff of "mutual debts" in a bankruptcy proceeding under 11 U.S.C. 553(a).  Section 553 makes no reference to non-mutual debts, which courts interpret to mean that non-mutual debts are not subject to setoff under the Bankruptcy Code.  Recently, in the SemCrude bankruptcy, the Honorable Brendan L. Shannon issued a decision finding that a multi-party agreement that contemplates a triangular setoff lacks the mutuality required for setoff under section 553.  This post provides a general look at setoffs under section 553, plus looks at the Court's analysis of triangular setoffs in SemCrude. (Read the decision in SemCrude here).

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As many are aware, NetVersant Solutions, Inc. ("NetVersant" or "Debtors"),  a provider of voice, video and data communication services, filed for bankruptcy in the United States Bankruptcy Court, District of Delaware, on November 19, 2008.  Contemporaneous with its bankruptcy,  NetVersant filed an adversary action with the Bankruptcy Court seeking injunctive relief against against a long list of suppliers and subcontractors who are currently working on projects with NetVersant's customers.  NetVersant filed the adversary action in order to bar its suppliers and subcontractors from taking any action:

[T]o file, assert, collect on or otherwise enforce any lien, trust fund or other rights against any of the Debtors' customers, any property owned or leased by any customer, any payment made or to be made by any customer under or with respect to any contract between any Debtor and any customer, or any cash or receivables of any Debtor for 60 days.  Read the NetVersant Complaint for Injunctive Relief here.

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On October 14, 2008,  the United States Bankruptcy Court for the District of Delaware appointed Louis Freeh, the former Director of the FBI, as examiner in the SemCrude bankruptcy.  Five weeks after his appointment,  Freeh submitted the Examiner's Preliminary Work Plan as required under the order granting his appointment (the "Examiner Order").  Pursuant to the Examiner Order,  Freeh was directed to investigate circumstances surrounding SemCrude's trading strategy, the potential misuse of borrowed funds and whether any of SemCrude's employees or directors participated in fraud or mismanagement.  The Examiner Order requires Freeh to complete his investigation within six months after the Bankruptcy Court approves the Examiner's Work Plan.

As indicated in the Examiner's Preliminary Work Plan, soon after his appointment Freeh traveled to Tulsa, Oklahoma and met with SemCrude's attorneys, spoke with various employees and toured its offices.  During subsequent meetings,  Freeh, or his associates, met with the SEC, Department of Justice and the Commodity Futures Trading Commission.  These meetings culminated in SemCrude and Freeh reaching an agreement regarding the sharing of information and documents.

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