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

Summary

When a company files for bankruptcy, they gain a number of protections under federal law.  One of these protections is the “automatic stay” provided by 11 U.S.C. § 362. The automatic stay makes it illegal to continue prosecuting, or to initiate, an action against the debtor who is in bankruptcy.  Even if that debtor has injured you, it means that you cannot try to recover from them without getting the automatic stay lifted.  As more large bankruptcy cases are filed in Delaware, it becomes increasingly important that persons injured by debtors understand the legal hoops that they have to jump through in order to recover for their injuries.

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There are generally three types of claims in a bankruptcy proceeding: unsecured claims, secured claims and administrative expense claims. Section 503 of the Bankruptcy Code governs the allowance of administrative expense claims. Section 503 provides that "after notice and a hearing, there shall be allowed administrative expenses…, including the actual and necessary costs and expenses of preserving the estate." 11 U.S.C. §　503(b)(1)(A). A creditor who seeks to have its claim paid has an administrative claim, and therefore ahead of the general unsecured creditors, bears the burden of establishing that its claims qualifies for priority status. In re New Century TRS Holdings, Inc., et al, 446 B.R. 656, 661 (Bankr. D. Del. 2011). Courts generally apply a two-part test in deciding whether a claim qualifies as an administrative expense: (1) whether the expense arose from a post-petition transaction between the creditor and debtor; and, (2) whether the expense was "actual and necessary" to preserve the estate. Id., citing In re Unidigital, Inc., 262 B.R. 283, 288 (Bankr. D. Del. 2001). Claims which do not constitute an administrative expense are often treated as general unsecured claims which are payable in the ordinary course with other unsecured creditors of the estate. In re Arrow Carrier Corp., 154 B.R. 642, 646 (Bankr. D. N.J. 1993).

Aside from the allowance of an administrative claim, a common issue concerning creditors is the timing of payment of the administrative claim. Although Section 503 of the bankruptcy code provides that an entity can request payment of an administrative expense claim, the section does not address the question of when a claim for administrative expense is to be paid. In re HQ Global Holdings, Inc., 282 B.R. 169 (Bankr. D. Del. 2002) (further citations omitted). The determination of the timing of payment of an administrative expense claim is within the discretion of the bankruptcy court. Id., citing In re Colortex Industries, Inc. 19 3d 1371, 1384 (11^th Cir. 1994). In deciding the timing of payment for an administrative expense claim, one of the central factors courts consider is the goal of the bankruptcy court to have an orderly and equal distribution among creditors and a need to prevent a "race to a debtor’s assets." Id. Distributions to administrative claimants are generally not allowed when the estate may not be able to pay all administrative expenses in full. Id., citing In re Standard Furniture, 3 B.R. 527, 532 (Bankr. S.D. Cal. 1980). Even though courts generally wait until after confirmation before allowing payment on administrative expenses, courts nevertheless have discretion to consider other factors in deciding whether to grant immediate payment. These factors include the particular needs of the administrative claimants, as well as the length and expense of the administration of the bankruptcy proceeding. Id., at 173, citing In re Reams Broadcasting Corp., 153 B.R. 520, 522 (Bankr. N.D. Ohio 1993).

In HQ Global Holdings, the Delaware Bankruptcy Court considered whether commercial landlords of the debtor are entitled to the immediate payment of their administrative rent claims. The court in HQ Global agreed with the debtor "that any decision on the amount and payment of the [administrative rent] must await the debtor’s decision whether to assume or reject leases." Id. at 175. The court reasoned that if the debtor assumed the landlord’s lease, such assumption would resolve the issue of the landlord’s administrative rent claims. By that, if the debtors assumed the leases, then the debtor would be required to cure any defaults and make all past due rent payments under the lease. Id.

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Jason Cornell is a creditors' rights attorney with the law firm Fox Rothschild LLP.  Jason practices before the United States Bankruptcy Court for the District of Delaware. You can reach Jason at 302 252 5833 or jcornell@foxrothschild.com.

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Federal Rule of Bankruptcy Procedure 3003(c)(3) provides that "the [bankruptcy] court shall fix and for cause shown may extend the time within which proofs of claim or interest may be filed."  For various reasons, creditors sometimes miss the claims "bar date" and need to seek permission from the court to file a late filed claim or deem the late-filed claim allowed.  In order to succeed, the creditor must convince the court that the late claim was the result of excusable neglect.  In re Garden Ridge Corp., 348 B.R. 642, 645 (Bankr. D. Del. 2006).  Excusable neglect is not defined within the Bankruptcy Code.  Instead, "it is based on equity and depends on the particular circumstances and facts of the case."  Id., citing Pioneer Inv. Servs. Co. v. Brunswick Assocs. Ltd. P'ship, 507 U.S. 380, 395, 113 S.Ct. 1489, 123 L.Ed. 2d 74 (1993). 

Courts generally consider four factors in deciding whether a claimant has established excusable neglect.  In re Garden Ridge Corp., 348 B.R. at 645, citing Hefta v. Official Comm. of Unsecured Creditors (In re American Classic Voyages Co.), 405 F.3 133 (3d Cir. 2005).  These factors include (i) the danger of prejudice to the debtor; (ii) the length of delay and its impact on the judicial proceedings; (iii) the reason for the delay, including whether the delay was within the reasonable control of the movant; and, (iv) whether the creditor acted in good faith.  Id.  "All factors must be considered and balanced; no one factor trumps the others."  Id.

In Garden Ridge, the creditor who filed the late claim acknowledged to the court that it made a mistake in missing the deadline, but urged the court to weigh the "Pioneer factors" and not enforce the claims bar date.  Turning first to the issue of prejudice, the court noted that the claim was filed one week after the claims bar date.  The court can consider several factors in deciding whether prejudice exists.  These include "whether the debtor was surprised or caught unaware by the assertion of a claim that it had not anticipated; whether the payment of the claim would force the return of amounts already paid out under the confirmed plan or affect the distribution to creditors; whether payment of the claim would jeopardize the success of the debtor's reorganization; whether the allowance of the claim would adversely impact the debtor actually or legally; and whether allowance of the claim would open the floodgates to future claims."  Id. at 646, citing Pro-Tec Serv., LLC v. Inacom Corp. (In re Inacom Corp.), No. 00-2426, 2004 WL 2283599 *4 (D. Del. October 4, 2004), citing In re O'Brien Envtl. Energy, Inc. 188 F.3d 116, 126-28 (3d Cir. 1999).

After considering the four factors, the Garden Ridge court found that factors 1, 2 and 4 (prejudice, length of delay, and good faith) supported the creditor's request for allowance of the late filed claim.  The court recognized that the creditor was "careless in its obligation to file its claim by the deadline," however, this factor alone was not enough to support denial of the claim. 

The creditor in Garden Ridge was fortunate in that its claim was not disallowed even though it was filed one week after the bar date.  However, Garden Ridge should remind creditors that they carry the burden of establishing excusable neglect and should take all necessary steps to insure their claims are filed before the passing of the bar date.  In Hoos & Co. v. Dynamics Corp. of Am., 570 F.2d 433, (2d Cir. 1978), the Second Circuit explained why courts strictly enforce the claims bar date in a bankruptcy proceeding:

The practical, commercial rationale underlying the need for a bar date are [sic] manifest.  The creditors and bankruptcy court must be able to rely on a fixed financial position of the debtor in order to intelligently evaluate the proposed plan of reorganization for plan approval or amendment purpose.  After initiating a carefully orchestrated plan of reorganization, the untimely interjection of an unanticipated claim, particularly a relatively large one, can destroy the fragile balance struck by all the interested parties in the plan.  Given the time sensitivity of such financial undertakings, the consequent delay in reevaluation necessitated by the late allowance of the claim may often spell disaster to recovery, even where ultimate approval is forthcoming.  These considerations and realities militate in favor of restraint and caution in allowing untimely claims.

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Jason Cornell is a bankruptcy attorney with the law firm Fox Rothschild LLP.  Jason practices in Fox Rothschild's commercial bankruptcy department and is admitted to the United States Bankruptcy Court for the District of Delaware.  You can reach Jason at 302 252 5833 or jcornell@foxrothschild.com.

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Federal Rule of Bankruptcy Procedure 2004(a) states that "[o]n motion of any party in interest, the court may order the examination of any entity."  Courts construing Rule 2004(a) have found its scope "unfettered and broad."  In re Washington Mutual, Inc., 408 B.R. 45, 49 (Bankr. D. Del. 2009), citing In re Bennett Funding Group, Inc., 203 B.R. 24, 28 (Bankr. N. D. N.Y. 1996).  Federal Rule of Bankruptcy Procedure 2004(b) establishes some of the parameters of what is commonly referred to as a "Rule 2004 Examination":

The examination ... may relate only to the acts, conduct, or property or to the liabilities and financial condition of the debtor, or to any matter which may affect the administration of the debtor's estate.  [Additionally, in a] case under chapter 11 ... the examination may also relate to the operation of any business and the desirability of its continuance, the source of any money or property acquired or to be acquired by the debtor for purposes of consummating a plan and the consideration given or offered therefor, and any other matter relevant to the case or to the formation of a plan.

In its broadest sense, 2004 examinations are referred to as a "fishing expedition".  Bennett Funding Group, 203 B.R. at 28.  Rule 2004 examinations are not intended to be abusive, but instead provide opportunities for "discovering assets, examining transactions, and determining whether wrongdoing has occurred."  Washington Mutual, 408 B.R. at 50, citing In re Enron Corp., 281 B.R. 836, 840 (Bankr. S.D. N.Y. 2002). 

The scope of Rule 2004 examinations, however, has its limits.  For example, examinations cannot be used to abuse or harass a party, nor can the examinations "stray into matters which are not relevant to the basic inquiry."  Washington Mutual, 408 B.R. at 50, citing In re Table Talk, Inc., 51 B.R. 143, 145 (Bankr. D. Mass. 1985)(additional citations omitted). 

The decision in Washington Mutual arose from the Debtors' motion for a Rule 2004 examination of the entity that had purchased Washington Mutual's assets after they were sold by the FDIC. The issue before the court was whether a 2004 examination could be limited due to a pending adversary proceeding or litigation in another forum.  Washington Mutual, 408 B.R. at 50. The court begin its analysis by recognizing the "pending proceeding" rule. Under this rule, "once an adversary proceeding or contested matter has been commenced, discovery is made pursuant to Federal Rule of Bankruptcy Procedure 7026, et seq., rather then by a [Rule] 2004 examination.  Id., citing Bennett Funding Group, 203 B.R. at 28.  Courts also restrict the use of Rule 2004 exams where the party requesting the examination could benefit their pending litigation outside the bankruptcy court which happens to be against the Rule 2004 examinee.  Washington Mutual, 408 B.R. at 50, citing In re Enron Corp., 281 B.R. at 842.

The reasons for restricting 2004 examinations when other litigation is pending are straightforward.  First, in adversary proceedings and contested matters, the parties are governed by the general rules of discovery.  Second, Rule 2004 examinations do not provide the same safeguards as those afforded under Federal Rule of Bankruptcy Procedure 7026.  In a 2004 exam, for example, a witness does not have a general right to be represented by counsel during a deposition and there are limitations on the right to object to immaterial or improper questions.  Washington Mutual, 408 B.R. at 50, citing In re Dinubilo, 177 B.R. 932, 940 (Bankr. E.D. Cal. 1993). 

When a court is faced with a motion for 2004 examination and there is a pending adversary proceeding, the court must balance the abuses sought to be avoided by the "pending proceeding" rule against the trustee's fiduciary duty to maximize value for the estate.  Under this approach, the appropriate test is whether the Rule 2004 examination seeks to discover evidence related or unrelated to the pending adversary proceeding.  Washington Mutual, 408 B.R. at 51.  Applying this test to the facts before it, the Washington Mutual court found that the "pending proceeding" rule did not prohibit the debtors' use of a Rule 2004 examination against the asset purchaser.  The party that purchased the assets, and who opposed the 2004 examination, was not a party to the "pending proceeding," though it might intervene at a later time.  According to the court,  there was no basis for concern that the debtors were attempting to circumvent the Federal Rules of Civil Procedure for an action in which the asset purchaser was not a party.  Washington Mutual, 408 B.R. at 53. 

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Jason Cornell is a bankruptcy attorney with the law firm Fox Rothschild LLP. Jason practices before the United States Bankruptcy Court for the District of Delaware.  You can contact Jason at jcornell@foxrothschild.com or at (302) 252 5833.  For readers seeking more information concerning Delaware bankruptcy proceedings, below are prior posts that address various bankruptcy-related issues:

    Ten Things Every Commercial Landlord Should Know About a Tenant in Bankruptcy.

    Seeking Relief from the Automatic Stay in Delaware.

    A Tale of Two Bankruptcy Auctions.

    What Information is Required in a Chapter 11 Disclosure Statement?

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Introduction

On May 12, 2012, the United States District Court for the District of Delaware (the “District Court”) issued an opinion (the “Decision”) in the SemCrude bankruptcy in response to the SemCrude reorganized debtors’ (“Debtors”) motion to dismiss an appeal. Several of Debtors’ oil producers (the “Producers”) appealed from orders entered by the United States Bankruptcy Court for the District of Delaware (the “Bankruptcy Court”). The Bankruptcy Court’s orders included an Order Establishing Procedures for the Resolution of Liens Asserted Pursuant to Producers’ Statutory Lien or Similar Statutes (the “Lien Procedures Order”) and the Order Confirming Debtors’ Fourth Amended Joint Plan (the “Plan” and “Confirmation Order”). After considering the parties’ positions, the District Court granted the Debtors’ motion to dismiss, finding that the Producers’ appeal was equitably moot. This post will look at the doctrine of equitable mootness and the reasoning for the Court’s Decision.

Doctrine of Equitable Mootness

“The doctrine of equitable mootness provides that an appeal should be dismissed as moot when, even though effective relief could conceivably be fashioned, implementation of that relief would be inequitable.” Decision at *4, citing In re Continental Airlines, 203 F.3d. 203, 209 (3d Cir. 2000)(“Continental II”). Courts considering whether an appeal is equitably moot undertake a “discretionary balancing of equitable and prudential factors.” Id. citing In re Continental Airlines 91 F.3d 533, 560 (3d Cir. 1996)(en banc)(“Continental I”). Under Continental I, the Third Circuit listed five factors courts should consider in deciding whether to dismiss an appeal as equitably moot. Dec. at *5, citing Continental I at 560. These include:

(1) whether the reorganized plan has been substantially consummated; (2) whether a stay has been obtained; (3) whether the relief requested would affect the rights of the parties not before the Court; (4) whether the relief requested would affect the success of the plan; and (5) the public policy of affording finality to bankruptcy judgments.

Id.

Analysis by the Court

Applying the law to the facts before it, the District Court found that Producers neither sought to expedite their appeal, nor seek a stay of the confirmation order while their appeal was pending. Dec. at *6. The failure to either expedite the appeal or stay confirmation were two factors important to the Court, noting that “[b]ecause of the nature of bankruptcy confirmations … it is obligatory upon [an] appellant … to pursue with diligence all available remedies to obtain a stay of execution.” Dec. at *5, citing Nordhoff Invs., Inc. v. Zenith Elecs. Corp., 258 F.3d 180, 186-87 (3d Cir. 2001).

Next, the District Court considered the effect that granting an appeal might have on other parties. The Court noted that the effect that a reversal of the Bankruptcy Court would have on third parties supported a finding of equitable mootness. Dec. at *6. The reasoning behind the doctrine of equitable mootness supported this finding – the doctrine “protects the interests of non-adverse third parties who are not before the reviewing court but who have acted in reliance upon the plan as implemented.” Id., citing Continental I, 91 F.3d at 562 (internal question marks omitted).

The District Court also found that equitable mootness supported dismissal “if the relief requested … would jeopardize the success of the reorganization plan by causing its reversal or unraveling …” Dec. at *6, citing In re Genesis Health Ventures, Inc., 204 F. App’x 144, 146 (3d Cir. Oct. 4, 2006). Were the District Court to grant the Producers the relief they requested, the Court noted that it would “jeopardize the entire reorganization Plan.” Dec. at *7. Finally, the District Court found that dismissal of the appeal was appropriate under public policy considerations. Id. Again citing to Continental I, the District Court recognized “the importance of allowing approved reorganizations to go forward in reliance on bankruptcy court confirmation orders may be the central animating force behind the equitable mootness doctrine.” Dec. at *7, citing Continental I, 91 F.3d at 565.

After considering the factors relevant under the doctrine of equitable mootness, the Court in the SemCrude bankruptcy found that dismissal was appropriate. According to the District Court, the Producers’ failure to seek a stay or expedite an appeal, coupled with the need to keep a confirmed plan intact, supported dismissing the appeal. To do otherwise would unravel a plan that was confirmed over two and a half years ago.

Jason Cornell is a commercial bankruptcy attorney with the law firm of Fox Rothschild LLP. Jason practices before the United States Bankruptcy Court for the District of Delaware. You can reach Jason with questions or comments at jcornell@foxrothschild.com or by phone at (302) 252-5833. 

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Introduction

As more companies file for bankruptcy, creditors and other interested parties of a debtor must quickly familiarize themselves with the automatic stay.  Section 362(a)(1) of the Bankruptcy Code stays "the commencement or continuation ... of a judicial, administrative, or other action or proceeding against the debtor that was or could have been commenced before the commencement" of a bankruptcy proceeding.  Generally speaking, the automatic stay is intended to give the debtor a "breathing spell" from its creditors.  To do so, the stay stops various forms of collection efforts against the debtor.

The automatic stay is not without limitations, however.  In drafting the Bankruptcy Code, Congress carved out exceptions where the automatic stay does not apply.  Further, the Federal Rules of Bankruptcy Procedure provide procedural safeguards for a party seeking relief from the automatic stay.  Given the frequency with which automatic stay issues arise in bankruptcy proceedings, this post is intended to provide a brief summary of the scope of the automatic stay.  Further, the latter part of this post looks at cases frequently cited by parties seeking relief from the automatic stay in the Delaware Bankruptcy Court.

Scope of the Automatic Stay

Section 362(a)(3) of the Bankruptcy Code defines the scope of the automatic stay.  Under this section, the automatic stay bars any "act to obtain possession of property of the estate or of property from the estate or to exercise control over property of the estate."  In order to have the stay "lifted,"  section 362(d) authorizes a bankruptcy court to "grant relief from the stay provided
under subsection (a) of this section, such as by terminating, annulling, modifying or conditioning such stay …(1.) for cause, including the lack of adequate protection of an interest in property of such party in interest."

In order to trigger the automatic stay, there must be an act against either the debtor or against property of the debtor or of the estate. The automatic stay does not stay actions taken against non-debtor third parties. The Third Circuit has recognized that although the automatic stay has a broad scope,  the clear language under 362(a) applies only against a debtor.  See McCartney v. Integra Nat’l Bank North, 106 F.3d 506, 509 (3d Cir. 1997).  As a consequence “it is universally acknowledged that an automatic stay of proceedings accorded by § 362 may not be invoked by entities such as sureties, guarantors, co-obligors, or others with a similar legal or factual nexus to the … debtor."  Id.

Relief from Stay

Under section 362(d)(1) of the Bankruptcy Code, the bankruptcy court “shall” lift the automatic stay for “cause.”  If a creditor seeking relief from the automatic stay makes a prima facie case of “cause” for lifting the stay, the burden going forward shifts to the debtor pursuant to Bankruptcy Code § 362(g). See In re 234-6 West 22nd St. Corp., 214 B.R. 751, 756 (Bankr.S.D.N.Y. 1997).  

The Bankruptcy Code does not define “cause.” Instead, whether cause exists to lift the automatic stay should be determined on a case by case basis. See Izzarelli v. Rexene Prod. Co. (In re Rexene Prod. Co.), 141 B.R. 574, 576 (Bankr.D.Del. 1992). See also, In re Texas State Optical, Inc., 188 B.R. 552, 556 (Bankr. E.D.Tex. 1995) (finding that “cause” for modification of the automatic stay is “an intentionally broad and flexible concept that permits … [a] [b]ankruptcy [c]ourt, as a court of equity, to respond to inherently fact-sensitive situations.”) Courts determine what constitutes “cause” based on the totality of the circumstances in each particular case. Baldino v. Wilson (In re Wilson), 116 F.3d 87, 90 (3d Cir. 1997).

In re Rexene provides the “balancing test” to determine whether cause exists to lift the automatic stay. 141 B.R. at 576. Under Rexene, the balancing test looks at three factors to decide whether to lift the automatic stay, including: (a.) whether prejudice will be caused to the estate or the debtor;
(b.) whether hardship to the movant from continuing the stay outweighs any hardship to the debtor; and (c.) whether the movant has a reasonable probability of prevailing on the merits of the suit. Id.

In addition to the factors outlined above, a bankruptcy court may also consider the following general policies when deciding whether to grant a motion to lift the stay. These policies include: (1) whether the court has jurisdiction to hear the underlying claims arising from the underlying action; (2) whether granting movant relief from stay would provide a complete resolution of the issues presented in the underlying action; (3) whether granting the movant relief from the automatic stay would interfere with the debtors’ bankruptcy proceeding; (4) whether the interest of judicial economy and the expeditious and economical resolution of litigation weigh in favor of granting the movant relief from the automatic stay; (5) whether the parties are ready for trial in the underlying action; and, (6) whether the impact the stay has on the movant justifies the relief requested in the motion. In re: SCO Group, Inc., 395 B.R. 852, 857-58 & 859 (Bankr. D. Del. 2007).

Conclusion

Bankruptcy courts consider many factors when deciding whether to lift the automatic stay.  The broad scope of issues that can be considered by the court illustrate the flexibility provided for under the Bankruptcy Code.  Aside from the factors above, the timing of the request to lift the stay (i.e. requesting relief from stay days versus months after the commencement of a bankruptcy proceeding) also plays an important role in whether a court decides to lift the automatic stay.  A future post on this blog will look at recent decisions addressing the automatic stay.

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Jason Cornell is a partner 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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Those not familiar with the Federal Rules of Bankruptcy Procedure are often surprised to learn that service by mail is sufficient in a bankruptcy proceeding.  Federal Rule of Bankruptcy Procedure 7004(b)(3) authorizes service on a corporation (foreign or domestic) within the United States by first class mail as follows:

... by mailing a copy of the summons and complaint to the attention of an officer, a managing or general agent, or to any other agent authorized by appointment or by law to receive service of process and, if the agent is authorized by statute to receive service and the statute so requires, by also mailing a copy to the defendant.

A recent decision in the Custom Food Products ("CFP") bankruptcy discusses what is required in order for service by mail to be deemed proper.  In the CFP bankruptcy, the liquidating trustee (the "Trustee") brought suit against a defendant (the "Defendant"), alleging the Defendant received avoidable transfers under section 547 of the Bankruptcy Code.  After the Trustee commenced the adversary action, he mailed the summons and complaint to Defendant's remittance address (a Chicago address) instead of Defendant's business address in North Carolina.  Defendant's remittance address was a Bank of America lockbox which Defendant set up to receive payments only.  See Decision at *2. 

Defendant never filed a responsive pleading to the complaint, resulting in the court entering a default judgment against the Defendant.  After the court entered a default judgment, the Trustee sent a copy of the judgment to Defendant's business address.  After receiving the default judgment, Defendant filed a motion with the court seeking to have the default judgment set aside.

The court began its analysis by recognizing that Federal Rule of Civil Procedure 60(b)(4) allows the court to set aside a default judgment if the judgment is void.  A default judgment is void if the complaint was never properly served.  Decision at *3, citing Sun Healthcare Group, Inc. v. Mead Johnson Nutritional (In re Sun Healthcare Group, Inc.), 2004 Bankr. LEXIS 572 at *19 (Bankr. D. Del. Apr. 30, 2004).  Pursuant to Federal Rule of Bankruptcy Procedure 7004(b)(3), proper service of a summons and complaint may be made upon a corporation by first class mail if it is sent to an officer or agent of the corporation.  Decision at *3.  Rule 7004(b)(3) requires "strict compliance ... particularly when the plaintiff knows the defendant's business address and the identity of the person designated to receive service of process.  Id., citing In re Golden Books Family Entm't, 269 B.R. 300, 305 (Bankr. D. Del. 2001)(holding that service was not effective where pleadings were sent to a post office box addressed to the "assistant controller"). 

The court in CFP found that the Trustee's attempt to effectuate service by sending the complaint to the Defendant's remittance address "failed to comply with Rule 7004(b)(3)."  Decision at *4.  The court based its decision on the fact that the post office box where the complaint was sent was a lockbox at Bank of America and Bank of America was not authorized to receive service of process for the Defendant.  The court also found significant that the Trustee knew the Defendant's business address. 

Having found that there was no effective service, the court declared the default judgment void.  Given the large number of avoidance actions filed in the Delaware Bankruptcy Court, the CFP decision is worth review as it looks at some of the requirements for proper service of process.  The CFP decision was issued by the Honorable Peter J. Walsh.  Judge Walsh previously served as the Chief Judge of the United States Bankruptcy Court for the District of Delaware.

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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

In September of this year, the Honorable Mary F. Walrath, the presiding Judge in the DHP Holdings bankruptcy, issued a decision addressing  the effect of a forum selection clause when deciding a motion to change venue.  This issue came before the court in an adversary action filed by DHP against The Home Depot.  After DHP filed for bankruptcy, the company sued Home Depot for $5.5 million alleging Home Depot owed the company for an outstanding account receivable.  Opinion at *2.  In its Answer, Home Depot raised various defenses, one being that venue in Delaware was improper pursuant to a forum selection clause under the parties' Supplier Buying Agreement (the "SBA").  Home Depot filed a motion to transfer venue pursuant to the terms of the SBA.

Analysis

The court began its analysis by noting that motions to transfer venue require consideration of several factors.  Factors for consideration include the parties' forum preferences, where the claims arose, convenience to the parties and witnesses, as well as the location of books and records.  Opinion at *5, n.5.  Even though the court should consider various factors, it nevertheless has discretion to determine on a case by case basis whether convenience and fairness support transfering venue.  Id. at *5. 

Turning first to the SBA's forum selection clause, the court noted that selection clauses are "prima facie valid" and are generally enforced unless there is a strong showing that the clause would be unreasonable under the circumstances.  Id. Other courts have found forum selection clauses unenforceable where the clause was obtained through "fraud or overreaching."  Id. at *5, citing M/S Bremen v. Zapata Off-Shore Co., 407 U.S. 1, 18 (1972).  DHP argued that the forum selection clause should be given less weight because it was part of a form contract and therefore not a bargained-for contract provision.  The court disagreed, finding that the "lack of actual negotiations over the forum selection clause does not affect its validity."  Opinion at *6, citing Foster v. Chesapeake Ins. Co., Ltd., 933 F.2d 1207, 1219 (3d Cir. 1991). 

Although the court found that the forum selection clause (which supported a change in venue) valid,  it also found that the presence of the forum selection clause was not determinative.  Instead, such provisions are only a significant factor that is included in the court's analysis.  Opinion at *6.  The court next looked at whether the forum selection clause arose in either a core or non-core matter.  This distinction was significant as the court observed that forum selection clauses generally are more likely to be enforced in non-core matters.  Opinion at *7.

In deciding whether a matter is core or non-core, courts often consider two sources - section 157(b) of the Bankruptcy Code, as well as a two-part test under In re Guild & Gallery Plus, Inc., 72 F.3d 1171, 1178 (3d Cir. 1996).  Opinion at *8.  Section 157(b) provides a list of proceedings that may be considered core.  The Third Circuit's decision in Guild & Gallery Plus, on the otherhand, provides that a proceeding is core (1) if it involves substantive rights provided by title 11, or (2) if it is a proceeding that, by its nature, could arise only in the context of a bankruptcy case."  Opinion at *8. 

The court next considered whether each of the causes of action brought in the DHP adversary action were core or non-core.  DHP asserted three causes of action against Home Depot: (1) turnover of property under 542(b) of the Bankruptcy Code; (2) breach of contract; and (3) disallowance of claim under 502(d).  Opinion at *2.  Starting first with the turnover claim, the court observed that although such claims are core proceedings, the court must nevertheless determine whether DHP properly invoked this section of the Bankruptcy Code.  On this point, the court found that DHP's claim against Home Depot was non-core because it involved a "disputed" claim.  In doing so, the court recognized that "[m]ost courts require that the debt be undisputed for the action to be core."  Opinion at *11, citing U.S. v. Inslaw, Inc., 932 F.2d 1467, 1472 (D.C. Cir. 1991). 

After finding that all the counts in the complaint were non-core, the court went on to consider the factors for and against transferring venue.  Here, the court found that "most of the factors either favor transfer [of venue] or are neutral."  Opinion at *22.  Having reached this conclusion, the court granted the motion to transfer venue.

Conclusion

The decision in DHP is helpful in several respects.  First, it looks at the effect of a venue selection clause in the context of a motion to transfer venue.  Next, the court distinguishes between core and non-core matters, a common issue in bankruptcy proceedings.  Finally, the decision reviews those factors courts consdier in determining whether to grant a motion to change venue.  A copy of the decision is available here for review.   The DHP bankruptcy is in the United States Bankruptcy Court for the District of Delaware. 

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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

On August 20, 2010, Petroflow Energy Ltd. ("Petroflow"), filed a petition for bankruptcy in the United States Bankruptcy Court for the District of Delaware.  Months prior to Petroflow's filing for bankruptcy, the company's subsidiaries, North American Petroleum Corporation USA and Prize Petroleum LLC, filed petitions for bankruptcy in Delaware.  After Petroflow filed for bankruptcy in August, it filed a motion with the Bankruptcy Court seeking to have the orders entered in the "First Filed Debtors' Cases" (i.e. North American Petroleum's and Prize Petroleum's cases), made applicable to Petroflow's bankruptcy proceeding.

There is nothing extraordinary about the relief Petroflow seeks in its motion.  By filing the motion, the company seeks to save the time and expense of having to file, notice and present the same motions that if filed in the "First Filed Cases." However, in order to obtain such relief, Petroflow requests the Court exercise its equitable powers pursuant to section 105 of the Bankruptcy Code.  This post will look at how the Court can turn back the clock so that the orders entered in a previously filed case will have the full force and effect in a newly filed bankruptcy proceeding.

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Introduction

On August 4, Judge Mary F. Walrath issued an opinion in the Eclipse Aviation bankruptcy that discusses the scope of the Court's subject matter jurisdiction.  This issue - the subject matter jurisdiction of the bankruptcy courts - comes up less frequently in decisions than issues such as plan confirmation, relief from stay or avoidance actions (to name a few).  Often, the subject matter jurisdiction of a proceeding is simply not in dispute.  This reason alone is why Judge Walrath's decision is worth review:  it provides a brief but thorough look at how the Court decides whether it has jurisdiction over a particular matter.

Background

The procedural context of the Eclipse Aviation decision is interesting in itself.  The Plaintiff, a purchaser of aircraft from the Debtor, filed a motion to dismiss the Complaint it had previously filed as an adversary action.  Plaintiff originally filed the Complaint seeking declaratory relief that it possessed certain property interests in undelivered aircraft that were in the Debtor's possession.  During the course of the bankruptcy, Debtor was unable to consummate a sale of its assets and the case quickly converted to a chapter 7 liquidation.  Once a chapter 7 trustee (the "Trustee") was appointed, the Trustee sought to sell the estate assets including the planes that Plaintiff claimed an interest in.

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Introduction

On April 1, 2010, Judge Kevin J. Carey , Chief Judge of the United States Bankruptcy Court for the District of Delaware issued an opinion (the "Opinion") in the Spansion bankruptcy rejecting the Debtor's proposed plan of reorganization.  This post will look at the requirements provided for under the Bankruptcy Code in order for a Court to confirm a plan of reorganization.  Further, the post will look briefly at why the Court in Spansion declined to confirm the Debtor's proposed plan.

Background

As stated in the Opinion, Spansion manufactures and sells semiconductor products ("flash memory") used in cell phones and other consumer and industrial electronics.  In 2008, half of Spansion's sales consisted of flash memory used in wireless products or "embedded applications" such as electronic games and DVD players.  Spansion filed for bankruptcy hoping to restructure its business so that it could focus on the more profitable embedded products, shifting resources from the less profitable wireless business.

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Introduction

Section 548 of the United States Bankruptcy Code allows for the avoidance of transfers that are either intentionally or constructively fraudulent.  Section 548 provides, in relevant part, as follows:

(a)(1)  The trustee may avoid any transfer ... of an interest of the debtor in property, or any obligation ... incurred by the debtor, that was made or incurred on or within 2 years before the date of the filing of the petition, if the debtor voluntarily or involuntarily -- (A) made such transfer or incurred such obligation with actual intent to hinder, delay or defraud any entity to which the debtor was or become, on or after the date that such transfer was made or become, on or after the date that such transfer was made or such obligation was incurred, indebted; or (B)(i) received less than reasonably equivalent value in exchange for such transfer or obligation; and (ii)(I) was insolvent on the date that such transfer was made or such obligation was incurred, or became insolvent as a result of such transfer or obligation; (II) was engaged in a business or a transaction ... for which any property remaining with the debtor was an unreasonably small capital; (III) intended to incur, or believed that the debtor would incur, debts that would be beyond the debtor's ability to pay as such debtor's matured ...

At first glance, section 548 appears to cast a wide net that would classify many types of transactions as fraudulent transfers.  However, a recent decision by Judge Brendan L. Shannon in the Elrod Holdings bankruptcy shows the evidentiary hurdles a plaintiff must overcome in order to establish a fraudulent transfer claim under section 548. 

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Introduction

Judge Kevin J. Carey, Chief Judge of the Delaware Bankruptcy Court, issued a decision recently in the S-Tran Holdings bankruptcy that addresses whether letters of credit constitute property of the bankruptcy estate.  The Court's decision in S-Tran Holdings is worth review as letters of credit are a common part of a debtor's pre and post-petition financing.  Recent decisions hold that certain components of letters of credit (such as the proceeds drawn from the letter of credit) are estate property, while other components (like the collateral pledged for the letter of credit) are not estate property.  S-Tran explains why.  (A copy of the decision in S-Tran is available here).

Background

The debtor in S-Tran sued its insurer in an effort to recover the proceeds from a letter of credit and a cash deposit, both held by the insurer.  In order for the insurer to provide coverage to S-Tran, S-Tran had to provide a $477,000 cash deposit and letters of credit totaling $3.5 million.  A week prior to S-Tran's bankruptcy filing, the debtor's insurer drew on portions of the letter of credit to pay third parties and placed the remaining proceeds from the letter of credit in a loss reserve account.  After filing for bankruptcy, S-Tran demanded the insurer return the proceeds from the letters of credit, however, the insurer refused.

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Introduction

In recent months, bankruptcy auctions went forward in two different bankruptcy proceedings that illustrate the extent to which auctions can vary both procedurally and substantively. One auction involved the sale of a single asset and lasted less than an hour, while the second auction involved the sale of the debtor's entire business and lasted over the course of several days.  This post is intended to provide a brief "compare and contrast" of these two auctions in an effort to provide insight into a process that is a common component of corporate bankruptcies.

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Introduction

On June 25th, the Debtors in the SemCrude bankruptcy present their Motion Approving Debtors' Disclosure Statement (the "Motion").  Debtors' Motion provides a good opportunity to review the standards by which bankruptcy courts often measure the content of a debtor's disclosure statement.  The following provides a summary of some of the frequently cited cases and Bankruptcy Code provisions governing this fundamental component of the bankruptcy reorganization process.

The Code Provisions

A disclosure statement must contain adequate information for creditors and shareholders to make an informed judgment about a plan of reorganization. See In re Scioto Valley Mortgage Co., 88 B.R. 168, 170 (Bankr. S.D. Oh. 1988). Section 1125(b) of the Bankruptcy Code provides the threshold level of information that must be included in a disclosure statement:

An acceptance or rejection of the plan may not be solicited after the commencement of the case under this title from a holder of claim or interest with respect to such solicitation, unless, at the time of or before such solicitation, there is transmitted to such holder the plan or a summary of the plan, and a written disclosure statement approved, after notice and a hearing, by the court as containing adequate information.
11 U.S.C. § 1125(b).  (Emphasis added).

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Introduction

On May 1, 2009, Magna Entertainment ("Magna") filed a motion in the United States Bankruptcy Court for the District of Delaware whereby it sought authority to schedule an auction, receive approval of auction bid procedures and proceed with the sale of assets (the "Sale Motion").  I have previously written about bankruptcy sale motions on this blog,  however, I wanted to devote this post to the auction procedures that are often used in bankruptcy proceedings.  Specifically, this post is intended to address questions that arise when a chapter 11 debtor seeks to auction of assets.  Among them, how do debtors go about auctioning assets while in bankruptcy, how long does the auction process take, and finally, what are common requirements imposed on parties wishing to bid on a debtor's assets?  Recognizing that no two bankruptcies are the same, this post will look at the auction procedures proposed in Magna in an effort to shed light on the bankruptcy auction process in general.

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Introduction

Section 341 of the Bankruptcy Code requires the United States Trustee to "convene and preside at a meeting of creditors."  Section 341(a) of the Code requires the trustee to convene what is commonly referred to as a "341 meeting" or "meeting of creditors" within a "reasonable time" after a debtor files for bankruptcy.  Bankruptcy Rule 2003(a) requires the Trustee to call a meeting of creditors "no fewer than 20 and no more than 40 days" after the commencement of a bankruptcy proceeding. 

The meeting of creditors is a unique part of bankruptcy proceedings.  Clients and co-counsel often want to know what information is made available, and what procedures are followed, during a typical meeting of creditors.  This post will take a look at the recent meeting of creditors in the Magna Entertainment bankruptcy.  By doing so, the goal is to provide creditors and their counsel with an idea of what to expect in future meetings of creditors. 

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Introduction

On March 10, 2009, the Honorable Christopher S. Sontchi of the United States Bankruptcy Court for the District of Delaware issued a decision addressing the standard for preliminary injunctive relief in bankruptcy.  This post will look at the substantive and procedural issues considered by the Court in Broadstripe LLC v. National Cable Television Cooperative (In re Broadstripe). Specifically, when is injunctive relief appropriate in a bankruptcy proceeding and how does a party go about seeking injunctive relief under the Federal Rules of Bankruptcy Procedure?

Background

Broadstripe filed for bankruptcy in Delaware on January 2, 2009.  In July of 2000, eight years prior to filing for bankruptcy, Broadstripe joined the National Cable Television Cooperative ("NCTC") whereby NCTC agreed to negotiate master programming agreements for Broadstripe.  Under the programming agreements,  Broadstripe paid NCTC the licensing fees for programming services and NCTC distributed the funds paid by Broadstripe to various programmers (such as Fox, Disney, etc.).  In the months leading up to bankruptcy, Broadstripe failed to pay NCTC over $3.4 million in licensing fees.  However, after filing for bankruptcy Broadstripe paid NCTC all licensing fees incurred from the petition date forward. 

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Introduction

The Fairchild Corporation ("Fairchild" or the "Debtor"), filed for bankruptcy in Delaware on March 18, 2009.  Fairchild's bankruptcy proceeding is before the Honorable Christopher S. Sontchi of the United States Bankruptcy Court for the District of Delaware.  According to its press release, Fairchild operates in three markets:  aerospace, real estate and motor cycle apparel.  In the aerospace industry, Fairchild distributes parts and equipment to companies servicing aircraft.  Fairchild's business also includes managing and developing commercial real estate.  Finally,  with its apparel business, Fairchild designs and produces motorcycle apparel for companies such as Harley Davidson and PoloExpress.  (Read Fairchild's Affidavit in Support of Bankruptcy Motions here.)

The DIP Financing Motion and Relief From the Automatic Stay

One of Fairchild's "first day" motions seeks debtor-in-possession ("DIP") financing, refinancing of prepetition debt and modification of  the automatic stay (the "DIP Motion").  As stated in the DIP Motion,  Fairchild's prepetition debt totals $19 million and Fairchild seeks to refinance its debt with a postpetition revolving credit facility up to $23 million (the "DIP Facility").  Under the DIP Facility, PNC, as postpetition lender, would receive a "priming lien" that is senior or equal to previously encumbered property.  Fairchild seeks the priming lien for the DIP Facility pursuant to 11 U.S.C. 364(d)(1)(authorizing a bankruptcy court to approve DIP financing secured by an equal or superior lien on property of the estate already subject to a lien, provided the holder of the primed lien receives adequate protection). 

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Introduction

Bankruptcy lawyers are sometimes asked how a business or individual can be required to defend a lawsuit in Delaware.  Typically, this issue arises when a debtor commences an adversary action, such as filing a preference complaint, and sues a defendant who has no ties to Delaware.  "How can they do this?" is a common question.  Judge Walrath recently issued a decision in the Uni-Marts bankruptcy that addresses this question - the scope of personal jurisdiction under the Bankruptcy Code.  This post looks at the opinion in Uni-Marts and the basis by which bankruptcy courts extend jurisdiction.

Background

Uni-Marts operates company-owned, franchise operated stores throughout the northeast.  Charan Trading Company and Varni LLC ("Plaintiffs") purchased a store from Uni-Marts in 2005, however, by 2008 Plaintiffs filed an adversary action in Uni-Marts' bankruptcy proceeding seeking to rescind the contract and recover damages.  Plaintiffs' sued Uni-Marts, as well as its president,  Henry Sahakian, alleging Sahakian induced Plaintiffs to purchase the Uni-Marts store in Wilkes-Barre, Pennsylvania through fraud or negligent misrepresentation. 

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Introduction

Foamex International Inc. ("Foamex" or "Debtors"), located in Media, Pennsylvania, filed for bankruptcy in the United States Bankruptcy Court for the District of Delaware on February 18, 2009.  Foamex is one of the largest manufacturers of polyurethane and polymer foam products. (Read Foamex's Declaration in Support of First Day Motions here).  Foamex generated $980 million in revenue for the four quarters ending in September 2008.  Foamex operates facilities in the United States, Canada, Mexico and China and manufactures goods that fall into four categories:  technical products, foam products, automotive products and carpet cushion products.

The Critical Vendor Motion

One of the first motions Foamex filed in its bankruptcy was a Motion to Honor Prepetition Obligations with Critical Vendors (the "Critical Vendor Motion").  Pursuant to the Critical Vendor Motion,  Foamex sought an Order from the Court allowing it to pay prepetition obligations to critical vendors up to $29 million.  Foamex sought to pay the prepetition invoices for those vendors that agree to deal with it during bankruptcy under "normal trade terms." 

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Introduction

In September of last year,  the Honorable Peter J. Walsh, the judge presiding over the NVF Company bankruptcy, issued an opinion regarding the application of section 502(b)(3) of the Bankruptcy Code.  The opinion is interesting in that the Court decided not to apply a strict interpretation to a section of the Bankruptcy Code, but instead apply an interpretation that is consistent with legislative intent.  This post looks at the issues that arise when a party seeks to disallow a claim under 502(b)(3), and look at Judge Walsh's decision not to invoke a strict interpretation when doing so is contrary to the intent and purpose of the Bankruptcy Code.

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Introduction

On January 14, 2009, Gottschalks Inc., the California-based department store, filed for bankruptcy in Delaware (read the Gottschalks bankruptcy petition here).  One of Gottschalks' first motions filed with the Delaware Bankruptcy Court was its Motion Prohibiting Utility Providers from Discontinuing Service (the "Utilities Motion").  The Utilities Motion seeks various forms of relief,  however, the purpose of this post is to look at the statutory basis for prohibiting a utility from discontinuing service.  Additionally, this post looks at some of the issues that arise when a debtor files such a motion.

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