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

Introduction

On April 24, 2013, Robert S. Bernstein, Plan Administrator for the Berkline/BenchCraft bankruptcy estates, began filing complaints with the Delaware Bankruptcy Court seeking to recover what he contends are preferential transfers.  For those not familiar with preference actions, Bernstein contends that certain payments, or "transfers", made to creditors in the months prior to the Berkline bankruptcy are subject to avoidance and recovery pursuant to sections 547 and 550 of the Bankruptcy Code.  According to court papers filed by Bernstein, a pretrial conference is scheduled for July 9, 2013 at 10:30 a.m..

Background

Berkline and various related entities filed chapter 11 petitions for bankruptcy on May 2, 2011.  According to the Declaration of Berkline's Chief Restructuring Office (the "Decl."), Berkline was a "leading North American designer and manufacturer of upholstered and reclining furniture."  Decl. at *2. Berkline manufactured home theater seating, sofas, love seats and sectionals which were sold in furniture stores, department stores, "big box" stores and on the internet.  Two of the company's brands included the "Berkline" and "Benchcraft" lines of furniture.  Id.

Reasons for Bankruptcy

Berkline attributes its bankruptcy to the recent economic recession and decline in the housing market, both of which caused the company to experience a significant decline in sales.  As a result of the economic downturn, Berkline began streamlining operations through cost reductions and trimming underperforming units.  Although the company's management believed they had implemented a successful reorganization plan, their efforts were not enough to overcome Berkline's tremendous debt.  Decl. at *6.

Objectives in Bankruptcy

Prior to filing for bankruptcy, Berkline hired a Chief Restructuring Officer to locate a buyer of the company's assets.  However, without the ability to obtain needed financing, the company was unable to complete an out of court restructuring.  Decl. at *6. In March of 2011, Berkline's Board of Directors decided that the most effective way to maximize value for creditors was through a liquidation through chapter 11 bankruptcy proceedings.  Decl. at *6-7.  Once the company filed for bankruptcy, it eventually received approval of its Second Amended Chapter 11 Plan of Liquidation.

The Berkline bankruptcy and preference actions are before Judge Mary F. Walrath under lead case no. 11-11369 (MFW).  The Berkline Plan Administrator, as plaintiff in the preference actions, is represented by the law firms Pachulski Stang Ziehl & Jones LLP and Bernstein-Burkley, P.C..

Defenses to a Preference Action

The Bankruptcy Code provides creditors with many defenses to preference actions. Included among these are the "ordinary course of business defense" and the "new value defense."  For reader's looking for more information concerning claims and defenses in preference litigation, attached is a booklet I prepared on the subject:  "A Preference Reference:  Common Issues that Arise in Delaware Preference Litigation."

Jason Cornell is a partner and bankruptcy attorney with the law firm Fox Rothschild LLP.  Jason is admitted and practices before the United States Bankruptcy Court for the District of Delaware.  You can reach Jason at 302 427-5512 or jcornell@foxrothschild.com. 

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Introduction

Earlier this week, RG Steel Sparrows Point, LLC ("RG Steel"), began filing complaints to avoid and recover what it contends are preferential transfers under sections 547 and 548 of the United States Bankruptcy Code.  For those not familiar with this bankruptcy proceeding, RG Steel originally filed chapter 11 petitions for bankruptcy in the Delaware Bankruptcy Court on May 30, 2012.  At the time the company filed for bankruptcy, RG Steel was the fourth largest flat-rolled steel company in the United States. Operating at full capacity, RG Steel produced over 8 million tons of steel per year.  This post will look at RG Steel's original business, why the company filed for bankruptcy and what are recent developments since the company has filed for bankruptcy protection.

Business Formation and Bankruptcy

At the time RG Steel and its affiliates filed for bankruptcy, the company operated steel production facilities in West Virginia, Maryland and Ohio.  The company was formed in 2011 as a result of a stock purchase agreement with Severstal U.S. Holdings II, Inc., and various related entities.  According to court filings, after RG Steel acquired Severstal it discovered a "working capital shortfall" resulting in liquidity problems and the company's ultimate bankruptcy filing.  The company also attributed its bankruptcy to declining steel prices while its costs for raw materials continued to rise.

Objectives in Bankruptcy

Once in Bankruptcy, RG Steel filed various motions seeking authority to sell substantially all of its assets.  After receiving approval from the Bankruptcy Court, the company commenced bidding procedures and bankruptcy auctions which allowed it to sell the majority of its assets.  The asset sales allowed RG Steel to payoff its debtor in possession financing and first lien debt.  With the sales out of the way, the company shifted its focus to attempting to recover assets through preference actions.

Defenses to a Preference Action

The Bankruptcy Code provides creditors with many defenses to preference actions. Included among these are the "ordinary course of business defense" and the "new value defense."  For reader's looking for more information concerning claims and defenses in preference litigation, attached is a booklet I prepared on the subject:  "A Preference Reference:  Common Issues that Arise in Delaware Preference Litigation."

Jason Cornell is a partner and bankruptcy attorney with the law firm Fox Rothschild LLP.  Jason is admitted and practices before the United States Bankruptcy Court for the District of Delaware.  You can reach Jason at 302 427-5512 or jcornell@foxrothschild.com. 

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Introduction

In July of 2011, the Chapter 7 Trustee (the "Trustee") in the Ultimate Acquisition Partners (formerly "Ultimate Electronics") bankruptcy began filing complaints to avoid and recover payments which the Trustee alleged were avoidable transfers under section 547 of the United States Bankruptcy Code.  Earlier this month, the Trustee filed another round of preference complaints seeking to recover what he contends are preferential transfers.  This post will look briefly at the Ultimate's business, why the company filed for bankruptcy and provide some general information regarding defenses to a preference action.

Reasons Ultimate Electronics Filed for Bankruptcy

Prior to going in to bankruptcy, Ultimate Electronics sold high-end home entertainment and consumer electronics throughout the western and mid-western United States.  Based in Thornton, Colorado, Ultimate Electronics employed approximately 1,500 employees before it filed for bankruptcy.  According to pleadings filed with the Delaware Bankruptcy Court, Ultimate attributed its bankruptcy filing to a "significant downturn in business at certain of the Debtors' locations, coupled with refusal by certain of Debtors' vendors to ship goods to the Debtors on open credit."  By filing for bankruptcy, Ultimate was hoping to close under performing stores, re-negotiate its leases and improve its profitability.

Conversion from Chapter 11 to Chapter 7

Plans quickly changed for Ultimate after the company filed for bankruptcy.  Nine days after filing for bankruptcy, on February 4, 2011, the company filed a motion with the Bankruptcy Court seeking approval of going out of business sales.  Within two months of filing the going out of business motions, Ultimate had sold substantially all of its assets.

On April 25, 2011, Ultimate Electronic's DIP lender issued a "Termination Event" under Ultimate's Final Cash Collateral Order (the "DIP Order").  Under the DIP Order, if the lenders' termination notice is not contested within five business days, the automatic stay is lifted in favor of Ultimate's DIP lender.  Ultimate filed its Motion to Convert to Chapter 7 one day after receiving the Termination Event.  The Bankruptcy Court converted Ultimate's bankruptcy to a Chapter 7 liquidation on May 3, 2011.  The following day, Alfred T. Giuliano was appointed the Chapter 7 Trustee for Ultimate Electronic's bankruptcy proceeding.

The Preference Actions

The Trustee in the Ultimate Electronics bankruptcy is represented by the law firm Pachulski Stang Ziehl & Jones LLP.  The bankruptcy proceeding, along with the preference actions filed by the Trustee, are before the Honorable Mary F. Walrath.  Judge Walrath is a former Chief Judge of the Delaware Bankruptcy Court. 

For reader's looking for more information concerning preference litigation, attached is a booklet I prepared on the subject:  "A Preference Reference:  Common Issues that Arise in Delaware Preference Litigation."

Jason Cornell is a partner and bankruptcy attorney with the law firm Fox Rothschild LLP.  Jason is admitted and practices before the United States Bankruptcy Court for the District of Delaware.  You can reach Jason at 302 427 5512 or jcornell@foxrothschild.com.

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Introduction

Earlier this month, William Giovanniello, acting as the creditor trustee (the "Trustee") for Raser Technologies ("Raser"), began filing complaints seeking to avoid and recover what the Trustee contends are preferential transfers under 11 U.S.C. sec. 547.  Often, defendants receive preference complaints and have little or no information about the underlying bankruptcy proceeding and the reasons for the commencement of the avoidance action.  This post will look at  Raser's business, why the company filed for bankruptcy and why the Trustee is pursuing the preference complaints.

Raser Technologies' Business

Raser filed chapter 11 petitions for bankruptcy on April 29, 2011 (the "Petition Date").  According to the company's Declaration in Support of Chapter 11 Petitions (the "Decl."), filed with the Delaware Bankruptcy Court, Raser was founded in 2002 to build geothermal electric plants and develop electric generating equipment for use in electric and hybrid electric vehicles.  Decl. at *1-2.  Raser traded as a public company on the New York Stock Exchange from October 2003 until the time of its delisting in November of 2010. 

As part of its business model, Raser acquired "geothermal interests" in over 270,000 acres of land in the western United States.  The company also acquired geothermal rights to over 100,000 acres of land in Indonesia.  Once Raser acquired rights to a geothermal site, it conducted testing to determine whether the geothermal features warranted the construction of a power plant.  If the company determined that a site had sufficient resources to support a power plant, Raser would construct plant facilities at the site that included injection wells, specialized turbines, transmission lines and pipelines.  Decl. at *3.

Events Leading to Bankruptcy

Raser attributed its bankruptcy filing, in part, to the less than optimal performance of its one and only fully-operational energy plant.  At the time of the Petition Date, Raser only operated one power plant ("Plant No. 1") which is located in southern Utah.  Decl. at *3.  The company's business requires substantial amounts of investment to complete the exploration and development phases of a geothermal electric facility.  Plant No. 1, for example, required $120 million in development and construction costs.  Id.  From its inception, the company raised over $200 million to explore and develop geothermal sites.  Decl. at *13.

Plant No. 1's performance was less than optimal.  As of the Petition Date, this facility was generating 8 megawatts of electrical power, 2 megawatts of which were consumed by the plant's own energy needs.  This level of production was well below the amount of electricity the facility was designed to produce.  Raser attributes the under performance to several factors, most notable being "inefficiencies occurring as a result of the failure of certain equipment to perform to contractual specifications, and the costs to operate and maintain said equipment."  Decl. at 13.

The failure of Plant No. 1 to operate at expected levels, coupled with the tight capital markets that existed from 2009 through the date it filed for bankruptcy, created a liquidity crisis for the company.  Although the company sought investments from third parties, it was unable to raise the cash necessary to maintain operations and complete construction of other energy production projects.  Decl. at *14.

The Bankruptcy Proceeding and Preference Complaints

Raser filed Chapter 11 petitions for bankruptcy on April 29, 2011.  On August 30, 2011, the Delaware Bankruptcy Court entered an order confirming Raser's Third Amended Joint Plan of Reorganization.  Pursuant to the Plan, the Creditor Trust was established and the Creditor Trustee was appointed to pursue the preference actions that were transferred to the Creditor Trust.  

The Raser Technologies bankruptcy is before the Honorable Kevin J. Carey.  Judge Carey previously served as the Chief Judge of the Delaware Bankruptcy Court.  The Trustee pursuing the preference actions on behalf of the Creditor Trust is represented by the law firm Womble Carlyle Sandridge & Rice, LLP and Foley & Lardner LLP.  

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For reader's looking for more information concerning preference litigation, attached is a booklet I prepared on the subject:  "A Preference Reference:  Common Issues that Arise in Delaware Preference Litigation."

Jason Cornell is a bankruptcy attorney with the law firm Fox Rothschild LLP.  Jason is admitted and practices before the United States Bankruptcy Court for the District of Delaware.  You can reach Jason at 302 427-5512, or jcornell@foxrothschild.com.

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This week, Edward Gavin, the liquidating trustee (the "Trustee") for the Ultimate Escapes bankruptcy, filed preference complaints against several defendants.  Under the complaints, the Trustee alleges that the defendants received preferential transfers that are avoidable under 11 U.S.C. section 547 of the Bankruptcy Code.  For those unfamiliar with this bankruptcy proceeding, Ultimate Escapes ("Ultimate" or the "Debtor") filed petitions for bankruptcy in the Delaware Bankruptcy Court on September 20, 2010. 

Prior to bankruptcy, Ultimate was in the luxury destination club industry.  The company provided members with access to high-end residences and resorts in the U.S. and around the world.  According to the company's declaration in support of its bankruptcy pleadings (the "Declaration"),  Ultimate operated 119 "luxury club residences," most of which were owned by the Debtor.  Decl. at *2.

Ultimate blames its bankruptcy on the declining sales that followed the 2008 recession.  As demand for the company's services declined, Ultimate was faced with a liquidity problem and inability to service its debt.  The company tried unsuccessfully to negotiate an out of court restructuring with its lenders.  Once negotiations failed, Ultimate decided that filing for bankruptcy would provide the most value to creditors.  Decl. at *3. 

Approximately fourteen (14) months after filing for bankruptcy, Ultimate filed its Second Amended Chapter 11 Liquidating Plan.  On December 8, 2011, the Bankruptcy Court entered an order confirming the Debtor's Plan.  The Plan of Liquidation became effective on January 3, 2012 and the Trustee was named soon after.  The Ultimate bankruptcy proceeding is before Judge Brendan Shannon.  The Trustee is represented by the law firm Polsinelli Shughart.

For reader's looking for more information concerning preference litigation, attached is a booklet I prepared on the subject:  "A Preference Reference:  Common Issues that Arise in Delaware Preference Litigation."

Jason Cornell is a bankruptcy attorney with the law firm Fox Rothschild LLP.  Jason is admitted and practices before the United States Bankruptcy Court for the District of Delaware.  You can reach Jason at 561 804-4415, or jcornell@foxrothschild.com.

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Earlier this week, George L. Miller, the chapter 7 trustee (the "Trustee") in the Moll Industries bankruptcy, began filng complaints seeking to avoid and recover what the Trustee alleges are avoidable transfers, or preference payments, from various third parties.  For those unfamiliar with Moll Industries, the company filed a chapter 11 petition for bankruptcy in the Delaware Bankruptcy Court on April 27, 2010.  On August 4, 2011, the Bankruptcy Court entered an order coverting Moll's chapter 11 proceeding into a chapter 7 liquidation.  George Miller was appointed the chapter 7 trustee soon after.

When Moll originally filed for bankruptcy protection, one of the first pleadings it filed with the Bankruptcy Court was the Declaration in Support of First Day Motions and Applications (the "Declaration").  According to the Declaration, Moll described itself as a "significant provider of global injection molding and full-service contract manufacturing solutions for the medical, appliance, industrial, consumer and automotive markets."  Decl. at *3. 

Moll was created following the merger of two plastic injection molders in 1998.  After the merger, however, the company's European operations were lower than expected, which led Moll to shut down facilities in France and the United Kingdom.  Certain creditors of Moll filed an involuntary bankruptcy petition against the company in 2002.  The company emerged from its first bankruptcy in 2003.  Decl. at *3-4. 

From 2004 to 2006, Moll provided injection molding and contract manufacturing for end-users in the industrial, appliance and medical markets.  In 2006, approximately 60% of Moll's revenues were generated from its sales to Whirlpool.  However, that relationship ended due to a dispute concerning pricing.  Once the company lost its contract with Whirlpool, Moll began losing money year after year.  By 2010, continued losses created a liquidity problem for Moll which forced the company to offer large customer discounts in order to receive needed cash and fund operations on a short term basis.  Decl. at *7-8.  The company's problems worsened when a judgment was entered against it for $947,000 and the judgment creditor was able to seize certain production equipment.  Decl. at *9.

On September 16, 2010, the Bankruptcy Court authorized Moll to sell substantially all of its machinery and equipment to Branford Auctions, LLC.  The company later received authority to lease one of its facilities to FPE NC, LLC.  After disposing of its assets, Moll filed a motion seeking authority to convert from a chapter 11 reorganization to a chapter 7 liquidation.  Once converted, the Trustee commenced the present preference actions. 

The Moll bankruptcy, including the preference actions filed by the Trustee, is before the Honorable Mary F. Walrath. The Trustee, as plaintiff in the preference actions, is represented by the law firm Morris James LLP. 

For reader's looking for more information concerning preference litigation, attached is a booklet I prepared on the subject:  "A Preference Reference:  Common Issues that Arise in Delaware Preference Litigation."

Jason Cornell is a bankruptcy attorney with the law firm Fox Rothschild LLP.  Jason is admitted and practices before the United States Bankruptcy Court for the District of Delaware.  You can reach Jason at 561 804-4415, or jcornell@foxrothschild.com.

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We recently finished "A Preference Reference:  Common Issues that Arise in Delaware Preference Litigation."  Delaware has such a high volume of preference litigation, we thought it might be helpful to put together a brief publication that addresses the elements and common defenses to avoidable preference claims.  We wrote the booklet in a format that hopefully is helpful to attorneys and non-attorneys alike. A copy of the "Preference Reference" is available here for review.   

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Introduction

Earlier this month, JH Cohn, LLP ("Cohn" or "Plaintiff") began filing preference complaints against various defendants in the Orleans Homebuilders ("Orleans") bankruptcy proceeding.  For those not familiar with the Orleans bankruptcy proceeding, Cohn was appointed as the "unsecured creditor agent" pursuant to order confirming Orleans' Modified Second Amended Joint Plan of Reorganization (the "Plan").  Pursuant to Orleans' Plan, Cohn filed the preference actions seeking both to avoid transfers it contends are avoidable transfers under the Bankruptcy Code, as well as disallow claims pursuant to 11 U.S.C. section 502(d).  This post will look briefly at why Orleans filed for bankruptcy, as well as address some of the issues that arise in preference litigation.

Events Leading to Bankruptcy

I originally wrote about the Orleans bankruptcy proceeding in March of 2010, days after the company first filed petitions for bankruptcy.  As I stated in my prior post, the Orleans bankruptcy provided a clear demonstration of the recession's effect on home builders throughout the United States.  Orleans experienced strong home sales in 2006 with revenues reaching $987 million.  However, by 2009, the company's sales had dropped to $335 million.  In response to the decline in new home sales, Orleans cut its spec home production by half and stopped construction all together in the Florida and Arizona markets.

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Introduction

In January, Jeoffrey L. Burtch, the Chapter 7 Trustee (the "Trustee") in the ManagedStorage bankruptcy proceeding, commenced adversary proceedings in the Delaware Bankruptcy Court against various defendants.  As alleged in the complaints, the Trustee claims that the defendants received "preferential" payments from ManagedStorage (dba "Incentrix Solutions" or "Incentrix") and that the payments are subject to avoidance and recovery under the United States Bankruptcy Code (the "Bankruptcy Code").  This post will look at the Incentrix bankruptcy, why the company filed for bankruptcy as well as some of the issues that arise in preference litigation.

The Bankruptcy Proceeding

Incentrix filed Chapter 11 petitions for bankruptcy in February of 2009.  At the time the company filed for bankruptcy, it was based in Denver, Colorado and operated offices in Illinois, Washington, California, New Jersey, Pennsylvania, New York, Oregon, Texas, Colorado and the United Kingdom. According to a Declaration of Incentrix's Chief Financial Officer (the "Declaration" or "Decl."), the company's business consisted primarily of the resale of technology hardware and software products, as well as maintenance contracts.  Decl. at *3.  Aside from its resale business, the company also provided managed IT services.  Decl. at *3.

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Introduction

This month, Bruce H. Mason, acting as creditor trustee (the "Trustee") for the CEI Liquidation Trust (the "Liquidation Trust" or "Trust") began filing preference actions against various defendants.  As stated in the Liquidation Trust's complaints, the Trust was created in the Champion Enterprises (aka "Champion Home Builders" or "Champion") bankruptcy pursuant to Champion's Second Amended Joint Plan of Liquidation.  This post will look at Champion's business, why the company filed for bankruptcy as well as some of the events that have transpired since the company entered into bankruptcy.

Background

As I discussed in a 2009 post on this blog, Champion filed for bankruptcy protection in the Delaware Bankruptcy Court on November 25, 2009.  One of the first documents Champion filed with the Bankruptcy Court was the Declaration of Champion's CFO in Support of its First Day Motions (the "Declaration").  As reflected in the Declaration, Champion builds commercial and residential modular housing throughout the United States.  The company began in 1953 in Dryden, Michigan where it produced roughly two houses per week. Over the years, Champion expanded in to the production of travel trailers, campers, commercial buses and mobile homes.  Decl. at *4.

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Introduction

Earlier this month, the Liquidating Trust in the Advanta Corp. bankruptcy proceeding began filing preference complaints in the Delaware Bankruptcy Court.  Advanta and certain affiliates ("Advanta") filed for bankruptcy in Delaware in November of 2009.  As stated in the Liquidating Trust's complaints, Advanta was at one time one of the largest issuers of "business purpose credit cards" in the United States. 

Background

Advanta started in 1974 as "Teachers Service Organization, Inc.."  In the 1980s, Teacher Service Organization became one of the first companies to securitize credit card and mortgage receivables.  In 1988, the company changed its name to Advanta.  Starting in the 1990s, Advanta began issuing credit cards targeting small businesses.  In 2001, Advanta made small business credit cards its primary focus.  See Advanta's Declaration in Support of Chapter 11 Petitions and First-Day Motions (the "Declaration" or "Decl."), filed with the Delaware Bankruptcy Court on November 8, 2009.

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Last month, Jeoffrey Burtch (the "Trustee"), as Chapter 7 Trustee for the Opus South Bankruptcy, began filing preference complaints seeking to recover what the Trustee alleges are avoidable transfers under the Bankruptcy Code.  For those unfamiliar with the Opus South bankruptcy, the company filed petitions for bankruptcy in the Delaware Bankruptcy Court on April 22, 2009.  The Opus South bankruptcy began as a chapter 11 reorganization.  However,  on August 27, 2010, the Bankruptcy Court entered an order converting the case to a chapter 7 liquidation.  The Trustee was appointed on the same day that the case converted to chapter 7.

When Opus South originally filed for bankruptcy, one of the first documents filed with the Bankruptcy Court was a declaration (the "Declaration") of the company's Chief Restructuring Officer.  As stated in the Declaration, Opus South was a real estate development corporation headquartered in Atlanta, Georgia.  Prior to bankruptcy, the company had developed over 27 million square feet of real estate space.  The company's development projects included office, retail, government and multi-family projects.  Decl. at *4.

Prior to filing for bankruptcy, Opus South contacted its lenders in an effort to either restructure its loans or turnover properties through a deed-in-lieu of foreclosure.  According to the Declaration, the company's pre-bankruptcy efforts "did not result in a resolution of all issues with regard to the Debtors' pre-petition secured loans."  Decl. at *15. 

Opus South went in to bankruptcy hoping it could sell off properties under a section 363 sale of assets.  As the bankruptcy got underway, it became clear that not all of the company's lenders could agree on the terms of a sale of assets.  Unable to reach an agreement with its lenders and unable to fund a reorganization, Opus South eventually sought to convert to chapter 7. 

The Opus South bankruptcy proceeding is before Judge Mary F. Walrath.  Judge Walrath previously served as the Chief Judge of the Delaware Bankruptcy Court.  The Chapter 7 Trustee in Opus South is represented by the law firm Cooch and Taylor P.A. 

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Jason Cornell is an attorney with the law firm Fox Rothschild LLP.  Jason practices before the United States Bankruptcy Courts for the District of Delaware and Southern District of Florida.  You can reach Jason at 302 427 5512, or jcornell@foxrothschild.com.

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Earlier this month, James Carroll in his capacity as the "Wind Down Professional" for the Velocity Express bankruptcy, began filing preference actions against various defendants.  As alleged in the preference complaints, Carroll was appointed as Velocity's Wind Down Professional under a "Wind Down Order" entered by the Delaware Bankruptcy Court in July of last year.  At the time it filed for bankruptcy, Velocity was a package delivery (aka "logistics") provider whose services included customer bulk shipments, pick-up and delivery services as well as "expedited point to point services."  Decl. at *3. 

Velocity began its business as United Shipping & Technology.  In 1999, United acquired Corporate Express Delivery Systems.  Since reorganizing in 2002, United has operated as Velocity Express.  On September 24, 2009, Velocity filed petitions for bankruptcy with the Delaware Bankruptcy Court.  At the time of filing for bankruptcy, the company employed over 1,300 employees and had contracts with approximately 2,400 drivers.  Decl. at *5. 

Velocity attributes its need to file for bankruptcy to the downturn in the U.S. economy.  Many of Velocity's customers cut back on their shipping expenses as their sales declined.  As Velocity lost revenue, it was unable to cut certain expenses.  Commercial leases were just one of the fixed costs that Velocity contends forced it in to bankruptcy.  Decl. at *8.  To address the costs associated with leases, Velocity filed a motion with the Bankruptcy Court authorizing it to reject certain leases.  Velocity filed the lease rejection motion simultaneous with filing its petitions for bankruptcy.  Decl. at *16.

On September 24, 2009, Comvest Velocity Acquisition LLC entered into an asset purchase agreement with Velocity.  Comvest Velocity Acquisition LLC is an affiliate of Convest Investment Partners III, L.P.  The Bankruptcy Court approved the sale to Comvest on November 3, 2009. 

The Velocity Express bankruptcy, as well as the preference actions, are before the Honorable Mary F. Walrath.  Judge Walrath previously served as the Chief Judge of the Delaware Bankruptcy Court.  James Carroll, as the Plaintiff in the Velocity Express preference actions, is represented by the law firm Sullivan Hazeltine Allinson, LLC. 

For readers interested in more information concerning preference litigation, below are some prior posts I have written on the subject:  

Decision in Archway Cookies Grants Summary Judgment Based on Ordinary Course of Business Defense

Using the Solvency Defense in a Preference Action: In re Bernard Technologies

Recent Decision in Pillowtex Addresses Elements of the Ordinary Course of Business Defense in a Preference Action

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

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Jason Cornell is an attorney with the law firm Fox Rothschild LLP and practices before the United States Bankruptcy Court for the District of Delaware.  You can reach Jason at 302 427-5512 or jcornell@foxrothschild.com.

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On August 7,  2009, Meridian Automotive Systems ("Meridian") filed a voluntary petition for relief under chapter 7 of the United States Bankruptcy Code.  Soon after Meridian filed its petition for bankruptcy, the Office of the United States Trustee appointed George L. Miller to serve as the chapter 7 trustee (the "Trustee") for the Meridian bankruptcy estates.  Approximately one month before Meridian filed for bankruptcy, on July 6, 2009, Meridian entered in to an agreement to sell substantially all of its assets (the "Asset Purchase Agreement" or "APA") to Ventra Greenwich Holdings, Corp. ("Ventra"), and its related entities. 

A "typical" preference action includes allegations that in the ninety days prior to the debtor's petition date, the debtor made one or more transfers to a creditor and such transfers constitute avoidable preferences.  The allegations in the Meridian preference complaints, however, take a different approach.  As alleged by the Trustee in the complaints,  under the Asset Purchase Agreement, Ventra assumed Meridian's liabilities for certain account payables to trade creditors of Meridian.  See Trustee's Complaint at *4.  The Trustee argues that the assumed liabilities under the APA include the antecedent debt that was owed by Meridian to various creditors.  Compl. at *4. 

The Trustee further argues that the liabilities assumed under the APA constituted a "transfer" as defined under the Bankruptcy Code, as the assumed liability:

... was an indirect mode of transferring property or an interest in property.  Specifically,  the Selling Debtors by the Indirect Transfers effectively transferred to the Defendant on the Closing Date its right to receive a portion of the sale price equal to the amount of the debt.  In addition the Indirect Transfers were transfers to or for the benefit of the creditor, in that the APA required that Ventra 'pay discharge or perform when due' the Defendant's Assumed Liabilities.

Compl. at. *4.

Within the preference complaint, the Trustee cites a Seventh Circuit decision, Warsco v. Preferred Technical Group, 258 F.3d 557 (7th Cir. 2001), for the proposition that an avoidable transfer does not need to come directly from a debtor to a creditor.  Instead, transfers by a third party to a creditor on the debtor's behalf may also be avoidable under the Bankruptcy Code.  Compl. at *4-5, citing Warsco 258 F.3d at 564.  Absent from the Trustee's complaints are citations to case law from either the Third Circuit or District of Delaware on the voidability of transfers from a non-debtor third party to a creditor.

The Meridian bankruptcy, as well as the adversary proceedings commenced by the Trustee, are before the Honorable Mary F. Walrath.  Judge Walrath previously served as Chief Judge of the Delaware Bankruptcy Court.  The Trustee for the Meridian bankruptcy estate is represented by the law firm Cozen O'Connor.

For readers interested in more information concerning issues that arise in preference litigation, below are some prior posts I have written on the subject:  

Decision in Archway Cookies Grants Summary Judgment Based on Ordinary Course of Business Defense

Using the Solvency Defense in a Preference Action: In re Bernard Technologies

Recent Decision in Pillowtex Addresses Elements of the Ordinary Course of Business Defense in a Preference Action

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

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Jason Cornell is an attorney with the law firm Fox Rothschild LLP and practices before the United States Bankruptcy Court for the District of Delaware.  You can reach Jason at 302 427-5512 or jcornell@foxrothschild.com.

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Introduction

In July, Alfred T. Giuliano, the Chapter 7 Trustee (the "Trustee") in the DHP Holdings ("DHP") bankruptcy proceeding began filing adversary complaints against various defendants, seeking to avoid and recover what the Trustee contends are avoidable transfers.  This post will look at DHP's business, why the company filed for bankruptcy and some of the developments during the course of the DHP bankruptcy proceeding.  Towards the end of the post, I will also discuss the statutory lien defense - an infrequent but helpful defense to be considered when defending against a preference action.

DHP's Business

On December 29, 2008 (the "Petition Date"), DHP filed a voluntary petition for bankruptcy under chapter 11 of the Bankruptcy Code.  At the time the company filed for bankruptcy, DHP was based in Bowling Green, Kentucky and described itself as a "leading manufacturer, distributor, and marketer of vent-free heating appliances, outdoor heaters, lawn and garden electrical products, and consumer fastening systems in the United States.  See Declaration of DHP's Chief Restructuring Officer in Support of First Day Motions (the "Declaration" or "Decl") at *4, filed with the Delaware Bankruptcy Court on December 29, 2008. 

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Introduction

A couple of weeks ago, the Chapter 7 Trustee (the "Trustee"), in the Ultimate Acquisition Partners bankruptcy, began filing complaints to avoid and recover payments the Trustee alleges constitute preferential transfers under section 547 of the Bankruptcy Code.  Ultimate Acquisition filed chapter 11 petitions for bankruptcy in the Delaware Bankruptcy Court on January 26, 2011 (the "Petition Date").  At the time it filed for bankruptcy, the company operated retail stores under the name "Ultimate Electronics."  This post will look at why Ultimate Acquisitions filed for bankruptcy, why the case converted to a Chapter 7 liquidation, as well as address some issues that often arise in preference litigation.

Reasons for Bankruptcy

Prior to filing for bankruptcy, Ultimate sold "high-end home entertainment and consumer electronics" in over 40 stores throughout the mid-west and western United States.  See Declaration of Ultimate's CEO in Support of Chapter 11 Petitions (the "Declaration"), at p. 2, a copy of which is available here for review.  Based in Thornton, Colorado, at the time of the company's Petition Date, Ultimate employed 1,500 employees.  As stated in its Declaration, Ultimate attributed its bankruptcy filing to "a significant downturn in business at certain of the Debtors' locations, coupled with the refusal by certain of the Debtors' vendors to ship goods to the Debtors on open credit."  Decl. at p. 2.  By filing for bankruptcy, Ultimate hoped to close poor performing stores, re-negotiate leases and improve profitability.  Id.

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Last month, Jeoffrey Burtch, the Chapter 7 Trustee (the "Trustee") in the Opus East bankruptcy filed approximately 90 preference actions against various defendants.  As stated in his complaints, the Trustee "seeks to avoid and recover ... all preferential transfers of property made for or on account of an antecedent debt made to or for the benefit of the Defendant by the Debtor during the ninety-day period prior to the filing of the Debtor's bankruptcy petition under 11 U.S.C. sec. 547 and 550."  This post will look briefly at the Opus East bankruptcy proceeding, as well as provide some general information concerning defenses to preference litigation.

Opus East, LLC ("Opus East") filed a voluntary petition for relief under the Bankruptcy Code on July 1, 2009.  Instead of filing a chapter 11 petition for reorganization, Opus East filed a chapter 7 petition for liquidation.  On July 2, 2009, the Office of the United States Trustee appointed Jeoffrey Burtch as Trustee.  Prior to filing for bankruptcy, Opus East developed residential and commercial properties.  According to court papers filed by one of Opus East's lenders, Opus East originally intended to reorganize under chapter 11 and surrender various assets to the bank.  Once the company determined that it was unable to reach an agreement with its lenders, Opus East sought to liquidate under the Bankruptcy Code. 

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Last month, the Chapter 7 trustee (the "Trustee") in the Viashow bankruptcy filed avoidance actions against several creditors of the bankruptcy estate.  One avoidance action in particular seeks to recover damages allegedly sustained by Viashow due to breaches of fiduciary duties by its officers and directors (the "D&O Action").  In addition to Viashow's officers and directors, the D&O Action seeks damages against defendants who allegedly "aided and abetted" the officers and directors in their breach.  

On June 1, 2009, Viashow filed petitions for bankruptcy in the Delaware Bankruptcy Court under Chapter 7 of the United States Bankruptcy Code.  Like most Chapter 7 proceedings, after Viashow filed its petitions, the Office of the United States Trustee appointed a trustee to administer the liquidation of the bankruptcy estate.  George L. Miller is the Trustee appointed to oversee the Viashow bankruptcy. 

As part of the D&O Action, the Trustee alleges that Viashow made "substantial expenditures on obligations" of non-debtor third parties.  A copy of the Complaint filed by the Trustee in the D&O Action (the "Complaint") is available here for review.  In the Complaint, the Trustee alleges Viashow covered the expenses associated with the "Fuego Raw Talent" show that ran from August 2008 to February 2009 at the Sahara Hotel and Casino in Las Vegas.  According to the Trustee, Viashow covered Fuego's production and advertising costs, as well as costs associated with permits, licensing and sound.  All total, the Trustee alleges that over $4.2 million was transferred from Viashow to the various defendants in support of the Fuego show.  See Trustee's Complaint at *7-8. 

In addition to the D&O Action, the Viashow Trustee has also filed preference actions alleging creditors received avoidable preferences during the 90 days preceding Viashow's bankruptcy petition date.  The Viashow bankruptcy is before the Honorable Brendan L. Shannon of the United States Bankruptcy Court for the District of Delaware.  The Trustee in Viashow is represented by the law firm Flaster/Greenberg P.C..  For readers not generally familiar with Delaware preference litigation, below are prior posts I have written on the subject:  

Decision in Archway Cookies Grants Summary Judgment Based on Ordinary Course of Business Defense

Using the Solvency Defense in a Preference Action: In re Bernard Technologies

Recent Decision in Pillowtex Addresses Elements of the Ordinary Course of Business Defense in a Preference Action

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

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

Last week, Visteon Corporation began filing preference complaints against hundreds of current and former creditors of the company. This post will look briefly at the nature of Visteon’s business, why the company filed for bankruptcy, as well some of the likely “next steps” now that the company has filed its preference complaints.

The Bankruptcy Filing

On May 28, 2009, Visteon filed for bankruptcy in the United States Bankruptcy Court for the District of Delaware. At the time Visteon filed for bankruptcy, the company was one of the largest suppliers of automotive components to original equipment manufacturers ("OEM") worldwide. See Visteon's Declaration in Support of First Day Motions (the "Declaration"). Going in to bankruptcy, Visteon operated manufacturing and engineering facilities in 27 countries with annual sales reaching $9.54 billion in 2008.

Events Leading to Bankruptcy

In 2000, Visteon spun-off from Ford Motor Company after decades as a parts division of Ford. By 2006, Visteon began a two year restructuring of its business that would result in Visteon reducing its workforce by 15,000 employees. During its pre-bankruptcy restructuring, Visteon was able to close or sell-off over 30 of its facilities, saving hundreds of millions of dollars in engineering and administrative costs.

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Introduction

Earlier this month, George L. Miller, the chapter 7 trustee (the "Trustee") in the GRA Liquidation bankruptcy proceeding began filing preference complaints against various defendants.  For those not familiar with the GRA Liquidation bankruptcy, Debtor Pecus ARG Holding, Inc. and certain affiliated companies (the "Debtors") filed chapter 11 petitions for bankruptcy with the Delaware Bankruptcy Court on January 15, 2009.  At the time the company filed for bankruptcy, Debtors owned and operated the Black Angus Restaurants.  This post will look briefly at the Debtors' business, why Debtors filed for bankruptcy as well as the first steps of the Trustee now that he has commenced the preference actions.

Background

Debtors began their operations in 1964 as the Black Angus Steakhouse in Seattle, Washington.  By the time Debtors filed for bankruptcy protection in Delaware, the company had grown to 69 restaurants located in 7 states throughout the western United States and Hawaii.  Going in to bankruptcy, Debtors had $53 million in secured debt under a revolving credit agreement and $13 million reserved for letters of credit.  For more information regarding Debtors background and operations, see Debtors' Declaration in Support of First Day Motions (the "Declaration"), a copy of which is available here for review. 

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Earlier this month, Avidity Partners, LLC ("Avidity"), in its role as claims agent for the bankruptcy estates of AbitibiBowater, Inc., et al. ("Debtors"), began filing avoidance actions against various defendants.  As alleged in the complaints, on April 16, 2009, Debtors filed petitions for bankruptcy with the United States Bankruptcy Court for the District of Delaware.  As I reported in a prior post concerning the AbitibiBowater bankruptcy, going in to bankruptcy Debtors were one of the largest newsprint producers in the world (my prior post regarding the AbitibiBowater bankruptcy is available here for review). 

On November 23, 2010, the Delaware Bankruptcy Court approved Debtors' Second Amended Joint Plan of Reorganization.  Debtors' Plan of Reorganization became effective December 9, 2010.  Under the Plan, Debtors appointed Avidity as claims agent to litigate and/or settle avoidance actions pursuant to sections 547 and 548 of the United States Bankruptcy Code. 

The AbitibiBowater avoidance actions, along with the AbitibiBowater bankruptcy proceeding, are before the Honorable Kevin J. Carey.  Judge Carey is the Chief Judge of the Delaware Bankruptcy Court.  Counsel for the Debtors' claims agent includes the Bayard Firm and the law firm of Paul, Hastings, Janofsky & Walker LLP. 

For more information regarding Delaware preference litigation, below are prior posts I have written on the subject:  

Decision in Archway Cookies Grants Summary Judgment Based on Ordinary Course of Business Defense

Using the Solvency Defense in a Preference Action: In re Bernard Technologies

Recent Decision in Pillowtex Addresses Elements of the Ordinary Course of Business Defense in a Preference Action

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

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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Earlier this month, the Chapter 7 Trustee (the "Trustee") appointed in the Indalex bankruptcy began filing avoidance actions against various Indalex creditors.  For those not familiar with the Indalex bankruptcy, Indalex filed petitions for bankruptcy in the United States Bankruptcy Court for the District of Delaware on March 20, 2009. Prior to filing bankruptcy, Indalex was one of the largest aluminum extruders in the United States. 

In April of 2009, I wrote a post summarizing the Indalex bankruptcy proceeding.  A link to my prior post is available here for review. Months after Indalex filed for bankruptcy, the company sold substantially all of its assets. The Bankruptcy Court entered an order approving the sale of assets on July 20, 2009.  Approximately two months after the Court approved the sale of assets, the Official Committee of Unsecured Creditors filed a motion seeking to convert the Indalex proceeding from a chapter 11 reorganization to a chapter 7 liquidation.  Indalex and other parties in interest submitted an agreed order converting the case to chapter 7 on October 14, 2009.

With the sale of substantially all of Indalex's assets and the conversion to chapter 7, Indalex is no longer operating as a viable business. Instead, the Trustee is in the process of pursuing claims and liquidating assets of the company, including preference actions.  The Indalex bankruptcy, along with the preference actions, are before the Honorable Peter J. Walsh.  The Trustee in Indalex is represented by the law firm Dilworth Paxson LLP. 

For more information regarding Delaware preference litigation, below are prior posts I have written on the subject:  

Decision in Archway Cookies Grants Summary Judgment Based on Ordinary Course of Business Defense

Using the Solvency Defense in a Preference Action: In re Bernard Technologies

Recent Decision in Pillowtex Addresses Elements of the Ordinary Course of Business Defense in a Preference Action

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

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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Background

Last month, the Chapter 7 Trustee in the Sunset Aviation bankruptcy began filing preference actions against various defendants seeking the recovery of alleged avoidable transfers.  The Sunset Aviation bankruptcy proceeding includes the consolidated bankruptcies of Sunset Aviation, Inc., JetDirect Aviation and Regal Jets, LLC.  The first bankruptcy commenced on February 25, 2009, when Regal Jets filed a petition for chapter 11 bankruptcy protection with the United States Bankruptcy Court for the District of Delaware.  On March 6, 2009, Sunset Aviation filed a petition for bankruptcy under chapter 7 of the Bankruptcy Code.  JetDirect filed its chapter 7 petition on May 1, 2009.  On June 10, 2009, the Regal bankruptcy proceeding was converted from a chapter 11 reorganization to a chapter 7 liquidation.  Soon after, the Office of the United States Trustee appointed the Chapter 7 Trustee.

Debtors' Operations

Prior to filing for bankruptcy, Debtors provided a range of services for the private aviation industry.  These services included brokering the sales and rentals of private jets, in-flight catering, records management and aircraft utilization.  According to court filings by the Chapter 7 Trustee, although the Debtors were separate legal entities, the companies operated from the same headquarters, co-mingled assets and were generally viewed by their creditors as a single entity.  Based on these findings, the Trustee filed a motion to substantively consolidate the bankruptcy proceedings in July of 2010.  The Court granted the Trustee's consolidation motion the following month.

The Preference Actions

As is common in avoidance actions, the Chapter 7 Trustee in Sunset Aviation seeks to recover pursuant to several different causes of action.  Pursuant to section 547 of the Bankruptcy Code, the Trustee seeks to avoid and recover transfers for the ninety days prior to the Debtors' petition date - November 27, 2008 to February 25, 2009.  According to the complaints, the "preference period" is calculated based on the earliest bankruptcy petition date for the consolidated Debtors. 

Conclusion

The Sunset Aviation bankruptcy is before the Honorable Peter J. Walsh.  Judge Walsh previously served as the Chief Judge of the Delaware Bankruptcy Court.  Cozen O'Connor and ASK Financial LLP serve as Plaintiff's counsel for the Trustee. 

For more information regarding Delaware preference litigation, below are prior posts I have written on the subject:  

Decision in Archway Cookies Grants Summary Judgment Based on Ordinary Course of Business Defense

Using the Solvency Defense in a Preference Action: In re Bernard Technologies

Recent Decision in Pillowtex Addresses Elements of the Ordinary Course of Business Defense in a Preference Action

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

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, Qimonda Richmond, LLC and Qimonda North America Corp (collectively, the "Debtors"), filed adversary actions against various defendants in the United States Bankruptcy Court for the District of Delaware.  As alleged in the complaints, Debtors contend that the defendants received preferential transfers which are subject to avoidance under section 547 of the Bankruptcy Code.   This post will look briefly at why Qimonda filed for bankruptcy, plus provide a status regarding the preference actions.

The Bankruptcy Proceeding

Debtors originally filed petitions for bankruptcy in Delaware on February 20, 2009 (the "Petition Date").   According to Debtors' Affidavit in Support of its Bankruptcy Motions (the "Affidavit"),  Debtors were one of the largest producers of semiconductor "memory products" with operations in Europe, Asia and North America.  Qimonda AG specialized in the production of "dynamic random acess memory" ("DRAM") memory products with end users such as HP, Dell, IBM and Sony. 

Why Qimonda Filed For Bankruptcy

Beginning in March of 2007, the market price for Qimonda AG's memory products began to drop due to decreased demand.  As more and more DRAM products came onto the market,  prices continued to fall.  According to Debtors' Affidavit, DRAM prices dropped 85% in 2007 and 58% in 2008.  In an effort to restructure its business, Qimonda AG closed its Vermont operations in June 2008.  In October, Qimonda AG let go over 1,000 employees at its Richmond facility.  Two months later Qimonda was notified by the New York Stock Exchange that it was not in compliance with the NYSE's listing standards as its market capitalization fell below $100 million.  Qimonda AG began insolvency proceedings in Germany on January 23, 2009 and this bankruptcy proceeding soon followed.

The Avoidance Actions

Preference actions are frequently brought by a liquidating trust or creditors committee of the bankruptcy estate.  In the Qimonda bankruptcy, the preference actions were filed by the Debtors instead of a third party.  According to the preference complaints, Qimonda continues to operate as a debtor in possession.  Qimonda is represented by Silverman Acampora LLP and Elliott Greenleaf.  The avoidance actions, along with the Qimonda bankruptcy proceeding, are before the Honorable Mary F. Walrath.  Judge Walrath previously served as Chief Judge of the Delaware Bankruptcy Court.  At the time of this post, there does not appear to be a date and time scheduled for the initial scheduling conference.  

For more information regarding Delaware preference litigation, below are prior posts I have written on the subject:  

Decision in Archway Cookies Grants Summary Judgment Based on Ordinary Course of Business Defense

Using the Solvency Defense in a Preference Action: In re Bernard Technologies

Recent Decision in Pillowtex Addresses Elements of the Ordinary Course of Business Defense in a Preference Action

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

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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Last year, the Liquidating Trustee (the "Trustee") in the Midway Games bankruptcy began filing avoidance actions against creditors of the bankruptcy estate.  Midway Games ("Midway" or the "Debtor") filed petitions for bankruptcy in the United States Bankruptcy Court for the District of Delaware on February 12, 2009.  For those not familiar with this bankruptcy proceeding, Midway developed and distributed video games throughout the North America, Europe and Asia.  See Debtor's Declaration in Support of First Day Motions ("Declaration") at *4.  

On May 21, 2010, the Bankruptcy Court entered an Order confirming Midway's joint chapter 11 plan of liquidation (the "Plan of Liquidation").  Under the Plan of Liquidation, Buchwald Capital Advisors LLC was appointed the Trustee.  The Trustee's responsibilities include collecting and distributing assets of Midway.  More specifically, the Trustee is responsible for commencing causes of actions on behalf of the bankruptcy estate.  

The Midway Games bankruptcy, as well as the avoidance actions filed by the Trustee, are pending before the Honorable Kevin Gross.  The Trustee is represented by Nieger LLP and Stevens & Lee, P.C.  

For more information regarding avoidance actions, below are prior posts I have written on the subject:  

Decision in Archway Cookies Grants Summary Judgment Based on Ordinary Course of Business Defense

Using the Solvency Defense in a Preference Action: In re Bernard Technologies

Recent Decision in Pillowtex Addresses Elements of the Ordinary Course of Business Defense in a Preference Action

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

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 January of this year, George L. Miller, the chapter 7 trustee (the "Trustee") in the WL Homes bankruptcy, began filing avoidance actions against various creditors.  As alleged in the complaints, the Trustee seeks the recovery of what he deems are "preferential transfers" pursuant to 11 U.S.C. section 547(b) of the Bankruptcy Code.  This post will look briefly at the WL Homes bankruptcy, as well as provide information on common issues that arise in preference litigation.

Background on the Bankruptcy Proceeding

On February 19, 2009, W L Homes, also known as John Laing Homes, filed for bankruptcy in the United States Bankruptcy Court for the District of Delaware.  According to the Affidavit in Support of  First Day Bankruptcy Motions,  WL Homes sold over 1,300 homes in 2007, generating revenues of $948 million.  With the crash of housing market, the company's home sales dropped to approximately 560 homes in 2008, with revenue declining to $287 million. 

Prior to filing for bankruptcy, WL Homes had over 100 development projects underway ranging from entry level condos to multimillion dollar homes.  When the company originally filed for bankruptcy, its stated goal was to exit certain "non-core regions" and move forward with more successful developments in the southern California region. 

 Debtors' Financials

In the days prior to bankruptcy, WL Homes' secured debt totaled $350 million.  Debtors' secured lenders include Wells Fargo, Bank of America, Wachovia, Indy Mac and KeyBank (among others).  At $140 million, Bank of America holds the largest amount of WL Homes' secured debt.  According to W L Homes' bankruptcy petition,  its largest unsecured trade creditors hold claims ranging from $331,000 to $118,000 for construction-related goods and services. 

W L Homes was purchased by Emaar Properties in 2006 for $1.05 billion.  Emaar is a public joint stock corporation formed in Dubai and considers itself the "world's largest real estate developer."  Since buying W L Homes, Emaar has invested over $600 million in WL Homes for the purpose of asset acquisition.  Emaar cut-off funding to WL Homes in December of 2008.

Conversion to Chapter 7 and Sale of Assets

On May 7, 2009, the Official Committee of Unsecured Creditors for WL Homes filed a motion to convert the bankruptcy proceeding from a chapter 11 reorganization to a chapter 7 liquidation.  The WL Homes bankruptcy converted to a chapter 7 on June 5, 2009 and the Trustee was appointed soon after.  In August of 2009, the Delaware Bankruptcy Court approved the sale of substantially all of WL Homes' assets to Emaar for $7 million.  With the sale completed, the Trustee will now seek to administer claims made against the bankruptcy estate and pursue various causes of action, including preference actions.

Issues Relevant to Avoidance Actions

For readers not generally familiar with avoidance actions, below are prior posts I have written on the subject:  

Decision in Archway Cookies Grants Summary Judgment Based on Ordinary Course of Business Defense

Using the Solvency Defense in a Preference Action: In re Bernard Technologies

Recent Decision in Pillowtex Addresses Elements of the Ordinary Course of Business Defense in a Preference Action

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

This bankruptcy proceeding is before the Honorable Brendan L. Shannon.  The Trustee in these avoidance actions is represented by the law firm Ciardi Ciardi and Astin.

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 December of 2010, the Official Committee of Unsecured Creditors (the "Committee"), in the Precision Parts International ("PPI") bankruptcy commenced several avoidance actions against various creditors of PPI.  As reflected in the Committee's complaints, on November 12, 2010, the Delaware Bankruptcy Court entered an order granting the Committee derivative standing to prosecute avoidance actions on behalf of the PPI bankruptcy estate.  This post will look briefly at the nature of PPI's business, why the company filed for bankruptcy and provide information relevant to avoidance actions.

Background

PPI filed for bankruptcy in Delaware on December 12, 2008.  As stated in the Declaration in Support of PPI's First Day Motions,  at the time it filed for bankruptcy, PPI designed and manufactured metal stamping in a process known as "fineblanking."  In addition to the automotive market, PPI sold its products to the construction, agriculture and lawn and garden industries.  Based in Rochester Hills, Michigan, PPI operated six manufacturing facilities in North America.  Read the PPI petition for bankruptcy here.

Why PPI Filed for Bankruptcy

PPI's success was tied, in large part, to the U.S. auto industry.  Almost 40% of PPI's revenue in 2007 came from sales to manufacturers in the automotive industry.  Lower volume in the auto industry, combined with higher steel prices, reduced PPI's revenue and cash flow, which in turn led to bankruptcy.  As reported in the media, PPI sold most of its assets to Cerion LLC in 2009.  Cerion is a privately held manufacturing firm located in Michigan. 

 Issues Relevant to Avoidance Actions

For readers not generally familiar with avoidance actions, below are prior posts I have written on the subject:  

Decision in Archway Cookies Grants Summary Judgment Based on Ordinary Course of Business Defense

Using the Solvency Defense in a Preference Action: In re Bernard Technologies

Recent Decision in Pillowtex Addresses Elements of the Ordinary Course of Business Defense in a Preference Action

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

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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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In November, Jeoffrey Burtch, the Chapter 7 Trustee in the AE Liquidation bankruptcy (formerly "Eclipse Aviation"), began filing preference actions against various creditors of Eclipse.  Eclipse Aviation began as a New Mexico manufacturer of small jet aircraft.  The company filed for bankruptcy in the United States Bankruptcy Court for the District of Delaware on November 25, 2008.  As stated in the Affidavit in Support of Eclipse's Bankruptcy Motions,  Eclipse began approximately 12 years ago as a manufacturer of aircraft intended for individual pilots, small companies seeking corporate aircraft and air taxi services serving smaller hubs.  In order to produce affordable aircraft, Eclipse created a "manufacturing strategy" based upon low production costs and high volume. 

Over time, Eclipse was unable to meet the production goals necessary to sustain a positive cash flow. Eclipse tried to increase production through additional financing and increase its revenue by raising its prices. When neither were successful, Eclipse began to lay off employees and seek a buyer. After looking at all its options, Eclipse decided that a sale of its assets under section 363 of the Bankruptcy Code was the best way to proceed.

On March 5, 2009, the Eclipse bankruptcy converted from a chapter 11 reorganization to a chapter 7 liquidation.  Jeoffrey Burtch was appointed the chapter 7 trustee the same day the case converted to chapter 7.  The Trustee is represented by the law firm Cooch and Taylor, P.A.  This bankruptcy proceeding, as well as the preference actions, are before the Honorable Mary F. Walrath.  Judge Walrath previously served as the Chief Judge of the Delaware Bankruptcy Court. 

For readers not familiar with preference litigation, below are some prior posts I have written on the subject:

Decision in Archway Cookies Grants Summary Judgment Based on Ordinary Course of Business Defense

Using the Solvency Defense in a Preference Action: In re Bernard Technologies

Recent Decision in Pillowtex Addresses Elements of the Ordinary Course of Business Defense in a Preference Action

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

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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 October 31, 2008, VeraSun Energy Corporation ("VeraSun"), and 24 of its affiliates or subsidiaries filed petitions for bankruptcy in the United States Bankruptcy Court for the District of Delaware.  Nine months after VeraSun filed for bankruptcy, the company filed its Joint Plan of Liquidation.  Thereafter, in October of 2009, VeraSun filed a modified Plan of Liquidation which was confirmed by the Bankruptcy Court on October 23, 2009.  Pursuant to VeraSun's Plan, KDW Restructuring and Liquidating Services LLC ("KDW") is authorized to pursue, litigate and/or settle various pieces of litigation, including avoidance actions.  See VeraSun's Motion Establishing Procedures Governing Adversary Proceedings, pp. 2-3.  It was these avoidance actions that were commenced on behalf of the Debtors recently in the Bankruptcy Court. 

Background

In November of 2008, I wrote a post about the VeraSun bankruptcy.  My prior post looked at VeraSun's business, why the company filed for bankruptcy and who some of the larger creditor constituencies are in the bankruptcy proceeding.  A copy of my prior post regarding VeraSun is available here for review.  Below is an excerpt from my 2008 post discussing the company's business and some of the factors leading to bankruptcy:

Based in Sioux Falls, South Dakota, VeraSun Energy Corporation (“VeraSun” or the “Debtor”), grew in its seven year history to become the leading producer of ethanol. As stated in a declaration of VeraSun’s chief financial officer in support of its “first day” bankruptcy motions (VeraSun declaration), VeraSun has fourteen production facilities in eight states producing over 1.4 billion gallons of ethanol annually. VeraSun employs approximately 932 employees, over one third of whom are salaried employees. The Debtor’s annual payroll expenses totals approximately $60 million, including payroll taxes.

Given that ethanol is a blend component used in gasoline, VeraSun’s sales are influenced to a large degree by fuel prices. VeraSun produces corn-based ethanol, which means that the price of its largest commodity, corn, is tied to factors such as crop production, government regulation and annual rainfall. The high volatility in the price of corn and gasoline in 2008, combined with a unfavorable hedging strategy on the price of corn, led to VeraSun sustaining significant third quarter losses in 2008. VeraSun’s hedging strategy on corn was based on the assumption that corn prices would continue to rise in 2008. Instead, the price of a bushel of corn fell by 63% by August of 2008, resulting in third quarter losses estimated between $60 and $100 million.

In addition to fluctuations in corn and gas, VeraSun’s bankruptcy was also the result of its inability to service its debt. In 2007, VeraSun purchased ASA Opco Holdings, LLC for $405.6 million. To purchase ASA, VeraSun borrowed $233.4 million. In April of 208, VeraSun purchased US BioEnergy Corporation for $756.9 million, borrowing $525.1 million to fund its second acquisition. Both acquisitions represented VeraSun’s growth strategy in ethanol production. However, the unexpected shifts in fuel and corn prices meant VeraSun needed to raise cash in order to sustain its operations. A failed equity offering, coupled with the recent freeze on lending, gave VeraSun no other choice than to file for bankruptcy protection.

The Avoidance Actions

Many, if not most, of the VeraSun avoidance actions were filed earlier this month.  Like the bankruptcy proceeding, the avoidance actions are before the Honorable Brendan L. Shannon.  On November 12, 2010, VeraSun filed its Motion for Order Establishing Procedures Governing Adversary Proceedings (the "Procedures Motion").  A copy of the Procedures Motion is available here for review.  VeraSun is represented in these proceedings by The Rosner Law Group and Kelley Drye & Warren LLP.

For readers not familiar with avoidance actions, below are prior posts I have written on the subject:

Decision in Archway Cookies Grants Summary Judgment Based on Ordinary Course of Business Defense

Using the Solvency Defense in a Preference Action: In re Bernard Technologies

Recent Decision in Pillowtex Addresses Elements of the Ordinary Course of Business Defense in a Preference Action

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

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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

Recently, over 180 adversary actions were filed in the MPC Computers bankruptcy.  The adversary actions fall generally in to two categories - preference actions filed by MPC's Committee of Unsecured Creditors and breach of contract actions filed by MPC.  This post will look briefly at why MPC filed for bankruptcy and discuss what may happen next now that the adversary actions are underway.

Background on the MPC's Business and Events Leading to Bankruptcy

As reflected in the declaration of MPC's CFO,  Curtis Akey,  MPC (formerly Gateway) provided computer-based products and services to mid-sized businesses, government agencies and educational organizations (read here the Declaration of Gateway's CFO in Support of Debtors' Chapter 11 Petitions).  MPC-Pro, LLC acquired Gateway in October of 2007.  As a result of this acquisition,  MPC's revenue rose to $895 million.  Six months after the acquisition, the company decided to stop manufacturing at its Tennessee facility and outsource a substantial portion of manufacturing to Flextronics at its Juarez, Mexico facility. 

The Flextronics' facility came on line slower than planned and with limited production.  On October 28, 2008, Flextronics informed MPC that it was discontinuing its supply of products and services to MPC.  As stated in the Akey Declaration, MPC's purchase of Gateway, followed by the unsuccessful outsourcing to Flextronics and the overall lack of liquidity led to the present bankruptcy filing.

The Adversary Actions

According to the adversary complaints filed by MPC's Creditors' Committee, the Committee and MPC entered into a stipulation on October 12, 2010.  The stipulation appoints the Committee as representative of MPC and confers standing on the Committee for purposes of investigating and prosecuting avoidance actions under chapter 5 of the Bankruptcy Code.  Judge Walsh, the bankruptcy judge presiding over the MPC bankruptcy, approved the stipulation on October 21, 2010. 

Unlike the preference actions, the breach of contract actions are brought directly by MPC (versus the Creditors' Committee).  Through these actions, MPC alleges various defendants received goods from the Debtors which were never paid for. 

Given the size and frequency of bankruptcy filings in Delaware, judges in the Delaware Bankruptcy Court often (but not always) enter uniform scheduling orders that provide parties with similar dates to serve discovery, complete motion practice, etc.. Scheduling orders in preference actions usually allow the parties 90 to 120 days to complete fact discovery and require the parties participate in mediation.  Click here to review a copy of one of the form scheduling orders posted to the Delaware Bankruptcy Court's web page.

The MPC bankruptcy, including the adversary actions, are before Honorable Peter J. Walsh.  Judge Walsh is the former Chief Judge of the Delaware Bankruptcy Court.  MPC is represented by Reed Smith LLP and the Creditors' Committee is represented by Drinker Biddle and Reath LLP. 

For readers not familiar with preference actions, below are prior posts I have written on the subject:

Decision in Archway Cookies Grants Summary Judgment Based on Ordinary Course of Business Defense

Using the Solvency Defense in a Preference Action: In re Bernard Technologies

Recent Decision in Pillowtex Addresses Elements of the Ordinary Course of Business Defense in a Preference Action

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

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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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In August, the Chapter 7 Trustee in the National Wholesale Liquidators ("NWL") bankruptcy filing approximately 90 preference actions.  Just recently,  the Trustee filed over 100 more preference actions in NWL.  In November of 2008, I wrote about the commencement of NWL bankruptcy (read my prior post concerning the NWL bankruptcy here).  As indicated in the prior post, NWL filed for bankruptcy in agreement with its lenders that it would either find a buyer while in bankruptcy, or convert and liquidate under Chapter 7 of the Bankruptcy Code.  The NWL bankruptcy converted to Chapter 7 on February 26, 2009. 

The Chapter 7 Trustee hired Archer and Greiner to represent him in this bankruptcy proceeding.  Pursuant to the summons filed with the most recent preference actions, the Court scheduled a pretrial conference on February 16, 2011.  These adversary actions, as well as the NWL bankruptcy proceeding, are before the Honorable Mary F. Walrath.  Judge Walrath previously served as Chief Judge of the Delaware Bankruptcy Court. 

Below are other posts I have written concerning avoidance actions in bankruptcy court:

Decision in Archway Cookies Grants Summary Judgment Based on Ordinary Course of Business Defense

Using the Solvency Defense in a Preference Action: In re Bernard Technologies

Recent Decision in Pillowtex Addresses Elements of the Ordinary Course of Business Defense in a Preference Action

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

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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 7 Trustee (the "Trustee") in the Consolidated Bedding bankruptcy commenced several avoidance actions under sections 547 and 548 of the Bankruptcy Code.  Consolidated commenced this bankruptcy proceeding on May 29, 2009, when it filed petitions for bankruptcy under Chapter 7 of the Bankruptcy Code.  Consolidated manufactured and sold mattresses under the trade name "Spring Air."  According to documents filed with the Delaware Bankruptcy Court, Consolidated ceased operations and terminated its employees prior to filing for bankruptcy. 

Events Leading to Bankruptcy

On May 13, 2009 (two weeks before filing for bankruptcy), certain lenders of Consolidated sent notices of default under the company's loan agreement.  Soon after, the lenders accelerated Consolidated's loan obligations and demanded repayment.  Approximately two weeks after sending the notice of default, Consolidated and its lender entered into a foreclosure agreement whereby the company agreed to sell substantially all of its assets to Spring Air International LLC.  After the sale to Spring Air International, Consolidated filed for bankrupty and the Trustee was appointed.

The Avoidance Actions

As of the date of this post, the Trustee has filed over 80 avoidance actions against various defendants.  These adversary actions, as well as the main case, are before the Honorable Brendan L. Shannon.  The Trustee is represented by Archer & Greiner and ASK Financial LLP. 

Below are other posts I have written on this blog concerning avoidance actions in Bankruptcy Court:

Decision in Archway Cookies Grants Summary Judgment Based on Ordinary Course of Business Defense

Using the Solvency Defense in a Preference Action: In re Bernard Technologies

Recent Decision in Pillowtex Addresses Elements of the Ordinary Course of Business Defense in a Preference Action

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

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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 September 1, 2010, Judge Christopher S. Sontchi of the United States Bankruptcy Court for the District of Delaware issued a decision finding that the payment practices between a creditor and debtor satisfied the ordinary course of business defense.  Judge Sontchi's decision is worth review as it provides a current look at one of the most common defenses to a preference action.  Better still, motions for summary judgment based on ordinary course of business often fail due to fact intensive nature of the defense.  It is helpful, then, to understand the reasons for the court granting summary judgment and the facts the court found significant.

Background

Archway Cookies ("Archway") filed for chapter 11 bankruptcy protection on October 6, 2008.  Approximately three months after filing for bankruptcy, the company converted to a chapter 7 liquidation and a chapter 7 trustee (the "Trustee") was appointed.  The Trustee commenced several avoidance actions, one of which was against Detroit Forming, Inc. ("DFI").  DFI manufactures plastic trays which it sold to Archway for approximately two years prior to the petition date.  Pursuant to the parties agreement, DFI shipped goods to Archway on net 20 day payment terms.  Opinion at *3.

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Recently, the Chapter 7 Trustee (the "Trustee") in the HRP Myrtle Beach Holdings bankruptcy, filed several avoidance actions pursuant to sections 547, 548, and 549 of the Bankruptcy Code.  The avoidance actions, filed in the United States Bankruptcy Court for the District of Delaware, are before the Honorable Kevin J. Carey, Chief Judge of the Delaware Bankruptcy Court.  For those not familiar with the HRP bankruptcy proceeding, this post will look briefly at the nature of HRP's business and why the case ultimately converted to a chapter 7 liquidation.

HRP Myrtle Beach Holdings, LLC ("HRP") is the parent company of various subsidiaries and affiliates that owned and operated the Hard Rock Park theme park, located in Myrtle Beach, South Carolina.  HRP marketed the theme park as the world's first rock n' roll theme park that highlighted the "culture, lifestyle and legends of rock music entertainment."  See HRP's Declaration in Support of First-Day Pleadings (the "Declaration") at *3.  Situated on 140 acres, HRP considered the $400 million property the largest investment to date in South Carolina tourism.  Id. at *4. 

Despite its size and unique theme, HRP's theme park suffered from low attendance following its opening in April 2008.  According to the Declaration, HRP blames poor attendance at its park on high energy and food costs, which in turn reduced overall consumer spending.  Declaration at *8.  In response to slumping sales, HRP filed for bankruptcy in September of 2008 hoping to restructure its debt and better develop its marketing and operations.  While in bankruptcy, HRP tried unsuccessfully to complete a sale of all of its assets under section 363 of the Bankruptcy Code.  Following the unsuccessful sale attempts, on January 2, 2009 HRP sought permission from the Bankruptcy Court to convert to a chapter 7 liquidation.  The Court approved the conversion to chapter 7 on January 6, 2009 and the Trustee was appointed soon after.

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

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Earlier this month, the Chapter 7 Trustee for the Rehrig International bankruptcy estate filed several preference actions against various defendants. As set forth in the complaints, the Trustee seeks to avoid and recover payments which he contends are preferential transfers, fraudulent conveyances and/or postpetition transfers. Rehrig filed for bankruptcy on September 5, 2008. Less than four months later, Rehrig’s Chapter 11 proceedings were converted to cases under chapter 7. Soon after the conversion to Chapter 7, the Office of the United States Trustee appointed George L. Miller as the Chapter 7 Trustee.

As is common in avoidance actions, the Trustee in Rehrig seeks an order disallowing the defendants’ claims pursuant to 502(d) of the United States Bankruptcy Code. Under 11 U.S.C § 502(d), the Bankruptcy Court “shall disallow any claim of any entity from which property is recoverable" under sections 547 and 548. Under 502(d), a defendant’s claim is temporarily disallowed if a creditor holds a debtor’s property.  Although a creditor's claim can be disallowed under 502(d), section 502(h) of the Code grants a preference defendant an allowed claim for preference dollars paid back in to the estate as part of a settlement or judgment.

According to papers filed with the Court, a pretrial conference is scheduled in the Rehrig preference actions on November 18, 2010 at 1:30 p.m. The Chapter 7 Trustee is represented by Cozen & O’Connor.

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Jason Cornell is an attorney with the law firm Fox Rothschild LLP.  Jason practices in Fox Rothschild's Financial Services department in Wilmington, Delaware.  He may be reached at 302 427 5512 or jcornell@foxrothschild.com.

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In late August, the Official Committee of Unsecured Creditors (the "Committee") in the Pacific Energy Resources bankruptcy, began filing adversary actions against various creditors.  The complaints filed by the Committee allege the defendants received preferential transfers and/or fraudulent transfers from the Debtor.  Prior to filing the adversary actions,  the Committee filed a motion with the Delaware Bankruptcy Court seeking standing to pursue the avoidance actions that would otherwise belong to the Debtor (the "Motion," a copy of which is available here).  The Court granted the Committee's Motion on April 19, 2010 with the consent of the Debtor.  

Pacific Energy filed for bankruptcy protection on March 9, 2009.  Approximately three months later, on June 4, 2009, the Court entered an order approving Debtor's postpetition financing.  As stated in the order, "... [t]he Prepetition Lenders and the DIP Lenders shall subordinate their unsecured deficiency claims to the claims of the general unsecured creditors solely with respect to the Settlement Proceeds, if any, and the proceeds of the avoidance actions under chapter 5 of the Bankruptcy Code ..."  Under the DIP financing order, Debtor's lenders agreed to allow the proceeds of the preference actions to go to the benefit of the unsecured creditors, instead of the secured creditors.  Motion at *2.

In its Motion, the Committee concedes that the Bankruptcy Code does not provide express authority for the Committee to prosecute claims belonging to the estate.  Motion at *4.  Instead, the Committee cites to section 1103(c)(5) of the Bankruptcy Code that permits a committee to perform "such other services as are in the interests of those represented."  11 U.S.C. Sec. 1103(c)(5).  The Committee also cites section 1109(b) of the Bankruptcy Code that authorizes a creditors' committee, as an interested party, to "appear and be heard on any issue" in a bankruptcy proceeding.  11 U.S.C. Sec. 1109(b).  Motion at *4.  Finally, the Committee cites the Third Circuit's decision in Cybergenics for the idea that "sections 1109(b) and 1103(c)(5), taken together, evince a Congressional intent for committees to play a robust and flexible role representing the bankruptcy estate, even in adversarial proceedings."  Official Comm. of Unsecured Cred. of Cybergenics Corp. v. Chinery, 330 F.3d 548, 566 (3d Cir. 2003).

With the avoidance actions now filed, the Court has scheduled a pretrial conference on November 3, 2010 at 1:30 p.m. The Pacific Energy bankruptcy, as well as the avoidance actions filed by the Committee, are 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 partner with the law firm Fox Rothschild LLP.  Jason practices in Wilmington, Delaware. You may reach him at 302 427 5512, or jcornell@foxrothschild.com.

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Earlier this month Alfred T. Giuliano, the Chapter 7 Trustee for National Wholesale Liquidators, began filing various complaints seeking the avoidance and recovery of alleged preferential transfers.  On November 19, 2008, I wrote on this blog about the commencement of the National Wholesale Liquidators ("NWL") bankruptcy (read my prior post concerning NWL here).  As indicated in the prior post, NWL filed for bankruptcy with an agreement with its lenders that it would either find a buyer while in bankruptcy, or convert and liquidate under Chapter 7 of the Bankruptcy Code.  The NWL bankruptcy converted to Chapter 7 on February 26, 2009. 

The Chapter 7 Trustee hired Archer and Greiner to represent him in this bankruptcy proceeding.  Pursuant to the summons filed with the preference actions, the Court has scheduled the first pretrial conference on December 8, 2010.  The Trustee appears to have filed approximately 90 preference actions so far, however, more may follow.  These adversary actions, as well as the NWL bankruptcy proceeding, are before the Honorable Mary F. Walrath.  Judge Walrath previously served as Chief Judge of the Delaware Bankruptcy Court. 

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Jason Cornell is a bankruptcy attorney in Wilmington, Delaware.  Jason practices in Fox Rothschild's Financial Services and Litigation departments.  You can reach him at 302 427 5512, or jcornell@foxrothschild.com.

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Introduction

Earlier this month, the Liquidating Trustee in the Intermet bankruptcy filed preference actions against various defendants.  This post will look at the nature of Intermet's business, why the company filed for bankruptcy and the circumstances behind the formation of the Liquidating Trust that is pursuing the preference actions.

As I often do on this blog, much of the information used in this post comes from information provided in the Debtors' Declaration in Support of its Chapter 11 Petitions.  Intermet filed for bankruptcy in the United States Bankruptcy Court for the District of Delaware on August 12, 2008 (the "Petition Date").  In support of its bankruptcy filings, Intermet filed a Declaration of William H. Whalen, Intermet's Chief Financial Officer (the "Whalen Declaration").  The Whalen Declaration provides a good summary of Intermet's business operations and the events leading the company into bankruptcy.  A copy of the Whalen Declaration is available here.

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Introduction

In July of this year, Ascendia Brands, Inc., began filing preference actions against various defendants who allegedly received payments from Ascendia.  According to the complaints, the defendants, many of whom were former customers of the company, received "avoidable" payments either before or after Ascendia filed for bankruptcy.  Citing various provisions of the Bankruptcy Code, Ascendia alleges that the recipients of these payments are required to return the funds to Ascendia.  This post will look briefly at Ascendia's business operations, why it filed for bankruptcy and what the next steps will likely be for the preference actions Ascendia filed with the Bankruptcy Court.

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Earlier this month, Bettina M. Whyte, the SemGroup Litigation Trustee (the "Trustee") filed approximately 350 adversary actions against various creditors in the SemCrude bankruptcy.  The majority of the adversary actions are preference actions under 11 U.S.C. section 547 of the United States Bankruptcy Code.  Some of the adversary actions, however, allege defendants received fraudulent transfers from various SemCrude debtors (the "Debtors"). 

As stated in the Trustee's pleadings, Debtors filed for bankruptcy in July of 2008.  On November 30, 2009, Debtors' Fourth Amended Joint Plan of Reorganization (the "Plan") was confirmed by the United States Bankruptcy Court for the District of Delaware.  Debtors bankruptcy proceeding, as well as the Trustee's adversary actions, are before the Honorable Brendan L. Shannon. 

Pursuant to Plan,  the Trustee was appointed to oversee the SemGroup Litigation Trust.  Under the Plan, the Litigation Trust may pursue certain claims that would otherwise belong to the Debtors.  It is these claims that the Trustee seeks to liquidate through the various adversary actions.  

To read other posts on this blog concerning the SemCrude bankruptcy proceeding, click here.  Further, click here to read prior posts regarding developments in Delaware preference litigation, including a look at other recently commenced preference actions. 

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Jason Cornell is a bankruptcy attorney with Fox Rothschild LLP.  Jason practices in Fox Rothschild's Wilmington, Delaware office.  He may be contacted at 302 427-5512, or jcornell@foxrothschild.com.

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 Introduction

Recently, the Plan Administrator for the Goody's Family Clothing bankruptcy commenced adversary actions against various defendants in the United States Bankruptcy Court for the District of Delaware.  The Goody's Plan Administrator was appointed pursuant to Goody's plan of reorganization.  The Bankruptcy Court approved Goody's plan on October 7, 2008, approximately four months after the company filed for bankruptcy. 

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 Introduction

Recently, the LandSource Creditor Litigation Liquidating Trust (the "Litigation Trust"), commenced various avoidance actions in the United States Bankruptcy Court for the District of Delaware.  This post will look briefly at the events leading to the commencement of this bankruptcy proceeding. Further, the post will look at some of the issues that confronted the Debtor during the reorganization process.

Background

LandSource Communities Development, LLC ("LandSource"), filed petitions for bankruptcy on June 8, 2008.  LandSource is a home builder.  Like other builders throughout the U.S., the company was severely affected by the decline in the U.S. real estate market, as well as the decrease in the availability of credit following the subprime mortgage crisis.  The drop in the demand for housing led to increased inventories of homes for builders.  This further depressed prices, worsening conditions even more for LandSource.

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Introduction

Judge Kevin J. Carey, Chief Judge of the United States Bankruptcy Court for the District of Delaware, recently issued a decision in the Pillowtex bankruptcy addressing the ordinary course of business ("OCB") defense.  Given the large number of preference actions that are filed it Delaware every year, there is a fair amount of case law in Delaware on this commonly relied upon defense to avoidance actions.  Judge Carey's decision in Pillowtex highlights those decisions the Court finds relevant when considering the OCB defense. Better still, because Pillowtex filed for bankruptcy before the 2005 amendments to the Bankruptcy Code, the decision looks at both the "subjective" and "objective" prongs of the OCB defense.

Background

Pillowtex filed for bankruptcy in Delaware in 2003.  In 2005, Pillowtex filed an adversary action against Classic Packaging Company seeking the recovery of approximately $60,000 in transfers.  Pillowtex alleged the transfers constituted both preferential transfers under section 547 of the Bankruptcy Code, and fraudulent transfers under section 548 of the Code.  Classic filed a motion for summary judgment on the preferential transfers portion of the complaint, arguing that the payments it received from Pillowtex were sheltered from avoidance under the OCB defense.  Classic also sought dismissal of the fraudulent transfers, arguing the Plaintiff (the Liquidating Trustee of Pillowtex) failed to satisfy the pleading requirements under Federal Rule of Civil Procedure 9(b).

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George Miller, the Chapter 7 Trustee in the HomeBanc Mortgage bankruptcy, recently filed approximately 400 preference actions against various defendants under section 547 of the Bankruptcy Code.  According to a Summons filed in one of the adversary actions,  the first pre-trial conference is scheduled in the United States Bankruptcy Court for the District of Delaware on April 21, 2010.  The HomeBanc bankruptcy, along with these adversary actions, are before the Honorable Kevin J. Carey,  Chief Judge of the Delaware Bankruptcy Court.

HomeBanc originally filed petitions for relief on August 9, 2007, under chapter 11 of the Bankruptcy Code.  On February 24, 2009, the cases were converted to chapter 7.  Thereafter, the Office of the United States Trustee appointed George Miller as the Chapter 7 Trustee.  According to documents filed in support of the Debtor's bankruptcy petition, prior to filing for bankruptcy, HomeBanc originated, serviced and sold retail mortgage loans.  HomeBanc also managed and invested in mortgage-backed securities. 

Section 547(c)(1) of the Bankruptcy Code excludes from preference liability payments "made to be a contemporaneous exchange for new value given to the debtor."  Judge Carey recently issued a decision that addresses the extent to which a party may rely on the new value defense.  A copy of Judge Carey's decision is available here. 

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

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The Chapter 7 Trustees in the Pope & Talbot and Specialty Motors bankruptcies recently filed hundreds of complaints in the United States Bankruptcy Court for the District of Delaware.  George Miller is the Chapter 7 Trustee in the Pope & Talbot bankruptcy while Jeoffrey Burtch is the Trustee in the Specialty Motors (aka "Von Weise Inc.") bankruptcy.  Both groups of complaints seek the avoidance and recovery of alleged preferential transfers from various creditors of the debtors. 

The adversary actions filed in both Pope and Specialty Motors are before the Honorable Christopher S. Sontchi.  In prior preference actions, Judge Sontchi entered scheduling orders similar to the form scheduling order attached here.  A copy of Judge Sontchi's Chamber Procedures are attached here.

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Jason Cornell is a bankruptcy attorney at the law firm Fox Rothschild LLP in Wilmington, Delaware.  If you have questions regarding a Delaware bankruptcy proceeding,  you can reach Jason at 302 427 5512, or jcornell@foxrothschild.com.

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Introduction

In June of last year, retailer Whitehall Jewelers filed for Bankruptcy in the United States Bankruptcy Court for the District of Delaware.  Last month, 14 months after filing for bankruptcy, Whitehall filed over 90 adversary actions in Delaware seeking to recovery payments the company made to various creditors during the 90 days prior to its filing for bankruptcy. 

Debtors in bankruptcy (or their assignee) routinely seek to recover what they allege are "avoidable transfers" from the creditors who received payments as the debtor slides into bankruptcy.  While "ordinary course of business" and "new value" are core defenses frequently relied upon by defendants in a preference action, there are less common defenses that should not be overlooked. 

This post will look briefly at the "mere conduit" defense.  Although the mere conduit defense is not always available to certain creditors, it is helpful to have an understanding of how the mere conduit defense has been applied by bankruptcy courts in both the District of Delaware and other jurisdictions. 

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Introduction

Earlier this month,  the Official Committee of Unsecured Creditors (the "Committee") for American Home Mortgage ("AMH") filed over ninety (90) adversary actions (review one of the Committee's Complaints here).  As reflected in the Complaint,  the Committee alleges that various creditors of AMH received preferential and/or fraudulent transfers pursuant to 11 U.S.C. sections 547, 548, 550 and 551. 

Procedural Posture of These Cases

At the time of this posting, the Committee had not filed the summonses which would contain information regarding service of process and the initial pretrial conference scheduled by the Court.  Approximately three weeks before filing the preference actions, the Committee sent out demand letters to those parties who its claimed received avoidable preferences during the ninety days prior to AMH's petition date.

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Linens N Things recently filed over twenty preference complaints.  As stated in the complaints,  Linens seeks the avoidance and recovery of alleged preferential transfers pursuant to 11 U.S.C. section 547 of the Bankruptcy Code.  According to a summons, a pretrial conference is scheduled on June 12, 2009. 

The Linens bankruptcy proceeding is before the Honorable Christopher S. Sontchi of the United States Bankruptcy Court for the District of Delaware.  Linens is represented by Richards Layton & Finger in Wilmington, Delaware.  To read other posts on this blog regarding issues that arise in preference litigation, click here. 

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Jason Cornell is a bankruptcy attorney at the law firm Fox Rothschild LLP. If you have questions regarding this, or any other Delaware legal proceeding, you may contact Jason at (302) 427-5512 or jcornell@foxrothschild.com.

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Introduction

Two weeks ago,  preference actions were commenced against a long list of defendants in the New Century Mortgage ("New Century") and Tweeter Home Entertainment ("Tweeter") bankruptcies.  The plaintiff in the New Century preference actions is Alan M. Jacobs, the liquidating trustee authorized under New Century's Second Amended Plan of Liquidation to commence and prosecute preference actions.  The preference actions in the Tweeter bankruptcy, on the other hand, were brought by the debtor instead of a liquidating trustee. 

Summary of the New Century Bankruptcy

New Century filed for bankruptcy in Delaware on April 2, 2007.   According to New Century's Declaration in Support of Chapter 11 Petitions (the "Declaration"),  New Century, through its subsidiaries, originated, purchased and sold mortgage loans nationwide.  New Century also serviced some of the loans they originated and sold.  

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Introduction

The debtor in the Friedman's bankruptcy recently filed preference complaints against various defendants.  Days later,  Charles Stanziale, the liquidating trustee in the Custom Foods bankruptcy, filed preference complaints against various parties as well.  The plaintiffs in both actions seek the avoidance and recovery of alleged preference payments under sections 547 of the United States Bankruptcy Code.  Given the commencement of these two preference programs,  this post will look at a 2004 decision by the Delaware Bankruptcy Court, TWA v. Marsh USA, et. al., (In re TWA), 305 B.R. 228 (Bankr. D.Del. 2004), addressing the pleading requirements in an avoidance complaint.

Background

In TWA, the plaintiff, the post-confirmation estate of TWA,  sought to recover alleged preferential transfers from several defendants.  Defendants sought to dismiss the complaint,  arguing the complaint lacked sufficient information to put the defendants on notice of a cause of action.  Id. at 230-31.  In support of their motion to dismiss, defendants cited the Valley Media decision which addresses the necessary components of a preference complaint.  See Valley Media, Inc., v. Borders, Inc. (In re Valley Media, Inc.), 288 B.R. 189, 192 (Bankr. D.Del. 2003).  In Valley Media, the court found that in order to survive a motion to dismiss, a preference complaint must (i) identify the nature and amount of each antecedent debt, and (ii) identify each alleged preferential transfer by date, name of transferor, name of transferee and amount of the transfer.  Id. at 192 (citations omitted). 

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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

In January, Mortgage Lenders Network commenced over 65 adversary actions against various defendants, seeking the avoidance and recovery of preferential transfers (read one of the preference complaints here).  As reflected in its complaints,  Mortgage Lenders filed a chapter 11 bankruptcy petition in the Delaware Bankruptcy Court on February 5, 2007. During the ten years prior to its bankruptcy, Mortgage Lenders grew from a small mortgage company with seven employees, to a residential mortgage provider serving 47 states with over 1,700 employees. 

Given the commencement of Mortgage Lenders' preference program, this post provides a brief summary of the elements and common defenses to preference claims.

Elements to a Preference Claim

In order to establish that a party received a preferential transfer, the plaintiff must prove that payments were received by a creditor on account of an “antecedent debt.” Further, the preferential payments must be made (i.) while the debtor was “insolvent”, (ii.) made within 90 days before the debtor filed for bankruptcy, and (iii.) the payments provide the creditor with more payments than it would receive if the debtor had liquidated under a chapter 7 liquidation.

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 Introduction

In a recent opinion issued by the Honorable Kevin Gross of the United States Bankruptcy Court, District of Delaware,  the Court addressed the issue of whether a debtor was solvent when it made allegedly preferential transfers to the Defendant.  The Court's decision provides a helpful analysis of the less frequent "solvency" defense to a preference action.  Further, the decision provides guidance regarding the evidentiary issues that arise when a party raises this defense.

Background

The Court issued its decision in Miller v. Barenberg, et al. (In re Bernard Technologies, Inc.), Adv. No. 06-51017(KG), slip op. (Bankr.D.Del. Dec. 5, 2008).  In Bernard Technologies,  George Miller, the chapter 7 Trustee and plaintiff, sought to recover pre-petition transfers paid to Bernard's former CEO, Dr. Sumner Barenberg (the "Defendant").  As an alleged "insider," the Trustee sought to recover transfers made to the Defendant during the one year prior to Bernard Technologies (the "Debtor") filing for bankruptcy.  One of the defenses raised by the Defendant was that the Debtor was solvent during both the 90 day preference period, as well as the one year preference period applied to insiders.

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Beginning on October 28, 2008,  Dura Automotive Systems filed approximately 170 avoidance actions pursuant to section 547(b) of the United States Bankruptcy Code.  Dura Automotive, along with its related entities, filed for bankruptcy in the United States Bankruptcy Court for the District of Delaware on October 30, 2006.  The Debtors filed an initial plan of reorganization in August of 2007, however, a revised joint plan was not confirmed until May of 2008. 

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When considering defenses to avoidance actions, ordinary course, new value and contemporaneous exchange often come to mind. A less common defense arises under 11 U.S.C. § 546(e), excluding from avoidance actions "settlement payments" as defined under the Bankruptcy Code. A recent decision in the United States Bankruptcy Court for the District of Delaware, Elway Company, LLP v. Miller, et.al (In re Elrod Holdings), highlights the expansive scope courts in Delaware, as well as the Third Circuit, apply when deciding whether payments from a debtor constitute settlement payments and are therefore sheltered from avoidance actions.

Jack K. Elrod Company, Inc. designed, installed and serviced spectator seating. In 2005, the Elrod family sold the business to Champlain Capital Partners, L.P.. As part of the transaction, the parties executed a stock purchase agreement whereby the family sold all of its interest in the company in exchange for cash and secured notes. The holding company Champlain created after it purchased Elrod filed for Chapter 7 liquidation in October of 2006. Approximately eleven months after filing for bankruptcy, the former owners of the debtor (the "Elrods") filed an adversary action in the debtor’s bankruptcy seeking a determination of the validity of their liens and an allowance of their claims.

In responding to the Elrods’ adversary action, the bankruptcy trustee claimed that $21 million in wire transfers to the Elrods in 2005 and 2006 were fraudulent conveyances and therefore subject to avoidance under the Bankruptcy Code. In response, the Elrods filed a motion for summary judgment seeking a finding that the wire transfers were "settlement payments" to "financial institutions" as defined under the Code. Disagreeing with the Elrods, the bankruptcy trustee argued that the term "settlement payments" applies only to publicly-traded securities, not the privately held securities involved in the Elrod bankruptcy.  Whether the transfers were settlement payments under the Code was significant to both parties, as section 546(e) excepts settlement payments from avoidance actions.

Judge Brendan L. Shannon, the bankruptcy judge assigned to the case, agreed with the Elrods and rejected the bankruptcy trustee’s narrow definition of settlement payment. The court began its analysis looking at the Bankruptcy Code’s definition of a "settlement payment" under § 741(8). Pursuant to the Code, settlement payments include "a preliminary settlement payment … a final settlement payment, or any other similar payment used in the securities trade." The court found the trustee’s argument limiting settlement payments to public securities "unconvincing" especially given that the securities trade includes a "robust trade or market for non-publicly traded securities."

In ruling against the chapter 7 trustee, the Bankruptcy Court also relied on the Third Circuit’s decision in Lowenschuss v. Resorts Int’l, Inc. (In re Resorts Int’l Inc.), 181 F.3d 505, 515 (3^rd Cir. 1999). In Lowenschuss, the appellate court found that a settlement payment "is generally the transfer of cash or securities made to complete a securities transaction." Judge Shannon noted that the Lowenschuss definition of settlement payment was an "expansive one" citing the appellate court’s finding that "settlement payments" under the Bankruptcy Code "includes almost all securities transactions."

Elrod is helpful as it reaffirms the wide brush court’s use when applying the Bankruptcy Code’s definition of a settlement payment. Where appropriate, creditors should consider the settlement payment defense when faced with an avoidance action. Creditors who were a party to security transactions will therefore appreciate Elrod’s finding that the settlement payment safe harbor applies to both public and privately held securities.

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Courts are split on whether new value must remain unpaid in order to constitute a valid defense to a preference claim. The United States Bankruptcy Court for the District of Delaware addressed this issue a couple of years ago in Waccamaw’s Homeplace, et. al., v. Salton Inc. (In re Waccamaw's Homeplace). Judge Walsh’s decision in Waccamaw is helpful in many respects. Besides addressing whether new value must remain paid or unpaid, the opinion provides a general overview of the elements of a preference claim, the presumption of insolvency, plus a discussion of the ordinary course defense.

Under Waccamaw, in order to establish a new value defense, a creditor (i.) must have received a transfer that is otherwise avoidable under § 547(b); (ii.) after receiving the transfer, the creditor must provide new value “to the debtor on an unsecured basis;” and, (iii.) the debtor must not have fully compensated the creditor for the new value as of the petition date. Like courts before it, Waccamaw relied upon the Third Circuit’s decision in New York City Shoes, Inc. v. Bentley Int’l, Inc. (In re New York City Shoes), 880 F.2d 679, 880 (3d Cir. 1989), for the holding that in order for a creditor to establish a new value defense, “the debtor must not have fully compensated the creditor for the ‘new value’ as of the date that it filed its bankruptcy petition.”

Not all preference cases before the Bankruptcy Court for the District of Delaware embrace New York City Shoes. For example, in Hechinger Investment Co. of Delaware Inc., v. Universal Forest Products, Inc. (In re Hechinger Investment Co.), the court declined to follow New York City Shoes finding that the decision was “distinguishable on its facts” and instead adopted the reasoning of Check Reporting Services v. The Water Doctor (In re Check Reporting Services, Inc.), 140 B.R. 425 (Bankr.W.D.Mich. 1992). In Check Reporting Services, the United States Bankruptcy Court for the Western District of Michigan ruled that a “subsequent advance of new value does not have to remain unpaid to satisfy [the] new value exception to the avoidance of preferential transfers …”

The preference claim in Check Reporting Services arose from a “stereotypical [] creditor dealing with a debtor on a running account basis during the preference period.” Citing several cases that addressed this issue before it, the court in Check Reporting recognized that § 547(c)(4) does not contain any language to suggest that new value must remain unpaid. Further, the court noted that its holding, “though in the minority … is more firmly rooted in the statutory language” of the Bankruptcy Code.

In Hechinger, the creditor who argued that new value could remain unpaid also had a “running account” payment history similar to the creditor in Check Reporting Services. In contrast, the creditor in New York City Shoes received “just one transfer” during the preference period. Judge Lindsey thought this distinction significant enough to find that the new value provided by the creditor in Hechinger did not have to remain unpaid in order to qualify as a defense and setoff to a preference claim.

It is worth noting that Judge Walsh’s decision in Waccamaw’s Homeplace, finding that new value must remain unpaid, did not involve the “stereotypical running account” found in Hechinger and Check Reporting Services. Instead, the two preference payments at issue in Waccamaw were each in excess of $1 million and part of the debtor’s “Big Buy” program that extended invoice terms for larger purchases by the debtor.

 Given the Third Circuit’s holding in New York City Shoes, new value must remain unpaid in order to receive the new value set off. Hechinger stands for the proposition that New York City Shoes does not apply when the payments at issue are on a “running account or rolling account” basis, instead of cases concerning just one or two payments. The question that emerges, then, is why would payments made on a “rolling” basis, instead of just one or two single payments, result in two different holdings. The court in Hechinger supported its split from the Third Circuit “based on language of § 547(c)(4)(B) and the policy reasons of the code section …” It will be interesting to see whether this split in opinion is resolved as this area of the law develops.

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