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

Introduction

Earlier this year, Judge Kevin J. Carey, Chief Judge of the Delaware Bankruptcy Court, issued a decision in the Interlake Material Handling bankruptcy, whereby the Court dismissed a complaint that sought to impose a constructive trust.  The dispute in Interlake concerned the terms of a distributorship agreement (the "Agreement").  Pursuant to the terms of the Agreement, the Court in Interstate addressed the issue of constructive trust under Illinois law.  Although state law governed, the Court's analysis in Interstate provides a useful look at how issues of constructive trust are decided in a bankruptcy context.

Background

National Store Fixtures ("National Store") is an operating division of United Fixtures Company, which in turn is one of the debtors that filed bankruptcy petitions in the Interlake bankruptcy.  National Store sold shelving to Tiare International, Inc. ("Tiare").  Two months after National Store and United Fixtures filed for bankruptcy, Tiare filed an adversary complaint alleging that certain funds received by National Store and its lender, NCBC, were not property of the bankruptcy estate and were instead subject to a constructive trust.  Opinion at *1-2. 

Under the Agreement, Tiare purchased shelving from National Store and then re-sold the shelving to Tiare's customers.  For larger orders, National Store agreed to invoice Tiare's customers directly.  After Tiare's customers paid National Store's invoice, National Store would pay Tiare the difference between its agreed to price with National Store and the price paid by Tiare's customers (the "Mark-up").  Opinion at *4. 

A few months prior to National Store filing for bankruptcy, Tiare submitted orders to National Store for two of Tiare's customers.  After the petition date, these customers paid National Store's invoices.  Payment of the invoices generated a Mark-up worth $207,711.13.  NCBC, acting under a credit agreement, swept National Store's account, which included the funds constituting the Mark-up.  Opinion at *4-5.

Court's Analysis

National Store and NCBC both filed  motions to dismiss Tiare's complaint, alleging Tiare failed to state a claim upon which relief can be granted as to the constructive trust claim.  In granting the motions, the Court began by noting that section 541 of the Bankruptcy Code creates a bankruptcy estate that consists of "all legal and equitable interests of the debtor in property."  Opinion at *5.  Next, the Court cited a decision by the Second Circuit that holds that "[w]here the debtor's conduct gives rise to the imposition of a constructive trust, so that the debtor holds only bare legal title to the property, subject to a duty to reconvey it to the rightful owner, the estate will generally hold the property subject to the same restrictions."  In re Howard's Appliance Corp., 874 F.2d 88, 93 (2d Cir. 1989), quoting In re Flight Transp. Corp. Securities Litigation, 730 F.2d 1128, 1136 (8th Cir. 1984).

Turning to Illinois law,  a constructive trust is created "when a court declares the party in possession of wrongfully acquired property as the constructive trustee of that property, because it would be inequitable for that party to retain possession of the property."  Opinion at *6, citing Suttles v. Vogel, 533 N.E.2d 901, 904 (Ill. 1988).  A court will not impose a constructive trust unless the complaint alleges "wrongdoing, such as fraud, breach of fiduciary duty, duress, coercion or mistake."  Id. at 905.  The nonpayment of money does not constitute "wrongdoing" sufficient to support a constructive trust, nor does a claim for breach of contract. Opinion at *6 (citations omitted).

In Interlake, Tiare argued that the wrongdoing committed by the Defendants arose from their improper claim to the Mark-up.  In support of its argument, Tiare cited In re Bake-Line Group, LLC, 359 B.R. 566 (D. Del. 2007), where the court imposed a constructive trust on a check which the debtor deposited into its bank account.  The Court, however, found In re Bake-Line Group distinguishable from the facts presented in Interlake. In Bake-Line, the debtor deposited the check in to its own account and then, realizing its mistake, returned the funds to the defendant.  The Interlake debtor, on the other hand, received checks that were made payable to the debtor.  Further, Tiare and the debtor in Interlake had a "long-standing, arms-length relationship."  Opinion at *7. 

Conclusion

Having considered the facts alleged in the light most favorable to Tiare, the Court found that Tiare had not provided a "plausible basis for determining that there was any mistake or wrongdoing" by the Defendants.  Id.

---------------------------------------------------------------------

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.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

Introduction

Recently, the Delaware Bankruptcy Court in the Six Flags bankruptcy issued a decision addressing whether an adversary complaint alleged facts sufficient to overcome a motion to dismiss.  The Court's decision provides analysis of recent decisions by the Supreme Court and the Third Circuit regarding standards for pleading.   More specifically, the Six Flags decision looks at whether the underlying complaint satisfies the "factual plausability" pleading requirement set forth by the Supreme Court in Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (2007).  The Court's decision in Six Flags, in addressing recent decisions regarding pleading standards, provides a useful analysis of an issue common in litigation.

The Contract Dispute

Six Flags filed for bankruptcy in June of 2009.  Two years prior to filing for bankruptcy, the company sold nine amusement parks to Parc Management LLC and other Parc entities (hereinafter "Parc").  Parc paid Six Flags $275 million in cash for the amusement parks and issued subordinated promissory notes to Six Flags having a face value of $37 million.  Decision at *4.  The notes contained a provision providing for the payment of an "Excess Amount" in the event certain conditions were satisfied.  Six Flags claimed that Parc owed it an Excess Amount of $1,001,875, which Parc refused to pay.  Decision at *10.

Allegations in the Complaint

Through its Complaint, Six Flags alleged it was entitled to the recovery of the Excess Amount from Parc.  In response, Parc filed a motion to dismiss all counts alleged in the Complaint, arguing that the Excess Amount was a one time payment that was no longer due.  Parc also argued that the Excess Amount was no longer due pursuant to the terms of a subordination agreement.  Decision at *11-12.

Sufficiency of Pleadings Under Fed.R.Civ.P. 12(b)(6)

The Court began its analysis by noting that motions brought pursuant to Fed.R.Civ.P. 12(b)(6) test the sufficiency of the factual allegations set forth in a plaintiff's complaint.  Next, the Court reiterated the Third Circuit's recent observation that "[s]tandards of pleading have been in the forefront of jurisprudence in recent years."  Decision at *12, citing Fowler v. UPMC Shadyside, 578 F.3d 203 (3d Cir. 2009).  As a result of the Supreme Court's decisions in Bell Atlantic Corp. v. Twombly and Ashcroft v. Iqbal, "pleading standards have seemingly shifted from simple notice pleading to a more heightened form of pleading, requiring a plaintiff to plead more than the possibility of relief to survive a motion to dismiss."  Decision at *13, citing Fowler, 578 F.3d at 210.

The heightened pleading requirement under Twombly requires claims be "facially plausible."  Decision at *13.  Under Iqbal, the Supreme Court extended the facial plausibility requirement to all civil suits brought before federal courts.   Id., citing Fowler, 578 F.3d at 210.  In order for a claim to be facially plausible, the Supreme Court in Iqbal requires a plaintiff plead "factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged."  Decision at *13-14, citing Iqbal, 129 S. Ct. at 1950.

The Third Circuit has interpreted Iqbal to require "a two-part analysis.  First, the factual and legal elements of a claim should be separated.  The [court] must accept all of the complaint's well-pleaded facts as true, but may disregard any legal conclusions."  Next, the court "must then determine whether the facts alleged in the complaint are sufficient to show that the plaintiff has a plausible claim for relief."  Decision at *14, citing Fowler, 578 F.3d at 210-11.  More recently, the Third Circuit clarified that "[s]ome claims will demand relatively more factual detail to satisfy this standard, while others require less."  Id. at *15, citing In re Ins. Brokerage Antitrust Litig., 2010 U.S. App. LEXIS 17107, 46-47 n. 18 (3d Cir. Aug. 16, 2010).

The Plausibility of Plaintiff's Claims

To determine whether Six Flags' claims against Parc were in fact plausible, the Court considered the parties' various interpretations of the notes and related documents.  See Decision at *15-26. Although the parties offered differing interpretations of certain contract provisions, the court found the disputed language clear and unambiguous.  Id. at *24.  Parc argued that Six Flags' interpretation of the disputed language "would lead to an absurd result" and the court agreed with Parc's conclusion.  Id. at *26.  In rejecting Six Flags' interpretation of the disputed language, the Court found that "[a]lthough Six Flags has pled sufficient facts taken as true to support its claims, the Note contradicts the allegations and controls."  Id. at *26, citing Sierra Invs., LLC v. SHC, Inc., (In re SHC, Inc.), 329 B.R. 438, 442 (Bankr.D.Del. 2005). 

Conclusion

Ultimately, the Court found that Six Flags' interpretation of the disputed provision was not logical when the language in the provision was considered in its entirety.  Id. at *27.  In reaching its decision, the Court considered many different provisions in the notes (provisions, many of which  are not discussed in this blog post but are discussed in detail in the Court's decision available here) and found that Six Flags' claims contradicted the language of the notes and "simply does not make sense."  Id. at *26.  Here the Court shows the discretion provided to federal courts under Iqbal to assess the plausibility of a plaintiff's claims.  Citing Iqbal, the Court recognized that the law "promotes the use of judicial experience and common sense."  Id. at *26, n. 75, citing Iqbal, 129 S. Ct. 1950. 

-------------------------------------------------------------

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

• Email This
• Print
• Comments
• Trackbacks
• Share Link

Below is a post from Michael Temin, senior counsel with Fox Rothschild.  Michael's post looks at a recent decision by Judge Sontchi in the Leslie Controls bankruptcy.

-----------------------------------------------------------------------------

A discovery dispute gave the bankruptcy court an opportunity to rule on the common interest privilege which, the court said, has completely replaced the joint defense privilege for information sharing among clients with different attorneys, citing In re Teleglobe Communications Corp., 493 F.3d 345, 364 n. 20 (3d Cir. 2007). Leslie Controls, Inc., Case No. 10-12199 (Bankr. D. Del. 9/21/10)(Sontchi, B.J.).

The question presented was whether privileged communications between the debtor and its counsel which were shared pre-petition with the ad hoc committee of asbestos plaintiffs and the proposed future claimants’ representative remained protected from discovery.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

Introduction

On August 3, 2010, Judge Mary F. Walrath of the United States Bankruptcy Court for the District of Delaware issued an opinion in the Qimonda bankruptcy addressing whether Google was entitled to an administrative claim against the Qimonda bankruptcy estate.  This post will look briefly at the facts underlying Google's claim, the holding of the Court and the basis for the Court's decision.  Click here to review the Court's Opinion in Qimonda. 

Background

Qimonda manufactured memory modules which it sold to various customers including Google.  Since the company's formation in 2006, it had sold hundreds of thousands of its memory modules to Google.  Pursuant to the terms and conditions of Google's purchase orders, defective modules were either returned, repaired or replaced at Qimonda's option.  Opinion, at pp. 1-2.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

On February 1, 2010, the United States Bankruptcy Court for the District of Delaware revised its Local Rules.  A clean copy of the Local Rules are available here.  To view the changes made to the prior Local Rules, a "red line" copy of the Local Rules are available here.  Most of the changes to the Rules concern recent revisions to the calculation of time set forth in the Federal Rules of Bankruptcy Procedure Amendments.  The following are some of the revisions to the Rules that do not involve computation of time:

Local Rule 2002-1(d):  Language to the Local Rule concerning Entries of Appearance was added to read "[a]ny entity that requests, in a particular case or adversary proceeding, service of documents by receipt of ECF notices or by email only, needs to complete Local Form 114 Consent to Service of Documents by Receipt of ECF Notice or Email in Chapter 11 Cases."

Local Rule 9019-1:  Interested parties can submit consensual orders to the Court resolving objections to motions, claim objections and other pleadings by filing a Certificate of Counsel.  The Certificate of Counsel must be signed by Delaware counsel.  L.R. 9019-1(a).  Further, if there is an objection deadline, the Certificate of Counsel cannot be filed until 48 hours after such deadline.  L.R. 9019-1(b). 

Local Rule 9019-2(e):  For matters that are assigned to mediation, the parties must select a mediator selected from the Court's Register of Mediators, unless the parties stipulate and agree to a mediator not on the Register.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

Introduction

Recently, Judge Kevin J. Carey, Chief Judge of the United States Bankruptcy Court for the District of Delaware, issued a decision in the Spansion bankruptcy denying a motion for the appointment of an official committee of equity security holders.  See In re Spansion, Inc., et al., Case No. 09-10690(KJC)(December 18, 2009).  The decision is helpful as it provides a summary of the law in this and other jurisdictions on when is it appropriate for a bankruptcy court to appoint a special committee of creditors or security holders.  

Background

Spansion designs semiconductors that are used in a broad range of applications, including cell phones, consumer electronics and automobiles.  The company filed for bankruptcy in Delaware on March 1, 2009.  In October of 2009, Spansion filed a disclosure statement and plan of reorganization which proposed no distributions to common equity holders.  The security holders, acting through an informal "ad hoc committee,"  argued that the Debtors' reorganization value was based on projections that were too conservative.  Opinion at *9.  The security holders therefore asked the Court to create a special committee of equity holders in order to supervise the Debtors' reorganization and protect their interests.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

Introduction

On June 2, 2009,  Judge Kevin J. Carey, Chief Judge of the United States Bankruptcy Court for the District of Delaware, issued an opinion in the Spansion bankruptcy finding that the Debtors' settlement of various patent cases was not the result of the "sound exercise of the Debtors' business judgment."  Judge Carey's decision in Spansion is helpful as it provides analysis of what is required in order for a debtor to meet its burden when seeking bankruptcy court approval of a settlement. 

Background

Spansion filed for bankruptcy on March 1, 2009.  Approximately two weeks after filing for bankruptcy,  Spansion entered into a settlement agreement with Samsung Electronics Co. settling two patent infringement cases commenced by Spansion and settling one patent infringement case commenced by Samsung against Spansion.  Pursuant to the parties' settlement agreement, Samsung agreed to pay Spansion $70 million.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

Introduction

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

Background

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

• Email This
• Print
• Comments
• Trackbacks
• Share Link

Introduction

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

• Email This
• Print
• Comments
• Trackbacks
• Share Link

Today in the PPI Holdings bankruptcy,  the PPI debtors presented their bid procedures motion which sought approval of the procedures by which PPI would sell substantially all of its assets.  PPI's motion also sought approval of a break-up fee for the stalking horse bidder.  In support of the break-up fee, PPI cited the Third Circuit's decision in Calpine Corp. v. O'Brien Envtl. Energy, Inc. (In re O'Brien Envtl. Energy, Inc.), 181 F.3d 527 (3d Cir. 1999). 

Given the increase in bankruptcies,  break-up fees will continue to be an issue for debtors and creditors alike.  The purpose of this post is to take a look at the O'Brien decision and consider when a break-up fee is appropriate, and the factors courts will consider in deciding to award such fees.

• Email This
• Print
• Comments
• Trackbacks (2)
• Share Link

 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.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

Introduction

In a recent decision in the Distributed Energy Systems bankruptcy ("DES" or "Debtors"),  the Honorable Kevin Gross of the United States Bankruptcy Court for the District of Delaware provided a concise discussion of what is required for a debtor to assume and assign an executory contract.  DES filed a motion seeking to assume and assign contracts with ePower and Vestas Wind Systems to CB Wind Acquisition Corp ("CB Wind").  CB Wind previously purchased all of Debtors' assets. Due to what Debtors' termed a "scrivener's error,"  the ePower and Vestas contracts were not included in the schedules to the original asset purchase agreement.

ePower objected to the assumption of its contract on several grounds.  First, ePower argued that DES failed to prove CB Wind could provide adequate assurance of future performance.  Next,  ePower claimed that its contract was not an executory contract and therefore not subject to assumption and assignment under section 365 of the Bankruptcy Code.  Finally,  ePower argued that Debtors' failure to include its contract in the sale motion evidenced its original intent to reject the agreement. 

• Email This
• Print
• Comments
• Trackbacks
• Share Link

Introduction

In a decision that the Court deemed “one of first impression for this Circuit,” the Honorable Kevin Gross of the United States Bankruptcy Court for the District of Delaware, declined to grant administrative claim status to employee WARN Act claims, instead finding that the employees’ claims vested prior to the commencement of the bankruptcy proceeding. See Henderson v. Powermate Holding Corp. (In re Powermate Holding Corp.), Case No. 08-10498(KG)(Bankr. D. Del. Oct. 10, 2008)(read opinion here). The opinion provides a useful analysis of the application of the WARN Act following the 2005 amendments to § 503 of the Bankruptcy Code governing administrative claims.

Background

Powermate Holding Corp (“Powermate”), and its related entities, filed for chapter 11 bankruptcy protection on March 17, 2008. Powermate also terminated all of its remaining employees on March 17, however, it did so prior to the filing its bankruptcy petition. Powermate’s employees brought claims against the Debtors alleging the Debtors violated their rights under the Worker Adjustment and Retraining Notification Act (the “WARN Act”). The employees further alleged that they were entitled to sixty days of wages and benefits under the WARN Act, and that these expenses were entitled to administrative claim status pursuant to 11 U.S.C. § 503(b)(1)(A)(ii). In response to the employees’ adversary complaint for damages, Powermate argued that the employees’ WARN Act claims, to the extent proven, were entitled to fourth or fifth priority status under §§ 507(a)(4) and (5), not administrative status.

Analysis

The WARN Act provides qualified employees up to sixty (60) days of back pay and benefits due to an employer’s failure to provide proper notice of a potential termination. As the Court observed, Congress passed the WARN Act in 1988 “following two decades which many workers were terminated without notice as a result of mergers, acquisition and closings.” Id. at *7. Exceptions to the WARN Act include terminations due to shut downs that were not reasonably foreseeable, natural disasters or situations where notice to employees might interfere with an employer’s efforts to secure outside investments.

After looking at the intent behind the WARN Act, the Court next looked at administrative expense claims in the context of wages. Administrative expense claims are those which either “preserve the estate in a reorganization or facilitate the winding-down in a liquidation.” Id. at *9. Congress amended § 503(b)(1)(A) in 2005, extending administrative claim status to “(ii.) wages and benefits awarded pursuant to a judicial proceeding or a proceeding of the National Labor Relations Board as back pay attributable to any period of time occurring after commencement of the case under this title.”

Looking at the plain meaning of the statute, the court found that the amended § 503 grants administrative status to wages that “vest post-petition, [so that] the back pay is attributable to the time occurring after the commencement of the case and therefore it is an administrative expense claim.” Id. at *16. The question remaining for the Court, then, was to determine when the employees’ rights under the WARN Act vest.

The Court found that rights of employees discharged in violation of the WARN Act accrued upon their termination. In reaching this conclusion, the Court relied upon other opinions that “consistently hold that WARN damages are specifically like payment at termination in lieu of notice.” Id. at *18. Citing In re First Magnus Fin. Corp., 390 B.R. 667, 673 (Bankr. D. Ariz. 2008). The Powermate employees were terminated prior to the filing of the bankruptcy petition. Because the employees’ claims vested pre-petition, they were not entitled to administrative expense status. Instead, the employees’ damage claims were governed under § 507(a)(4)-(5) granting unsecured claim status to wages.

Conclusion

The Powermate decision is helpful, in part, for the clarity it provides to a portion of the 2005 Bankruptcy Code amendments. Like with many other decisions before it, the Court in Powermate applied a “plain meaning” analysis to the 2005 amendments. The Powermate employees who commenced the WARN Act claim might not agree that this decision is “helpful.” On October 20, 2008, the employees filed a Notice of Appeal of the Court’s Order dismissing their adversary action.
 

• Email This
• Print
• Comments
• Trackbacks
• Share Link

Earlier this year, the United States Bankruptcy Court for the District of Delaware issued an important decision in American Home Mortgage, Inc. regarding the scope of the recently amended definition of a “repurchase agreement”.  Under the Bankruptcy Abuse Prevention Consumer Protection Act of 2005,  Congress broadened the Bankruptcy Code's definition of  "repurchase agreement" to include the transfer of "mortgage related securities, mortgage loans [and] interests in mortgage related securities or mortgage loans."  A review of the opinion in Calyon New York Branch v. American Home Mortgage Corp., 379 B.R. 503 (Bankr.D.Del. 2008) provides guidance regarding how courts apply the revised definition going forward.  Furthermore, given the increase in mortgage related bankruptcies, Judge Christopher S. Sontchi's decison In American Home Mortgage, Inc. addresses an important issue which is likely to arise again in future bankruptcy proceedings.

American Home Mortgage originated, sold and serviced subprime loans. Prior to filing for bankruptcy, Calyon New York Branch issued a notice of default to American Home, demanding that it repurchase the loans in Calyon’s possession. Soon after American Home filed for bankruptcy, Calyon sought a declaratory judgment finding that the agreement between the parties was a “repurchase agreement” as defined under the Bankruptcy Code.  Calyon also asked the court to find that the entire contract was a repurchase agreement, including the portion of the agreement governing loan servicing.

The court agreed with Calyon that the terms of the agreement rendered it a “repurchase agreement,” however, the court rejected Calyon’s argument that the loan servicing portion was a repurchase agreement. The court based its decision on the plain meaning of the contract. Applying the definition of “repurchase agreement” to the terms of the contract, the court found that American Home Mortgage agreed to transfer the originated loans to Calyon in exchange for funds, Calyon agreed to transfer the loans back to American Home Mortgage, also for funds, and the second transfer by Calyon was made within 180 days of the first.

By finding that the parties entered into a repurchase agreement, Calyon could proceed with its rights under the contract despite the automatic stay’s injunction against actions arising from a pre-bankruptcy default. However, Calyon did not receive such “safe harbor” protection for the loan servicing portion of the contract. Instead, the court found that the servicing component was an asset of American Home Mortgage that could be severed from the repurchase portion of the agreement.

In order to find that loan servicing could be severed from the repurchase agreement, the court considered several factors, most important of which was the language of the agreement. The loans were sold on a “servicing retained” basis, instead of “servicing released.” Had the parties intended to transfer the servicing rights to Calyon, the loan would have been structured as a servicing released agreement, resulting in Calyon paying a higher premium for the loans.

American Home Mortgage sheds light on how parties to a loan repurchase agreement can receive the protections provided under the Bankruptcy Code by satisfying the Code’s definition of “repurchase agreement.” It is the language of the agreement, not the economics of the transaction, that determine whether a contract is a repurchase agreement. Additionally, whether the servicing portion of the contract remains with the loan originator, versus the loan purchaser, also depends on the terms of the contract. By clarifying what constitutes a repurchase agreement under the Bankruptcy Code, American Home Mortgage provides guidance and certainty to parties drafting repurchase agreements, or those seeking to enforce their rights under an agreement with a lender in bankruptcy.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

The United States Bankruptcy Court for the District of Delaware recently approved a Trade Vendor Payment Program (the “Vendor Program” or “Program”) in the Linens N Things Center, Inc., et al.(“Linens”), bankruptcy . According to Linens' Motion to Approve Trade Vendor Payment Program, Linens created the Program in order to encourage trade creditors to extend credit to Linens with terms that were “no fewer than 45 days after receipt of goods.”  In return for 45 day creditor terms, creditors would receive the benefit of a letter of credit funded up to $100 million. The Vendor Program reflected a willingness by Linens’ committee of unsecured creditors to provide better trade terms, in exchange for better creditor protection.

Why Linens Filed and Why It Needed a Vendor Program

In 2006, Linens tried unsuccessfully to restructure and improve profitability. By 2007, Linens’ sales reached $2.8 billion, yet it was operating at a net loss of $191 million. Linens’ troubles were due in part to a poor housing market, resulting in lower sales and tighter credit. These conditions worsened during the beginning of 2008, resulting in Linens filing for chapter 11 bankruptcy protection in May of 2008.

As the second largest specialty retailer of products for the home (from bedding and towels, to cookware and small appliances), Linens deals with over 1,000 suppliers. In order to properly reorganize, Linens needed to maintain, and possibly improve, its supplier relationships. As a result, less than two months after filing for bankruptcy, Linens filed its Motion to Approve the Trade Vendor Payment Program.

During the hearing to consider the Vendor Program, counsel for the committee of unsecured creditors stated that the Program was critical to the success of the case. Without the Vendor Program, Linens’ trade creditors would continue to restrict trade credit, in turn limiting Linens’ cash flow. The creditors’ committee wanted to avoid a situation common in past retail bankruptcies where the debtor’s secured debt became so large that it diluted the administrative claims of trade vendors. Instead, the parties sought to institute a program that would provide vendors with creditor protections sufficient to continue the supplier relationships, plus provide more favorable payment terms to Linens.

The Design of the Vendor Program

Under the Vendor Program, participating creditors received the benefit of a letter of credit funded by Linens, up to $100 million. Vendors, in turn, agreed to 45 day terms, plus agree to “meet normal industry standards for performance regarding timing and completion levels of fill rates…”

The Vendor Program imposed limitations on both the participating creditors and Linens. Linens’ “Aggregate Approved Trade Creditors Account Balance” could not exceed twice the amount of the letter of credit. This provision, in essence, extended Linens’ trade to $200 million. Creditors who signed a confidentiality agreement would receive weekly reports of the aggregate amounts of Linens’ vendor account balance.

The Vendor Program also required concessions from the trade creditors. For example, individual creditors were not the direct beneficiaries of the letter of credit. Instead, a trustee, working under a “Collateral Trust Agreement” was designated as the beneficiary of the letter of credit. The trustee serves at the direction of a board of disinterested creditors (consisting of creditors who did not participate in the Vendor Program). The board of disinterred creditors, not the creditors as a whole, would decide when to draw on the letter of credit.

Recent reports indicate that more than 40 of Linens largest vendors have signed up for the Vendor Program. Suppliers participating in the Vendor Program include Springs Global US, the Yankee Candle Company, Croscill Home Fashions and M. Block & Sons. Such vendor support plays a prominent role in the success of Linens’ bankruptcy reorganization.

Conclusion

It remains to be seen whether the Linens’ Vendor Program provides trade creditors with the protections that are often lacking in other retail bankruptcies. Ideally, Linens will not “default” under the Vendor Program and the trustee’s duties and responsibilities under the Trust Agreement will never come into play. Regardless, the Vendor Program serves as example of parties in a bankruptcy proceeding working together to create innovative solutions with mutual benefit.

Finally, it should be noted that the motion approving the Vendor Program went uncontested during the bankruptcy court hearing. This, by itself, is remarkable given that even routine bankruptcy motions often receive “limited objections” from creditors seeking to reserve their rights or make clarifications on the record. Instead of opposing Linens’ motion, counsel for the committee of unsecured creditors spoke at length regarding the virtues of the Vendor Program. Hearing the evidence, and considering the comments from counsel, Judge Christopher S. Sontchi approved the motion and signed the order authorizing the Program. In doing so, the Court observed that the Linens’ Vendor Program was “more than a reasonable exercise of the debtors’ business judgment.”
 

• Email This
• Print
• Comments
• Trackbacks (1)
• Share Link