Posted on July 27, 2009 by Jason Cornell, Esq.

JL French Automotive Castings Files for Bankruptcy Three Months After the Close of its 2006 Bankruptcy

Introduction

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

JLF's Business

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

In addition to manufacturing automotive parts, JLF operates an aluminum smelting facility which provides JLF with aluminum needed for its die-casting operations.  In order to meet expected production capacity, JLF made significant investments in aluminum separation and shredding equipment.  JLF invested in the new equipment to meet its own aluminum requirements, as well as provide aluminum to third party manufacturers. 

Events Leading to Bankruptcy

Like the auto part suppliers that filed for bankruptcy before it, JLF's revenues are closely tied to the auto industry.  According to its Declaration, 95% of JLF's revenue comes from four customers: Ford, GM, Chrysler and Magna International.  JLF designs its products for a particular auto manufacturer's vehicle.  To tailor its products to one manufacturer's design requires JLF to make substantial investments years prior to production.

In papers filed with the Bankruptcy Court, JLF cites forecasts for the auto industry predicting vehicle sales in 2009 to drop to 4.2 million vehicles, representing a 44% drop in production compared to 2008, and a 55% drop compared to 2007.  JLF made considerable investment in die-casting and smelting equipment in the years leading up to the present recession assuming its production would grow.  Instead, the company is faced with drops in revenue that leave JLF unable to satisfy its debt obligations (JLF's secured debt at the time it filed for bankruptcy totals $264 million). 

Conclusion

Days prior to filing for bankruptcy, JLF entered into a "Restructuring Lock-up Agreement" with its first and second lien lenders.  Under the agreement, JLF intends to convert the lenders' debt to equity in the reorganized company.  JLF intends to file its plan and disclosure statement soon after the commencement of its bankruptcy.  This proceeding is before the Honorable Kevin Gross.

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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 this, or any other Delaware bankruptcy proceeding, you may contact Jason at (302) 427-5512 or jcornell@foxrothschild.com.

 

 
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Posted on December 10, 2008 by Jason Cornell, Esq.

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

 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.

 

Analysis

The Court began its analysis by recognizing that under 11 U.S.C. § 547(f), the Debtor is presumed insolvent during the 90 days prior to the filing for bankruptcy. The Defendant, however, challenged whether the Debtor was insolvent during the 91st to 365th day prior to filing for bankruptcy (the "Insider Preference Period").  The issue for Court, therefore, was whether the Trustee could prove that the Debtor was insolvent during the Insider Preference Period.

The Court noted that the Trustee did not offer an insolvency report or expert testimony to prove insolvency.  Instead, the Trustee relied upon a partner in his firm who testified after reviewing the Debtor's books and records.  At trial, the Trustee's witness testified that the Debtor was insolvent during the year prior to bankruptcy.  The witness based her testimony, in part, on the Debtor's financial records and a "Balance Sheet Summary" the witness prepared prior to trial.

After considering the evidence, the Court found that the Debtor was insolvent during the one year preference period.   In reaching this conclusion, the Court first looked to § 101(32)(A)'s definition of "insolvent" under the Bankruptcy Code.  The Code defines insolvent as "the financial condition such that the sum of such entity's debts is greater than all of such entity's property, at fair valuation."  The Trustee's solvency analysis failed to consider the fair market value of Debtor's assets, instead relying on a balance sheet analysis.  The Trustee's lack of proof regarding the Debtor's assets was "problematic" to the Court.

The Court noted that the issue of proving insolvency was previously addressed in Lids Corp. v. Marathon Investment Partners, L.P., (In re Lids Corp.), 281 B.R. 535 (Bankr.D.Del. 2002).  In Lids,  the Court held that the "balance sheet test" is typically applied, however, such a test is based on "fair valuation and not based on Generally Accepted Accounting Principles ("GAAP") which are used to prepare a typical balance sheet." Id.  Applying Lids, the Court in Bernard Technologies held that  a "solvency analysis requires asset valuation [of the Debtor]."

Conclusion

Despite the Trustee's reliance on "balance sheet" analysis instead of "valuation," the Court in Bernard Technologies found that the Debtor was insolvent.  It did so for two reasons.  First, the Trustee had the presumption of insolvency during the 90 day preference period and the presumption was not rebutted by the Defendant.  The Trustee also established that the Debtor was unable to "meet its obligations as they came due."  The Defendant, however, did not establish that the Debtor was solvent, nor did it introduce evidence regarding the value of the Debtor's assets.  Based on such evidence, the Court found that the Debtor was insolvent at the time of the transfers. The clear message from this decision is that when a party is seeking to prove or disprove the solvency of a debtor,  they should present qualified evidence regarding the fair market value of the Debtor's assets.   

 
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