Posted on November 18, 2009 by Jason Cornell, Esq.

Trustees in the Pope & Talbot and Specialty Motors Bankruptcies File Hundreds of Preference Actions

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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Posted on September 17, 2009 by Jason Cornell, Esq.

Metal Manufacturer, Barzel Industries, Files Bankruptcy Seeking To Sell Majority of Assets

Introduction

Barzel Industries, the Massachusetts-based metal manufacturer, filed for bankruptcy on September 14, 2009, in the United States Bankruptcy Court for the District of Delaware.  One of the initial documents Barzel filed with the Bankruptcy Court is a Declaration in Support of First Day Pleadings (the "Declaration").  According to the Declaration, as of the petition date Barzel has 600 employees working at 15 different manufacturing and distribution facilities in the U.S. and Canada.

Events Leading to Bankruptcy

According to the Declaration, Barzel's bankruptcy was the result of operating losses that began in 2008 and continued in to 2009.  Barzel ties its losses directly to the "current global economic recession and credit crisis, and the resulting dramatic downturn in the automotive, transportation, manufacturing and construction industries in the United States and Canada."  These industries account for much of Barzel's business.  Barzel's problems worsened following a drop in the price of steel.  With prices and demand both down, Barzel sought to reduce expenses and improve its operations by closing 6 facilities and reducing its workforce by 350 employees.

Barzel's cost-cutting measures were not enough and in May of this year, the company missed an interest payment due on its Senior Secured Notes, two-thirds of which are held by JPMorgan Chase.  With few options remaining, Barzel began looking for potential purchasers of the company.  As a result of its marketing efforts, 72 parties executed confidentiality agreements and 12 made offers to pursue a purchase transaction.

On September 14, 2009, Barzel entered into an asset purchase agreement with Chriscott USA Inc. and 4513614 Canada.  Under the APA, Barzel will sell substantially all of its assets for $65 million unless a better offer comes about through the bankruptcy auction process.  Barzel's lenders have agreed to finance its bankruptcy proceeding through December 11, 2009, while Barzel completes the auction process. 

According to Barzel's Bankruptcy Petition, its assets total $365 million against debts totaling $384 million.  This bankruptcy is before the Honorable Christopher S. Sontchi.

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Jason Cornell is a bankruptcy attorney with Fox Rothschild LLP in Wilmington, Delaware.  If you have questions regarding this or any other bankruptcy proceeding, you may contact Jason at 302 427-5512, or jcornell@foxrothschild.com. 
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Posted on August 10, 2009 by Jason Cornell, Esq.

Auto Parts Manufacturer, Proliance International, Files for Bankruptcy 18 Months After a Tornado Destroys Distribution Facility

Introduction

Proliance International ("Proliance" or "Debtor"), an automotive heating and cooling parts manufacturer, filed for bankruptcy in the United States Bankruptcy Court for the District of Delaware on July 12, 2009.  The Debtor is represented by Jones Day of New York.  This bankruptcy proceeding is before the Honorable Christopher S. Sontchi of the Delaware Bankruptcy Court.  A review of the docket shows that the Court recently entered several of the Debtor's "first day motions" including a motion allowing the Debtor to honor certain pre-bankruptcy obligations and customer programs.  The United States Trustee has scheduled a meeting of creditors for August 14, 2009 at 4:00 p.m. (click here to read a prior post on section 341 meeting of creditors). 

 

Debtor's Business

According to Proliance's Declaration in Support of First Day Motions (the "Declaration"), the company's origins go back to 1915 when it began manufacturing radiators for automobiles and fire engines.  Proliance today is the product of a merger between Transpro Inc. and Modine Aftermarket Holdings, Inc..  There are two primary component's to the Debtor's business - domestic and international operations. 

On February 5, 2008, a tornado destroyed Proliance's domestic distribution center in Southaven, Mississippi.  The tornadoes ruined a substantial portion of Proliance's auto and truck heat exchange inventory.  With the loss of this inventory, Proliance encountered "severe liquidity constraints" which the company views as "one of the major precipitating factors for these cases."  See Debtors' Declaration at p. 5.

Debtor's Financials

Within the U.S., Proliance is one of the largest manufacturers of heat exchange products.  The company list net sales for 2008 of $350 million.  According to the Declaration, sales for 2008 were down 11.1% when compared to 2007.  The Debtor attributes most of its drop in sales in 2008 to the destruction of its Mississippi distribution center. 

In 2007, Proliance entered into a prepetition credit agreement with Silver Point Finance as administrative agent and collateral agent for the prepetition lenders.  Although the prepetition credit facility provides up to $100 million in debt, going into bankruptcy the company owed $33.6 million under a term loan and $6.5 million under a revolving loan facility.  

The Debtor estimates its trade debt totals $51.7 million.  This amount includes moneys owed to both domestic and foreign vendors.  According to Proliance's Bankruptcy Petition, its ten largest unsecured creditors include the following:

  1. Enterex Industrial ... $17.1 million
  2. Transtec Global ... $11.8 million
  3. U&C Auto Parts ... $2.6 million
  4. Alcoa Mill Products ... $1.8 million
  5. Luvata Netherlands ... $1.3 million
  6. Foshan Guang Dong Automotive ... $1.2 million
  7. President Automotive Industries ... $1.2 million
  8. Lumei Auto Radiator ... $1.1 million
  9. Sapa/Norca Heat Transfer ... $918,685
  10. Tianjin Xinyue Auto Part Co. ...$878,026 

The company lists total assets of $160 million against debts totaling $133 million.

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Jason Cornell is a bankruptcy attorney with the law firm Fox Rothschild LLP in Wilmington, Delaware. 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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Posted on July 12, 2009 by Jason Cornell, Esq.

Diabetes Supply Company, Chronic Care Solutions, Files for Bankruptcy in Delaware

Introduction

CCS Medical Holdings ("CCS" or the "Debtor"), the parent of Chronic Care Solutions, KeyMed, TotalCare Wholesale, and other diabetes and chronic care suppliers, filed for bankruptcy on July 8, 2009.  CCS filed its bankruptcy petition in the United States Bankruptcy Court for the District of Delaware.  According to CCS's Declaration in Support of its First Day Pleadings (the "Declaration"),  CCS provides testing and insulin pump supplies to diabetes patients.  Besides diabetes equipment and supplies, CCS also sells urology, wound and respiratory care equipment. 

Going into bankruptcy, CCS has 1,600 employees, most of whom work in CCS's call centers addressing the needs of the Debtor's 400,000 patient-customers.  CCS's operations include patient enrollment, patient support, shipping and billing.  Based in Clearwater, Florida, CCS operates distribution centers in Florida, Virgnia, California, Colorado, Georgia and Texas.  Besides its distribution centers, CCS operates 37 offices in 17 states. 

First Steps in Bankruptcy

Nine days after filing for bankruptcy, CCS filed its proposed disclosure statement and plan of reorganization.  According to its Declaration, the terms of the CCS plan is "supported by over 70% in amount of the outstanding obligations under the First Lien Credit Agreement."  Further, Debtors contend that the "purpose of the plan is to provide for the restructuring of the Debtors' liabilities in a manner designed to maximize recovery to all stakeholders and to enhance the financial viability of the Debtors upon emergence from chapter 11."

Conclusion

CCS's prepetition debt totals $519 million, $329 million of which arises from a first lien revolver and term loan originated in September of 2005.  The company attributes its bankruptcy to lower than expected earnings that arose, in part, from reductions in Medicare reimbursement rates. 

This bankruptcy proceeding is before the Honorable Christopher S. Sontchi. 

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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 May 30, 2009 by Jason Cornell, Esq.

Visteon Corporation, a Former Division of Ford Motor Company, Files for Bankruptcy in Delaware

Introduction

Visteon Corporation  filed for bankruptcy in the United States Bankruptcy Court for the District of Delaware on May 28, 2009.  According to Visteon's Declaration in Support of First Day Motions (the "Declaration"), Visteon is one of the largest suppliers of automotive components to original equipment manufacturers ("OEM") worldwide.  With manufacturing and engineering facilities in 27 countries, Visteon's sales reached $9.54 billion in 2008. 

Ford's Role in Visteon's 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.

Despite is aggressive restructuring,  Visteon suffered considerable losses due to the global recession.  As stated in its Declaration, Visteon contends that the decline in the automotive industry caused it to receive a "going concern" opinion from its auditors that constituted an event of default under its secured credit facility.  In response to its going concern default, Ford, a major Visteon customer, agreed to take an assignment of Visteon's working capital loan agreement on May 13, 2009.  Recognizing the importance of Visteon to its own business, Ford agreed to support debtor-in-possession financing for Visteon's bankruptcy proceeding. 

Visteon's Creditors

It is always helpful to know who a debtor's creditors are to understand the dynamics of a particular bankruptcy.  According to Visteon's Petition for Bankruptcy,  the Bank of New York serves as administrative agent for three different bonds:  one issue for $450 million and two separate bond issues for $206 million.  Visteon lists the following organizations as holding the ten largest unsecured trade claims:

  1. Jabil Circuit, Inc.  ... $7.0 million
  2. IBM Corp. ... $5.7 million
  3. Freescale Semiconductor ... $4.4 million
  4. Ogura Corp. ... $3.1 million
  5. QAD, Inc. ... $2.4 million
  6. SL Alabama ... $2.3 million
  7. AT&T ... $2.1 million
  8. Hollingsworth Logistics ... $1.9 million
  9. Brown Corp. ... $1.9 million
  10. Unigraphics Solutions ... $1.7 million

This bankruptcy proceeding is before the Honorable Christopher S. Sontchi.  To read a recent decision of Judge Sontchi in an another bankruptcy proceeding (the American Home Mortgage bankruptcy), click 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 this, or any other Delaware legal proceeding, you may contact Jason at (302) 427-5512 or jcornell@foxrothschild.com.
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Posted on May 27, 2009 by Jason Cornell, Esq.

White Energy, One of the Largest Ethanol Producers in the U.S., Files for Bankruptcy in Delaware

Introduction

White Energy, Inc. ""White Energy" or the "Debtor"), one of the largest ethanol and gluten producers in the United States, filed for bankruptcy in the United States Bankruptcy for the District of Delaware on May 7, 2009.  According to its Declaration in Support of First Day Motions (the "Declaration"), White Energy generated over $500 million in revenue in 2008.  Based in Dallas, Texas,  White Energy operates three ethanol production facilities in Kansas and Texas. 

White Energy produces both ethanol and gluten (an ingredient used by food producers) at its Russell, Kansas facility.  As stated in its Declaration, the Debtor processes wheat to make gluten.  White Energy uses starch, a byproduct from gluten production, in its ethanol production. By doing so, White Energy is able to reduce its overall costs to produce ethanol.

Debtors' Financials

In July of 2006, White Energy entered into a $298 million senior secured loan with WestLB as administrative agent.  Leading up to bankruptcy, White Energy's lenders declared several events of default under the secured loan, including (i) a failure to pay property taxes, (ii) failure to make payments under construction contracts and (iii) failure to pay franchise taxes.  White Energy tried unsuccessfully to get its lenders to agree to restructure its debt.  Unable to reach an agreement with its lenders, White Energy soon filed for bankruptcy. 

According to White Energy's bankruptcy petition, the following entities hold the ten largest unsecured claims against this debtor:

  1. ADM ... $2.9 million
  2. The Scoular Co. ... $1.8 million
  3. Novozymes NA ... $608,526
  4. Nexen ... $379,113
  5. City of Hays ... $346,056
  6. Oneok Energy ... $317,000
  7. Russell County ... $290,457
  8. Milbank Tweed ... $208,731
  9. Univar USA ... $134,385
  10. Occidental Chemical ... $114,170

White Energy entered into the ethanol industry in 2006.  Since then, commodity prices have become exceptionally volatile with corn prices reaching double their normal price per bushel.  At the same time that commodity prices reached historic highs, the oversupply of ethanol has kept prices low.  The resulting low profit margins strained White Energy's cash flow, which in turn led to loan defaults and bankruptcy.

This bankruptcy proceeding is before the Honorable Christopher S. Sontchi.

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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 legal proceeding, you may contact Jason at (302) 427-5512 or jcornell@foxrothschild.com.

 
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Posted on April 23, 2009 by Jason Cornell, Esq.

Linens N Things Commences Preference Actions

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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Posted on April 20, 2009 by Jason Cornell, Esq.

Decision in Broadstripe Bankruptcy Looks At Standard for Preliminary Injunctive Relief

Introduction

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

Background

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

Two weeks after filing for bankruptcy, Broadstripe filed an adversary proceeding with the Bankruptcy Court against NCTC.  The adversary proceeding included a Motion for Declaratory and Injunctive Relief against NCTC.  One day after the commencement of the adversary proceeding, the Court granted a temporary injunction barring NCTC from excluding Broadstripe from participating in new and existing programming agreements.  One month later, the Court conducted a two day evidentiary hearing on the Motion.  Less than three weeks after the evidentiary hearing, the Court issued its Findings of Fact and Conclusions of Law. 

Requirements for Injunctive Relief in Bankruptcy

The Court began its analysis by recognizing that Federal Rule of Bankruptcy Procedure 7065 grants bankruptcy courts with equitable power to issue temporary restraining orders and preliminary injunctions.  Parties seeking either form of relief must demonstrate (i) a reasonable likelihood of success on the merits; (ii) a likelihood that it will suffer irreparable harm if the requested relief is denied; (iii) that the nonmoving party will not suffer even greater harm if the injunction is granted; and (iv) that public interest favors granting such relief.  See Kos Pharm., Inc. v. Andrx Corp., 369 F.3d 700, 708 (3d Cir. 2004). 

The Court next cited the Third Circuit's decision in GlaxoSmithKline Consumer Healthcare, L.P. v. Merix Pharm. Corp.,  197 Fed. Appx. 120, 124 (3d Cir. 2006)(holding that in deciding whether to issue an injunction, the court must balance the probabilities of ultimate success at the final hearing against the consequences of immediate irreparable injury).  Under GlaxoSmithKline, courts must conduct a "delicate balancing" wherein the factors considered by the court are given the appropriate weight.  Id. 

Applying these standards, the Court in Broadstripe found that the Debtors were likely to prevail on both counts in its complaint.  The Court next looked at whether Broadstripe established the likelihood of irreparable harm were the injunctive relief requested denied. Broadstripe satisfied this part of the standard by demonstrating that without the continuation of the NCTC agreements, Broadstripe would be unable to continue providing cable, internet and phone services.  Without granting injunctive relief, the Court found that "Broadstripe could be irreparably harmed."

After considering the likelihood of success and the harm to Broadstripe, the Court considered the harm to NCTC.  Here, the Court found that NCTC would not be harmed by allowing Broadstripe to continue participating in the programming agreements.  The Court recognized that NCTC had a claim against Broadstripe for nonpayment totaling $3.4 million.  However, such harm was "fixed as of the Petition Date and can neither be lessened nor worsened by the approval (or denial) of the injunctive relief requested herein."

Finally, as to the last prong of the analysis - public policy, the Court cited the Supreme Court's decision, NLRB v. Bildisco & Bildisco, for its finding that "the fundamental purpose of reorganization is to prevent a debtor from going into liquidation, with an attendant loss of jobs and possible misuse of economic resources."  104 S.Ct. 1188, 1197 (1984).  Recognizing that to deny the injunctive relief would cause injury to both Debtors' business and its customers, the Court in Broadstripe easily found that the public policy component of the analysis was satisfied. 

Conclusion

Injunctive relief is sometimes viewed as an extraordinary remedy.  Even so, such relief may be appropriate if it furthers the intent of the Bankruptcy Code.  The Court in Broadstripe cited a First Circuit decision, Engine Specialties, Inc. v. Bombardier Ltd. for its finding that "an injunction is proper to prevent the threatened extinction of a business."  454 F.2d 527 (1st Cir. 1972).  When seeking injunctive relief in bankruptcy, movants should keep this idea in mind - will the injunction further the intent behind reorganization.  Those movants who can make such a showing may be more successful in obtaining injunctive relief.
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Posted on April 4, 2009 by Jason Cornell, Esq.

Sporting Retailer, Sportsman's Warehouse, Files for Bankruptcy

Introduction

Sportsman's Warehouse, the Utah-based sporting retailer, filed for bankruptcy in Delaware on March 21, 2009.  Sportsman's Warehouse filed for bankruptcy along with its wholly-owned subsidiaries (collectively, the "Debtors").  At the time they filed bankruptcy, Debtors employed over 3,200 employees in their stores, headquarters and distribution centers.  According to Debtors' Declaration in Support of First Day Motions (the "Declaration"),  Debtors' assets in 2008 totaled $436 million, against liabilities of $452 million.  Further, revenues reached $741 million in 2008, yet Debtors incurred operating losses of $25 million.

Events Leading to Bankruptcy

According to Debtors' Declaration,  "Sportsman's Warehouse is another retailer victim of the worldwide global recession."  From 2006 to 2007, Debtors grew their operations by adding twenty-one stores.  However, by the end of 2007, Debtors' same store sales began to decline.  The drop in sales caused Debtors to experience liquidity problems, forcing Debtors to refinance various loans with their lenders.  Despite refinancing with their lenders, Debtors liquidity problems continued throughout 2008. 

Debtors' problems worsened when Seidler Equity Partners, an investor group that purchased a 25% equity stake in the Debtors in 2007, exercised its right to "put" the shares it previously purchased back to the Debtors.  Looking for cash, Debtors entered into a letter of intent with United Farmers of Alberta ("UFA") on November 3, 2008.  The parties closed the transaction approximately two weeks before Debtors filed for bankruptcy.  Under the deal, UFA purchased 15 of Debtors' stores for $90 million. 

Prior to filing for bankruptcy, Debtors decided to begin a store-closing process in order to close under performing stores.  Gordon Brothers Retail Partners, LLC was hired to conduct the store closing sales and on March 11, 2009 store closing sales began.

Objectives in Bankruptcy

As stated in their Declaration, Debtors filed bankruptcy hoping "to consummate either a sale or plan of reorganization centered on the ongoing operations of a smaller, viable chain of Sportsman's Warehouse stores." 

This bankruptcy proceeding is before the Honorable Christopher S. Sontchi of the United States Bankruptcy Court for the District of Delaware.  Debtors are represented by Skadden Arps Slate Meagher & Flom LLP.

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Jason Cornell is a bankruptcy attorney in Fox Rothschild's Financial Services department. If you have any questions regarding this, or any other bankruptcy proceeding discussed on the Delaware Bankruptcy Litigation Blog, you may contact Jason at (302) 427-5512 or jcornell@foxrothschild.com.

 
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Posted on April 1, 2009 by Jason Cornell, Esq.

Despite Having No Funded Debt, Sun-Times Media Files for Bankruptcy Hoping to Sell Assets Under Section 363

Introduction

Chicago media giant, Sun-Times Media Group ("Sun-Times" or "Debtors"), filed chapter 11 bankruptcy petitions in the Delaware Bankruptcy Court on March 31, 2009.  In initial pleadings filed with the Bankruptcy Court,  Sun-Times states that it is in a "unique position" for a newspaper company in bankruptcy in that it filed bankruptcy "without any outstanding funded debt."  Unlike other media companies in bankruptcy, Sun-Times claims to have a "significant pool of unencumbered assets."  Click here to read Sun-Times' Declaration in Support of First Day Motions (hereinafter, the "Declaration"). 

Debtors' Businesses

Sun-Times is the parent company for over 100 newspapers, websites and other news media in the Chicago area.  Besides publishing and distributing the Chicago Sun-Times, Debtors own Pioneer Press Group which publishes 39 weekly papers in the Chicago suburbs, the SouthtownStar, the Post-Tribune in Indiana, the Beacon News in Aurora, Illinois and the Napersville Sun in Napersville, Illinois.  On weekdays, the Chicago-Sun Times' circulation exceeds 319,000 copies, while Debtors' suburban daily and weekly papers reach 217,000 copies. 

 

In addition to print, Debtors offer news media via the web.  In any given month, 3.4 million visitors will read news and information from Suntimes.com.  Ad revenue from Debtors' websites continues to grow.  Despite revenue growth from Internet publications,  Debtors were forced to file bankruptcy in order to respond to what the Debtors refer to as a "deteriorating economic climate," a drop in print advertising revenue and substantial tax liabilities to the IRS.

Debtors' Financials

According to its Declaration, Sun-Times generated revenue in 2008 totaling $324 million and operating losses  of $344 million.  Debtors' largest trade creditors, as listed in the Sun Times bankruptcy petition, include:

  • Catalyst Paper ... $1.5 million
  • Alberta Newsprint ... $1.1 million
  • Tembec Enterprises ... $1.0 million
  • Chicago Tribune Distribution ... $615,000
  • United Temps ... $370,000
  • Skybridge ... $328,000
  • Web Printing Controls ... $260,000
  • Classified Plus, Inc. ... $211,000
  • Security Professionals, Inc. ... $174,000
  • Central Ink Corp. ... $162,000

First Steps in Bankruptcy

As is common in Delaware, when a corporate debtor files for bankruptcy, it files various "first day" motions at the same time that it files its petition for bankruptcy.  One of the first motions filed by Sun-Times is its Motion for Authority to Pay Prepetition Claims of Shippers and Lien Claimants (the "Shippers Motion").  Pursuant to the Shippers Motion,  Debtors rely on third-party carriers and truckers to assist in distributing Debtors' papers. 

At the time Sun-Times filed for bankruptcy,  many of its carriers had outstanding invoices for prior deliveries.  Were Sun-Times not to pay its shippers, its papers would not be distributed to customers.  To avoid this risk, Sun-Times' Shippers Motion seeks to set aside $800,000 for what it classifies as "shipping claims."  In essence, the Shippers Motion is a critical vendor motion for the Debtors.  (To read other posts on this blog discussing critical vendor motions, click here.)

Through bankruptcy, Debtors hope to "reset the Company's cost structure, stabilize operations and consider strategic alternatives, which likely will include commencing a process for a sale of the Company's assets pursuant to Bankruptcy Code section 363."  See Declaration at p. 3.  This bankruptcy proceeding is before the Honorable Christopher S. Sontchi. 

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Jason Cornell is a bankruptcy attorney in Fox Rothschild's Financial Services department.  If you have any questions regarding this, or any other bankruptcy proceeding discussed on the Delaware Bankruptcy Litigation Blog, you may contact Jason at (302) 427-5512 or jcornell@foxrothschild.com.

 
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Posted on March 20, 2009 by Jason Cornell, Esq.

Issues Relevant To The Fairchild Corporation Bankruptcy: What are the Standards for DIP Financing Priming Liens and Granting Relief from the Automatic Stay?

Introduction

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

The DIP Financing Motion and Relief From the Automatic Stay

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

Pursuant to paragraph 65 of the DIP Motion, Fairchild proposes that the automatic stay under 11 U.S.C. 362 be vacated to permit the DIP lenders to perform "any acts necessary to implement" the DIP Facility.  In addition, Fairchild seeks to lift the automatic stay for the lenders "to the extent necessary to exercise, upon the occurrence and during the continuation of any event of default ... and to take various actions without further order of or application to the Court."  Although the DIP Motion does not contain citations for granting relief from the automatic stay, it notes that "[s]tay modification provisions of this sort are ordinary and usual features of debtor in possession financing."  This blog post will look at the standard often applied in Delaware for parties seeking relief from the automatic stay.

Scope of the Automatic Stay

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

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

Relief from Stay

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

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

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

Conclusion

The relief from stay sought for the DIP lenders in the Fairchild DIP Motion serves as one example of the importance of the automatic stay.  Through the DIP Motion, Fairchild seeks to preemptively lift the automatic stay so its lenders can exercise their rights in the event of a default.  Without receiving such blanket protection, lenders may be unwilling to lend to a debtor in possession.  Regardless, the automatic stay is a fundamental protection provided to debtors.  It is always helpful to understand the scope of the stay, as well as the parameters applied when a party seeks relief from the automatic stay.

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If you have any questions regarding this, or any other bankruptcy proceeding discussed on the Delaware Bankruptcy Litigation Blog, please contact Jason Cornell, Esquire at (302) 427-5512 or jcornell@foxrothschild.com.
 
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Posted on February 6, 2009 by Jason Cornell, Esq.

Autobacs Strauss Files For Bankruptcy

Autobacs Strauss, the after-market auto parts and auto service provider, filed a chapter 11 bankruptcy petition in the Delaware Bankruptcy Court on February 4, 2009.  As reflected in Autobacs' declaration in support of its bankruptcy motions,  Autobacs operates 86 retail stores and has approximately 1,450 employees.  At the beginning of 2009, it listed assets valued at $75 million and liabilities of $72 million.

Autobacs is a subsidiary of Autobacs Seven, a Japanese auto parts retailer.  Autobacs Seven formed the Debtor in March of 2007 through the purchase of bankrupt auto parts suppliers R&S Parts and 1945 Route 23 Associates.  Autobacs Seven invested substantial assets in the Debtor in order to renovate stores and expand product lines.  Although Debtor's expansion allowed it to increase sales, it was never able to generate a profit. 

Autobac's objectives in bankruptcy include closing poor performing stores and focusing more on auto services.  This proceeding is before the Honorable Christopher S. Sontchi.

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