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

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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Earlier this month, GameTech International, Inc., and various related entities (collectively, "GameTech"), filed chapter 11 petitions for bankruptcy in the United States Bankruptcy Court for the District of Delaware. According to GameTech's Declaration in Support of its Chapter 11 Petitions (the "Decl."), the company entered the electronic bingo business in 1994  and the video lottery terminal ("VLT") and slot machine business in 2007.  Decl. at *5.   Based in Reno, Nevada, GameTech is a Delaware corporation that was incorporated in 1994.  GameTech also does business under GameTech Canada, a Canadian corporation and GameTech Mexico, a Mexican corporation.  Decl. at *3. 

The bingo segment of GameTech's business leases electronic bingo equipment and licenses operating software throughout the U.S. and Canada.  The company generates revenue through leasing and licensing fees with nonprofits, Native American tribes, casinos and other users of its equipment and software.  As for its VLT business, GameTech produces slot machines, video poker and other games and software.  Decl. at *3.  GameTech's total revenue for 2011 exceeded $30 million.  The company expects revenues to drop in 2012 and then increase again in 2013.  Id.

GameTech attributes its need for bankruptcy protection to a couple of factors.  First,  the gaming equipment market has become more competitive ever since 2008.  Further, GameTech's acquisition of the VLT business in 2007 has resulted in a "severe financial and operational strain" on the company.  Decl. at *7.  The VLT acquisition, coupled with the construction of new corporate headquarters, created liquidity problems which prevented GameTech from investing in technology upgrades.  Without the upgrades, GameTech has had trouble competing in the electronic gaming market.  Decl. at *8. 

The GameTech bankruptcy is due in part to the alleged actions of one of the company's competitors.  According to its Declaration,  prior to bankruptcy GameTech negotiated a forbearance agreement with its lenders.  The forbearance agreement expired on June 30, 2012.  Prior to its expiration, however, GameTech's lenders sold their rights and obligations under the credit agreement to one of GameTech's competitors.  Thereafter, the competitor notified GameTech that it was unwilling to further extend the forbearance agreement.  Soon after, the competitor sent GameTech a proposed merger agreement wherein it intended to acquire the company.  Once negotiations between GameTech and its competitor fell apart regarding the terms of a merger, GameTech filed its petitions for bankruptcy in Delaware.  Decl. at  *8-9. 

The GameTech bankruptcy is before Judge Peter J. Walsh.  GameTech is represented by the law firm Greenberg Traurig. 

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

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

    Seeking Relief from the Automatic Stay in Delaware.

    A Tale of Two Bankruptcy Auctions.

    What Information is Required in a Chapter 11 Disclosure Statement?

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In June, Northstar Aerospace and various related entities (collectively, "Northstar") filed chapter 11 petitions for bankruptcy in the United States Bankruptcy Court for the District of Delaware.  Northstar describes itself as a supplier of "components and assemblies for the commercial and military aerospace markets."  The company also provides machining, repair and overhaul services for the aerospace industry.  See Northstar's Declaration in Support of First Day Motions (the "Decl.") at *3.  The company enters bankruptcy following a marketing process for the sale of its business.  Id.  By filing for bankruptcy, Northstar hopes to continue with operations while the company finds a buyer.  Decl. at *4.  Click here to review a copy of Northstar's Declaration in Support of First Day Motions. 

Northstar operates six production facilities in the U.S. and Canada, the largest of which is located in Bedford Park, Illinois.  The Northstar U.S. Debtors include Northstar USA, Derlan USA Inc., Northstar Chicago and Northstar Phoenix.  Besides the U.S. companies, Northstar also has a Canadian parent company and various Canadian affiliates.  Decl. at *6.  The Northstar U.S. and Canadian entities work together to provide products used in helicopters manufactured by Boeing (the Apache helicopter), Sikorsky (the Blackhawk helicopter) and AgustaWestland (the Wildcat helicopter), among others.  Decl. at *7.  Even though the company provides parts and services to several helicopter manufacturers, the majority of Northstar's revenue comes from is contracts with Boeing.

Northstar attributes part of its need for bankruptcy on a lack of cash.  The company purchases metals and other raw materials from third party suppliers which must meet high standards set by Northstar customers.  Northstar's materials can only be purchased from qualified suppliers, however, the qualification process for a supplier can be both lengthy and expensive.  Decl. at *13.  Recent announcements concerning Northstar's financial problems have led most of Northstar's suppliers to require cash in advance or at the time of delivery.  Id.

Given that the Northstar bankruptcy was filed over a month ago, the Delaware Bankruptcy Court has had an opportunity to consider and rule on many of Northstar's initial motions.  On July 3rd, the Bankruptcy Court entered the following orders:

The Northstar bankruptcy is before Judge Peter J. Walsh.  Northstar is represented by the Delaware law firm, Bayard P.A. 

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

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

    Seeking Relief from the Automatic Stay in Delaware.

    A Tale of Two Bankruptcy Auctions.

    What Information is Required in a Chapter 11 Disclosure Statement?

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On March 21st, Blue Springs Ford ("Blue Springs") filed a chapter 11 petition for bankruptcy in the United States Bankruptcy Court for the District of Delaware.  Based in Blue Springs, Missouri, Blue Springs has operated as an authorized Ford dealership since 1978.  Like most dealerships, the company sells and services Ford vehicles and provides general maintenance and repair services.  See the Declaration of Blues Springs' President in Support of First Day Motions (the "Declaration" or "Decl.") at *2. 

At the time it filed for bankruptcy, Blue Springs employed 124 people and had monthly payroll expenses of approximately $557,000.  Decl. at *2.  Blue Spring operates under a financing agreement with Ford Motor Credit Company.  As of the petition date, Blue Spring had a secured debt obligation with Ford Motor Credit for approximately $7.9 million.  The company's unsecured debt obligations total $2.1 million.  Id.  Blue Spring achieved $60.8 million in net revenues in 2011. 

According to Blue Spring, its need to file for bankruptcy "is the direct result of the Debtor's involvement in pending state court litigation where the Debtor is vigorously defending itself."  Decl. at *3.  Prior to filing for bankruptcy, Blue Spring was sued in Missouri state court by a plaintiff alleging Blue Spring failed to fully disclose vehicle history regarding the sale of a used vehicle.  The state court litigation went to trial in February 2010 which resulted in a jury verdict against Blue Spring in the amount of $171,520 in actual damages and $1.75 million in punitive damages. 

Blue Spring sought unsuccessfully to have the state court judgment reduced, arguing that it was 54 times the amount of actual damages.  With remittutur unsuccessful, Blue Spring appealed.  Due to the size of the verdict, Blue Spring was unable to post bond pending the appeal.  According to Blue Spring, negotiations regarding the a resolution of the state court matter have been unsuccessful.  In order to try to protect itself from the judgment, Blue Spring filed for bankruptcy hoping to "preserve the value of its business and assets."  Decl. at *4. 

The Blue Springs bankruptcy is pending before the Honorable Mary F. Walrath.  Judge Walrath previously served as Chief Judge of the Delaware Bankruptcy Court.  Blue Springs is represented by the law firm Polsinelli Shughart P.C.

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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 and the United States Bankruptcy Court for the Southern District of Florida. You can reach Jason at (561) 804-4415, or jcornell@foxrothschild.com.

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Introduction

On October 4, 2011, Real Mex Restaurants, Inc. ("Real Mex") filed chapter 11 petitions for bankruptcy in the United States Bankruptcy Court for the District of Delaware.  In addition to Real Max, several of the company's subsidiaries also filed for bankruptcy protection.  These subsidiaries include Acapulco Restaurants, Inc., Chevys Restaurants, LLC, El Torito Restaurants, Inc., and El Paso Cantina, Inc. (collectively with Real Mex, the "Debtors").  This post will provide a brief summary of Real Mex's business operations, factors that lead to the company's bankruptcy filing, as well as the company's objectives now that it is in bankruptcy.  As I often do, much of the information provided in this post comes from the Declaration of Debtors' CFO in Support of First Day Motions (the "Declaration" or "Decl.").

Background

Real Mex describes itself as the "largest full service Mexican casual dining restaurant chain operator in the United States in terms of number of restaurants."  Decl. at *3.  As of June of 2011, Real Mex operated 178 restaurants, the vast majority of which are in California.  In addition to operating restaurants, Real Mex also franchises or licenses 30 restaurants in 10 states and two foreign countries.  The company's restaurants are spread all over the U.S., with stores in Washington state, New York, Florida and Louisiana (among others).  Id.

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Introduction

On October 17, 2011, commercial real estate developer Security National Properties Funding III, LLC ("Security National"), and certain affiliates filed chapter 11 petitions for bankruptcy in the United States Bankruptcy Court for the District of Delaware.  Based in Eureka, California, Security National owns and operates 33 commercial properties in fifteen states across the U.S.  The company's holdings include commercial office space, retail locations, a mobile home park and industrial-use property.  See Declaration of Security National's CFO (the "Declaration"), filed with the Bankruptcy Court in conjunction with its bankruptcy petitions.  As is often the case,  this post will look at the debtor-company's finances and operations, why the company filed for bankruptcy and what it hopes to achieve while in bankruptcy.

Security National's Finances and Operations

Security National owns properties throughout the United States with specific holdings in Alabama, Alaska, Illinois, Kansas, Maine, Michigan, Minnesota, Mississippi, Montana, Nebraska, New York, North Carolina, South Carolina, Texas and Wyoming.  The company acquired most of its properties between 1993 and 2006.  Security National describes its business strategy as acquiring underperforming properties and then implementing a "stabilization of these properties through aggressive leasing and cost-cutting measures."  Decl. at *3. 

In 2009, Security National's lenders conducted an appraisal of the company's properties.  According to the lender's appraisal, the company's real estate portfolio was valued at $176 million.  Since receiving this appraisal, Security National points out that it has improved occupancy rates and income on its properties.  Decl. at *3.

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Introduction

As reported in the media, Friendly's Ice Cream Corporation ("Friendly's"), filed petitions for bankruptcy this week in the United States Bankruptcy Court for the District of Delaware.  According to the Declaration of Friendly's CFO (the "Declaration" or "Decl."), Friendly's and four of its affiliates filed petitions for reorganization under Chapter 11 of the Bankruptcy Code.  Relying primarily on the Declaration, this post will look at Friendly's businesses, why the company filed for bankruptcy as well as what the company's objectives are now that it is in bankruptcy.

Friendly's Business

Friendly's describes itself as a "leading full-service, family-oriented restaurant chain and provider of ice cream products in the Eastern United States."  Decl. at *2.  Going in to bankruptcy, the company operates 490 restaurants in 16 states.  Aside from its restaurant operations, Friendly's also manufactures and sells ice cream in supermarkets and other stores.  Id.  Friendly's owns 250 of its restaurants, whereas the remaining stores operate under franchise agreements.  The company's franchised stores are operated by 40 independent businesses.  Id. at *5.  Restaurant sales reached over $213 million in the first eight months of this year.  Id.

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On September 7, 2011, NewPage Corporation ("NewPage" or "Debtors") filed petitions for bankruptcy in the United States Bankruptcy Court for the District of Delaware.  As stated in NewPage's Declaration in Support of First Day Motions (the "Declaration" or "Decl."), filed with the Bankruptcy Court, NewPage produces coated paper used in magazines, brochures catalogs and textbooks.  NewPage manufactures its products in paper mills located in Kentucky, Maine, Maryland, Michigan, Minnesota, Wisconsin and in Nova Scotia, Canada.  Decl. at *4.

NewPage sells the majority of products in the United States and Canada.  The company uses three primary sales channels - direct sales to customers, sales to brokers who re-sell the products to end users and specialty sales to packaging and label manufacturers.  Decl. at *7.  Going in to bankruptcy, NewPage's workforce consists of approximately 6,000 employees, 70% of whom are represented by labor unions.  The Debtors have 16 collective bargaining agreements with its unions, most of which are settled and ratified.  One collective bargaining agreement remains open and subject to negotiation as of the Debtors' petition date.

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Introduction

On June 26, 2011, clothing retailer Deb Shops, Inc. ("Deb") and its related entities filed petitions for bankruptcy in the United States Bankruptcy Court for the District of Delaware.  This post will look at why Deb filed for bankruptcy, the scope of the company's business, as well as provide an update on the Deb bankruptcy proceedings in the Delaware Bankruptcy Court.  Much of the information contained in this post comes from the Debtors' Declaration in Support of First Day Motions (the "Declaration" or "Decl."), filed in the Bankruptcy Court the same day Deb filed its petitions for bankruptcy.  Portions of Deb's Declaration are available here for review.

Reasons for Bankruptcy

It has been a long three years for retailers in the United States.  According to Deb, beginning in 2008 U.S. retailers have faced a challenging market due to the foreclosure crisis, increased unemployment and the tightening of commercial credit.  Decl. at *16.  The recession in the U.S. has reduced discretionary consumer spending, which in turn led to poor operating performance by Deb.  By January of 2009, Deb's poor performance triggered a loan covenant violation with its lenders.  Although the company was able to reach agreements with its lenders following the covenant breach, Deb continued to suffer from "liquidity issues" which made it difficult for the company to maintain proper inventory levels.  Decl. at *17.

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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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Equipment maker, Xerium Technologies, filed chapter 11 petitions for bankruptcy on March 30th in the United States Bankruptcy Court for the District of Delaware.  According to the Declaration filed by Xerium's CEO (the "Declaration"),  the company filed for bankruptcy in order to trim its debt down from $640 million to $480 million.  To achieve this, Xerium filed a prepackaged plan of reorganization with the Bankruptcy Court at the same time that it filed for bankruptcy.  A copy of Xerium's proposed plan is available here.

Xerium began soliciting votes for its plan of reorganization almost one month prior to its filing for bankruptcy.  Under the proposed plan,  the company's lenders and certain creditors will receive approximately 83% of Xerium's stock in exchange for new debt totaling $410 million.  Existing shareholders of Xerium will receive pro rata shares of the remaining 17% of the reorganized company's newly issued stock. 

Xerium manufacturers equipment used in the paper industry.  According to its Declaration, Xerium is "a leading global manufacturer and supplier" of consumable products used in the production of paper products.  The company's customers include International Paper, MeadWestvaco Corp. and Smurfit-Stone Corporation (read more about the Smurfit-Stone bankruptcy here).  According to Xerium's Bankruptcy Petition, the company's assets total $693 million against debts of $813 million. 

This bankruptcy proceeding is 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 bankruptcy attorney with Fox Rothschild LLP in Wilmington, Delaware.  You may contact Jason at 302 427 5512, or jcornell@foxrothschild.com.

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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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