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Delaware Bankruptcy Litigation

Information on Corporate Bankruptcy Proceedings in Delaware and Throughout the United States

Quantum Foods: The Intersection of Preference Litigation and Administrative Claims

Posted in Opinions

On July 25, 2016, Judge Kevin Carey of the Delaware Bankruptcy Court issued a thorough decision pursuant to a motion for judgment on the pleadings analyzing the intersection of a preference defendant’s post-petition administrative claim and their preference exposure.  A copy of the Opinion is available here.

In the Opinion, Judge Carey cites the Third Circuit’s Friedman’s decision extensively:  Friedman’s Liquidating Tr. v. Roth Staffing Co., LP (In re Friedman’s, Inc.), 738 F.3d 547 (3d Cir. 2013).  According to the Friedman’s court, “As articulated by the Third Circuit in Friedman’s, the preference analysis cannot be affected by post-petition activity.”  Further, “The judicial consensus is that setoff is only available in bankruptcy when the opposing obligations arise on the same side of the . . . bankruptcy petition date.”  Opinion at *7.

Judge Carey provides a thorough explanation of the various theories by which preference defendants may attempt to reduce their preference liability through post-petition transfers.  He holds that a post-petition transfer cannot offset, or otherwise act as new value to reduce, a preference payment.  Opinion at *7-8.  He then turns to the plaintiff’s argument in its motion for judgment on the pleadings that pursuant to Section 502, the defendant is not entitled to any payment, including administrative payments, until the preference payment is satisfied.  In the Opinion, Judge Carey holds to the contrary, concluding his Opinion with the following quote from the Friedman’s decision:

If it is a rule in bankruptcy that all creditors must be treated equally, surely the exceptions swallow the rule. It could be said that some creditors are treated more equally than others. There are special provisions for aircraft leases and shopping center leases, and some claims are given priority over others. The balancing of interests in, for instance, wage orders, has been held to justify the type of unequal treatment condemned in cases that would include the post-petition payment in the preference analysis. See, e.g., In re Primary Health Sys., Inc., 275 B.R. 709, 709 (Bankr. D. Del. 2002) (holding payments pursuant to court order allowing debtor to pay employee wages and benefits to be out of reach of § 547). Inequality per se is not to be avoided; indeed, reasoned and justified inequality sometimes prevails, usually based on what is in the best interest of the estate. For this reason, the courts positing that the interpretation that “results in absolutely equal treatment of all unsecured claims” is the “most reasonable interpretation of section 547(c)(4),”. . . are misguided.

Opinion at *10.


Defenses to a Preference Action

The Bankruptcy Code provides creditors with many defenses to preference actions. While the efficacy of the preference defendants’ attempt to reduce exposure in this case is still in question, it does not look like it will be an easy decision for the court or a briefly litigated issue.  Other defenses are more common, and more easily gauged.  Included among these are the “ordinary course of business defense” and the “new value defense.” For reader’s looking for more information concerning claims and defenses in preference litigation, attached is a booklet I prepared on the subject: “A Preference Reference: Common Issues that Arise in Delaware Preference Litigation.”

John Bird is a bankruptcy attorney with the law firm of Fox Rothschild LLP.  John is admitted in Delaware and regularly practices before the United States Bankruptcy Court for the District of Delaware. You can reach John at (302) 622-4263 or at jbird@foxrothschild.com.

Appalachian Conventional Production Comp Files Chapter 7 Liquidation

Posted in Bankruptcy Case Summaries

On July 13, 2016, Appalachian Conventional Production Comp (“Appalachian” or “Debtor”) filed a Chapter 7 liquidation in the United States Bankruptcy Court for the District of Delaware.  According to the Debtor’s Petition, Appalachian has assets less totaling less than $500,000, and liabilities between $500,000 and $1 million.  Click here to view a copy of Appalachian’s Petition, Schedules of Assets and Liabilities, and Statement of Financial Affairs.

Appalachian previously went by the name of Hayden Harper Energy KA, LLC, which was formed in August 2009 with a focus on the acquisition and development of low-risk conventional oil and gas properties in the Appalachian Basin.

The Debtor’s Section 341 meeting of the creditors is scheduled for August 11, 2016 at 11:00 a.m. at J. Caleb Boggs Federal Building, 844 King St., Room 2112, Wilmington, DE 19801.

Carl D. Neff is a partner with the law firm of Fox Rothschild LLP.  You can reach Carl at (302) 622-4272 or at cneff@foxrothschild.com.

Qui Tam Motions and Settlements

Posted in Opinions

John O’Toole writes:

On July 13, 2016, Judge Kevin J. Carey denied a former shareholder’s (the “Movant”) Motion to Proceed Qui Tam (the “Motion”) against the chapter 11 debtors (the “Debtors”) in In re Syntax-Brillian Corporation, Case No. 08-11407 (KJC) (Bankr. D. Del. Jul. 13, 2016).  A copy of the opinion is available here.  The Motion would have allowed the Movant to exercise his power under the False Claims Act (“FCA”) to bring a civil action on behalf of the United States against, among others, the Debtors.  As a threshold matter, Judge Carey determined that because the Movant had previously entered into a “Settlement Agreement Resolving Shareholder Claims” by which he agreed to release any claims “concerning, arising from or related to” the Debtors and the chapter 11 cases, the Movant lacked standing to bring the Motion.  Despite the Movant’s lack of standing, the Court heard the Motion because former shareholders who were not parties to the Settlement Agreement, and thus had standing, filed papers in support of the Motion.

The Court ultimately denied the Motion because the Movant failed to “establish a prima facie case under the [FCA].”  Opinion at *6.  In order to proceed qui tam “under the [FCA] a plaintiff must prove: (1) the defendant presented or caused to be presented to an agent of the United States a claim for payment; (2) the claim was false or fraudulent; and (3) the defendant knew the claim was false or fraudulent.”  Opinion at *6.  The Movant’s allegations suggested only that the government should have taken action to protect him and other former shareholders from the alleged fraud perpetrated by the Debtors, not that the government itself had been aggrieved by the Debtors’ fraud.  Thus, as the “primary purpose of the FCA is to indemnify the government…against losses caused by a defendant’s fraud,” Judge Carey determined that the Motion was deficient.  Opinion at *5.

Also of note is a footnote in the Court’s opinion that indicates that, even if the Movant had standing and the assertions in the Motion validly stated a claim under the FCA, the Court does not have jurisdiction.  The Court stated that it “lacks jurisdiction to determine [the Motion] because qui tam suits under the [FCA] must be heard in a federal district court.”  Opinion at *7 n. 18.

John O’Toole is a summer associate, resident in the firm’s Wilmington office.

Executive’s Unpaid Stock-Based Compensation Considered an Equity Security by the Court

Posted in Opinions

On July 18, 2016, Judge Walrath issued a concise written opinion ruling upon whether an executive’s claim for unpaid stock-based compensation was an equity security or rather a general unsecured claim against the Debtors’ estate.  The opinion is styled as GSE Environmental, Inc., et al. v. Sorrentino (In re GSE Environmental, Inc., et al.), Adv. Pro. No. 16-50377 (MFW) (Bankr. D. Del. July 18, 2016).

Defendant was the Debtors interim and CEO starting July 1, 2013, with a salary of $100,000 per month in cash and $86,000 per month in stock.  By the time of Debtors’ filing, Defendant’s stock compensation had been unpaid. Accordingly, Defendant filed a general unsecured claim for the unpaid stock.  The Debtors filed a complaint asserting that the amount owed for the share-based component of the Defendant’s compensation constitutes an equity security.  Defendant disagreed, contending that the amounts owed should be characterized as a general unsecured claim.  Debtors moved for judgment on the pleadings.

The Bankruptcy Code defines “equity security” to encompass “warrants or rights . . . to purchase, sell . . . a share, security, or interest” in a corporation. 11 U.S.C. § 101(16) (A),(C). Common stock received in exchange for labor constitutes a purchase and sale of a security under the Code. Frankum v. Int’l Wireless Commc’ns Holdings, Inc. (In re Int’l Wireless Commc’ns Holdings, Inc.), 279 B.R. 463, 467 (D. Del. 2002).

The Defendant contended that the value of stock owed to him constitutes a claim because the stock component of his compensation was calculated as a fixed dollar amount rather than a fixed number of shares.  Judge Walrath disagreed, stating that “[a]lthough the quantity of stock owed to the Defendant under the amended employment agreement was based on a fixed dollar amount, the fact remains that the agreement entitled the Defendant only to company stock, not cash.”  Moreover, “the stock rights received under the amended employment agreement constitute a purchase and sale of a security because they were given in exchange for the Defendant’s labor.”

Thus, the Court found that Defendant’s stock-based compensation fits within the Code’s definition of equity security, and granted Debtors’ motion on the pleadings.

Carl D. Neff is a partner with the law firm of Fox Rothschild LLP.  You can reach Carl at (302) 622-4272 or at cneff@foxrothschild.com.

Valuing Assets in Chapter 13

Posted in Opinions

While many people only see the glamorous, large Chapter 11 cases filed in the Delaware Bankruptcy Court, the Court still handles individual bankruptcies – treating them with just as much respect as any other case.  On July 8, 2016, the chief bankruptcy judge, Brendan L. Shannon, issued an opinion valuing the mobile home of Ms. Anita Barnard.  A copy of the Opinion is available here.  This was a situation when the valuation methodology was agreed upon – yet there are still some judgment calls.

Case law in this jurisdiction teaches, that the NADA Retail Value Guidebook for Manufactured and Mobile Homes (“NADA”) method is the proper resource for mobile home valuations.  Opinion at *1.  The case law then requires that, for cram-down purposes, a formula is applied to determine the appropriate interest rate – Prime plus 1-3 percent.  While lenders will always aim for the top, the borrower will, naturally, aim for the lowest possible rate.  This is exactly what happened here.

While Judge Shannon does not provide extensive analysis of why he selected the rate he did, he ultimately held that “based on the record” the lower of the proposed rates was appropriate.  Opinion at *3.  I can’t help but wonder – if the lender had sought a more moderate rate, rather than going for the max, would they have received it?  This is likely a question that will never be answered, as what lender would voluntarily reduce their demand – and thus the perceived strength of their position.

John Bird practices with the law firm Fox Rothschild LLP in Wilmington, Delaware. You can reach John at 302-622-4263, or jbird@foxrothschild.com.

Indie Film Distributor Gold Alchemy, LLC Files Chapter 7 Liquidation in Delaware

Posted in Bankruptcy Case Summaries

On July 1, 2016, Gold Alchemy LLC filed for Chapter 7 bankruptcy protection with the U.S. Bankruptcy Court for the District of Delaware.  According to the petition, the debtor’s estimated assets are $10 to 50 million, and estimated liabilities are $50 to 100 million.

Alchemy is a distribution company formerly known as Millennium Entertainment.  According to Deadline Hollywood:

Alchemy was an enormous buyer out of the 2015 Cannes Film Festival, acquiring titles such as the Colin Farrell film The Lobster and Nanni Morretti’s Mia Madre. The company was financially healthy when it was known as Millennium Entertainment, however financial straits ensued during the Bill Lee era at Alchemy.  Alchemy acquired content distribution outfit AnConnect and Anderson Digital a year ago, saw the departure Lee at the end of 2015, with Alchemy’s Scott Guthrie and Kelly Summers being promoted to co-presidents in an effort to correct the company’s course. Previously Guthrie was COO, while Summers was SVP of strategy and financial planning.

According to the docket, the Section 341 meeting of the creditors is scheduled for July 25th at 10:00 a.m. at the J. Caleb Boggs Federal Building, 844 King Street, Room 2112, Wilmington, Delaware.

The Trustee assigned to the case is George L. Miller.  The debtor is represented by the law firm of Morris, Nichols, Arsht & Tunnell. Judge Kevin Gross is presiding over the case.

Carl D. Neff is a partner with the law firm of Fox Rothschild LLP.  You can reach Carl at (302) 622-4272 or at cneff@foxrothschild.com.

SynCardia Systems Files Chapter 11 Bankruptcy – First Day Hearing Scheduled July 6, 2016

Posted in Bankruptcy Case Summaries

On July 1, 2016, SynCardia Systems, Inc. (“Debtor” or “SynCardia”) filed a voluntary petition for relief under Chapter 11 of the Bankruptcy Code before the United States Bankruptcy Court for the District of Delaware.

According to the Declaration of Stephen Marotta, the Debtor’s Chief Restructuring Officer, SynCardia is a medical technology company that develops artificial heart implants.  In the months leading to the Debtor’s  filing, SynCardia attempted but then withdrew an IPO attempt due to adverse market conditions.  Since then it has become insolvent.

Through the bankruptcy, SynCardia seeks to sell substantially all of its assets on a liquidated basis.  To this end, SynCardia entered into a stalking horse asset purchase agreement with its senior lender in contemplation of a Section 363 sale before the Bankruptcy Court.

SynCardia’s first-day hearing is scheduled for Wednesday, July 6th at 2:00 p.m. (ET).  Among other things, the Debtor has filed a sale motion through which it seeks to establish and approve bid procedures for the sale of substantially all of its assets, and to establish procedures to assume and assign certain executory contracts and unexpired leases.

The Debtor’s bankruptcy proceeding is pending before Judge Walrath.  SynCardia is represented by the law firm of Young, Conaway, Stargatt & Taylor, LLP.

Carl D. Neff is a partner with the law firm of Fox Rothschild LLP.  You can reach Carl at (302) 622-4272 or at cneff@foxrothschild.com.

Swift – Motion for Stay Pending Appeal Denied

Posted in Opinions

On June 29, 2016, Judge Sleet of the Delaware District Court entered an order denying a motion for stay of the Debtors’ plan confirmation pending appeal.  A copy of the related Opinion is attached here.

Morris Propp II and Morris Propp II Foundation (the “Movants”) had filed an objection to the Debtors’ plan on the basis that they were not allowed to participate in the DIP loan.  After making significant waves in the Debtors’ bankruptcy proceedings, the Debtors conceded the point and provided at confirmation that any noteholders who so desired would be allowed to participate in the syndication of the DIP loan.  Opinion at *3.  The Court determined that such a concession mooted the Movants’ objection and confirmed the Debtors’ plan.

The Movants then elected to participate in the DIP loan’s syndication.  Opinion at *3.  As part of the process of participating, the Movants agreed to be bound by the Restructuring Support Agreement (the “RSA”).  Opinion at *4.  The RSA prohibits any signatory thereto from opposing confirmation.

The Movants appealed the decision approving confirmation, and the Debtors filed a motion to enforce the RSA.  The Bankruptcy Court granted the Debtors’ motion, holding that the Movants were “sophisticated investors, and that despite counsel’s contention that Appellants executed the Subscription Documents without consulting their counsel, ignorance of the law is no defense.”  Opinion at *5.

The Movants then filed the appeal and motion to stay pending appeal.  In relatively short order, Judge Sleet examined the four factor test created by the Third Circuit:  (1) whether the movant has made “a strong showing” that it is likely to succeed on the merits; (2) whether the movant will be irreparably injured absent a stay; (3) whether a stay will substantially injure other interested parties; and (4) where the public interest lies. Republic of Phil. v. Westinghouse Electric Corp., 949 F.2d 653, 658 (3d Cir. 1991).  Opinion at *7.  In a later case, the Third Circuit provided that the first two factors of this four factor test were gating issues, and that “if the movant does not make the requisite showings on either of these first two factors, the inquiry into the balance of harms and the public interest is unnecessary…”  Opinion at *9.

Moving through the first two factors, Judge Sleet determined that the Movants failed to meet their burden as to both, and quickly denied their motion for stay pending appeal.  Opinion at *14.

John Bird practices with the law firm Fox Rothschild LLP in Wilmington, Delaware. You can reach John at 302-622-4263, or jbird@foxrothschild.com.

PacSun – Judge Silverstein Grants Class Certification

Posted in Opinions

On June 22, 2016, Judge Laurie Selber Silverstein of the Delaware Bankruptcy Court ruled on a motion to for class certification in the PacSun bankruptcy, Case No. 16-10882.  In 2011, two plaintiffs filed actions under the California Labor Code Private Attorneys General Act (“PAGA”), alleging violations of California wage and hour laws.  One of the Plaintiffs was granted class certification in February, 2016.  After PacSun filed for bankruptcy, these plaintiffs moved for authority to file bankruptcy proofs of claim as representatives of the PAGA class for the class.  The “Opinion” is available here.

Because of the clarity and length of the Opinion, I have included only a cursory summary here.  However, it is worth noting that instances in which bankruptcy courts approve of class treatment for class-action claims is not terribly common.  Often, the Court will rule that the bankruptcy claims process is just as likely to provide adequate notice and recovery to potential claimants as the class-action process – but without the additional costs of class counsel (which is often upwards of 25% of any class recovery).  As held by the Third Circuit in a prior case:  “All creditors were given notice of the insolvency proceedings, and they were given the opportunity to file claims…  Furthermore, this is not a plenary suit but a liquidation proceeding which should be concluded as expeditiously as possible. We see no indication that a class action designation would have such a result…”  Opinion at *7-8 (quoting SEC v. Aberdeen Securities Co., 480 F.2d 1121, 1128 (3d Cir. 1973)).

As Judge Silverstein rules in this case, however, “Aberdeen does not stand for the principle that class claims are, as a rule, impermissible in bankruptcy case.  Opinion at *9.  Instead, she looks to the Musicland factors: (1) whether the class was certified pre-petition; (2) whether the members of the putative class received notice of the bar date; and (3) whether class certification will adversely affect the administration of the estate.  Opinion at *10 (citing In re Musicland Holding Corp., 362 B.R. 644, 654-55 (Bankr. S.D.N.Y. 2007)).

In this case, the first factor was met (the class was previously certified), the second factor was met (the Debtor limited notice to only a portion of former employees, not all employees who were members of this class, and Judge Silverstein held that regardless of whether certification occurred, she would have to address these claims, satisfying the third factor.  Opinion at *12.  Thus, she determined that it was appropriate that she exercise her discretion under Rule 7023.  She then analyzed the elements and arguments around Federal Rule 23, determining that it was satisfied in this case.  This portion of the Opinion spans pages 13-20.

Ultimately, Judge Silverstein granted the motion in part, certifying nearly the exact same class as had been previously certified (the differences are in bold below):

Class: All hourly, non-exempt employees of PacSun working in retail locations in the State of California from March 18, 2007 through the 181st day prior to the filing of the bankruptcy petition concerning Ms. Beeney’s claims for:

a) failing to authorize and permit employees to take duty-free rest breaks every four hours or major fraction thereof and to compensate employees therefor; and

b) requiring employees to undergo security checks and perform closing duties off-the-clock without compensation.

My $.02

At the end of the day, no matter how infrequent relief of a specific type is granted, if you have met ALL of the statutory requirements and you can successfully distinguish contrary case law, you can obtain the relief you seek.  In some cases it is easy – but those cases almost always end up settling.  However, a litigant will not settle unless they will get more from settling than they would after getting a Court ruling and paying their lawyers – So if they feel certain of winning, their settlement range is much narrower than if they are uncertain of the outcome.  In a case like this, where certification of a class is infrequent, settling becomes a more difficult proposition.

John Bird practices with the law firm Fox Rothschild LLP in Wilmington, Delaware. You can reach John at 302-622-4263, or jbird@foxrothschild.com.

Kid Brands Inc. Preference Actions Filed in New Jersey

Posted in Preference Litigation

On June 16, 2016, the Official Committee of Unsecured Creditors (the “Committee”) of Kid Brands Inc., et al. (the “Debtors”), filed approximately 64 complaints seeking the avoidance and recovery of allegedly preferential and fraudulent transfers under Sections 547, 548 and 550 of the Bankruptcy Code.  The Committee also seeks to disallow claims of such preference defendants under Sections 502(d) and (j) of the Bankruptcy Code.

The Debtors filed voluntary petitions for bankruptcy in the U.S. Bankruptcy Court for the District of New Jersey on June 18, 2014 under Chapter 11 of the Bankruptcy Code.   On July 2, 2014, the Office of the United States Trustee for the District of New Jersey appointed the Committee.

The law firms of ASK LLP and Gellert Scali Busenkell & Brown, LLC represent the Committee in these various preference cases.  The pretrial conference has not yet been scheduled.

For preference defendants looking for an analysis of defenses that can be asserted in response to a preference complaint, below are several articles on this topic:

Preference Payments: Brief Analysis of Preference Actions and Common Defenses

Minimizing Preference Exposure: Require Prepayment for Goods or Services

Minimizing Preference Exposure (Part II) – Contemporaneous Exchanges

Carl D. Neff is a bankruptcy attorney with the law firm of Fox Rothschild LLP.  You can reach Carl at (302) 622-4272 or at cneff@foxrothschild.com.