On November 17, 2017, Real Industry, Inc., along with its subsidiaries and affiliates (collectively the “Debtors” or “Real Industry”), filed a petition for relief under Chapter 11 in the Bankruptcy Court for the District of Delaware (Case No. 17-12464).

According to the Declaration in Support of First Day Motions of Michael J. Hobey, liquidity issues and certain singular negative events have led to Real Industry’s bankruptcy filing. The Debtors operate an aluminum recycling and alloy production company based in Beachwood, Ohio.

Contemporaneously, Real Alloy Holding, Inc. and its U.S. subsidiaries filed petitions for voluntary Chapter 11 reorganization in the U.S. Bankruptcy Court for the District of Delaware.  However, Real Alloy’s operations in Germany, United Kingdom, Norway, Canada and Mexico and its Goodyear, Ariz. joint venture are not included in the filings.

The First Day Hearing is scheduled for Monday, November 20th at 1:00 PM at US Bankruptcy Court, 824 Market St., 5th Fl., Courtroom #5, Wilmington, Delaware.  The Debtors have have filed a number of First Day Motions, including, but not limited to, the following:

  • Motion to Pay Employee Wages and Maintain and Continue Certain Compensation and Benefit Programs Postpetition;
  • Motion for Continuation of Utility Service and Approval of Adequate Assurance of Payment to Utility Company Under Section 366(b);
  • Motion to Pay Critical Trade Vendor Claims and Authorizing the Debtors to Pay Certain Prepetition Claims of Shippers, Warehousemen, and Materialmen; and Authorizing Banks to Honor and Process Checks and Electronic Transfer Requests Related Thereto; and
  • Motion to Authorize Debtors to (A) Continue Performing Under Prepetition Hedging and Trading Arrangements and Honor Obligations Related Thereto, and (B) Enter Into and Perform Under New Postpetition Hedging Arrangements.

The cases have been assigned to the Honorable Kevin J. Carey.  The proposed claims and noticing agent is Prime Clerk LLC.

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.

In a short opinion entered November 14, 2017 Judge Gross of the Delaware Bankruptcy Court denied a motion of an interested party to “Attend and Participate in the Rule 2004 Examinations to be Conducted by the Trustee”. Judge Gross’s opinion is available here (the “Opinion”).

This is a very short Opinion and resolves a very straight-forward issue.  Can a party in separate litigation take advantage of Bankruptcy Rule 2004 to obtain discovery from the opposing party?

The answer: No.

Citing multiple cases, Judge Gross explains that the “pending proceeding rule” provides that once an adversary proceeding or contested matter has been commenced, discovery must proceed under the federal discovery rules.  The cited opinions were: In re SunEdison, Inc., 572 B.R. 482 (Bankr. S.D.N.Y. 2017);  In re Wash. Mut., Inc., 408 B.R. 45 (Bankr. D. Del. 2009); In re Enron Corp., 281 B.R. 836 (Bankr. S.D.N.Y. 2002); 2435 Plainsfield Ave. v. Township of Scotch Plains (In re 2435 Plainsfield Ave.), 223 B.R. 440 (Bankr. D.N.J. 1998); In re Coffee Cupboard, Inc., 128 B.R. 509 (Bankr. E.D.N.Y. 1991).

As discussed in a previous post on this blog, 2004 discovery is most akin to fishing expeditions meant to determine whether or not litigation should be commenced.  You can read that post here: What are the Scope and Limitations of a Rule 2004 Examination?

John Bird practices with the law firm Fox Rothschild LLP and is resident in Portland, Oregon. You can reach John at 302-622-4263, or jbird@foxrothschild.com.

In a 10-page decision signed November 6, 2017 in an adversary proceeding arising within the Physiotherapy Holdings bankruptcy (PAH Litigation Trust, case 15-51238), Judge Gross of the Delaware Bankruptcy Court denied a motion of the Litigation Trust (the “Trust”) to file an amended complaint, providing guidance on a number of different issues. Judge Gross’s opinion is available here (the “Opinion”).

The Defendants opposing the motion to amend had an uphill battle in this issue.  Judge Gross begins his discussion by stating, “Motions for leave to amend the complaint are granted liberally.”  Opinion at *2.  Judge Gross then provided a foreshadowing of the Defendants’ way out, stating, “The Court may, however, deny leave to amend if the proposed amendment is futile or untimely.”  Id.

The Court had established a deadline of September 30, 2016 for the amending of the complaint.  The Trust filed its motion approximately ten months after that deadline.  The Trust was thus required to satisfy the ‘good cause’ standard of FRCP 16(b)(4) in order to obtain approval of its motion.  Opinion at *2.

The  Trust argued that it satisfied the good cause requirement because the proposed defendants had “deeper pockets”.  Opinion at *3.  The Trust expressed concern that the current defendants have made distributions to their limited partners, the proposed defendants.  The Court held that “the Litigation Trust has not satisfied the ‘good cause’ requirement…  The fact that Defendants may not have sufficient assets to satisfy any judgments is not good cause to add the Proposed Defendants.”  Opinion at *4-5.

Judge Gross then turned to the motion’s request to amend the complaint to seek punitive damages.  There was an initial dispute as to whether the defendant should have raised choice of law arguments in their motion to dismiss.  Judge Gross opined that “there must be an actual conflict between the laws of different jurisdictions to engage in a choice of law determination.”  Opinion at *6 (quoting Rice v. Dow Chem. Co., 875 P. 2d 1213, 1216 (1994)).  Judge Gross held that the answer to which law controls depends on which state has the most significant relationship to the claim and the parties.  Opinion at *6-7 (following the precedent of Emerald Capital Advisors Corp. v. Bayerische Motoren Aktiengesellschaft (In re FAH Liquidating Corp.), 2017 WL 2559892, at *9 (Bankr. D. Del. June 13, 2017)).  Finding that Delaware law controls, and Delaware courts of equity do not allow for punitive damages to be awarded.  Opinion at *9 (“under Delaware law punitive damages are not available under principles of equity which Delaware courts apply.”)

And with that, Judge Gross denies the motion to amend the complaint.  The primary takeaway – if the Court sets a deadline to amend the complaint, make sure you hit the deadline.  Because the Court grants motions to amend “liberally”, had this motion been timely I imagine the result would have been very different.

John Bird practices with the law firm Fox Rothschild LLP and is resident in Portland, Oregon. You can reach John at 302-622-4263, or jbird@foxrothschild.com.

Effective November 6, 2017, the U.S. Bankruptcy Court for the District of Delaware will start making audio recordings of certain proceedings available to the public through PACER, as well as the standard ECF notifications received by counsel.  The recordings themselves will be an attachment to a PDF document, and will be in MP3 format.

Initially it will only be for proceedings before Judge Kevin J. Carey, although it may expand to other Judges in the future.  Click here for the notification posted by the Clerk’s Office, and click here for instructions on accessing the audio files through ECF notification or PACER.

Included with the notification are details regarding confidential, sealed or personal information that may come up during a hearing and how that is being handled.  Short answer, counsel will have to move to seal the entire recording, as partial redactions are not possible.

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.

In the recent decision of Indian Harbor Ins. Co. v. Zucker, 860 F.3d 373 (6th Cir. 2017), the Sixth Circuit Court of Appeals held that a liquidation trustee’s suit against the debtor’s former directors and officers (D&Os) falls within the “insured-versus-insured” exclusion in the debtor’s liability insurance policy.

The liquidation trustee sued the D&Os for $18.8 million, alleging breach of fiduciary duties.  The insurance company filed a suit for a declaratory judgment that it had no obligation to cover any damages from the lawsuit because the trustee’s claims fell within on the “insured-versus-insured” exclusion, which excluded from coverage “any claim made against an Insured Person . . . by, on behalf of, or in the name or right of, the Company or any Insured Person,” except for derivative suits by independent shareholders and employment claims.  The District Court held that exclusion applied.  The Circuit Court affirmed.

The Sixth Circuit held that, “[a]s a voluntary assignee, the Trust stands in [debtor] Capitol’s shoes and possesses the same rights subject to the same defenses.  Just as the exclusion covers a lawsuit ‘by’ Capitol, it covers a lawsuit ‘by’ the Trust ‘in the . . . right’ of Capitol.”

The fact that the debtor became a new entity – a debtor in possession – upon filing for bankruptcy did not change the result because “this new-entity argument surely would not work before bankruptcy.  Capitol could not have dodged the exclusion by transferring a mismanagement claim to a new company – call it Capitol II – for the purpose of filing a mismanagement claim against the [D&Os].  No matter how legally distinct Capitol II might be, the claim would still be ‘by, on behalf of, or in the name or right of’ Capitol.  The same conclusion applies to a claim filed after bankruptcy.”

The Sixth Circuit acknowledged that the purpose of the “insured-versus-insured” exception was to prevent people within the insured company from “push[ing] the costs of mismanagement onto an insurance company just by suing (and perhaps collusively settling with) past officers who made bad business decisions.”  Nevertheless, it mattered not that the bankruptcy court approval of the plan transferring the causes of action provided “a safeguard against the collusive suits that insured-versus-insured exclusions seek to prevent” because it did “not eliminate the practical and legal difference between an assignee and a court-appointed trustee that receives the right to sue on the estate’s behalf by statute.”

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.

In a decision signed October 25, 2017, Judge Shannon of the Delaware Bankruptcy Court issued an opinion requiring a professional to disgorge fees, pay a sanction of $25,000, and enjoined him from taking various actions in bankruptcy court. Judge Shannon’s opinion is available here (the “Opinion”).

The United States Trustee filed a Complaint for Injunctive relief, Fines and Civil Contempt against Robert F. Martin.  Mr. Martin has twice before been the subject of inquiry and action by the United States Trustee. First in 2011, the United States Trustee alleged that Mr. Martin was acting as a petition preparer in violation of 11 U.S.C. § 110. A Consent Order resolving that litigation was entered by the Court on March 28, 2012 (the “First Consent Order”) by which Mr. Martin agreed to disgorge fees and refrain from acting as a petition preparer in the future.

Two years later, the United States Trustee filed a new complaint against Mr. Martin, alleging that he had acted as a petition preparer in at least 19 cases in violation of the terms of the First Consent Order.  Mr. Martin again agreed to disgorge fees and to refrain from acting as a petition preparer in the future.

The United States Trustee alleged that Mr. Martin returned to his prior practice of encouraging homeowners to file for relief under Chapter 13, and assisting them in the process of filing bankruptcy in violation of § 110 of the Bankruptcy Code. Mr. Martin’s debtor clients were not adequately instructed  by Mr. Martin regarding the Chapter 13 filing and its potential consequences, and that his efforts constituted a violation of the provisions of Bankruptcy Code § 110 and the First and Second Consent Orders.

The Court held that “Mr. Martin’s business model is based upon practices that violate federal law and orders of this Court.”  Opinion at *14.  It then levied the above fines and directed that Mr. Martin was to refrain from taking any further actions in violation of Bankruptcy Code § 110.

While this is not the type of case normally discussed on this blog, it illustrates an important principle that I have seen play out several times in the Delaware Bankruptcy Court – each time you are penalized for the same bad act, the consequences get more severe.

John Bird practices with the law firm Fox Rothschild LLP and is resident in Portland, Oregon. You can reach John at 302-622-4263, or jbird@foxrothschild.com.

In a decision signed October 4, 2017 in an adversary proceeding arising within the Haggens bankruptcy (HH Liquidation, LLC, et al., case 16-51204), Judge Gross of the Delaware Bankruptcy Court denied a motion for summary judgment, holding that he Court and needs to see evidence at trial of why and how the Debtor failed while a related entity was flush with cash. Judge Gross’s opinion is available here (the “Opinion”).

By way of history, the Haggen family started operating a grocery in 1933, growing to operate thirty stores and a pharmacy by 2011.  In late 2014, the Safeway / Albertsons merger occurred, which required them to sell 146 stores.  In February 2015, Haggen (thanks in large part to the direction of Comvest Partners, a private equity firm who had purchased 80% of Haggen’s equity) purchased the 146 former Albertsons locations.  With a signature, Haggens grew to a size that was approximately 600% larger than it had ever been.  It is my opinion that growth at this pace either succeeds fantastically, or fails fantastically.  Unfortunately, this is a bankruptcy court opinion – so it’s clear this wasn’t a fantastic success.

Haggens split the acquisition into multiple pieces, segregating the operating and real property assets in different entities.  Those which held real property I will refer to collectively as PropCos, and those which operated stores and leased the real property for such a purpose I will refer to collectively as OpCos.  For those who have not followed the Haggens bankruptcy, it is important to recognize that OpCos were placed into bankruptcy and the PropCos were not.

The plaintiff in the adversary proceeding argued that the debtor and non-debtor related entities should be substantively consolidated and that the OpCos and PropCos were liable for fraudulent transfer.  Without consolidation or a fraudulent transfer ruling, the PropCos creditors will receive 100% of their claims while OpCos unsecured creditors will receive 0%.  If the plaintiffs are successful in their claims, the PropCos creditors and the OpCos creditors would all receive approximately 20% of their claims.  Opinion at *7.

Judge Gross was not sympathetic to the Debtors’ opining that:

Comvest created Holdings, the OpCo Entities and the PropCo Entities and formed them to hold separate assets. The OpCo Entities held operational assets and leased property from the PropCo  Entities which held the real property. Then, in a matter of a few months the OpCo Entities were bankrupt and are unable to pay unsecured creditors anything while the PropCo Entities are flush with money.  The Court and the OpCo Entities’ creditors need to see evidence at trial of why and how this happened.

Opinion at *7-8.  Of particular note, Judge Gross made repeated references to the Mervyn’s decision,  In re Mervyn’s Holdings, LLC, 426 B.R. 488 (Bankr. D. Del. 2010).  “In Mervyn’s, like here, the owner of real property (Target Corporation) sold its interest in Mervyn’s, LLC to a group of private equity firms who spun off real estate leaving the operational portion of Mervyn’s, LLC undercapitalized and paying rent to the real estate holding entity.”  Opinion at *9.  I have found that when a judge on the Bankruptcy Court makes repeated reference to another decision, particularly when it is a decision of that very judge, litigants should make every effort to differentiate, or analogize, the instant case.  The repeated reference to Mervyn’s by Judge Gross provides a clear picture of the issues he will need answered by the litigants here.  It’s his opinion, I’d expect it to be the first and last thing out of both litigants’ mouths.

John Bird practices with the law firm Fox Rothschild LLP and is resident in Portland, Oregon. You can reach John at 302-622-4263, or jbird@foxrothschild.com.

In a decision signed September 21, 2017 in an adversary proceeding related to the Boomerang Systems bankruptcy (case 15-11729), Judge Walrath of the Delaware Bankruptcy Court denied a defendants FRCP 12(b)(6) motion to dismiss a preference complaint. Judge Walrath’s opinion is available here (the “Opinion”).

Judge Walrath first provided the requirements for a preference action to survive a motion to dismiss.  Quoting Stanziale v. DMJ Gas-Mktg. Consultants, LLC (In re Tri-Valley Corp.), Adv. No. 14-50446 (MFW), 2015 WL 110074, at *2 (Bankr. D. Del. Jan. 7, 2015), Judge Walrath stated that “to satisfy Rule 8, the complaint must identify each alleged preferential transfer by the date of the transfer, the name of the debtor/transferor, the name of the transferee, and the amount transferred.”  Opinion at *5.

In this case, Gavin Solmonese, LLC, the liquidating trustee of Boomerang Systems (the “Liquidating Trustee”), filed a preference action that is, in Delaware, a fairly routine pleading.  In its complaint, the Liquidating Trustee alleged the amount, date, and method of payment made by the Debtors to the Defendant.  Judge Walrath held that “this allegation is sufficient to allege a preferential transfer.”  Opinion at *6.

 

The Defendant asserted its affirmative defenses as grounds for dismissal of the complaint.  However, as the Court held, “these defenses are not grounds to dismiss the action under Rule 12.”  Opinion at *6.  A 12(b)(6) dismissal requires a deficiency in the plaintiff’s pleading.

Avoidance actions are painful for defendants – particularly when they are innocent actors.  But the innocence of a preference defendant is not a defense.  The only defenses available are those provided by statute – 11 U.S.C. § 547(c). We have provided an overview of these defenses in our short booklet A Preference Reference.

John Bird practices with the law firm Fox Rothschild LLP and is resident in Portland, Oregon. You can reach John at 302-622-4263, or jbird@foxrothschild.com.

Starting on September 12, 2017, Peter Kravitz, as Settlement Trustee of the Samson Settlement Trust, filed approximately 293 complaints seeking the avoidance and recovery of allegedly preferential and/or fraudulent transfers under Sections 547, 548 and 550 of the Bankruptcy Code.

Samson Resources Corporation and its affiliated debtors filed voluntary petitions for bankruptcy in the U.S. Bankruptcy Court for the District of Delaware on September 16, 2015 under Chapter 7 of the Bankruptcy Code.  The Debtors were an onshore oil and gas exploration and production company with interests in various oil and gas leases primarily located in Colorado, Louisiana, North Dakota, Oklahoma, Texas, and Wyoming.  On February 13, 2017, the Court entered an order confirming the Global Settlement Joint Chapter 11 Plan of Reorganization of Samson Resources Corporation and Its Debtor Affiliates. The cases are jointly administered pursuant to Rule 1015(b) of the Bankruptcy Rules.

The various avoidance actions are pending before the Honorable Christopher S. Sontchi.  As of the present date, the Pretrial Conference has not yet been scheduled.

For readers looking for more information concerning claims and defenses in preference litigation, attached is a booklet prepared by this firm on the subject: “A Preference Reference: Common Issues that Arise in Delaware Preference Litigation.”

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.

Starting on September 5, 2017, the Official Committee of Unsecured Creditors on behalf of the bankruptcy estates of HH Liquidation, LLC and its affiliated debtors (“Debtors”) filed approximately 178 complaints seeking the avoidance and recovery of allegedly preferential and/or fraudulent transfers under Sections 547 and 550 of the Bankruptcy Code.

The Debtors filed voluntary petitions for bankruptcy in the U.S. Bankruptcy Court for the District of Delaware on September 8, 2015 under Chapter 11 of the Bankruptcy Code.  On September 21, 2015, pursuant to section 1102 of the Bankruptcy Code, the Office of the United States Trustee appointed the Official Committee of Unsecured Creditors.

The various avoidance actions are pending before the Honorable Kevin Gross.  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 partner with the law firm of Fox Rothschild LLP.  You can reach Carl at (302) 622-4272 or at cneff@foxrothschild.com.