In Rosenberg v. DVI Receivables XVII, LLC, 2016 WL 4501675 (3d Cir. August 29, 2016), the United States Court of Appeals for the Third Circuit held that Section 303(i) of the United States Bankruptcy Code does not preempt state law claims by non-debtors for damages arising from the filing of an involuntary bankruptcy petition.

The Petitioning Entities filed involuntary bankruptcy petitions against Mr. Rosenberg and his affiliated entities.  The involuntary petitions were dismissed because the entities were not Rosenberg’s creditors.  Rosenberg subsequently recovered compensatory and punitive damages under Section 303(i).

Rosenberg’s wife and several affiliated entities (the “Rosenberg Affiliates”) then filed suit in the Eastern District of Pennsylvania against the Petitioning Entities for tortious interference with contracts and business relationships.  The Rosenberg Affiliates alleged that the Petitioning Entities filed the involuntary petitions with the intent of causing the Rosenberg Affiliates to default on their mortgages and lose their properties.

The District Court dismissed the complaint on the ground that the Rosenberg Affiliates’ state law tortious interference claim was preempted by the involuntary provisions of the Bankruptcy Code.  The Third Circuit reversed.

The Court explained that “[i]n deciding whether Congress has occupied a field for exclusive federal regulation, we begin, based on concerns of federalism, with a sturdy presumption against preemption.”

The Third Circuit noted that although section 303(i) provides a remedy to the debtor, it “is silent as to potential remedies for non-debtors harmed by an involuntary bankruptcy petition.  This suggests that when Congress passed the provision it either did not intend to disturb the existing framework of state law remedies for non-debtors or (more likely) was not thinking about non-debtor remedies at all.  In either case, field preemption does not apply.”

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.

It isn’t only the athletic-wear retailers going through bankruptcy (Sports Authority and Golfsmith), but retailers on the other end of the athletic spectrum – think t.v. and tobacco.

Delivery Agent, a company which has developed technology focused on allowing television watchers to easily purchase any items they see in a television show or advertisement, has filed for bankruptcy protection in Delaware.  Its formation meeting is scheduled for September 29, 2016 at 10:00 a.m. at the The Double Tree Hotel, 700 King Street, Salon C, Wilmington, DE 19801.  Until the Formation Meeting occurs, a copy of the Notice will be available here.  In its first day pleadings, Delivery Agent has represented that it intends to sell all of its assets, and divide the sales proceeds among its creditors.

The second case with a formation meeting scheduled for this week is NJOY, Inc.  NJOY is a producer and seller of e-cigarettes.  Its formation meeting is scheduled for September 27, 2016 at 2:00 p.m. at the Office of the United States Trustee, 844 King Street, Room 2112, Wilmington, DE 19801.  Until the Formation Meeting occurs, a copy of the Notice will be available here.  Like Delivery Agent, NJOY has represented that it intends to sell its assets and divide the sales proceeds among its creditors.

As prior posts on this blog have stated, a Creditors’ Committee (which will be created at each of these formation meetings) is the best vehicle for an unsecured creditor to have an influence on a bankruptcy.  Counsel for the Creditors Committee attends every hearing in a case and works to increase recoveries for the unsecured creditors – all at the direction of the members of the Committee.  If you are a creditor of either of these companies and want to discuss how membership in the Committee may affect you, feel free to give us a call.

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.

In the recent decision of FBI Wind Down Inc. Liquidating Trust, by and through Alan D. Halperin, as Liquidating Trustee, v. Heritage Home Group, LLC, et al., Adv. Pro. No. 15-51899 (CSS) (Bankr. D. Del. Sept. 15, 2016) Judge Sontchi considered whether motion to compel the arbitration of several claims.  For the reasons set forth below, the Court denied the motion.

Background

Heritage Home Group LLC (“Heritage”), purchased substantially all of the Debtors’ assets pursuant to a Sale Order. The Second Amendment to the Asset Purchase Agreement (the “Second Amendment” and the “APA”) required Heritage and the Sellers to engage in a purchase price reconciliation process in the sixty days after Closing.  The parties were unable to agree on the proper purchase price reconciliations. Thus, the Trustee, as successor-in-interest to the Sellers, filed the instant adversary proceeding. The Trustee asserted that, under the purchase price reconciliation provisions in the APA, Heritage owes the Liquidating Trust approximately $13,000,000. Heritage denied the Trustee’s accounting and asserts that the Liquidating Trust owes Heritage approximately $8,000,000. The merits of the parties’ dispute has not yet been adjudicated because § 3(a) and § 3(b) of the Second Amendment, which govern the reconciliation process, each contain an Accounting Arbitration Clause (the “Arbitration Clause”).

The parties have raised two disputes that might be subject to mandatory arbitration: (i) whether Heritage has the right to retain “Auction Clearing House Electronic Receipts & Deposits” (“ACHE-R/D”) earned by the Sellers shortly before Closing; and (ii) what accounting method—GAAP or the Sellers’ traditional practices—must be applied in calculating the purchase price reconciliations.

The parties disputed whether under §§ 3(a) and 3(b) of the Second Amendment, the disputes must be submitted to the Accounting Arbitrator for resolution. In objecting to the motion, the Trustee argued that the Court must first determine several “threshold legal issues” before these claims may be submitted to arbitration.  The Trustee asserted that the issues raised in his Complaint (1) are outside the scope of the Arbitration Clause and (2) are issues over which the Court expressly retained jurisdiction in the Sale Order.

Analysis

The Court interpreted the Arbitration Clause as follows: (1) disputes over the calculation of reconciliation items, including disputes over how a set of accounting principles must be applied, are arbitrable while (2) disputes over the interpretation of the APA, including disputes over what rules the APA places on the Accounting Arbitrator, are not arbitrable. The Court has determined that this interpretation is the most reasonable—and only reasonable—interpretation after engaging in a three-step interpretative process.

The Court examined the parties’ disputes to determine if either dispute falls within the narrow scope of the Arbitration Clause.  The Court found that because both disputes are clearly disputes over the proper interpretation of the APA, the Court finds that neither dispute is arbitrable. As a result, the Court denied Heritage’s motion to compel arbitration.

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.

On February 19, 2016, Judge Brendan L. Shannon of the Delaware Bankruptcy Court granted in part the motion of K. Ivan F. Gothner (the “Defendant”) to dismiss a complaint filed by JLL Consultants, the Liquidating Trustee (the “Trustee”) in the AgFeed bankruptcy.  I summarized that opinion in a prior post: Opinion in AgFeed USA – Another (Mostly) Successful Motion to Dismiss

Since publishing that post, the Trustee filed his amended complaint, to which the Defendant filed another motion to dismiss (the “Motion”).  On September 13, 2016, Judge Shannon issued an opinion (the “Opinion”) deciding this Motion.  The “Opinion” is available here.

Continue Reading Motion to Dismiss Second Amended Complaint – Another AgFeed Opinion

On September 7-8, 2016, various debtors in the ADI Liquidation, Inc. (f/k/a AWI Delaware, Inc.), et al. bankruptcy proceeding filed approximately 332 complaints seeking the avoidance and recovery of allegedly preferential and/or fraudulent transfers under Sections 544 and/or 547, 548 and 550 of the Bankruptcy Code (depending upon the nature of the underlying transactions).  The Debtors also seek to disallow claims of such defendants under Sections 502(d) and (j) of the Bankruptcy Code.

Of the 332 avoidance actions, AW Liquidation, Inc. (f/k/a Associated Wholesalers, Inc.), filed approximately 294, WR Liquidation, Inc. (f/k/a White Rose Inc.) filed approximately 27 avoidance actions, and RT Liquidation Corp. (f/k/a Rose Trucking Corp.) filed 11 avoidance actions.

The ADI Liquidation Debtors filed voluntary petitions for bankruptcy in the U.S. Bankruptcy Court for the District of Delaware on September 9, 2014 under Chapter 11 of the Bankruptcy Code.   A hearing on the confirmation of the Debtors’ Second Amended Chapter 11 Plan of Liquidation is scheduled for September 30, 2016.

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

Introduction

On September 6th and 7th, 2016, Nathan A. Schultz, as Distribution Trustee of the TER Trust (the “Trustee”) for the bankruptcy estate of Trump Entertainment Resorts, Inc. (the “Debtors”), filed 92 complaints in preference action cases.  The Trustee filed these actions in the Delaware Bankruptcy Court and argued that the defendants hold assets belonging to the Debtor and that the payments received by various defendants are avoidable and subject to recovery under 11 U.S.C. §§ 547, 548, 549 and 550 of the United States Bankruptcy Code.  The Trustee is represented by the law firms ASK LLC and Gibbons, P.C.

Background

The Debtors owned and operated two casino hotels located in Atlantic City, New Jersey: the Trump Taj Mahal Casino Resort (the “Taj Mahal”) and the Trump Plaza Hotel (the “Plaza”).  On October 2, 2015, the Court entered an order confirming the Debtors’ Third Amended Joint Plan of Reorganization Under Chapter 11 of the Bankruptcy Code as Modified (the “Confirmation Order” and “Plan,” respectively). [D.I. 1123].  The effective date of the Plan (the “Effective Date”) occurred on February 26, 2016. [D.I. 1902]. In accordance with the Plan and Confirmation Order, the TER Trust (the “Trust”) was established effective on the Effective Date of the Plan, and the Debtors and the Trustee entered into that certain Distribution Trust Agreement.

Pursuant to the Distribution Trust Agreement, the Trustee was tasked with prosecuting avoidance actions, including preference and fraudulent transfer actions.  The Debtor’s bankruptcy, as well as the preference actions, are before the Honorable Kevin Gross.

Defenses to a Preference Action

Preference actions are a form of litigation specifically provided for by the Bankruptcy Code which are intended to recover payments made by the Debtor within the 90 days prior to declaring bankruptcy.  The presumption is that the Debtor knew it was going to file bankruptcy, so any payments it made during this 90-day window went to friends and people it wanted to keep happy, and stiffed those the Debtor’s management didn’t like.   Recognizing that these payments aren’t always made for inappropriate reasons, the Bankruptcy Code provides creditors with many defenses to preference actions. 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.

On August 29, 2016, the Third Circuit released a precedential opinion (the “Opinion”) which opined on whether filing an involuntary bankruptcy petition could qualify as tortious interference under state law.  The Third Circuit’s Opinion is available here.  This Opinion was issued in Rosenberg v. DVI Receivables XVII, LLC, Case No. 15-2622.  The District Court had ruled that the tortious interference claim was preempted by § 303(i) of the Bankruptcy Code.  The Third Circuit reversed and remanded this case back to District Court.  While the background and history of the underlying conflict is extensive, this decision was issued to resolve a narrow question of preemption law.  Opinion at *4.

Prior to the instant conflict, Maury Rosenberg and several companies were the target of involuntary bankruptcy petitions.  Mr. Rosenberg succeeded in having the involuntary petitions dismissed as the purported creditors were determined not to be their creditors.  After a jury trial in Florida District Court, he was awarded compensatory and punative damages totaling $6.1 million.

In August, 2013, Mrs. Sara Rosenberg and several entities, related to those against whom involuntary petitions were filed, brought suit to recover damages stemming from the involuntary petitions.  Opinion at *6.  Mrs. Rosenberg and the related entities alleged that they suffered extensive losses due to the filing of the involuntary bankruptcy petitions.  The defendants argued that these suits were preempted, and the District Court for the Eastern District of Pennsylvania agreed, dismissing the complaint.  Thereupon, Mrs. Rosenberg and the related entities appealed to the Third Circuit.  After oral arguments, the Opinion was issued.

According to the plain language of Section 303(i), a debtor can recover against involuntary petitioners.  However, the litigants in this case were not debtors.  As the Third Circuit stated, “As they were not debtors, the Rosenberg Affiliates cannot recover damages from the Defendants under § 303(i).”  Opinion at *8.  The Third Circuit then examines in detail the principle of federal preemption, holding that preemption does not apply in this case.  As provided by the Third Circuit, “we do not lightly infer from congressional silence the intent to deprive some persons of a judicial remedy…”  Opinion at *10.

This Opinion creates a split in the Circuits – the Ninth Circuit applied preemption more broadly in the case In re Miles, 430 F.3d 1083 (9th Cir. 2005).  Opinion at *13-14.  The Third Circuit found that the Miles decision was not persuasive on the issue of preemption.  Opinion at *14.  The Third Circuit’s reasoning is summarized in the last statement of its analysis: “Absent evidence that Congress actually meant for § 303(i) to be an exclusive remedy, we do not make the same inference.”  Opinion at *15.

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.

In the recent decision of Lehman Bros. Special Fin. Inc. v. Bank of Am. Nat’l Assoc. (In re Lehman Bros. Holdings Inc.), 2016 WL 3621180 (Bankr. S.D.N.Y. June 28, 2016),  the U.S. Bankruptcy Court for the Southern District of New York held that certain priority payment provisions in swap agreements do not constitute impermissible ipso facto provisions and that the distribution of liquidated swap agreement collateral is protected by the safe harbor in Bankruptcy Code Section 560.

The case involved synthetic collateralized debt obligation transactions (“CDOs”) structured by Lehman Brothers Special Financing (“LBSF”) in the years before the Lehman empire’s collapse.  On September 15, 2008, LBSF’s parent, Lehman Brothers Holdings, Inc. (“LBHI”) filed for bankruptcy.  LBHI’s bankruptcy filing caused LBSF to become a defaulting party under the CDOs, and gave the noteholders a priority claim on the collateral under the waterfall provisions.  LBSF did not file for bankruptcy until three weeks later.  During that three-week period, many Issuers terminated their swaps with LBSF based on the default caused by LBHI’s bankruptcy filing.  In most cases, the collateral was liquidated and distributed to noteholders prior to the occurrence of LBSF’s own bankruptcy filing (a “pre-pre transaction”).  In some cases, although termination occurred prior to LBSF’s bankruptcy, liquidation and distribution occurred afterwards (a “pre-post transaction”).

LBSF commenced an adversary proceeding against 250 defendant noteholders, Issuers, and indenture trustees, seeking to invalidate the priority of payment provisions as impermissible ipso facto clauses and to claw back approximately $1 billion in proceeds of the liquidated collateral distributed to the noteholders in both pre-pre and pre-post transactions.  The bankruptcy court granted the defendants’ motion to dismiss.

First, the court ruled that the CDO provisions that determined waterfall priority only when termination occurred were not impermissible ipso facto provisions under Bankruptcy Code sections 363(e)(1), 363(l) & 541.  On the other hand, the CDO provisions that gave LBSF priority in the waterfall from the outset, but deprived LBSF of this priority when there was an early termination based upon an LBSF event of default (such as its bankruptcy), were possibly impermissible ipso facto provisions.

Nevertheless, because the early terminations in this case all occurred before LBSF filed for bankruptcy (with only the collateral being liquidated postpetition in the pre-post transactions), the court ruled that none of the priority provisions violated the anti-ipso facto provisions of the Bankruptcy Code.  In this case, the court declined to adopt the “singular event” theory, and held instead that “any modification of LBSF’s rights that occurred prior to the LBSF Petition Date cannot be the basis of a violation of the anti-ipso facto provisions.”

Second, the court held that the distributions made pursuant to the priority provisions in the CDOs were protected by Bankruptcy Code section 560’s safe harbor.  The court observed that the common meaning of “liquidate” “include[s] the payment of the proceeds of the liquidation.”  Moreover, “[l]iquidation of a swap . . . must refer to something other than its termination.”  Accordingly, the court concluded that “section 560 protects the enforcement of the Priority Provisions and the distribution of the proceeds of the sale of the Collateral as part of the exercise of the right to liquidate the Swaps.”

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 decision of In re Metroplex on the Atlantic, LLC, 545 B.R. 786 (Bankr. E.D.N.Y. 2016), the United States Bankruptcy Court for the Eastern District of New York held that an easement is an in rem property interest, subject to sale free and clear under Bankruptcy Code section 363(f).

The debtor constructed a building on property facing the Far Rockaway ocean.  Almost 100 years earlier, an easement had been granted to owners of an adjacent property, giving them a right of way to the ocean. The debtor and its secured creditor proposed a plan that provided for the property to be sold free and clear of all claims and interests, including the easement.  The owner objected, arguing that the property could not be sold free and clear of the easement.

The bankruptcy court found that the easement was an in rem property interest:  “An easement is more than a personal privilege to use another’s land, it is an actual interest in that land.”  As such, the court held it was subject to sale free and clear under section 363(f), and concluded that the easement owner could be compelled to accept a monetary satisfaction for the easement under state law.

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.

On August 24, 2016, Judge Mary F. Walrath of the Delaware Bankruptcy Court overruling an objection to claim for reclamation.   The decision was issued in the Reichold Holdings US, Inc. Bankruptcy (Case No. 14-12237) in the Delaware Bankruptcy Court.  A copy of the Opinion is available here.

While the background to this dispute is laid out in detail in the Opinion, it can be easily summarized.  A prepetition lender had a lien on substantially all the Debtor’s assets, including inventory.  Covestro LLC (the “Claimant”) supplied goods to the Debtor within the 45-day reclamation period.  Claimant issued a reclamation demand to the Debtor within days of the Debtor’s bankruptcy filing and later filed a proof of claim for all goods provided within the reclamation period.  As part of the DIP financing, the prepetition loan was paid in full and the DIP lender obtained a first priority lien on all prepetition and postpetition property of the Debtor’s estate, including inventory.  The DIP loan was repaid from the sale of the Debtor’s assets and a plan of liquidation was confirmed.  Opinion *1-3.

The Liquidation Trustee objected to Covestro’s claim, arguing that its security interest was rendered valueless when the Prepetition Loan was repaid.  Opinion at *3.  However, Judge Walrath disagreed, holding that once the prepetition lien was repaid, the reclamation lien became the first priority lien.  “The function of a lien is to secure a debt; once that debt is repaid, the lien and the rights of the lien-holder terminate.”  Opinion at *8.  The DIP lien was expressly subject to reclamation rights.  Id.  Judge Walrath held that if the prepetition lien holder had foreclosed on the inventory, the analysis would be different.  However, “Covestro’s goods were not sold and their proceeds were not paid to the Prepetition Lender.”  Opinion at *9 (emphasis in original).

Judge Walrath concluded by opining that “Because Covestro’s rights arose before the DIP Lenders had any rights in the goods, the Court concludes that the DIP Lenders do not have prior rights in the goods.”  Id.  The Court thus overruled the Liquidating Trustee’s objection to the claim.

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.