Serving as an illustration of the principal that a financial restructuring won’t save a business that has ceased to be frequented by customers, RadioShack has filed for bankruptcy for the second time in as many years.  The prior case was filed in the Bankruptcy Court for the District of Delaware as case no. 15-10197.  This case is also in the Bankruptcy Court for the District of Delaware, and is case no. 17-10506.  Prime Clerk is the noticing agent in both cases and maintains a copy of the Court’s docket on its website – http://www.primeclerk.com/case-archive/.

The first bankruptcy had three primary results: 1) RadioShack closed approximately 2,400 stores, 2) the remaining stores were sold as a going concern to General Wireless, Inc., and 3) an agreement was entered into with Sprint, providing for co-branded product, exclusive access for Sprint within the RadioShack stores, and the payment of a portion of RadioShack rents by Sprint.

At the time of this second bankruptcy filing, there were over 1,500 stores in operation.  According to the first day declaration of Dene Rogers (the “Rogers Declaration”) in support of this bankruptcy, RadioShack is again seeking to shed underperforming leases and pursue a sale or restructuring.  As part of this process, it has transferred 115 stores to Sprint in exchange for a $12 million payment and the termination of the Sprint agreement, with the possibility of receiving another $5 million following an investigation period.

RadioShack has sought authority to close and liquidate the inventory of “between 530 and substantially all of their stores.”  See Rogers Declaration at 22.  Accordingly, creditors will want to keep close tabs on this case to make sure that any debts owed or claims they may have are not eliminated.

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 March 2, 2017, Cal Dive Offshore Contractors, Inc. (“Cal Dive” or “Debtor”) filed approximately 136 complaints seeking the avoidance and recovery of allegedly preferential and/or fraudulent transfers under Sections 547, 548 and 550 of the Bankruptcy Code.

Cal Dive and its affiliated debtors filed voluntary petitions for bankruptcy in the U.S. Bankruptcy Court for the District of Delaware on March 3, 2015 under Chapter 11 of the Bankruptcy Code.  According to each complaint, Cal Dive “constituted a global marine contractor that provided highly specialized manned diving, pipelay and pipe burial, platform installation and salvage, and well-intervention services to a diverse customer base in the offshore oil and gas industry.”

The various avoidance actions are pending before the Honorable Christopher S. Sontchi.  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.

On February 28, 2017, Judge Sontchi of the Delaware Bankruptcy Court issued an opinion (the “Opinion”) in the Money Center of America  bankruptcy – Bankr. D. Del., Case 14-10603.  The Opinion is available here.  This Opinion decided two separate, but similar, motions to dismiss filed by 2 entities owned by federally recognized Indian Tribes and sovereign nations (the “Tribes”).  Each of these Tribes owned a casino (through wholly owned entities) in which the Debtor placed ATMs and other cash advance services, in order to allow casino patrons ready access to funds.  The process that was followed in each case is that the Debtor would provide the ATM or service, the casino would advance the funds by providing payments and stocking the ATMs, and the Debtor would reimburse the casinos from the funds transferred by the patrons’ banks.  In this process, the Debtor would also charge the patrons a fee, funding its operations.

This was a process in which large sums of money flowed, but with little direct benefit to the casinos or the Debtor, as the majority of funds came from a patron’s bank and was paid to the patron.  Of course, I make no judgment as to how much additional profit this allowed the casinos to recognize, as the direct and initial transfers involved were to the patrons, through the casinos and Debtor.  Naturally, the Debtor was required to make frequent payments to the casinos as reimbursement for funds advanced and, following the Debtor’s bankruptcy filing and the appointment of the Trustee in this bankruptcy, significant preference and fraudulent conveyance lawsuits were initiated.

The Opinion

Judge Sontchi carefully weighs several issues in this Opinion, ultimately holding that (1) the Tribes sovereign immunity arguments are to be considered as Rule 12 motions, not as affirmative defenses [Opinion at *15], (2) the casinos enjoy the sovereign immunity of the Tribes [Opinion at *22], (3) the Bankruptcy Code does no abrogate the sovereign immunity [Opinion at *27], and (4) the filing of a claim by one of the Tribes will allow the Trustee’s action to proceed solely to determine if the preference action can recoup the amount of the claim [Opinion at *36].

This is a lengthy opinion, containing a large number of citations to controlling authority.  At no point did Judge Sontchi gloss over any of the case law supporting his holdings.  Accordingly, I consider this Opinion to be important reading material for any attorneys involved in preference litigation against foreign sovereigns.  It also makes me regret not having taken the class on “Native American Law” when in school – the issues involved are very interesting.

We have published a number of posts about preference actions on this blog.  The key issue of note here, is that many trustee’s merely look at a debtor’s check register and sue each and every recipient of transfers in the 90-day time period immediately preceding the debtor’s bankruptcy filing.  As this is what is allowed under the Bankruptcy Code, this is the procedure most frequently used by trustees.  Most of the time, the trustee involved has an informational problem and the only way to start talking with opposing parties in is to file suit.  I haven’t ever had a conversation go well when it starts, “you might owe me money and I’d like to talk to you about whether you do.”  But this is exactly the situation trustees often find themselves in.

If you are a named defendant in a preference action, the first step is to make sure you understand the law surrounding preference litigation.  Educate yourself, then have your lawyer start a dialogue with the Trustee’s lawyer.  The vast majority of preference actions settle or are dismissed once the parties understand whether there were actual preference payments or not.  If you are in the lucky position to have not yet had a client or customer go through bankruptcy, (1) count yourself lucky and (2) start making plans to protect yourself for when one of them does go under.  It isn’t pretty, but since most of us aren’t foreign sovereigns, we need to plan carefully toy reduce our preference exposure.

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.

On February 21, 2017, Judge Silverstein of the Delaware Bankruptcy Court issued an opinion (the “Opinion”) in the Outer Harbor Terminal bankruptcy proceeding – Bankr. D. Del., Case 16-10283.  The Opinion is available here.  This Opinion decided the Debtor’s objection to a claim for breach of contract filed by Kawasaki Kisen Kaisha, Ltd. (“K Line”).  The claim objection objected both to the amount of the K Line claim, and to the very existence of the K Line claim.  The Opinion only addressed the claim’s validity and did not liquidate the claim.  That issue was reserved by Judge Silverstein for a later trial.  However, I’m of the opinion that the amount of the claim will be determined consensually, as most issues are in bankruptcy proceedings.

Background

In 2013, K Line entered into an agreement with the Debtor to provide stevedoring and terminal services at the Port of Oakland.  Opinion at *2.  Unfortunately, the Debtor was never profitable and, in 2016, declared bankruptcy.  With that action in mind, on January 21, 2016, the Debtor provided notice to K Line that it would be winding down operations and intended to cease handling vessels as of February 20, 2016 and cease handling gates as of March 19, 2016.  However, the Debtor serviced K Line through March 28, 2016.  In anticipation of the Debtor’s termination of services, on March 4, 2016, K Line found a new provider of services and entered an agreement accordingly.  K Line then filed a claim in this bankruptcy case, and the Debtor objected on November 4, 2016.  An evidentiary hearing was held January 12, 2017 and this Opinion followed.  Opinion at *2-4.

The Opinion

Judge Silverstein focused entirely on the Agreement and the actions of the parties, needing to look no further than the document and the testimony of the Debtor.  She cited to the following chain of logic in making her decision:  1) The Agreement allowed either party to terminate immediately upon certain events occurring, including bankruptcy, Opinion at *7; 2) The Agreement does not provide that termination is self-executing, Opinion at *8; 3) Neither Debtor’s counsel, nor the witness it presented at the hearing testified or argued that the Debtor communicated to K Line that the Agreement was terminated, Opinion at *8-9.

Judge Silverstein makes it clear that although the Bankruptcy Court is a court of equity, it will not rewrite contracts.  “Just as the Court cannot rewrite the Agreement to save ‘K’ Line from a bad bargain, it cannot rewrite the Agreement to save the Debtor from any perceived penalty resulting from its choice to be a good corporate citizen.”  Opinion at *10.  Judge Silverstein held that the announcements of upcoming work stoppage appear to have been a repudiation.  Opinion at *11.  Pursuant to California law, which controlled the Agreement, a party injured by repudiation can elect its remedy, either treating the repudiation as anticipatory breach and seek damages, or ignore the repudiation, await the time when performance is due and exercise remedies for the actual breach.  In this instance, however, neither party briefed the issue of anticipatory breach or damages.  Accordingly Judge Silverstein “grant[ed]” them the opportunity to brief the issue in connection with a damages trial.  Opinion at *12.

Contract law is a part of nearly every business transaction – from retaining employees, to selling goods or services, to finding ways to protect your assets and business opportunities.  While the Bankruptcy Court is a court of equity, at the end of the day, all of the judges have studied contract law (even if only in preparation for the bar), and will give parties to a contract the benefit (or loss) of their bargains.  It is my hope that all of you reading this post will not need to exercise contractual protections.  But in today’s volatile business environment, even if all the parties to a contract are acting in good faith, a good contract, and following it closely, is the best protection for your business.  Should you ever have a contract counter-party encourage you to push through an incomplete contract, it may do well to remind them, and yourself, that strong fences build strong neighbors.

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.

Earlier this month, the U.S. Bankruptcy Court for the District of Delaware (the “Delaware Bankruptcy Court”) released an update to the Local Rules for the United States Bankruptcy Court District of Delaware (Effective February 1, 2017) (the “Local Rules”).  According to Local Rule 1001-1(e), the 2017 version of the Local Rules governs all cases or proceedings filed after February 1, 2017, and also applies to proceedings pending on the effective date, except to the extent that the Court finds that it would not be feasible or would work an injustice.

A summary of the amendments is below:

New LR 3016-1 – Requires any amended Plan or Disclosure Statement to include a redline showing changes from the previous version.

New LR 9029-2 –Cross-Border Insolvency Matters – refers to new Part X of the local rules.

New LR 9033-1 – Transmittal to District Court of Proposed Findings of Fact and Conclusions of Law.

New Part X – Guidelines for Communication and Cooperation Between Courts in Cross-Border Insolvency Matters.

Rule 2002-1(f)(viii) – The amendment requires the claims agent to make the complete Proof of Claim and attachments “viewable and accessible by the public”.

Rule 2016-2(e)(iii) – adds language allowing $0.80 per page for color copy charges (B&W remains $0.10 per page).  Outgoing fax charges reduced from $1.00 per page to $0.25 per page.

Rule 3023-1(b)(i)(B) – new sub-section on Nonstandard Plan Provisions added.

Rule 9013-1 – Motions and Applications – numerous language changes throughout the Rule.

Rule 9018-1:

(a) – New subsection stating that exhibits entered into evidence must be retained by counsel until the later of the closing of the main case or entry of a final non-appealable order.

(b) – Parties must make exhibits admitted into evidence available to any other party at its expense (subject to confidentiality).

(c) – Motions to seal do not require a motion to shorten notice, objections may be presented at the hearing.

A link to the 2017 Local Rules can be found here.  In addition, a redline reflecting the changes between the 2016 and 2017 Local rules can be found here.

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 Spizz v. Goldfarb Seligman & Co. (In re Ampal-American Israel Corp.), 2017 WL 75750 (Bankr. S.D.N.Y. Jan. 9, 2017), the United States Bankruptcy Court for the Southern District of New York dismissed a preference complaint filed by a trustee of chapter 7 debtor headquartered in Israel, where the payment was made from the debtor’s Israeli bank to an Israeli supplier.  The Court held that Section 547 of the Bankruptcy Code does not have extraterritorial effect and the transfer did not originate in the U.S.

Within 90 days before bankruptcy, the debtor wired money from the debtor’s Israeli bank account to the supplier’s Israeli bank account, on account of an antecedent debt.  The chapter 7 trustee sued the supplier to avoid and recover the alleged preferential payment.  The supplier asserted that Section 547 could not be applied extraterritorially.

Judge Bernstein observed that the “presumption against extraterritoriality” is a “longstanding principle of American law that legislation of Congress, unless a contrary intent appears, is meant to apply only within the territorial jurisdiction of the United States.”  In Morrison v. Nat’l Australia Bank Ltd., 561 U.S. 247 (2010), the United States Supreme Court outlined a two-step approach to determine whether the presumption forecloses a claim.

First, the court asks “whether the statute gives a clear, affirmative indication that it applies extraterritorially.”  If not, the court must turn to the second step to determine if the litigation involves an extraterritorial application of the statute.  Second, the court determines “whether the case involves a domestic application of the statute, . . . by looking to the statute’s ‘focus.’ . . . [I]f the conduct relevant to the focus occurred in a foreign country, then the case involves an impermissible extraterritorial application regardless of any other conduct that occurred in U.S. territory.”

In applying this analysis, the S.D.N.Y. bankruptcy court first held that the avoidance provisions of the Bankruptcy Code (including Section 547) do not apply extraterritorially.  In so holding, the Court disagreed with the Fourth Circuit’s decision in French v. Liebmann (In re French), 440 F.3d 145 (4th Cir. 2006), which held that Congress intended international application of U.S. fraudulent transfer law.

Next, the S.D.N.Y. Bankruptcy Court ruled that the determination of whether the case involves a domestic or extraterritorial application of section 547 depends on whether the initial transfer came from the United States.  Because the transfer here occurred between a U.S. transferor headquartered in Israel and an Israeli transferee through Israeli bank accounts, the transfer occurred in Israel, and was not domestic.

Therefore, the court concluded that it could not be avoided, and dismissed the trustee’s preference complaint.

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 Miller v. Zurich American Ins. Co. (In re WL Homes LLC, et al.), Adv. No. 11-50839 (BLS) (Bankr. Del. Jan. 10, 2017), the Delaware Bankruptcy Court addressed the affirmative defense of recoupment asserted by an insurer in defense of an adversary proceeding seeking the return of insurance premium overpayments.

Background

The Trustee determined that WL Homes had overpaid its premium obligations for the 2007 to 2009 term by roughly $2.2 million.  The Trustee filed an adversary proceeding against Zurich, asserting that he is entitled to turnover of approximately $2.2 million in insurance premium overpayments – called a “return premium” – from Zurich American Insurance Company (“Zurich”).  The Trustee also brought preference claims and sought to disallow claims of defendant.

Zurich defended against turnover by asserting the affirmative defense of recoupment for amounts actually spent defending and settling construction defect claims against WL Homes as insured, and Zurich as insurer.  The Trustee moved for partial summary judgment.

Analysis

Judge Shannon denied the Trustee’s motion.  To start, the Court provided a concise summary of the law of recoupment. “Recoupment is an equitable remedy that permits the offset of mutual debts arising from the same transaction or occurrence.” Slip op. at 5, citing In re Communication Dynamics, Inc., 300 B.R. 220, 225 (Bankr. D. Del. 2003).

The Trustee argued that recoupment did not apply because the respective debts arose from different parts of the Zurich policy, and because the policy did not contain an express reimbursement clause.

The Court disagreed with the Trustee’s contentions, and found that recoupment applied to the Trustee’s claims.  The Court held that the SIR amount and the premium “are interdependent economic features of the insurance contract[]”, and “form the economic basis of the insurance contract formed between Zurich and WL.”  In addition, the Court found it was unnecessary for the policy to contain an express reimbursement clause for recoupment to 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.

ATopTech, Inc. (“ATopTech” or “Debtor”), an electronic design automation software company manufacturing software solutions for engineers to assist them in the physical design of integrated circuits, filed a voluntary petition for chapter 11 bankruptcy relief on January 13, 2017 in the United States Bankruptcy Court for the District of Delaware.

In addition, ATopTech filed a motion to sell its businesses under section 363 of the Bankruptcy Code and has selected a stalking horse bidder. The Debtor expects that the sale will be completed by March 31, 2017.

The Debtor’s petition lists between $10 and $50 million in assets and liabilities.  The case has been assigned to the Honorable Mary F. Walrath, case number 17-10111.  The Debtor is being represented by the law firm of Dorsey & Whitney, LLP.

A first-day hearing has not yet been scheduled, although the Debtor has filed a notice of agenda, which can be accessed here.

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 In re: Abeinsa Holding Inc. et al., Del. Bankr. Ct. Dec. 14, 2016), Case No. 1:16-bk-10790, the Honorable Kevin J. Carey confirmed clean energy developer Abeinsa Holding Inc.’s Chapter 11 plan, which is part of the $16.5 billion global restructuring for Spanish parent Abengoa SA.  Abengoa, with operations in about 50 nations, is a major figure in clean energy and environmental sustainability engineering.

The plan was confirmed over the objections of the U.S. Trustee’s office, which complained among other things of the liability releases contained in the plan.

The Court agreed with the U.S. Trustee that the liability releases contained in the Chapter 11 plan are broad.  However, the Court found that they do not violate the Bankruptcy Code and were necessary, negotiated-for components of the exit strategy.  Notably, no creditors objected to the releases, which the Court found to be of significance.

The Court found the liability releases to be the result of extensive bargaining, and essential to the deal in which Abeinsa’s parent and other entities would bring in enough new money to make the exit strategy feasible and not cripple a crucial component of Abengoa’s multilayered global restructuring strategy.

One key objection from creditor Portland General Electric Co. (“PGE”), which has a litigation claim against Abeinsa for more than $200 million in damages on breach-of-contract claims. PGE’s objection dealt with the complex structure of Abeinsa’s bankruptcy plan, and a measure that has parent Abengoa retaining ownership of its subsidiary companies that the creditor argues is in violation the Chapter 11 absolute priority rule, which places equity holders at the very bottom when it comes to order of recovery.

Judge Carey overruled PGE’s objection, finding that there is an exception to the absolute priority rule when a stakeholder brings new value to the case.  The Court found that Abengoa was doing so with a new value contribution of nearly $40 million, part of which will be used for creditor distribution.

Abeinsa’s plan, a major component of Abengoa’s global restructuring effort, calls for four separate subplans that will liquidate some Abengoa subsidiaries and restructure others with $1 billion in new investment being injected.

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 December 21, 2016, Modular Space Corporation and its affiliated entities (“Modular Space” or the “Debtors”) filed for bankruptcy protection in the U.S. and Canada, to implement a plan to rework its $1 billion load of long-term debt.  Modular Space will continue its operations during what the restructuring. Modular Space makes, leases and sells office trailers, mobile offices, temporary classrooms, modular office complexes and portable storage units.

A restructuring that will swap out about $400 million worth of debt for equity was negotiated in advance of the bankruptcy filing in the U.S. and the initiation of Canadian restructuring proceedings in Toronto.

The slowdown in the oil-and-gas sector and mining hurt Modular Space’s sales, according to papers filed with the Delaware Bankruptcy Court. With nonresidential construction numbers falling sharply, Modular Space was up against lowered demand and pricing pressures that ate into its margins.

The Debtors are represented by Cleary Gottlieb Steen & Hamilton LLP, Lazard Frères & Co. LLC, and Young Conaway Stargatt & Taylor LLP.  The case is pending before the Honorable Kevin J. Carey.

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.