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.

In a decision signed September 8, 2017 in an adversary proceeding related to the Money Center of America bankruptcy (case 14-10603), Judge Sontchi of the Delaware Bankruptcy Court denied a defendants FRCP 12(b)(6) motion to dismiss a complaint filed in the adversary proceeding 15-50250. Judge Sontchi’s opinion is available here (the “Opinion”).

The chapter 7 trustee of the Money Center of America bankruptcy, Maria Aprile Sawczuk (the “Trustee”) filed a complaint against Christopher Wolfington, Jason Walsh and Lauren Anderson, alleging breach of fiduciary duty, aiding and abetting breach of fiduciary duty, corporate waste, conversion, recovery of avoidable transfers, and equitable subordination.  Defendant Walsh filed a motion to dismiss, arguing that the Trustee failed to adequately plead non-dischargeability in his personal bankruptcy or fraud.  His motion to dismiss was the subject of the Opinion.

After analyzing and reciting the complaint, the Court determined that “the Trustee’s Complaint sufficiently alleged that Walsh perpetrated fraudulent transfers through conduct “of the kind” specified in sections 523(a)(2) and (a)(4) in order to withstand a motion to dismiss.”   Opinion at *6.  The Court further held that “the Trustee has sufficiently alleged facts showing that Walsh’s conduct of the kind specified under sections 523(a)(2) and (a)(4).”  Opinion at *7.

This Opinion, although short, provides a strong reminder of the requirements of the pleading standards in the Delaware Bankruptcy Court.  Complaints do not need to contain long recitations of facts supported by extensive evidence.  Rather, a complaint need only contain allegations of sufficient facts to support the claims alleged.  In a prior blog post I discussed a time when this did not occur: You Don’t Get Three Strikes when Filing a Complaint – Lessons from Tropicana.  When a complaint clears this hurdle, it will not be dismissed by the Bankruptcy Court.

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.

On August 29, 2017, The Wet Seal, LLC filed preference actions against 67 defendants.  The lead Wet Seal bankruptcy case is Case No. 17-10229 in the Bankruptcy Court for the District of Delaware.  Wet Seal is represented by A.M. Saccullo Legal, LLC and ASK, LLC.

According to the complaints, the Debtors were a national multichannel specialty retailer selling fashion apparel and accessory items designed for female customers aged 18 to 24 years old. The Debtors were comprised of two primary business units; the retail store business and an e-commerce business. Through their retail store business, the Debtors operated approximately 142 retail locations in 37 states, principally in leased-based mall locations. Through their e-commerce business, the Debtors operated an e-commerce site at  and had over 2 million followers on their Facebook page.  As retailers, they had a significant supply chain, comprised of a significant number of suppliers.  The defendants in these preference actions were entities who were alleged to have received payments within the 90-day period immediately preceding Wet Seal’s February 2, 2017 bankruptcy filing.

 

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 26, 2017, Model Reorg Acquisition, LLC, and eighteen of its subsidiaries and affiliates (collectively, “Model Reorg” or “Debtors”), filed voluntary petitions for relief under Chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court for the District of Delaware (No. 17-11794).

The Debtors, which primarily operate under the brand “Perfumania”, comprise the largest national specialty retailer and distributor of fragrances and beauty products.  According to a press reslease issued by Perfumania Holdings, Inc., Model Reorg “has initiated a recapitalization to be facilitated through a pre-packaged Plan of Reorganization (“the Plan”) to reduce its retail store count to better align with current consumer shopping patterns, increase investments in its e-commerce business, and become a privately-held Company.”   A link to the press release can be found here.

The case has been assigned to the Honorable Christopher S. Sontchi.  The Debtors are represented by the law firm of Skadden Arps Slate Meagher & Flom LLP.  The First Day hearing is noticed to take place today, at 2:00 p.m.

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 23, 2017, Judge Shannon of the Delaware Bankruptcy Court issued an order that is a reminder that this is a court of equity – and that at the end of the day, he will act equitably.  A copy of Judge Shannon’s opinion (the “Opinion”) is available here.  Mr. Welsh filed the complaint that led to this Opinion, seeking damages for emotional distress, and punitive damages, for alleged violations of the automatic stay.

Brian Welsh is a debtor in bankruptcy case no. 14-11503 in the Bankruptcy Court for the District of Delaware.  On April 13, 2012, despite his mortgage being in default, Bank of America (“BofA”) mistakenly recorded a satisfaction of mortgage.   On February 7, 2014, BofA
filed a complaint in the Superior Court in the State of Delaware to set aside the Satisfaction.  On June 18, 2014, prior to any disposition in the Superior Court litigation, Mr. Welsh filed his Chapter 13 petition. On November 3, 2014, in order to protect its interest, BofA filed a proof of claim on account of the mortgage.  In response to an adversary proceeding seeking to avoid BofA’s claim, the Court issued a decision on October 1, 2015, in which it held that a bona fide purchaser would not have been on notice of the Superior Court litigation as of the Petition Date, and the lien was therefore avoided pursuant to Section 544(a)(3).  At that time, Judge Shannon said that Mr. Welsh “will benefit mightily due to [Defendant’s] honest mistake”, in essence obtaining “a house for free”.

As the facts are provided by Judge Shannon in the Opinion, it appears that he would be inclined to rule that BofA did violate the automatic stay.  This is reinforced by his denial of the defendants’ motion to dismiss the complaint.  He does, however, issue a parting word of guidance to the parties that makes exceptionally clear that the Debtor should not expect to receive any amount of damages due to BofA’s violation of the automatic stay.  “Candor requires that the Court advise the parties that it is highly unlikely that, at trial, this Court would award damages to the Plaintiff beyond the free house he has already obtained.”

When I was in law school, I heard numerous times that “pigs get fat and hogs get slaughtered”.  Mr. Welsh got a rich reward due to his handling of his bankruptcy petition – a free home.  Anything more than a free home, which had a mortgage of $205,000, may be more than a judge in a court of equity could in good conscience award.

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 Klauder v. Echo/RT Holdings LLC (In re Raytrans Holding, Inc.), Adv. No. 15-50273 (CSS) (Del. Bankr. Aug. 10, 2017), Judge Sontchi granted Defendants’ Motion to Dismiss the Trustee’s Second Amended Complaint, dismissing the Trustee’s claims in their entirety either under collateral estoppel or the doctrine of res judicata.

Procedural Background

Prior to the Raytrans bankruptcy proceeding, creditor Spring Capital Real Estate, LLC (“Spring Capital”) commenced a lawsuit in the Court of Chancery against Defendants Echo/RT Holdings LLC and Echo Global Logistics, Inc. (“Echo Defendants”) and RayTrans Distribution on October 31, 2012, seeking to void as fraudulent conveyances the transfers made to defendants by Holdings and RayTrans Distribution.

The Trustee joined the fraudulent transfer action commenced by Spring Capital in the Court of Chancery. On November 3, 2014, the Trustee asserted crossclaims against the defendants, pursuant to Del. Ch. R. 13(g), “seeking to assert the estate’s interest in, and to void as fraudulent conveyances, the transfers made to defendants by Holdings under Delaware and Illinois state law that were being challenged by Spring Capital. As recoverable by a creditor holding an unsecured claim.”

On December 31, 2013, the Court of Chancery dismissed Spring Capital’s claims with prejudice.  The Trustee then filed Amended Cross-Claims against the Echo Defendants, asserting slightly modified fraudulent transfer claims brought by Spring Capital, under both Delaware and Illinois law, that had also been dismissed by the Court of Chancery.  The Echo Defendants moved to dismiss the Trustee’s claims, which was granted on February 18, 2016, and the Court of Chancery both dismissed the Trustee’s entire Amended Cross-Claim with prejudice and denied the Trustee’s request for leave to amend (the “Dismissal Order”).  On December 12, 2016, the Delaware Supreme Court rejected the appeals filed by the Trustee and Spring Capital and affirmed the Dismissal Order.

Before the Court of Chancery granted the Motion to Dismiss, the Trustee filed the instant adversary proceeding against the Echo Defendants on April 24, 2015, asserting (i) three counts for avoidance of fraudulent transfers pursuant to 11 U.S.C. §§ 548 and 550, (ii) a count for avoidance of preferential transfer pursuant to 11 U.S.C. § 547, (iii) one count for recovery of an avoided transfer pursuant to 11 U.S.C. § 550, and (iv) disallowance of all claims pursuant to 11 U.S.C. § 502(d) and (j)

On November 7, 2016, the Trustee sought leave to amend his complaint. On December 28, 2016, the Court granted the Motion to Amend and the Trustee filed his Second Amended Complaint, now asserting two counts for avoidance of fraudulent transfers under Sections 544, 548, and 550 and added a new breach of contract claim (Count V) and a claim for attorneys’ fees (Count VIII). The original breach of contract claim (Count VI) and accounting claim (Count VII) remain in the Second Amended Complaint.

Analysis

The Court found that Counts I and II (for fraudulent transfer under Sections 544 and 548) were barred under the doctrine of collateral estoppel.  The Court of Chancery previously found that the APA was supported by reasonably equivalent value, and that the APA did not amount to a fraudulent transfer.

The Court likewise dismissed Counts III and IV, seeking the avoidance and recovery of preferential transfers under Sections 547 and 550 of the Bankruptcy Code.  Per the Opinion, the Trustee merely stated that Defendants were “insiders” of the Debtor, but offered no factual support for such a conclusion in the Second Amended Complaint.

Finally, the Court dismissed Counts V (breach of contract and judicial estoppel), VI (breach of contract), VII (accounting) and VIII (breach of guaranty and attorneys’ fees) under the doctrine of res judicata.  The Court noted that for the past three years, the Trustee and the defendants have been litigating before the Court of Chancery and then on appeal to the Delaware Supreme Court, and that the “basis of the entire adversary proceeding, and the prior Court of Chancery litigation, was the APA.”  Accordingly, the Court dismissed the Trustee’s Second Amended Complaint in its entirety.

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 July 19-21, 2017, David W. Carickhoff, in his capacity as Chapter 7 Trustee of the Estates of Univita Holdings, et al., filed approximately 46 complaints seeking the avoidance and recovery of allegedly preferential and/or fraudulent transfers under Sections 547 and 550 of the Bankruptcy Code.

Univita Health, Inc. and its affiliated debtors filed voluntary petitions for bankruptcy in the U.S. Bankruptcy Court for the District of Delaware on August 28, 2015 under Chapter 7 of the Bankruptcy Code.  The cases are jointly administered pursuant to Rule 1015(b) of the Bankruptcy Rules.

The various avoidance actions are pending before the Honorable Mary F. Walrath.  The Pretrial Conference has been set for 10/4/2017 at 02:00 PM ET.

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.

In a decision signed July 26, 2017 in the Nephrogenex bankruptcy (case 16-11074), Judge Gross of the Delaware Bankruptcy Court approved of the application of the Debtor’s investment banker for a success fee over the objection of, among others, the Debtor and the purchaser of all the reorganized debtor’s equity. Judge Gross’s opinion is available here (the “Opinion”).

In this case, the Debtor hired an investment banker (“CS”), which was duly approved by the Court.  Part of CS’s compensation included a “Sale Transaction” fee which would be earned in the event of a Sale Transaction.  The term Sale Transaction was broadly defined, Opinion at *4, and included:

“any transaction or series of transactions involving (a) an acquisition, merger, consolidation, or other business combination pursuant to which all or substantially all of the business assets, subsidiaries, divisions, business segments, operations, securities, or equity interests of the Company are, directly or indirectly, combined with another company; (b) the acquisition, directly or indirectly, by a buyer or buyers. . . of equity interests or options, or any combination thereof constituting a majority of the then outstanding economic interests in the Company. . .”  Opinion at *4.

As part of the Plan of liquidation, the equity of the reorganized debtor would be transferred to one of its creditors as satisfaction of that creditor’s claim.  After the transfer of equity, CS filed its fee application alleging that the release of the claim, with a post-distribution value of approximately $2 million (the claim was for $4,312,698.51 and the estimated distribution was 49.5%, Opinion at *2-3), was a Sale Transaction, triggering its success fee.

After reviewing all the relevant documents and hearing the testimony of the principle of CS, Mr. Cassel, Judge Gross agreed with CS, holding that the equity transfer satisfied the definition in CS’s engagement documents.  The one wrinkle that the objecting parties tried to use to oppose the the payment, is that CS’s retention agreement provided that the success fee would be paid out of the proceeds of the Sale Transaction, and there were no proceeds from this transaction.  Judge Gross determined that this was not a necessary requirement of compensation on the basis of two parts of the engagement agreement.  First, “the Engagement Agreement does not provide that the Sales Transaction Fee can only be paid if the Sales Transaction generates cash.”  Second, “the Engagement Agreement defines ‘Sale Consideration’ to include ‘(y) the principal amount of all indebtedness for borrowed money or other liabilities of the [Debtor] or [Debtor] related entity as applicable, as set forth on the most recent balance sheet, or in the case of a sale of assets, all indebtedness for borrowed money or other liabilities assumed, cancelled, exchanged, or forgiven by a third party. . . .'”  Opinion at *8.

Because people constantly try to find ways to get around definitions to maximize their profit, attorneys, like those representing CS, often draft language as broad (or narrow) as possible to best protect their client.  In this case, was the recipient of the reorganized debtor truly intending to buy the company?  Probably not.  However, CS’s attorney’s careful drafting of their retention agreement helped ensure that even if the acquiring company was trying to avoid the success fee, CS still received it.  The takeaway in this Opinion is, if you represent the retained professional, to make sure there is no language disallowing a fee for some reason, like a lack of cash in the consideration received.

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.