View of buildings along 11th Street at sunset in downtown Wilmington, DelawareFox Rothschild is pleased to announce that, effective June 11, it will merge with Shaw Fishman Glantz & Towbin LLC, a 23-attorney firm with robust practices in bankruptcy, commercial litigation and real estate. The merger with the Chicago-based firm will also deepen Fox’s capabilities in Wilmington, with the addition of counsel Johnna Darby and partner Tom Horan.

Johnna Darby, Counsel, Fox Rothschild LLPJohnna Darby represents businesses of various sizes and in various contexts, including formation guidance, contract review, corporate governance and business and commercial disputes pending in federal and state courts. Skilled at negotiating resolutions and litigating cases for clients, she is adept at knowing when to do one, the other, or both, and uses these skills to advise clients regarding a clear path forward.

In addition, Johnna’s work takes her into bankruptcy court. There she has represented creditors, an official committee of unsecured creditors, and other interested parties. Johnna has also represented a liquidating trustee in numerous preference actions. She also has had the pleasure of assisting out-of-state counsel with their representations by serving as Delaware counsel.

Thomas Horan, Partner, Fox Rothschild LLPTom Horan is experienced in a wide range of bankruptcy matters, focusing his national practice on the representation of debtors and official unsecured creditors committees in complex Chapter 11 proceedings. In addition to his work on behalf of debtors and official committees of unsecured creditors, Tom regularly represents secured creditors, trustees, unsecured creditors, and debtor-in-possession lenders.

Tom also represents clients in preference and fraudulent transfer proceedings. Beyond his extensive Chapter 11 experience, he frequently provides opinion letters on commercial transactions and represents parties in matters before the State of Delaware’s Court of Chancery and Superior Court.

Over the past several years, Fox Rothschild has grown its national footprint significantly. The firm opened in Minneapolis in 2016, welcoming more than 80 attorneys via a merger with Oppenheimer Wolff & Donnelly LLP. In May of 2017, Fox launched a Seattle office through a merger with 39-attorney law firm Riddell Williams LLP.

On her The Bottom Line 11 blog, Fox partner Mette Kurth discussed the recent bankruptcy filing of Italian restaurant chain owner and operator Bertucci’s Corporation:

Italian and Mediterranean food ingredientsCompany Overview

Bertucci’s  was formerly known as NE Restaurant Company, Inc.  It changed its name to Bertucci’s Corporation in August 2001. Founded in 1981, the company is based in Northborough, MA.  Today Bertucci’s owns and operates a chain of 59 casual dining Italian restaurants in the Northeast and Mid-Atlantic.

A Bankruptcy Sale

The filing sets up a process to sell the company to Right Lane Dough Acquisition, LLC (an affiliate of Right Lane Capital) or an overbidder. The proposed purchase price is $1.7 million in cash and a “credit bid” of up to $4 million.  In addition, the buyer will provide the company with exit financing in the form of $14 million in new second lien notes.

To read Mette’s full viewpoint on the filing, please visit her blog.

On April 5, 2018, VER Technologies Holdco LLC, along with eight subsidiaries and affiliates (collectively, “VER”), filed a voluntary petition for relief under Chapter 11 of the Bankruptcy Code in the U.S. Bankruptcy Court for the District of Delaware (Case No. 18-10834).

VER, based in Glendale, CA, is an engineering and equipment company that, among other things, lit the red carpet for the Academy Awards show.  VER filed for bankruptcy after negotiating a proposed restructuring deal with creditors. The Debtors listed $1 billion in liabilities and less than $50,000 worth of assets in its Chapter 11 petition.  According to the Debtors’ petition, VER filed for Chapter 11 having entered into a restructuring support agreement and will be seeking approval of DIP Financing provided by its pre-petition senior lenders.

Bank of America Corp. will act as the agent for lenders providing VER with funding to keep operating while under Bankruptcy Court supervision.  The Debtors in these bankruptcy cases are represented by the law firm of Kirkland & Ellis.  The cases have been assigned to the Honorable Kevin Gross.

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 her The Bottom Line 11 blog, Fox partner Mette Kurth discussed the recent bankruptcy filing of mechanical systems startup Fallbrook Technologies:

Cross section of an automatic transmission.Texas-based Fallbrook Technologies has filed for chapter 11 protection. The committee formation meeting will take place on March 9, 2018 at 10:00 a.m. in Wilmington, Delaware. The formation notice is available here.

World Domination, One Gear At a Time

Fallbrook develops and manufactures the NuVinci continuously variable transmission systems. What is that, you ask? It makes stuff more efficient. So the company’s mission can be summed up as achieving world domination by creating a better mousetrap. Or as it says, setting the new global standard for managing mechanical and electro-mechanical power systems.

And it will do this by “transforming gears to (NuVinci) spheres.” That is, by using a set of rotating and tilting spheres between the input and output components of a transmission. If you have a degree in engineering, perhaps this brings something to mind. For the rest of us, the company has provided a helpful illustration.

Cool! Fallbrook’s system is now commercially available for bicycles and e-bikes. And, Fallbrook says, its technology has exciting applications in machinery, vehicles, and other equipment.

The company has two divisions.

– Its Enviolo-branded bicycle division, which was formed to demonstrate mass market viability and to continue to develop the NuVinci technology.
– Its licensing division, which provides NuVinci technology to “industry leaders” such as Allison Transmission, Dana Limited, TEAM Industries and Conti Temic microelectronics.

To read Mette’s full viewpoint on the filing, please visit her blog.

On her The Bottom Line 11 blog, Fox partner Mette Kurth discussed the recent bankruptcy filing of health care provider HCR ManorCare:

Court Pillars
Copyright: bbourdages / 123RF Stock Photo

HCR ManorCare, Inc. commenced a chapter 11 bankruptcy case on March 4, 2018. It accompanied the filing with a “prepackaged” chapter 11 plan. The company has requested a hearing to approve that plan on April 12, 2018.

The debtor, through its operating subsidiaries, is a Toledo-based provider of short-term, post-hospital services and long-term care. Its operating subsidiaries have not filed for bankruptcy protection.

To read Mette’s full viewpoint on the filing, please visit her blog.

On her The Bottom Line 11 blog, Fox partner Mette Kurth discussed the recent bankruptcy filing of regional supermarket chain Tops Markets:

Woman grocery shopping in a supermarketRegional grocery chains continue to struggle as Supermarket chain Tops Markets filed for bankruptcy protection in Manhattan yesterday. (Is the re-pocalypse heading for your local grocer?  Learn more here.)

The Company

Tops operates 169 full-service supermarkets, 168 under the Tops trade name and one under Orchard Fresh. And franchisees operate five more. The markets are focused on key regions in upstate New York, Northern Pennsylvania, and Vermont.

Tops’ Bankruptcy Objectives

The company has identified three core objectives: reducing its debt, renegotiating or cancelling leases and supply agreements, and negotiating with its labor unions.

Tops hopes to complete its bankruptcy process in roughly six months. During its first three months, it plans to focus on creditor negotiations. Then, if all goes well, it will implement its negotiated plan. Towards that end, it has agreed to some milestones:

– April 2, 2018: Entry of final orders approving its financing;

– May 7, 2018: Execution of a restructuring support agreement with key lenders;

– July 21, 2018: Filing of a disclosure statement and solicitation of a plan acceptable to its key lenders, with confirmation 60 days thereafter.

As a further update, the formation meeting has been set for March 6. To read Mette’s full viewpoint on the filing, please visit her blog.

On February 13, 2018, Judge Silverstein of the Delaware Bankruptcy Court granted a motion to dismiss the Rent-A-Wreck of America bankruptcy case (Bankr. D. Del. case 17-11592). Judge Silverstein’s opinion is available here (the “Opinion”).

In summarizing her holding, Judge Silverstein provides: These privately-owned debtors are not in financial distress (or at least they have not proven they are), and they seek to use 11 U.S.C. § 365 to redistribute value from a long-time adversary to enrich their ultimate shareholder.  The one entity that may be adversely affected by the Debtors’ bankruptcy filing is the Movant, David Schwartz.  Mr. Schwartz was held by the Maryland District Court, and affirmed by the Fourth Circuit, to be the the holder of an implied-in-fact royalty and fee-free franchise in West Los Angeles.  Opinion at *7.  He argues that the Debtors filed bankruptcy for the sole purpose of rejecting his franchise, and are not filed in good faith, but are instead a continuation of the Maryland District Court litigation.  Opinion at *12

The Debtors argued that they filed for bankruptcy protection to maximize the value of the Rent-A-Wreck trademark, to reject burdensome franchise agreements, and to relieve Debtors’ balance sheet of significant debt, all of which Debtors posit constitute valid reorganizational purposes. Opinion at *12.

Judge Silverstein began her analysis of this case by reviewing the inquiry of the Debtors’ good faith as directed by  precedential holdings of the Third Circuit.  Opinion at *14.  The Third Circuit considers two primary factors to determine good faith – first, whether the petition serves a valid bankruptcy purpose, second, whether the petition was filed to gain a tactical advantage.  Id.  The main precedential opinion cited by Judge Silverstein is In re Integrated Telecom Express, Inc., 384 F.3d 108 (3d Cir. 2004).

According to the Opinion, good faith is a predicate to a debtor’s ability to use provisions of the Bankruptcy Code, and financial distress is a part of if not itself a predicate to—a good faith analysis.  Opinion at *15.  Judge Silverstein continues: The ability to use the redistributive
provisions of the Bankruptcy Code assumes the existence of a valid bankruptcy, which, in turn, assumes a debtor in financial distress.  Id.  In this case, the Debtors never represented that they were insolvent, and Judge Silverstein, accordingly, determined that they were solvent.  Opinion at *18.  Neither did the Debtors provide evidence indicating that they were unable to pay their debts as they came due.  Opinion at *19.  Judge Silverstein determined that, in sum, the lack of credible facts demonstrating financial distress supports a finding that these cases were not filed in good faith.  Opinion at *26.

Pursuant to the Opinion, Judge Silverstein understood the Debtors’ argument that their filing was in good faith as follows: the rejection of the Schwartz franchise agreement maximizes Debtors’ assets thus permitting them to stay in business, satisfying both prongs of the bankruptcy purpose.  Opinion at *28.  Judge Silverstein disagreed, quoting Integrated Telecom:

To be filed in good faith, a petition must do more than merely invoke some distributional mechanism in the Bankruptcy Code. It must seek to create or preserve some value that would otherwise be lost—not merely distributed to a different stakeholder—outside of bankruptcy.

Opinion at *28 (quoting Integrated Telecom, 384 F.3d at 128-29) (emphasis in Opinion).  Judge Silverstein concludes my opining that the Debtors bankruptcy filing was made for the purpose of redistributing the value of the Rent-A-Wreck trademark in the Los Angeles territory from Mr. Schwartz to Bundy.  Opinion at *29.   Accordingly, the primary, if not sole, beneficiaries of that value would be the Debtors’ equity holders, not its creditors.  Judge Silverstein states that she has “no doubt these petitions were just another chapter in the attempt to terminate Mr. Schwartz’s franchise and obtain the benefits for JJFMS.”  Opinion at *36.

Judge Silverstein provides in the Opinion, that a financially distressed debtor’s recognition of the outcome of litigation and/or a desire to avoid future litigation may serve as a legitimate basis for the filing of a bankruptcy case. Opinion at *36.  I note, however, that the thread running throughout the Opinion is the requirement that a debtor be financially distressed in order to take advantage of the relief provided by the Bankruptcy Code.  Financial distress is a broad term, that can be applied to entities ranging from those suffering a liquidity crisis with substantial equity – to those suffering from over-leverage or long-term non-profitability.  In these situations, and countless others, the Bankruptcy Code can provide relief.  It is important, however, to ensure that your company can satisfy the Court’s scrutiny of whether a petition was filed in good faith – recognizing that the burden of proof is on the debtor.

On January 31, 2018, Hancock Fabrics Inc., the post-effective date debtor, filed approximately 68 complaints seeking the avoidance and recovery of allegedly preferential and/or fraudulent transfers under Sections 547, 548 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 February 2, 2016 under Chapter 11 of the Bankruptcy Code.  On June 20, 2017, the Court entered an order confirming the Debtors’ Second Amended Joint Chapter 11 Plan of Liquidation. The various avoidance actions are pending before the Honorable Brendan Shannon.  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 January 22, 2018, in an adversary proceeding arising within the Haggen bankruptcy (Adv. No. 16-51204), Judge Gross of the Delaware Bankruptcy Court issued a ruling against the Plaintiff, denying the relief requested in the complaint and dismissing the adversary proceeding. Judge Gross’s opinion is available here (the “Opinion”).

The Committee filed an adversary proceeding with a 78 count, 145 page Complaint making numerous allegations including, but not limited to, fraudulent transfers, breach of fiduciary duties, and unjust enrichment.  The Defendants’ answer spanned 184 pages, denying the numerous allegations and laying out the groundwork for the intense legal battle that followed.  Accordingly, it came as no surprise that the trial lasted five days and Judge Gross’s Opinion was 162 pages.

This Opinion follows on the heels of motions for summary judgment, which were previously discussed in this blog post:  In Fact Intensive Issues, You Need a Trial to Provide the Court With the Facts.

As one could presume based on Judge Gross’s affable nature, both in the courtroom, in the public sphere, and in his rulings, Judge Gross has crafted this Opinion in a manner that clearly guides the reader through each issue and includes an easily understood summary.  Judge Gross held that the Defendants were not so cavalier in planning and effecting the Project that they were grossly negligent nor that there was anything inherently wrong with the OpCo-PropCo structure.

“The Project failed but not because the Defendants did not care if it succeeded. Moreover, it is not uncommon for parties who are planning a transaction to make certain that they are protected in the event the transaction fails. Such protection from adverse results is one of the reasons for forming a corporation or other entity – to limit personal liability.

It is unnerving that the Project failed in a matter of months and certainly the Court had questions about how it happened. It turns out that the people in charge, the Individual Defendants, to some degree were not prepared. They were not, however, grossly negligent and they certainly meant for Haggen, Holdings and the OpCo to succeed. The Committee made a strong case but, at the end of the day failed to establish gross negligence or self-dealing or the existence of any fraudulent transfers. The Committee did establish that the leases between Spirit and GIG, and the OpCo’s, were above the market rate, but there is no liability. The Committee failed however, to establish the remaining counts of the Complaint.”

Opinion at *3.  Judge Gross then cites to the Delaware Chancery Court for the proposition that “to allege that a corporation has suffered a loss as a result of a lawful transaction, within the corporation’s powers, authorized by a corporate fiduciary acting in a good faith pursuit of corporate purposes, does not state a claim for relief against that fiduciary no matter how foolish the investment may appear in retrospect.”  Opinion at *4 (quoting Gagliardi v. TriFoods Int’l, Inc., 683 A. 2d 1049, 1052 (Del. Ch. 1996)).

This case arose from a buyout that was structured with separate entities having separate roles.  The property owning entities have been successful – real estate is, after all, booming.  The operating entities, however, have struggled like a large number of other retailers.  Retail bankruptcy cases are at an all-time high and rents are higher than ever.  As Judge Gross recognized in the Opinion, the corporate structure is meant to provide down-side protection to equity holders.  In this instance (pending any possible appeals), the corporate form appears to have operated precisely as intended.

On her The Bottom Line 11 blog, Fox partner Mette Kurth examined new bankruptcy venue reform legislation recently unveiled in the U.S. Congress:

U.S. Capitol Building, Washington, D.C.Earlier today, Senators John Cornyn (R-TX) and Elizabeth Warren (D-MA) introduced the Bankruptcy Venue Reform Act of 2017The bill would require companies to seek bankruptcy protection where they are physically headquartered. And it would simultaneously prohibit them from filing where they are incorporated or where an affiliate has a pending case. The end result? The bill would effectively limit access to popular bankruptcy courts in New York and Delaware. If passed, this would represent a seismic shift for corporate bankruptcies.

Sens. Cornyn and Warren said in a joint statement that the bill is meant to strengthen the integrity of the bankruptcy system and build public confidence by preventing companies from “shopping” for favorable courts. The bill is also intended to allow employees at bankrupt companies, small business creditors, and others to participate in cases that will have tremendous impacts on their lives.

To read Mette’s viewpoint on the new legislation and its impact, please visit her blog.