On December 2, 2016, Limitless Mobile, LLC (“Limitless” or the “Debtor”) filed a chapter 11 voluntary petition in the United States Bankruptcy Court for the District of Delaware.  The Debtor was formed in 2013 to provide broadband and wireless telecommunication services in certain rural counties in central Pennsylvania.  The Debtor is part of a worldwide corporate family referred to as the Limitless Group.  According to the First Day Declaration, Limitless intends to wind down its retail-side business and emerge from bankruptcy as a wholesale operator.

According to the Petition, the Debtor has an estimated $10 million to $50 million in assets, and $50 million to $100 million in liabilities.  The law firm of Dilworth Paxson LLP represent the Debtor in this chapter 11 case.  The Honorable Kevin J. Carey has been assigned to the case.

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 Pacifica L51 LLC v. New Invs., Inc. (In re New Invs., Inc.), No. 13-36194, 2016 WL 6543520 (9th Cir. Nov. 4, 2016), the Ninth Circuit held that Section 1123(d) of the Bankruptcy Code legislatively overruled Great W. Bank & Tr. v. Entz-White Lumber & Supply, Inc. (In re Entz-White Lumber & Supply, Inc.), 850 F.2d 1338 (9th Cir. 1988), and required debtors to pay interest at the default rate to cure a default pursuant to a plan of reorganization.

The debtor defaulted on a mortgage.  The bankruptcy court confirmed a chapter 11 plan that allowed the debtor to cure the default by selling the property and using the sale proceeds to pay the loan off at the pre-default rate.  At the same time, the court required the debtor to escrow nearly $800,000 as a disputed claim reserve should an appellate court require the debtor to pay default interest to effectuate the cure.  On appeal, the Ninth Circuit reversed.

The Circuit Court ruled that “[t]he plain language of § 1123(d) compels the holding that a debtor cannot nullify a preexisting obligation in a loan agreement to pay post-default interest solely by proposing a cure.”  The Circuit Court stated as follows:

What § 1123(d) affects is how a debtor returns to pre-default conditions, which can include returning to a lower, pre-default interest rate. . . . [Under common law, the] borrower does not effectuate a cure merely by paying past due installments of principal at the pre-default interest rate. Rather, the borrower’s cure obligations may also include late charges, attorneys’ and trustee’s fees, and publication and court costs. . . .  It is only once these penalties are paid that the debtor can return to pre-default conditions as to the remainder of the loan obligation.

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.

Effective January 2, 2017, all telephonic court appearances before the Honorable Kevin Gross of the United States Bankruptcy Court for the District of Delaware will be through CourtSolutions LLC.  The alert was issued by the Court today on November 30th.  Click here for a copy of the notice.

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 November 28, 2016, Judge Laurie Selber Silverstein of the Delaware Bankruptcy Court ruled on a motion for relief from the automatic stay (we she treated as a motion for relief from the discharge injunction) in the Altegrity bankruptcy, Case No. 15-10226.  The “Opinion” is available here.  The Opinion was issued following legal argument and, by agreement of the parties, based only upon undisputed facts.  Opinion at *1.

While various other arguments are addressed by Judge Silverstein, the primary issue within the Opinion boils down to two simple issues – (1) what is a “Claim” in bankruptcy, and (2) did all of the relief sought by the movant (who did not file a claim) constitute “Claims”.  Opinion at *11.

In the Opinion, Judge Silverstein adopts the broad interpretation of a Claim that is routinely used, any “right to payment” constitutes a Claim.  Holding that substantially all of the movant’s claims would be resolved through payment, and because the movant filed no claim in the bankruptcy case, Judge Silverstein denied the Motion in all respects but one – the movant can continue an existing suit to seek to obtain non-monetary relief, including the expungement of his commercial driving report (DAC Report).

A number of other interesting issues are briefly addressed in the Opinion, and I encourage you to follow the above link and read it for yourself.  It is an easy 19-page read.  I note that once again, the Delaware Bankruptcy Court continues to take an expansive view of “Claims” and would advise any party to a bankruptcy to take note of any claims bar date orders.  If a cash payment *could* resolve your grievance with the Debtor, it would be wise to file a claim out of an abundance of caution.

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 August 29, 2016, the Third Circuit released a precedential opinion (the “Opinion”) which opined that a “[redemption] premium, meant to give the lenders the interest yield they expect, [does not] fall away because the full principal amount is now due and the noteholders are barred from rescinding the acceleration of debt.”  The Third Circuit’s Opinion is available here.  This Opinion was issued in an appeal from a decision made in the Energy Future Holdings Bankruptcy Case No. 14-10979.  The District Court and Bankruptcy Court both ruled that the make-whole premium did not survive bankruptcy, and this Opinion reversed those of the lower courts.

Because we represent a party at interest in the EFH bankruptcy, I won’t be providing a summary of this Opinion.  I will say, however, that this Opinion represents a major change in the way that redemption premiums will be considered in the Delaware Bankruptcy Court.  This is not an opinion that can be overlooked, and practitioners in the Delaware Bankruptcy Court should make sure they are familiar with the analysis applied by the Opinion written by Judge Ambro.

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.

Made-in-the-USA retailer American Apparel, LLC and its affiliated entities (“Debtors”) filed for Chapter 11 bankruptcy protection on Monday, Nov. 14th for the second time in just over a year, colloquially known as the “Chapter 22”.  The filing comes just about a year after the fashion retailer previously filed for bankruptcy, when the company exited court protection in early 2016 but quickly encountered trouble again.

Canadian clothing manufacturer Gildan Activewear has agreed to a $66 million deal to acquire intellectual property assets and inventory from American Apparel, including the chance to maintain some or all of the company’s Los Angeles production and distribution operations, according to a court filing.

According to chief restructuring officer Mark Weinstein, “[t]he company faced unfavorable market conditions that were more persistent and widespread than the debtors anticipated. These market conditions were particularly detrimental to retailers.”  According to Weinstein, American Apparel’s turnaround strategy “completely failed” as the company reported a 33% decline in year-over-year sales as of Sept. 30. Since its first bankruptcy, the company failed to optimize merchandising, bolster online sales, improve quality expeditiously and form a cohesive marketing plan, according to Weinsten.

With 110 stores in 28 states and the District of Columbia, American Apparel has dwindled from the time of its original bankruptcy filing, when it had about 8,500 employees at six factories and 230 stores worldwide.  The company listed about $215 million in debts. It had $497 million in net sales in 2015.

The First Day Hearing is today (11/15) at 9:00 a.m.  The bankruptcy proceeding has been assigned to the Honorable Brendan L. Shannon.

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 lengthy opinion published November 7, 2016, Judge Sontchi of the Delaware Bankruptcy Court provided a thorough analysis of the interaction between the Stored Communications Act (“SCA”) and the Bankruptcy Code.  Judge Sontchi’s opinion is available here (the “Opinion”).  The Opinion was issued in the Chapter 15 case In re Irish Bank Resolution Corporation Limited, Case No. 13-12159.  In this case, the Chapter 15 foreign representative of Irish Bank Resolution Corporation Limited (the “Debtor”) sought entry of an order directing Yahoo! Inc. (“Yahoo”) to turn over all electronically stored information (“ESI”) in a specific email account belonging to an individual who had evaded the proceeding and failed to comply with discovery orders.

This is one in a series of several opinions which has ruled that the SCA prohibits certain disclosures.  Opinion at *37-38 (“Other courts have come to similar conclusions regarding judicially-manufactured consent over the steadfast objection of an email user. That is, that the SCA does not provide for a mechanism in civil litigation to compel disclosure of a user’s private email contents through a subpoena or a court order directed at the service provider when none of the parties to the communication gave their consent.”)

The SCA allows only a small number of people to consent to the disclosure of the contents of an email account.  And despite no other contact information existing for the owner of this account, as their real identity is unknown, the Court found itself constrained by the limits of the SCA.  This is a particularly offensive situation as the owner of the email account shut it down for the apparent purpose of avoiding service.  As Judge Sontchi stated, “the Foreign Representatives rightly indicate that the only logical conclusion is that Rasimov (or someone on his behalf) terminated it upon receiving the 2004 Motion.”  Opinion at *16 (emphasis added).  To get a full flavor of the efforts the Foreign Representative engaged in to try and obtain this discovery, I recommend you read the 13 pages of history laid out in the Opinion.

This Opinion supports the principle that the will of Congress,  as understood by the courts, will be upheld.  See, e.g., Opinion at *44.  “[T]he Court reaches its conclusion based on clear principles laid down by Congress in the Bankruptcy Code and the SCA.”  Thus, it is my opinion that the most certain way for Congress to ensure they make the laws, rather than having judge made law, is to make it very clear what the intent of the law is as well as any limitations when creating the record of the law’s enactment.  Many may argue that the SCA’s provisions were created in an effort to prevent the government from becoming “Big Brother”, but the unfortunate result of how courts have applied it, is that those who should have their communications uncovered can shelter behind its broad protection.

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 Unsecured Creditors Comm. of Sparrer Sausage Co., Inc. v. Jason’s Foods, 826 F.3d 388 (7th Cir. 2016), the Seventh Circuit overturned the bankruptcy court’s application of the “bucketing” method to assess an ordinary-course defense to preference liability, concluding that range of invoice payment dates chosen as the baseline was arbitrarily narrow.

Jason’s Foods, a wholesale meat supplier, provided meat products to Sparrer Sausage, a sausage manufacturing company.  Their relationship stretched back two years before Sparrer filed for bankruptcy.  During the 90-day preference period, Sparrer paid 23 invoices from Jason’s totaling $586,658.  The creditors committee filed a complaint to recover the payments to Jason’s as avoidable preferences.

The bankruptcy court determined that before the preference period, Sparrer paid invoices from Jason’s within 16 to 28 days.  Of the 23 invoices that Sparrer Sausage paid during the preference period, 12 fell within this range, so the bankruptcy court concluded that these 12 payments were ordinary and thus nonavoidable.  The remaining 11 invoices were paid within 14, 29, 31, 37, and 38 days of the invoice date.  The court concluded that these payments, which totaled $306,110, were not ordinary and must be returned to the bankruptcy estate.  The district court affirmed, and Jason’s appealed.

Although Jason’s and committee stipulated to a historical period that covered all 234 invoices that Sparrer paid before the preference period, the bankruptcy court considered only 168 invoices.  The court cut off the historical period seven months before the start of the preference period based on its conclusion that that date “marked the beginning of the debtor’s financial difficulties” and that invoices paid after that date did not accurately reflect the norm when Sparrer was financially healthy.  The bankruptcy court based its finding on the fact that the percentage of invoices paid 30 or more days after issuance increased significantly after that date.  While acknowledging that the evidence of Sparrer’s financial distress was “hardly overwhelming,” and questioning the bankruptcy court’s decision to disregard the parties’ stipulation, the Seventh Circuit observed that the bankruptcy court “offered a reasoned explanation for his decision,” which could not be overturned as clear error.

On the other hand, the circuit court found clear error in the bankruptcy court’s application of the average-lateness method to conclude that invoices paid more than 6 days on either side of the 22-day average were outside the ordinary course.  The bankruptcy court “applied Quebecor World and its so-called ‘bucketing’ analysis to support this conclusion, but neither the facts nor the bankruptcy court’s analysis in that case bear any resemblance to this case.”

The Seventh Circuit observed that

H]ere a 16-to-28-day baseline range encompasses just 64% of the invoices that Sparrer Sausage paid during the historical period.  Even more problematically, the judge offered no explanation for the narrowness of this range.  Why exclude invoices that Sparrer Sausage paid within 14 days when these payments were among the most common during the historical period?  The same goes for invoices that Sparrer Sausage paid within 29 days.  Indeed by adding just two days to either end of the range, the analysis would have captured 88% of the invoices that Sparrer Sausage paid during the historical period, a percentage much more in line with the Quebecor World analysis.  Thus, a 16-to-28-day baseline appears not only excessively narrow but also arbitrary.

The circuit court pointed out that “Sparrer Sausage paid 9 of the 11 contested invoices within 14, 29, and 31 days of issuance.  These payments fall either squarely within or just outside the 14-to-30-day range in which Sparrer Sausage paid the vast majority of invoices during the historical period.  As such they are precisely the type of payments that the ordinary-course defense protects: recurrent transactions that generally adhere to the terms of a well-established commercial relationship.  Sparrer Sausage paid the other 2 invoices 37 and 38 days after they were issued, which is substantially outside the 14-to-30-day baseline.”

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 November 8, 2016, Judge Kevin Gross of the Delaware Bankruptcy Court issued an opinion (the “Opinion”) that affects nine different bankruptcy cases.  The Opinion was issued in response to the request of Honeywell and Ford for access to asbestos claimants’ Rule 2019 exhibits.  A copy of the Opinion is available here.

Before diving deep into this Opinion and these cases, it is worthwhile to review In re Motions for Access of Garlock Sealing Techs. LLC, 488 B.R. 281 (D. Del. 2013).  The Garlock Sealing opinion is cited extensively by Judge Gross, and is the controlling precedent in Delaware for this issue.  In that case, the District Court limited the use to which the movants could use the requested information, allowing it to be used solely in the Garlock Sealing bankruptcy proceeding.  Opinion at *10.  In this case, the requested documentation included: The Rule 2019 Exhibits include the following:

(1) the names and addresses of the clients of the submitting attorney; (2) exemplars or actual copies of the relevant retention agreements; (3) identification of disease; (4) claim amounts if liquidated; (5) sometimes full or partial social security numbers; (6) sometimes medical records, with information including full or partial social security numbers; family histories (including causes of death of family members), results of physical examinations, chest x‐rays, and lung function tests, and other similarly sensitive medical information; and (7) sometimes other records that the law firm maintained in connection with or commingled with the required information.

Opinion at *6.  Honeywell and Ford indicated in their papers and during the hearing on their motion that they want access to the Rule 2019 Exhibits, as well as to retain the information indefinitely, to “ferret out invalid or fraudulent asbestos claims”.  What came across in oral argument is that an important purpose for both Honeywell and Ford in seeking the Rule 2019 Exhibits is to aid in their lobbying efforts.  Opinion at *12.  While Honeywell and Ford sought limitless access to use the information outside of bankruptcy, Judge Gross was not sympathetic, putting significant limitations on their use of the information.  Judge Gross ruled that the information

“may not be used for “lobbying efforts.”  Honeywell and Ford may use the Rule 2019 Exhibits to investigate fraud in the claims process and may share the information with the NARCO Trust in an aggregate format.  In other words, Honeywell and Ford may not share the identity of individuals by name or other identifying means with the NARCO Trust.  Honeywell and Ford are granted three months to complete their work and must comply with the Protocol Order which requires the destruction of the Rule 2019 Exhibits at the conclusion of the work.  Honeywell’s and Ford’s efforts will be at their expense.  In addition, the Court will appoint a party to oversee the production of the Rule 2019 Exhibits.

Opinion at *15.  While Judge Gross did find that “the presumption of public access applies” to the 2019 Exhibits, Opinion at *13, he did cited to Garlock Sealing in deciding that they did not adequately state a proper purpose.  Opinion at *14.

In summary, while a court may give you the information you request, it may also limit it in such a manner that the information is no longer worth the expense incurred in obtaining it.  Prior to making these types of requests, it is important to determine what the controlling precedent says on the issue.  In the Delaware Bankruptcy Court, the judges read the entirety of cited opinions, so it is vital that briefs distinguish them, or rely upon them, appropriately.

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 October 27, 2016, Chief Judge Brendan L. Shannon of the Delaware Bankruptcy Court issued an opinion overruling objections to the claims of Seegrid’s former CEO.  A copy of the Opinion is available here.

This is a relatively short Opinion considering the number of issues that it discusses.  The first issue was whether Mr. Horbal, the CEO at the relevant time had authority to use the Debtors; private jet.  The second issue was whether Mr. Horbal was under contract at the time of his termination, and whether such termination was for cause.

The first issue hinges upon what the applicable policies of the Debtor were at the time of Mr. Horbal’s use of the jet.  In this case, the applicable corporate policy required the approval of the CEO prior to using the corporate jet.  In this instance, the Court held that as the CEO, Mr. Horbal had the authority to approve of his use of the jet.

The second issue was the more interesting one.  The essential facts are as follows: Mr. Horbal was a President at the Debtor prior to becoming its CEO.  During his time as a President, he was employed under a contract that provided specific remuneration and benefits upon termination.  However, when he accepted the role of CEO, his contract was never revised.

While the Debtors argue that the change in position effected the termination of the agreement, Opinion at *14, Mr. Horbal argued that the parties continued to comply with the terms of the agreement, thereby ratifying it, despite the change in position, Id.  In this instance, Judge Shannon held that “Mr. Horbal has the better argument.”  Id.

My  $.02

This case provides a solid reminder of the importance of documentation.  In this case, the Debtors did not have documentation to support the allegations made in their claim objection.  The Debtors argued that the policy concerning the corporate jet was recently changed – but failed to produce any evidence to support the allegation.  The Debtors also argued that Mr. Horbal was fired for cause – but failed to produce any evidence to support the allegation.  As Judge Shannon noted, “when a company (and especially a company as actively represented by counsel as Seegrid) fires a senior executive for cause, somebody usually writes it down.”  Opinion at *17.  

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.