A couple of weeks ago, the Chapter 7 Trustee (the “Trustee”), in the Ultimate Acquisition Partners bankruptcy, began filing complaints to avoid and recover payments the Trustee alleges constitute preferential transfers under section 547 of the Bankruptcy Code.  Ultimate Acquisition filed chapter 11 petitions for bankruptcy in the Delaware Bankruptcy Court on January 26, 2011 (the “Petition Date”).  At the time it filed for bankruptcy, the company operated retail stores under the name “Ultimate Electronics.”  This post will look at why Ultimate Acquisitions filed for bankruptcy, why the case converted to a Chapter 7 liquidation, as well as address some issues that often arise in preference litigation.

Reasons for Bankruptcy

Prior to filing for bankruptcy, Ultimate sold “high-end home entertainment and consumer electronics” in over 40 stores throughout the mid-west and western United States.  See Declaration of Ultimate’s CEO in Support of Chapter 11 Petitions (the “Declaration”), at p. 2, a copy of which is available here for review.  Based in Thornton, Colorado, at the time of the company’s Petition Date, Ultimate employed 1,500 employees.  As stated in its Declaration, Ultimate attributed its bankruptcy filing to “a significant downturn in business at certain of the Debtors’ locations, coupled with the refusal by certain of the Debtors’ vendors to ship goods to the Debtors on open credit.”  Decl. at p. 2.  By filing for bankruptcy, Ultimate hoped to close poor performing stores, re-negotiate leases and improve profitability.  Id.

Conversion to Chapter 7

Plans changed quickly for Ultimate after filing for bankruptcy.  On February 4, 2011, only nine days after filing for bankruptcy, Ultimate filed a motion with the Bankruptcy Court seeking approval of going out of business sales.  Within approximately two months of filing the “going out of business” sale motion, Ultimate had sold off most its assets.  See Ultimate’s Motion to Convert to Chapter 7 (the “Motion to Convert”) at pp. 2-3, a copy of which is available here for review.

On April 25, 2011, Ultimate Electronics’ DIP lender issued a “Termination Event” under Ultimate’s Final Cash Collateral Order (the “DIP Order”).  Under the DIP Order, if the lenders’ termination notice is not contested within five business days, the automatic stay is lifted in favor of Ultimate’s DIP lender.  Ultimate filed its Motion to Convert one day after receiving the Termination Event.  The Bankruptcy Court converted Ultimate’s bankruptcy to a Chapter 7 liquidation on May 3, 2011.  The next day, Alfred T. Giuliano was appointed the Chapter 7 Trustee for Ultimate’s bankruptcy proceeding.

The Preference Actions

The Trustee in the Ultimate Electronics bankruptcy is represented by the law firm Pachulski Stang Ziehl & Jones LLP.  The Trustee began filing preference complaints in mid-July.  This bankruptcy proceeding, along with the Ultimate Electronics preference actions, are before the Honorable Mary F. Walrath.  Judge Walrath is a former Chief Judge of the Delaware Bankruptcy Court.