In July, Alfred T. Giuliano, the Chapter 7 Trustee (the “Trustee”) in the DHP Holdings (“DHP”) bankruptcy proceeding began filing adversary complaints against various defendants, seeking to avoid and recover what the Trustee contends are avoidable transfers. This post will look at DHP’s business, why the company filed for bankruptcy and some of the developments during the course of the DHP bankruptcy proceeding. Towards the end of the post, I will also discuss the statutory lien defense – an infrequent but helpful defense to be considered when defending against a preference action.
On December 29, 2008 (the “Petition Date”), DHP filed a voluntary petition for bankruptcy under chapter 11 of the Bankruptcy Code. At the time the company filed for bankruptcy, DHP was based in Bowling Green, Kentucky and described itself as a “leading manufacturer, distributor, and marketer of vent-free heating appliances, outdoor heaters, lawn and garden electrical products, and consumer fastening systems in the United States. See Declaration of DHP’s Chief Restructuring Officer in Support of First Day Motions (the “Declaration” or “Decl”) at *4, filed with the Delaware Bankruptcy Court on December 29, 2008.
Events Leading to Bankruptcy
In the years prior to the Petition Date, DHP reports that it took several steps in an effort to restructure without the need for bankruptcy. According to its Declaration, DHP reduced its debt load, revised its ownership structure and realigned marketing, sales and manufacturing. Decl. at *15. Despite these initiatives, the company’s revenues were negatively affected from the recession that began in 2008 and what DHP describes as “negative trends in [DHP’s] business.” Decl. at *15. The company’s problems worsened when the company went into a “liquidity crisis” whereby DHP’s banks stopped lending it money. Decl. at *16.
Conversion to Chapter 7
On June 29, 2010, DHP filed its Motion to Convert Cases From Chapter 11 to Chapter 7 (“Motion to Convert” or “Motion”). Pursuant to the Motion, DHP sought conversion from a chapter 11 reorganization to a liquidation under chapter 7 following the sale and winding down of substantially all of its assets through the Bankruptcy Court. Motion at *3. DHP believed it was unable to propose or confirm plan of reorganization. Instead, it sought conversion so that the Court would appoint a chapter 7 trustee to pursue preference actions and finish the liquidation of the bankruptcy estate. Motion at *1.
The Statutory Lien Defense
I have written many posts on the more common defenses to avoidance actions – defenses like the “ordinary course business,” “new value” and “contemporaneous exchange.” A less common defense, but one that should be considered under the appropriate circumstances, is the statutory lien defense pursuant to section 547(c)(6) of the Bankruptcy Code. Section 547(c)(6) of the Bankruptcy Code provides that “[t]he Trustee may not avoid under this section a transfer … that is the fixing of a statutory lien that is not otherwise avoidable under section 545 of this title.” Under this section of the Bankruptcy Code, a trustee in a preference action cannot avoid payments made on an otherwise perfectible statutory lien. Fredman v. Milchem, Inc. (In re NuCorp Energy, Inc.), 80 B.R. 517, 520 (Bankr. S.D.Cal. 1987).
The statutory lien defense often arises when a creditor, such as a subcontractor, provides goods or services to a debtor that would give rise to a materialman’s lien under state law. In a 2005 decision in the United States Bankruptcy Court for the Southern District of New York, the court held that payments made in satisfaction of a potential statutory lien do not constitute avoidable transfers under section 547(c)(6). In re 360Networks (USA) Inc., et al., 327 B.R. 187, 193 (Bankr. S.D.N.Y. 2005)(holding that the intent of Congress is to include, within the gambit of section 547(c)(6), payments made to satisfy obligations which would otherwise lead to statutory liens).
In 360Networks, the preference defendant did not file a lien under the state statute, but instead argued that it could have done so if the preferential payment was not made. The defendant argued that under section 547(c)(6), it was shielded from liability. The bankruptcy court agreed, finding that “payments made to the holder of an inchoate statutory lien during the preference period are not avoidable where, at the time of payment, the lienholder (i) remained eligible to perfect the lien pursuant to relevant state law, and (ii) such perfection would not otherwise have been avoidable under the Bankruptcy Code.” In re 360Networks, 327 B.R. at 193.
The DHP bankruptcy proceeding, including the preference actions filed by the Trustee, are before Delaware Bankruptcy Judge Wary F. Walrath. Judge Walrath previously served as the Chief Judge of the Delaware Bankruptcy Court. The Trustee, as Plaintiff in the DHP preference actions, is represented by the law firm Eckert Seamans Cherin & Mellott, LLC and ASK Financial LLP.