Earlier this month, the Liquidating Trust in the Advanta Corp. bankruptcy proceeding began filing preference complaints in the Delaware Bankruptcy Court. Advanta and certain affiliates (“Advanta”) filed for bankruptcy in Delaware in November of 2009. As stated in the Liquidating Trust’s complaints, Advanta was at one time one of the largest issuers of “business purpose credit cards” in the United States.
Advanta started in 1974 as “Teachers Service Organization, Inc..” In the 1980s, Teacher Service Organization became one of the first companies to securitize credit card and mortgage receivables. In 1988, the company changed its name to Advanta. Starting in the 1990s, Advanta began issuing credit cards targeting small businesses. In 2001, Advanta made small business credit cards its primary focus. See Advanta’s Declaration in Support of Chapter 11 Petitions and First-Day Motions (the “Declaration” or “Decl.”), filed with the Delaware Bankruptcy Court on November 8, 2009.
Advanta’s Business Operations
At the time the company filed for bankruptcy, Advanta was the direct parent of Advanta Bank Corp. (“ABC”). Advanta’s primary business arose from its ownership of ABC. As a chartered bank, ABC was authorized to make consumer and commercial loans. The bank was also subject to the oversight and regulation of the FDIC. In 2009, Advanta implemented a plan intended to limit the company’s credit loss exposure. Under the proposed plan, ABC stopped funding new credit card debt in May of 2009. Decl. at *4.
Events Leading to Bankruptcy
Advanta attributes its bankruptcy filing to the U.S. recession that began in the fall of 2007. As the country slid in to recession, Advanta’s small business customers became more and more delinquent in repaying their credit card debt. Greater delinquencies resulted in larger charge-offs for Advanta, which in turn negatively affected the company’s operations and finances. Decl. at *11. In June of 2009, Advanta entered into regulatory agreements with the FDIC as part of cease and desist orders issued by the FDIC.
In July of 2009, Advanta proposed a plan to the FDIC intended to generate more cash for the company. Part of Advanta’s plan involved ABC funding a new portfolio of loans backed by triple net credit leases on commercial real estate. Decl. at *13. According to Advanta, the FDIC rejected the “net lease loans,” which in turn led to the company’s decision to reorganize under bankruptcy protection. Decl. at *13.
Commencement of the Preference Actions
On November 2, 2010, Advanta filed its Plan of Reorganization and Disclosure Statement with the Bankruptcy Court. The Court approved Advanta’s Disclosure Statement in December 2010 and confirmed Advanta’s Plan of Reorganization on February 11, 2011. Section 5.4 of Advanta’s Plan provides for the creation of the AC Liquidating Trust. The AC Liquidating Trust is the plaintiff in the preference actions filed in the Advanta bankruptcy proceeding. The law firm Drinker Biddle & Reath LLP serves as Plaintiff’s counsel for the AC Liquidating Trust. The Advanta bankruptcy, as well as the preference actions filed by the AC Liquidating Trust, are before the Honorable Kevin J. Carey. Judge Carey previously served as Chief Judge of the United States Bankruptcy Court for the District of Delaware.