In January, Jeoffrey L. Burtch, the Chapter 7 Trustee (the “Trustee”) in the ManagedStorage bankruptcy proceeding, commenced adversary proceedings in the Delaware Bankruptcy Court against various defendants.  As alleged in the complaints, the Trustee claims that the defendants received “preferential” payments from ManagedStorage (dba “Incentrix Solutions” or “Incentrix”) and that the payments are subject to avoidance and recovery under the United States Bankruptcy Code (the “Bankruptcy Code”).  This post will look at the Incentrix bankruptcy, why the company filed for bankruptcy as well as some of the issues that arise in preference litigation.

The Bankruptcy Proceeding

Incentrix filed Chapter 11 petitions for bankruptcy in February of 2009.  At the time the company filed for bankruptcy, it was based in Denver, Colorado and operated offices in Illinois, Washington, California, New Jersey, Pennsylvania, New York, Oregon, Texas, Colorado and the United Kingdom. According to a Declaration of Incentrix’s Chief Financial Officer (the “Declaration” or “Decl.”), the company’s business consisted primarily of the resale of technology hardware and software products, as well as maintenance contracts.  Decl. at *3.  Aside from its resale business, the company also provided managed IT services.  Decl. at *3.

Events Leading to Bankruptcy

Approximately two years prior to filing for bankruptcy, Incentrix entered into a secured revolving loan agreement (the “Revolver”) with certain of its lenders.  Under the Revolver, Incentrix could borrow up to $20 million.  In 2008, following the recession in the U.S. and Europe, Incentrix’s customers began delaying the purchase of IT hardware and software.  As a result of the drop in sales, Incentrix was unable to generate sufficient “trade receivables collateral” under the Revolver.  Without funding under the Revolver, Incentrix could not pay its trade creditors in a timely manner.  Decl. at *17. This, in turn, led to Incentrix’s vendors placing the company on a “credit hold,” further reducing the company’s ability to generate trade receivables collateral.  Decl. at *18.

The Preference Actions

On November 3, 2010, the Bankruptcy Court entered an order converting Incentrix’s bankruptcy proceeding from a chapter 11 reorganization to a chapter 7 liquidation.  The Trustee was appointed as Chapter 7 Trustee one day later, on November 4, 2010.  As alleged in the complaints, the Trustee seeks the avoidance and recovery of transfers pursuant to sections 547 and 550 of the Bankruptcy Code.

The Incentrix bankruptcy, as well as the preference actions commenced by the Trustee, are before the Honorable Mary F. Walrath.  Judge Walrath previously served as Chief Judge of the Delaware Bankruptcy Court.  The Trustee in Incentrix is represented by the law firm Cooch and Taylor, P.A..