In July of 2011, the Chapter 7 Trustee (the “Trustee”) in the Ultimate Acquisition Partners (formerly “Ultimate Electronics”) bankruptcy began filing complaints to avoid and recover payments which the Trustee alleged were avoidable transfers under section 547 of the United States Bankruptcy Code.  Earlier this month, the Trustee filed another round of preference complaints seeking to recover what he contends are preferential transfers.  This post will look briefly at the Ultimate’s business, why the company filed for bankruptcy and provide some general information regarding defenses to a preference action.

Reasons Ultimate Electronics Filed for Bankruptcy

Prior to going in to bankruptcy, Ultimate Electronics sold high-end home entertainment and consumer electronics throughout the western and mid-western United States.  Based in Thornton, Colorado, Ultimate Electronics employed approximately 1,500 employees before it filed for bankruptcy.  According to pleadings filed with the Delaware Bankruptcy Court, Ultimate attributed its bankruptcy filing to a “significant downturn in business at certain of the Debtors’ locations, coupled with refusal by certain of Debtors’ vendors to ship goods to the Debtors on open credit.”  By filing for bankruptcy, Ultimate was hoping to close under performing stores, re-negotiate its leases and improve its profitability.

Conversion from Chapter 11 to Chapter 7

Plans quickly changed for Ultimate after the company filed for bankruptcy.  Nine days after filing for bankruptcy, on February 4, 2011, the company filed a motion with the Bankruptcy Court seeking approval of going out of business sales.  Within two months of filing the going out of business motions, Ultimate had sold substantially all of its assets.

On April 25, 2011, Ultimate Electronic’s 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 to Chapter 7 one day after receiving the Termination Event.  The Bankruptcy Court converted Ultimate’s bankruptcy to a Chapter 7 liquidation on May 3, 2011.  The following day, Alfred T. Giuliano was appointed the Chapter 7 Trustee for Ultimate Electronic’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 bankruptcy proceeding, along with the preference actions filed by the Trustee, are before the Honorable Mary F. Walrath.  Judge Walrath is a former Chief Judge of the Delaware Bankruptcy Court.

For reader’s looking for more information concerning preference litigation, attached is a booklet I prepared on the subject:  “A Preference Reference:  Common Issues that Arise in Delaware Preference Litigation.”