Earlier this week, RG Steel Sparrows Point, LLC (“RG Steel”), began filing complaints to avoid and recover what it contends are preferential transfers under sections 547 and 548 of the United States Bankruptcy Code.  For those not familiar with this bankruptcy proceeding, RG Steel originally filed chapter 11 petitions for bankruptcy in the Delaware Bankruptcy Court on May 30, 2012.  At the time the company filed for bankruptcy, RG Steel was the fourth largest flat-rolled steel company in the United States. Operating at full capacity, RG Steel produced over 8 million tons of steel per year.  This post will look at RG Steel’s original business, why the company filed for bankruptcy and what are recent developments since the company has filed for bankruptcy protection.

Business Formation and Bankruptcy

At the time RG Steel and its affiliates filed for bankruptcy, the company operated steel production facilities in West Virginia, Maryland and Ohio.  The company was formed in 2011 as a result of a stock purchase agreement with Severstal U.S. Holdings II, Inc., and various related entities.  According to court filings, after RG Steel acquired Severstal it discovered a “working capital shortfall” resulting in liquidity problems and the company’s ultimate bankruptcy filing.  The company also attributed its bankruptcy to declining steel prices while its costs for raw materials continued to rise.

Objectives in Bankruptcy

Once in Bankruptcy, RG Steel filed various motions seeking authority to sell substantially all of its assets.  After receiving approval from the Bankruptcy Court, the company commenced bidding procedures and bankruptcy auctions which allowed it to sell the majority of its assets.  The asset sales allowed RG Steel to payoff its debtor in possession financing and first lien debt.  With the sales out of the way, the company shifted its focus to attempting to recover assets through preference actions.

Defenses to a Preference Action

The Bankruptcy Code provides creditors with many defenses to preference actions. Included among these are the “ordinary course of business defense” and the “new value defense.”  For reader’s looking for more information concerning claims and defenses in preference litigation, attached is a booklet I prepared on the subject:  “A Preference Reference:  Common Issues that Arise in Delaware Preference Litigation.”