Because no recent opinions have been published by the Delaware Bankruptcy Court, I wanted to touch on a subject that is vital in nearly every preference or fraudulent transfer case:  The Statute of Limitations For A Preference Claim

A. Statute of Limitations

The debtor has two years from the date it filed its petition for bankruptcy to file a complaint seeking the recovery of a preference payment. However, if the court appoints a trustee, the limitations period for filing the lawsuit extends one year from the date the trustee was appointed.  Preference litigation cannot be commenced once the court closes or dismisses the debtor’s bankruptcy.

B. Service of the Summons and Complaint

The two-year time period, or statute of limitations, is not the only deadline governing the commencement of the preference action. The statute of limitations governs when the preference complaint must be filed with the court. The Federal Rules of Bankruptcy Procedure govern how long the plaintiff has to serve the complaint on the party receiving the payments (i.e. the defendant). Under the Federal Rules, the party filing the lawsuit must serve the defendant within 120 days.2

Note, however, that the party may request an extension of time in which to complete service. The party commencing the lawsuit can achieve service in a number of methods, including mailing the summons and complaint to the defendant by First Class mail.

Failing to file a complaint within the applicable statute of limitations is a sure-fire way for a party to lose its rights.  In any litigation, preference or otherwise, the first thing to check is whether a claim is time-barred.  We have published several posts concerning the statute of limitations:  Statute Of Limitations Posts.  If you would like additional information about the statute of limitations, or preference litigation generally, please take a look at our “Preference Reference” – available here.


In an 8 page decision signed January 6, 2012, Judge Walrath of the Delaware Bankruptcy Court allowed a plaintiff to amend a preference complaint to include additional transfers, even though the statute of limitations had expired. Judge Walrath’s opinion is available here (the “Opinion”).  Numerous posts on this blog discuss other opinions issued by the Delaware Bankruptcy Court dealing with preference payments, as can be seen here:  Preference Opinion Posts.


The Debtors, filed for bankruptcy on November 25, 2008, and the Court converted the cases to chapter 7 and appointed the Trustee, Jeoffrey L. Burtch, on March 5, 2009. On November 19, 2010, the Trustee filed a complaint against Henry Production, Inc., d/b/a Pumps and Service (the “Defendant”) for recovery of any preference payments. In the original complaint, the Trustee specifically identified only one transfer as a preference payment, but included a spreadsheet showing all of the transactions between the Debtor and the Defendant. This spreadsheet included payments made within the preference period for which the Trustee was unable to identify a check or wire transfer payment (the “October Transfers”). Opinion at *2.

On July 6, 2011, in the course of discovery, the Defendant provided the Trustee with credit card receipts evidencing payment of the October Transfers. The Trustee then waited until November 8, 2011, well after the expiration of the statute of limitations to bring preference complaints, to file his motion to amend the complaint in order to include the October Transfers. The Defendant objected, and the Court issued the Opinion to decide the conflict.

Judge Walrath’s Opinion

As her opinions always do, this opinion of Judge Walrath begins with a legal analysis of the standard for the requested relief. Opinion at *4. She begins by citing the legal standard of FRCP 15(a), which provides that absent a few specific situations, leave to amend “should be freely given.” She then cites Coventry v. United States, 856 F.2d 514, 519 (3d Cir. 1988) for the proposition that the “potential for undue prejudice [to the other party] is the touchstone for the denial of the leave to amend.” Opinion at *4. Additionally, FRCP 15(c)(1)(B) provides that if the conduct set out in the original pleading gave rise to the additional claims in the amended pleading, the amendment will relate back to the date of the initial pleading. Opinion at *5.

The main argument of the Defendant in this matter is that the amendment should not relate back, as the October Transfers were made by a different method than the other alleged preference transfer and was not part of a payment schedule such that it would be considered to have arisen out of the same conduct, transaction, or occurrence. This argument finds some measure of support in MCB Greenhouse Co. v. CTC Direct, Inc., 307 B.R. 787, 792-93 (Bankr. D. Del. 2004). Opinion at *7.

Judge Walrath does not provide much credence to this defense, however, holding that the Defendant needed to show that it would be prejudiced if the amendment was allowed. Opinion at *7. Because the Trustee included the list of transactions, which included the October Transfers, in the complaint in which it made clear that it sought to avoid all preference transfers, the Defendant received adequate notice and would not be prejudiced by allowing the amendment to be related back to the time of the initial filing of the complaint. Judge Walrath then provided the Trustee 14 days to file an amended complaint.

When prosecuting or defending a preference action, it is very important to be aware of the relevant bankruptcy statutes and rules. However, lacking a knowledge of relevant case law can sink a party in a preference case. For this reason, it is vital that defendants and trustees, or their counsel, are well versed in current case law for the district and court in which a preference action is prosecuted.

On June 13, 2017, Judge Kevin Gross of the Delaware Bankruptcy Court issued an opinion granting in part and denying in part BMW’s motion to dismiss a complaint filed by Emerald Capital Advisors Corp., in its capacity as trustee for FAH Liquidating Trust – established in the Fisker bankruptcy proceedings.  A copy of the Opinion is available here.

Judge Gross addresses a large number of issues in the Opinion, including extraterritorial transfers, the findings necessary to support a motion to dismiss, and the relevant statute of limitations.  The primary holding in the Opinion, was that for the majority of the causes of action alleged by the plaintiff, the statute of limitations has expired – resulting in granting the motion to dismiss as to $31,786,216.13 and denied to the remaining $793,761.87.  The one major caveat and the most interesting aspect of the decision involves the plaintiff’s claim for unjust enrichment.

Judge Gross spent less than two pages of the 26-page Opinion in denying the motion to dismiss as to the count of unjust enrichment in the complaint.  Judge Gross cited to Halperin v. Moreno, (In re Green Field Energy Svcs., Inc.), 2015 WL 5146161 at *10 (Bankr. D. Del. Aug. 31, 2015) in holding that a claim for unjust enrichment can survive a motion to dismiss where it is plausible that the plaintiff’s other claims may fail and leave the plaintiff without a remedy at law.

It is clear however, that at the pleading stage it is entirely acceptable to pursue alternative theories.  Lass v. Bank of Am., N.A., 695 F. 3d 129, 140 (1st Cir. 2012).  It is also well established that a plaintiff may plead alternative claims for relief even where the pleading contains claims for breach of contract and unjust enrichment.  Pedrick v. Roten, 70 F. Supp. 3d 638, 653 (D. Del. 2014) (citing Corbin on Contracts § 66.10 (2014) for the proposition that “[e]xpectancy damages and restitution will not ordinarily be given as concurrent remedies for the same injury, although they may be pleaded as alternatives”).   The unjust enrichment claim in Count V is significant because it keeps alive the claim for the entire amount which the Trustee has placed at issue, namely, $32,579,798.87.

Opinion at *25.  Clearly, the fact that the Bankruptcy Court is a court of equity is clearly on display in allowing the unjust enrichment count survive, specifically for the purpose of ensuring that a plaintiff has a remedy at law in the failure of its other claims.  In this case, claims totaling $31 million that would otherwise have been dismissed survive to be disputed another day.  I have little doubt that trustees who had not been including unjust enrichment counts in their preference complaints will quickly make an adjustment.

On May 23, 2017, Don A. Beskrone, the chapter 7 trustee for the estate of PennySaver USA Publishing, LLC filed preference actions against 46 defendants.  PennySaver was an iconic company that specialized in the production, printing, and dissemination of a free weekly publication, offering coupons and classified ads to targeted audiences.

By 2013, the Debtors’ print circulation locally targeted 780 zones or regions and reached approximately 9.1 million California households every week. The Debtors’ website,, received 1 million unique visitors each month.  By 2015, the Debtors encountered financial difficulties, which arose from a number of causes including, among other things: (i) a decline in print advertising market that corresponded with a rise in electronic media and changing consumer habits, and (ii) a related inability of the Debtors to pay their debts as they came due.  Finally, on May 29, 2015 (the “Petition Date”), the Debtors filed for bankruptcy.  Accordingly, the Trustee had until May 29, 2017 to file preference actions in this case pursuant to the statute of limitations contained in the Bankruptcy Code.

These cases have been filed in the Bankruptcy Court for the District of Delaware.  The Trustee is represented by Ashby & Geddes, P.A.

Preference actions are a form of litigation specifically provided for by the Bankruptcy Code which are intended to recover payments made by the Debtor within the 90 days prior to declaring bankruptcy.  The presumption is that the Debtor knew it was going to file bankruptcy, so any payments it made during this 90-day window went to friends and people it wanted to keep happy, and stiffed those the Debtor’s management didn’t like.   Recognizing that these payments aren’t always made for inappropriate reasons, 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.”

A recent decision by the United States Bankruptcy Court for the Western District of Texas in In re Sanjel (USA) Inc., et al., Case No. 16-50778-CAG (Bankr. W.D. Tex. July 29, 2016) explains that in a Chapter 15 case, the U.S. bankruptcy court will not always apply the law of the foreign jurisdiction to U.S. creditors and U.S.-based claims.  Specifically, the case addresses whether it is appropriate for a bankruptcy court to modify or limit a foreign stay through changes to its Chapter 15 recognition order.

Sanjel (USA) Inc. and its related entities (multi-national energy services provider) originally commenced Canadian reorganization proceedings.  The Canadian court granted the debtors a broad stay of any actions against their directors and officers.  The United States bankruptcy court recognized the Canadian proceedings under chapter 15 of the Bankruptcy Code and entered a recognition order extending the reach of the Canadian stay to the United States.

The recognition order among other things gave domestic force to the Canadian stay of legal proceedings against the debtors’ directors and officers.  Claimants at issue included certain of the debtors’ U.S.-based employees who wanted to pursue claims arising under the United States Fair Labor Standards Act, or “FLSA.”  The statute of limitations on FLSA claims may continue to run during the pendency of a chapter 15 case, meaning that the continued imposition of the automatic stay could extinguish the employees’ claims.  Thus, two employees sought to modify the Canadian stay granted in the recognition order.

The Debtors contended that the recognition order was not prejudicial to the employees because they could seek relief before the Canadian court, and that any modification would be prejudicial to the debtors whose limited personnel would be distracted from their restructuring efforts.  Similar arguments made by debtors were successful in In re Nortel Networks Corp., et al., Case No. 09-10164-KG (Bankr. D. Del. Mar. 10, 2010)  in a dispute involving the similar issues before the United States Bankruptcy Court for the District of Delaware, upheld on appealNortel held that, if parties believed they were prejudiced by the stay imposed by the Canadian courts and given effect in the United States by a recognition order, the proper course of action was to seek relief from the Canadian court.

The Sanjel bankruptcy court departed from the Nortel decision under the facts presented.  Under the circumstances, the court concluded that the hardships of the employees carried the greatest weight and, accordingly, modified the recognition order to permit the employees to bring and continue their FLSA claims.  The court emphasized that, under the plain language of section 108(c) of the Bankruptcy Code, the statute of limitations for the FLSA claims would continue to run during the proceeding.  Without relief from the stay, the movants would not be able to argue this tolling point before the appropriate court.  The court also noted that the Debtors’ harm did not counterbalance movants’ risk of losing their statutory claims.

As such, the court departed from Nortel, finding that it would be too burdensome for the movants to appear in Canadian court to “pursue claims in Colorado based wholly on a statutory right created by United States law to protect employees within the United States.”

For U.S. creditors of foreign companies, the Sanjel decision appears to be a win in that they will not have to travel abroad to seek to protect certain of their rights. However, the Sanjel decision creates greater uncertainty for foreign debtors that foreign stays may be disrupted in a Chapter 15 bankruptcy proceedings in the U.S. Stay tuned for further Chapter 15 developments.

Carl D. Neff is a partner with the law firm of Fox Rothschild LLP.  You can reach Carl at (302) 622-4272 or at


Charles A. Stanziale, Jr., is on a roll, filing preference actions in a number of cases within the Delaware Bankruptcy Court this month.  As the Chapter 7 Trustee (the “Trustee”) for the bankruptcy estate of EP Liquidation, LLC f/k/a Equinox Payments, LLC (the “Debtor”), he filed approximately 37 complaints to recover what he contends are assets of the Debtor’s estate.  These actions are made up of preference actions, fraudulent transfer and asset turnover cases.  The Trustee filed these actions in the Delaware Bankruptcy Court and argued that the defendants hold assets belonging to the Debtor and that the payments received by various defendants are avoidable and subject to recovery under 11 U.S.C. § 547 and 548 of the United States Bankruptcy Code. This post will briefly cover the Debtor’s bankruptcy proceedings.


The Debtor was formed as HYI Acquisition, LLC to facilitate the purchase of the majority of assets owned by Hypercom Corporation, which was in the business of electronic payment solutions or the electronic point of sale business. The sale was considered to be a bargain purchase wherein the business was bought for less than the aggregate value of the assets.

The Debtor was a point-of-sale terminal manufacturer and in 2011, was reported to have the second largest terminal market base of installed terminals in the United States. However, the technology used by the Debtor in its products was scheduled to fall out of compliance with the Payment Card Industry Data Security Standard in 2014.

On February 6, 2014 the Debtor sold substantially all of its assets and business operations including certain equity ownership interests in SIA Equinox Payments Latvia and Netset Americos Centro Servicios, S. de R.L. de C. V, and the right to use its name to Brookfield Equinox, LLC pursuant to an Asset Purchase Agreement dated February 6, 2014. Included among the purchased Assets sold by the Debtor were all of the Debtor’s books and financial records (the “Sale”).

According to the last of the complaints filed by the Trustee, by the time the Trustee was appointed, the Debtor had run its bank accounts down to $4.06.  On February 24, 2014, the Debtor filed its chapter 7 petition for bankruptcy in the United States Bankruptcy Court for the District of Delaware.  The Trustee was appointed on February 24, 2014.  As the statute of limitations on these actions is 2 years from the appointment of the Trustee, he was cutting it close when filing the last of these actions – four were filed on February 24, 2016.

The Trustee handled the liquidation of all the remaining assets of the Debtor and is tasked with prosecuting litigation intended to increase the assets available to distribute to the company’s creditors.  This includes filing and prosecuting preference actions.  The Debtor’s bankruptcy, as well as the preference actions, are before the Honorable Christopher S. Sontchi.  The Trustee/Plaintiff prosecuting the preference actions is represented by the law firms Billion Law and Forman Holt Eliades & Youngman LLC.

Defenses to a Preference Action

Preference actions are a form of litigation specifically provided for by the Bankruptcy Code which are intended to recover payments made by the Debtor within the 90 days prior to declaring bankruptcy.  The presumption is that the Debtor knew it was going to file bankruptcy, so any payments it made during this 90-day window went to friends and people it wanted to keep happy, and stiffed those the Debtor’s management didn’t like.   Recognizing that these payments aren’t always made for inappropriate reasons, 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.”


In a 14 page decision signed September 30, 2013, Judge Walsh of the Delaware Bankruptcy Court provided a primer on one of the limitations of standing provided in the bankruptcy code in his opinion granting a motion to dismiss.  Judge Walsh’s opinion is available here (the “Opinion”).


On May 21, 2004, the Circuit Court for Montgomery County, Maryland entered four separate judgments pursuant to a civil action against Richard and Graciela Redden (“Debtors”).  All four judgments were transferred on July 15, 2004 to the Superior Court of Delaware in New Castle County, at which time they became judgment liens against the primary residence of Debtors.

On August 12, 2004, the Debtors filed a joint Chapter 7 bankruptcy petition.  The order of discharge was entered on September 2, 2005.  Their case was reopened and they filed a complaint to avoid and recover a preferential transfer from one of the four judgment creditors.  The Court granted the Debtors motion to avoid the judgment lien and the case was again closed on October 29, 2006.  The other three judgment liens remained outstanding.

On November 3, 2009, the Debtors conveyed their residence to the plaintiffs in this case (“Plaintiffs”).  After the three remaining judgment creditors informed the plaintiffs of their intent to foreclose on the property, the Plaintiffs filed a motion to reopen the bankruptcy case and filed a complaint to avoid the three remaining liens.  The case was reopened and the judgment lien holders filed a motion to dismiss the adversary complaint.  Judge Walsh issued his opinion and order granting the motion to dismiss.

Judge Walsh’s Opinion

In granting the motion to dismiss, Judge Walsh provided direction concerning the Plaintiffs’ standing to avoid a preferential transaction and the statute of limitations for preference actions.


Judge Walsh begins his analysis of the Plaintiffs’ standing by reviewing §§ 522 and 547 of the Bankruptcy Code.  These sections provide the Trustee and Debtor in a bankruptcy standing to bring an adversary case to avoid preferential transfers.  Judge Walsh cites Hartford Underwriters Ins. Co. v. Union Planters Bank, 530 U.S. 1, 7 (2000), in which the Supreme Court considers the exclusivity implied by similar language in § 506 of the Bankruptcy Code.  Opinion at *5.  Judge Walsh states that “[t]he rights given explicitly to the trustee in § 547(b) preclude Plaintiffs, as non-trustees, from exercising avoidance power.”

Judge Walsh then considered whether the Plaintiffs might have derivative standing to pursue their preference claim.  He cited to the Third Circuit’s extensive analysis of derivative standing in The Official Comm. of Unsecured Creditors of Cybergenics Corp. v. Chinery (Cybergenics II), 330 F.3d 548, 558 (3d Cir. 2003).  In that case, The Third Circuit focused on the distinction between a suit to benefit the estate and a suit initiated for the moving party’s “own direct benefit.”  Opinion at *7-8.  In the instant case, however, Judge Walsh notes that the Plaintiffs’ complaint could have no possible effect on the bankruptcy estate, and thus determined this argument was not relevant for the Plaintiffs.

Statute of Limitations

Judge Walsh next considered the statute of limitations for preference actions.  11 U.S.C § 546(a) provides that an action to avoid a preference payment may not be commenced after the earlier of:

(1) the later of –

(A) 2 years after the entry of the order for relief; or

(B) 1 year after the appointment or election of the first trustee under section 702, 1104, 1163, 1202, or 1302 of this title if such appointment or such election occurs before the expiration of the period specified in subparagraph (A); or

(2) the time the case is closed or dismissed.

The Court quickly determines that the statute of limitations had long passed in this case.  Judge Walsh then examined the Plaintiffs’ request that the complaint relate-back to the preference action filed by the Debtor in 2006.  However, this complaint was not an amendment, and thus the relation-back doctrine was inapplicable.  Opinion at *12.

The Plaintiffs’ last argument was that the Court should equitably toll the statute of limitation.  However, the Plaintiffs did not explain why they waited three years from the purchase of the property to file their action.  Thus, a claim of equitable tolling was not supported.  Opinion at *14.  Judge Walsh also notes that a title search would have revealed the three lien claims.  Since the remedy of equitable tolling “is lost upon a lack of showing of diligence to preserve a claim” the Plaintiffs “cannot support a claim of equable [sic] tolling in their favor.” Opinion at *14.

In this era of computers and organized records, it is more important than ever to do your due diligence before purchasing a major asset, like property.  The Plaintiffs who filed this complaint would have been better served if they had hired an attorney before buying the property.  As any estate attorney I have spoken with will confirm, it is far less expensive and much more pleasant to prepare for the possible risks than it is to try and fix a deal after the fact.


In a 23 page decision signed July 15, 2011, Judge Walsh of the Delaware Bankruptcy Court denied a motion to allow a plaintiff to file an amended complaint, holding that the amended complaint was too deficient to survive a motion to dismiss and therefore would not be allowed. Judge Walsh’s opinion is available here (the “Opinion”).


Following Fruehauf Trailer Corporation’s (the “Debtor”) bankruptcy and subsequent confirmation of its plan in September 1998, Chriss Street (“Street”) was appointed as the trustee of the Debtor’s liquidating trust. He served in this capacity until August 2005, when he resigned and was succeeded by Daniel Harrow (“Harrow”). While there was extensive litigation between Street and Harrow, this post will only discuss those portions of the litigation that led directly to the issuance of the Opinion.

In July 2007, Street filed a complaint (the “Original Complaint”) against Harrow in California State Court. The case was removed to federal court, where Harrow filed an answer denying all material allegations. The case was then transferred to the District Court of Delaware, then referred to the Bankruptcy Court as a core proceeding. The case lay dormant until July 12, 2010, when Street filed an amended complaint. Eight days later, Street filed a second amended complaint. The Court struck both amended complaints, because Street filed them without Harrow’s consent or Court approval, in violation of Rule 15 of the Federal Rules of Civil Procedure (“FRCP”). On September 8, 14, and 24, 2010, Street filed three identical motions to amend the Original Complaint, pursuant to Rule 15. Street appended a proposed amended complaint (the “Amended Complaint”) to these motions. Opinion at *2-3.

To summarize, the Original Complaint, filed 2 years after Street resigned, was eleven pages long and listed 26 defendants, 25 of which were “John Does” while the Amended Complaint, filed 5 years after Street’s resignation, was 126 pages and listed 16 defendants. Opinion at *7-8. The Opinion was written in response to Street’s motion to allow (the “Motion”) him to amend his complaint.

Judge Walsh’s Opinion

Judge Walsh begins his discussion of the Motion by quoting FRCP 15, which provides that “a party may amend its pleading only with the opposing party’s written consent or the court’s leave” and that “[t]he court should freely give leave when justice so requires.” Opinion at *8. Judge Walsh then quotes several opinions that define the extent to which an amendment should be allowed. These include: Foman v. Davis, 371 U.S. 178 (1962); Dole v. Arco Chem. Co., 921 F.2d 484 (3d Cir. 1990); Johnson v. Geico Cas. Co., 673 F.Supp.2d 244 (D. Del. 2009); and Koken v. GPC Int’l, Inc., 443 F.Supp.2d 631 (D. Del. 2006). Opinion at *8-9. In summation of the flaws in the Amended Complaint, Judge Walsh opines that “the Proposed Amended Complaint fails to state a claim upon which relief may be granted” and it “fails to meet the pleading requirements of Rule 9(b) … and alleges causes of action that are time barred.” Opinion at *9.

Judge Walsh then proceeds to identify general flaws within several counts of the Amended Complaint, including: (1) Failing to Plead Fraud with Particularity, at *9-12; and (2) Time-Barred by the Statute of Limitations, at *12-15. Judge Walsh then discusses each of the 22 counts of the Amended Complaint before ultimately concluding that “all twenty-two counts contained in Street’s Proposed Amended Complaint fail to state a claim upon which relief may be granted,” at which point he denies the Motion. Opinion at *23.

While FRCP 15 and Third Circuit precedent provide that leave to amend should be liberally granted, it is by no means a certainty. For this reason, it is vital to determine the appropriate defendants and fully research any relevant laws, particularly statutes of limitation, prior to filing a complaint.


Earlier this month,  the Official Committee of Unsecured Creditors (the “Committee”) for American Home Mortgage (“AMH”) filed over ninety (90) adversary actions (review one of the Committee’s Complaints here).  As reflected in the Complaint,  the Committee alleges that various creditors of AMH received preferential and/or fraudulent transfers pursuant to 11 U.S.C. sections 547, 548, 550 and 551.

Procedural Posture of These Cases

At the time of this posting, the Committee had not filed the summonses which would contain information regarding service of process and the initial pretrial conference scheduled by the Court.  Approximately three weeks before filing the preference actions, the Committee sent out demand letters to those parties who its claimed received avoidable preferences during the ninety days prior to AMH’s petition date.

AMH filed for bankruptcy on August 6, 2007.  Therefore, the Committee has until early August to file the adversary actions in order to satisfy the statute of limitations.  Although preference actions are often filed by a debtor, the Committee was assigned the right to pursue AMH’s preference claims pursuant to the Amended Chapter 11 Plan of Liquidations filed by AMH on November 25, 2008.

These adversary actions are before the Honorable Christopher S. Sontchi of the United States Bankruptcy Court for the District of Delaware.  For prior posts on this blog regarding issues that arise in preference actions, click here.  To read a post regarding a recent decision by Judge Sontchi in the American Home Mortgage bankruptcy, click here.


Two weeks ago,  preference actions were commenced against a long list of defendants in the New Century Mortgage (“New Century”) and Tweeter Home Entertainment (“Tweeter”) bankruptcies.  The plaintiff in the New Century preference actions is Alan M. Jacobs, the liquidating trustee authorized under New Century’s Second Amended Plan of Liquidation to commence and prosecute preference actions.  The preference actions in the Tweeter bankruptcy, on the other hand, were brought by the debtor instead of a liquidating trustee.

Summary of the New Century Bankruptcy

New Century filed for bankruptcy in Delaware on April 2, 2007.   According to New Century’s Declaration in Support of Chapter 11 Petitions (the “Declaration”),  New Century, through its subsidiaries, originated, purchased and sold mortgage loans nationwide.  New Century also serviced some of the loans they originated and sold.

New Century operated both wholesale and retail mortgage divisions. The wholesale division purchased loans through mortgage brokers and lenders. In the months prior to filing for bankruptcy, New Century’s wholesale division operated in 34 locations in 20 states. At the same time, New Century’s retail division, which originated loans directly with consumers, was operating out of 262 branch offices employing over 1,700 retail loan officers.

As stated in its Declaration, 86% of New Century’s loan origination were subprime loans in the year prior to filing for bankruptcy. Once housing prices begin to decline, New Century’s borrowers began to default in greater numbers.

Summary of the Tweeter Bankruptcy

Tweeter’s slide into bankruptcy was more gradual than New Century.  According to Tweeter’s Declaration in Support of Bankruptcy Petitions,  the company began experiencing operational losses for six years prior to filing for bankruptcy.  Tweeter contends that one of the largest factors to hurt is profitability was the increase in competition from “format stores” such as Walmart and Best Buy. As Tweeter’s competitors expanded their footprint in the video products market, competition grew and profit margins declined.  Tweeter’s problems worsened when Best Buy and Circuit City both expanded their in-home design and installation programs.

The Preference Actions

With a petition date of April 2, 2007, New Century filed its preference complaints on the eve of the statute of limitations.  Tweeter, on the other hand, has until June 11 before it runs up against the statute of limitations for preference actions (Tweeter filed for bankruptcy on June 11, 2007).  Tweeter, therefore, may file more preference actions in the months ahead.  The New Century preference actions are before the Honorable Kevin J. Carey, Chief Judge of the United States Bankruptcy Court for the District of Delaware.  The Tweeter preference actions are before the Honorable Peter J. Walsh, former Chief Judge of the Delaware Bankruptcy Court.

In prior posts, I have addressed issues relevant to preference litigation.  These posts address topics such as whether new value must remain unpaid to constitute a defense in a preference action.  To read prior posts on this blog regarding preference litigation click here.