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.

Very often in the course of a bankruptcy proceeding, a creditor with a pending lawsuit against the debtor will need to obtain relief from the automatic stay in order to continue to prosecute the pre-petition litigation.   For example, personal injury claimants who seek to recover solely against an insurance policy of a debtor may obtain relief from the automatic stay in certain circumstances.  Such claimants will need to file a motion with the Delaware Bankruptcy Court to obtain relief from the stay in order to pursue their claim to a final judgment.

Relief from Stay

Under section 362(d)(1) of the Bankruptcy Code, the bankruptcy court “shall” lift the automatic stay for “cause.”  If a creditor seeking relief from the automatic stay makes a prima facie case of “cause” for lifting the stay, the burden going forward shifts to the debtor pursuant to Bankruptcy Code § 362(g). See In re 234-6 West 22nd St. Corp., 214 B.R. 751, 756 (Bankr.S.D.N.Y. 1997).

The Bankruptcy Code does not define “cause.” Instead, whether cause exists to lift the automatic stay should be determined on a case by case basis. See Izzarelli v. Rexene Prod. Co. (In re Rexene Prod. Co.), 141 B.R. 574, 576 (Bankr.D.Del. 1992). See also, In re Texas State Optical, Inc., 188 B.R. 552, 556 (Bankr. E.D.Tex. 1995) (finding that “cause” for modification of the automatic stay is “an intentionally broad and flexible concept that permits … [a] [b]ankruptcy [c]ourt, as a court of equity, to respond to inherently fact-sensitive situations.”) Courts determine what constitutes “cause” based on the totality of the circumstances in each particular case. Baldino v. Wilson (In re Wilson), 116 F.3d 87, 90 (3d Cir. 1997).

In re Rexene provides the “balancing test” to determine whether cause exists to lift the automatic stay. 141 B.R. at 576. Under Rexene, the balancing test looks at three factors to decide whether to lift the automatic stay, including: (a.) whether prejudice will be caused to the estate or the debtor;
(b.) whether hardship to the movant from continuing the stay outweighs any hardship to the debtor; and (c.) whether the movant has a reasonable probability of prevailing on the merits of the suit. Id.

Carl D. Neff is a partner with the law firm of Fox Rothschild LLP.  Carl is admitted in Delaware and regularly practices before the United States Bankruptcy Court for the District of Delaware. You can reach Carl at (302) 622-4272 or at cneff@foxrothschild.com.

Can a financially distressed be “forced” into bankruptcy by its creditors?  In other words, is it possible for creditors to subject a distressed entity into an involuntary bankruptcy proceeding?

The answer is yes.  Under Section 303 of the Bankruptcy Code, a debtor can be “forced” into an involuntary bankruptcy.  11 U.S.C.§ 303(b)(1).  If a company has 12 or more creditors, an involuntary petition requires three or more creditors whose claims are not contingent as to liability or subject to a bona fide dispute as to either liability or amount to file the petition.

If the company timely objects to the involuntary filing, for the company to be placed in bankruptcy, the company also must: generally not be paying its debts as they become due unless those debts are subject to a bona fide dispute as to liability or amount, or have had a custodian appointed within the past 120 days to take possession or control of substantially all of its assets.

Stay tuned for additional posts regarding involuntary bankruptcy proceedings under Section 303 of the Bankruptcy Code.

Carl D. Neff is a bankruptcy attorney with the law firm of Fox Rothschild LLP.  Carl is admitted in Delaware and regularly practices before the United States Bankruptcy Court for the District of Delaware. You can reach Carl at (302) 622-4272 or at cneff@foxrothschild.com.

Under Section 503(b)(9) of the Bankruptcy Code, creditors may receive administrative-expense priority for the value of goods “received” by the debtor within 20 days before the debtor’s bankruptcy filing in which the goods have been sold to the debtor in the ordinary course of business. 11 U.S.C. § 503(b)(9).

The question becomes: when are goods considered to be received” under Section 503(b)(9) of the Code?

The majority of Courts construing the word “received” have relied upon the Uniform Commercial Code (“UCC”). For example, in the decision of In re Circuit City Stores Inc., 432 B.B. 225 (Bankr. E.d. Va. 2010), the United States Bankruptcy Court for the Eastern District of Virginia ruled that “received” was the functional equivalent of “receipt” under the UCC, and indicated that the terms should be construed identically.

The Court ruled that “received” means “having taken into physical possession” the goods and should be applied as a “federal definition” for purposes of interpreting Section 503(b)(9). This analysis was subsequently applied by the U.S. Bankruptcy Court for the District of New Hampshire which also applied the UCC’s definition of “receipt” to the term “received” contained in Section 503(b)(9). See In re Momenta Inc., 455 B.R. 353, 358-59 (Bankr. D. N.H. 2011).

For creditors seeking to assert a Section 503(b)(9) claim, below are several additional articles on this topic:

Section 503(b)(9) Claims: Timing of Payments

What Constitutes “Goods” Under Bankruptcy Section 503(b)(9)?

Bankruptcy Code Section 503(b)(9): Goods Shipped Within 20 Days

Carl D. Neff is a bankruptcy attorney with the law firm of Fox Rothschild LLP.  Carl is admitted in Delaware and regularly practices before the United States Bankruptcy Court for the District of Delaware. You can reach Carl at (302) 622-4272 or at cneff@foxrothschild.com.

 

What remedies do you have to recover goods shipped to a company in the weeks leading up to its bankruptcy?  As to those goods shipped 45 days prior to a debtor’s filing, Section 546(c) of the Bankruptcy Code provides a reclamation right to creditors to recover such goods.  This may provide you with the ability to recover your goods directly from the debtor.

There are several requirements under Section 546(c).  The goods must have been sold in the “ordinary course” of the vendor’s business and the debtor must have received the goods while insolvent.  Also, the reclamation demand must be in writing and made within 45 days of the receipt of the goods by the customer (now the debtor in bankruptcy).

If the 45-day period expires after the bankruptcy case is filed, the vendor must make the reclamation demand within 20 days after the bankruptcy filing.  As with pre-bankruptcy demands under the UCC, the demand should identify the goods being reclaimed, include a general statement reclaiming all goods received by the debtor from the vendor during the 45-day period, and demand that the goods be segregated. Often times, vendors will file a notice of reclamation with the bankruptcy court.

Conclusion

If you or your company shipped goods to a debtor prior to its filing for bankruptcy, then you should act quickly to file a reclamation claim against the debtor.  It may provide you with the ability to recover your goods from the debtor.

Carl D. Neff is a bankruptcy attorney with the law firm of Fox Rothschild LLP.  Carl is admitted in Delaware and regularly practices before the United States Bankruptcy Court for the District of Delaware. You can reach Carl at (302) 622-4272 or at cneff@foxrothschild.com.

When will your company’s Section 503(b)(9) claim be paid?  Under normal circumstances, Section 503(b)(9) claims are paid when the debtor makes a final distribution to creditors.  However, a Section 503(b)(9) creditor can file a motion to demand immediate payment of its claim.  This article will address the standard employed by the Bankruptcy Court in determining whether to grant immediate payment of a Section 503(b)(9) claim.

Bankruptcy Courts have considered the issue of whether a Section 503(b)(9) claim can be paid immediately, before the distribution to other similarly-situated creditors.  In the case of In re Global Home Prods., LLC, 2006 WL 3791955 (Bankr. D. Del. Dec. 21, 2006), the Court considered  the following three factors in deciding whether to make payment immediately to the creditor:

  1. prejudice to the debtor;
  2. hardship to the claimant; and
  3. potential detriment to other creditors.

The Court in Global Home denied the claimant’s request for immediate payment of the Section 503(b)(9) claim because the creditor could not demonstrate that it would suffer prejudice or hardship if payment is deferred until after confirmation of the plan, while the debtor would suffer substantial hardship.

As indicated by Global Home, Section 503(b)(9) claims are generally not be paid out prior to a final distribution to other creditors, absent compelling circumstances warranting an early distribution.

Carl D. Neff is a bankruptcy attorney with the law firm of Fox Rothschild LLP.  Carl is admitted in Delaware and regularly practices before the United States Bankruptcy Court for the District of Delaware. You can reach Carl at (302) 622-4272 or at cneff@foxrothschild.com.

As discussed in the prior post, creditors may receive administrative-expense priority for “the value of goods received by the debtor within 20 days before” the debtor’s bankruptcy filing “in which the goods have been sold to the debtor in the ordinary course of business.”  11 U.S.C. § 503(b)(9).

The question then becomes what constitutes a “good” under Section 503(b)(9)?

Bankruptcy Courts have consistently held that the Uniform Commercial Code’s (UCC) definition of a good controls for purposes of Section 503(b)(9). Under the UCC, a good is anything that is moveable. As such, to qualify for priority treatment under this section, the good at issue must be something that is moveable.  For example, “services” provided fall outside of the scope of Section 503(b)(9) treatment.

At times, whether a product is a “good” or a “service” may not be readily apparent.  For example, in the case of In re Goody’s Family Clothing, Inc., 401 B.R. 131 (Bankr. D. Del. 2009), the creditor seeking Section 503(b)(9) administrative priority was an intermediate vendor that received textiles from a supplier, would unpack the textiles, inspect them, ticket and repack them before shipping the textiles to the debtor.  The Court found that the creditor in fact provided services but not “goods” to the debtor, and therefore was denied its Section 503(b)(9) claim.

Subsequent posts will address further issues relating to Section 503(b)(9) claims, such as  the timing of payment for allowed Section 503(b)(9) claims, and reclamation rights of a creditor within the 45 day period prior to a debtor’s filing.

Carl D. Neff is a bankruptcy attorney with the law firm of Fox Rothschild LLP.  Carl is admitted in Delaware and regularly practices before the United States Bankruptcy Court for the District of Delaware. You can reach Carl at (302) 622-4272 or at cneff@foxrothschild.com.

It is your worst nightmare.  You ship goods to a company, only to find out that shortly after shipment, it files for bankruptcy.  Now, instead of receiving payment for those goods, you are simply one of many creditors of the debtor’s estate.  What remedies do you have under the Bankruptcy Code to recover the amount of the shipped goods?

If the goods were shipped within 20 days of the debtor’s filing, then your claim may qualify for “administrative” status under Section 503(b)(9) of the Bankruptcy Code. The Section provides as follows:

(b) After notice and a hearing, there shall be allowed, administrative expenses, other than claims allowed under section 502(f) of this title, including –

(9) the value of any goods received by the debtor within 20 days before the date of commencement of a case under this title in which the goods have been sold to the debtor in the ordinary course of such debtor’s business.

An administrative claim has higher priority, meaning that they get paid out before unsecured claims.   This is significant given that in many instances, a debtor lacks the assets to pay off all of its claims.  It can mean the difference between receiving 100% of your claim, or just pennies on the dollar.

Requirements of a Section 503(b)(9) Claim

To summarize, to be entitled to a 503(b)(9) claim,  a supplier must show four things:

(1) that it sold goods to the bankrupt customer;

(2) that these goods were received by debtor within 20 days prior to its bankruptcy filing;

(3) that goods were sold to debtor in ordinary course of the debtor’s business; and

(4) the value of the goods that were sold to the debtor.

Subsequent posts will discuss various aspects of this Section in greater detail, including what constitutes “goods”, the timing of payment for allowed Section 503(b)(9) claims, and reclamation rights of a creditor within the 45 day period prior to a debtor’s filing.

Carl D. Neff is a bankruptcy attorney with the law firm of Fox Rothschild LLP.  Carl is admitted in Delaware and regularly practices before the United States Bankruptcy Court for the District of Delaware. You can reach Carl at (302) 622-4272 or at cneff@foxrothschild.com.

Summary

When a company files for bankruptcy, they gain a number of protections under federal law.  One of these protections is the “automatic stay” provided by 11 U.S.C. § 362. The automatic stay makes it illegal to continue prosecuting, or to initiate, an action against the debtor who is in bankruptcy.  Even if that debtor has injured you, it means that you cannot try to recover from them without getting the automatic stay lifted.  As more large bankruptcy cases are filed in Delaware, it becomes increasingly important that persons injured by debtors understand the legal hoops that they have to jump through in order to recover for their injuries.

To aid in discussing this matter, imagine a situation in which a person (the “Injured”) is injured when hit by a truck belonging to the company (the “Debtor”).  The Injured files a lawsuit in state court to recover and the Debtor files for bankruptcy protection in Bankruptcy Court for the District of Delaware (“DE Bankruptcy Court”).  The last important assumption is that the Debtor, like most large companies, has insurance that can compensate the Injured.  While many of the principles of this post will apply in other courts, it will be discussed specifically in the context of this purely hypothetical situation.

The Automatic Stay

11 U.S.C. § 362 (“Section 362”) provides that, with limited exceptions, when the Debtor files for bankruptcy, a stay is placed on actions that could otherwise be brought against it.  Section 362 includes prohibitions against nearly any legal action that could be brought against the Debtor in any court other than the DE Bankruptcy Court.  While there are exceptions, they are very specific and beyond the scope of this post.  Rather, this post will focus on what a person who was injured by a Debtor should do in order to obtain a recovery.

The specific provisions of Section 362(a) which relate to our example are as follows:
“[A] petition filed under … this title … operates as a stay … of –
(1) the commencement or continuation  … of a judicial, administrative, or other action or proceeding against the debtor that was or could have been commenced before the commencement of the case under this title, or to recover a claim against the debtor that arose before the commencement of the case under this title;
(3) any act to obtain possession of property of the estate or of property from the estate or to exercise control over property of the estate;

Thus, the Injured will find it very difficult to recover, since they are prohibited from bringing a new lawsuit against the Debtor or continuing to prosecute the lawsuit that has already begun.  In some instances, a Debtor will declare bankruptcy days before a trial is scheduled to begin, freezing any litigation against it.  While this is certainly frustrating for the Injured, there is a path to obtain recovery.

Relief from the Automatic Stay

In order to resume an existing lawsuit against the Debtor, or start a new lawsuit against the Debtor, the Injured must obtain relief from the automatic stay.  This requires the Injured to file a motion for relief from stay and the judge presiding over the bankruptcy to grant the motion.

The relevant language from the Bankruptcy Code is found in Section 362(d), which provides in pertinent part as follows:
(d) On request of a party in interest and after notice and a hearing, the court shall grant relief from the stay provided under subsection (a) of this section, such as by terminating, annulling, modifying or conditioning such stay –
(1) for cause, including the lack of adequate protection of an interest in property of such party in interest.

Thus, the DE Bankruptcy Court is required to determine if there is “cause” to lift the stay.  In making that determination, the DE Bankruptcy Court follows the analysis of the case Izzarelli v. Rexene Prods. Co. (In re Rexene Prods. Co.), 141 B.R. 574, 577 (Bankr. D. Del. 1992).  The DE Bankruptcy Court places the initial burden on the Injured to establish that cause exists, and allows the Debtor an opportunity to rebut the Injured’s argument.

In the Rexene opinion, the DE Bankruptcy Court cites to the legislative history of Section 362 in its holding that ‘It will often be more appropriate to permit proceedings to continue in their place of origin, when no great prejudice to the bankruptcy estate would result, in order to leave the parties to their chosen forum and to relieve the bankruptcy court from any duties that may be handled elsewhere.’  Rexene Prods., 141 B.R. at 576 (quoting H.R. Rep. No. 95-595, 95th Cong., 1st Sess., 343-344 (1977)).

The DE Bankruptcy Court has adopted a three-prong analysis to determine whether there is cause to grant relief from the automatic stay.  The court determines whether (i) any great prejudice to either the bankruptcy estate or the Debtor will result from continuation of the civil suit; (ii) the hardship to the Injured by maintenance of the stay considerably outweighs the hardship to the Debtor; and (iii) the Injured has a probability of prevailing on the merits.

A bankruptcy estate generally is not considered to have an interest in proceeds of liability insurance policies.  Consequently, the DE Bankruptcy Court typically holds that a Debtor does not suffer prejudice or hardship if the Injured obtains stay relief to liquidate claims that are covered by such proceeds.

With respect to the third prong of the analysis regarding cause, the DE Bankruptcy Court held in Rexene that the required showing is very slight.  The threshold for this third prong is even easier to meet where a movant’s claim would be covered by non-debtor sources. In cases following Rexene, the DE Bankruptcy Court has stated that under such circumstances, a bankruptcy court should not examine the merits of the movant’s claims. Rather, “all that is required is that the movant make more than a ‘vague initial showing’ that he can establish a prima facie case. In a case, [sic] such as this one where the claimant seeks only to liquidate its claims as a predicate to recovering against insurance and other non-debtor sources, to require a merits analysis would defeat the objective of economizing judicial resources and would frustrate the effort to resolve relief from stay motions expeditiously.” Santa Fe Minerals v. BEPCO. L.P. (In re 15375 Memorial Corp.), 382 B.R. 652, 691 (Bankr. D. Del. 2008).

In deciding whether to lift the automatic stay, the Delaware Bankruptcy Court has also considered general policies, including: 1) whether relief would result in a partial or complete resolution of the issues; 2) lack of any connection with or interference with the bankruptcy case; 3) whether the debtor’s insurer has assumed full responsibility for defending it; 4) whether the parties are ready for trial in the other proceeding; and 5) impact of the stay on the parties and the balance of the harms.  While these issues may provide additional support for the motion for relief from stay that the Injured will need to file, the DE Bankruptcy Court will typically consider them within the context of the Rexene analysis, so attorneys for the Injured should always consider the Rexene factors first.

Finally, 28 U.S.C. § 157(b)(5) provides that Personal Injury and Wrongful Death claims shall be tried in the district court.  Thus, even if a bankruptcy court wanted to decide a personal injury matter, such a case cannot be tried in the bankruptcy court.  I have had the opportunity to observe, on multiple occasions, the judges of the Delaware Bankruptcy Court tell debtors’ counsel that they will not decide personal injury matters.  And while past performance is no guarantee of future results, it does provide a level of predictability here in Delaware.

There are generally three types of claims in a bankruptcy proceeding: unsecured claims, secured claims and administrative expense claims. Section 503 of the Bankruptcy Code governs the allowance of administrative expense claims. Section 503 provides that “after notice and a hearing, there shall be allowed administrative expenses…, including the actual and necessary costs and expenses of preserving the estate.” 11 U.S.C. § 503(b)(1)(A). A creditor who seeks to have its claim paid has an administrative claim, and therefore ahead of the general unsecured creditors, bears the burden of establishing that its claims qualifies for priority status. In re New Century TRS Holdings, Inc., et al, 446 B.R. 656, 661 (Bankr. D. Del. 2011). Courts generally apply a two-part test in deciding whether a claim qualifies as an administrative expense: (1) whether the expense arose from a post-petition transaction between the creditor and debtor; and, (2) whether the expense was “actual and necessary” to preserve the estate. Id., citing In re Unidigital, Inc., 262 B.R. 283, 288 (Bankr. D. Del. 2001). Claims which do not constitute an administrative expense are often treated as general unsecured claims which are payable in the ordinary course with other unsecured creditors of the estate. In re Arrow Carrier Corp., 154 B.R. 642, 646 (Bankr. D. N.J. 1993).

Aside from the allowance of an administrative claim, a common issue concerning creditors is the timing of payment of the administrative claim. Although Section 503 of the bankruptcy code provides that an entity can request payment of an administrative expense claim, the section does not address the question of when a claim for administrative expense is to be paid. In re HQ Global Holdings, Inc., 282 B.R. 169 (Bankr. D. Del. 2002) (further citations omitted). The determination of the timing of payment of an administrative expense claim is within the discretion of the bankruptcy court. Id., citing In re Colortex Industries, Inc. 19 3d 1371, 1384 (11th Cir. 1994). In deciding the timing of payment for an administrative expense claim, one of the central factors courts consider is the goal of the bankruptcy court to have an orderly and equal distribution among creditors and a need to prevent a “race to a debtor’s assets.” Id. Distributions to administrative claimants are generally not allowed when the estate may not be able to pay all administrative expenses in full. Id., citing In re Standard Furniture, 3 B.R. 527, 532 (Bankr. S.D. Cal. 1980). Even though courts generally wait until after confirmation before allowing payment on administrative expenses, courts nevertheless have discretion to consider other factors in deciding whether to grant immediate payment. These factors include the particular needs of the administrative claimants, as well as the length and expense of the administration of the bankruptcy proceeding. Id., at 173, citing In re Reams Broadcasting Corp., 153 B.R. 520, 522 (Bankr. N.D. Ohio 1993).

In HQ Global Holdings, the Delaware Bankruptcy Court considered whether commercial landlords of the debtor are entitled to the immediate payment of their administrative rent claims. The court in HQ Global agreed with the debtor “that any decision on the amount and payment of the [administrative rent] must await the debtor’s decision whether to assume or reject leases.” Id. at 175. The court reasoned that if the debtor assumed the landlord’s lease, such assumption would resolve the issue of the landlord’s administrative rent claims. By that, if the debtors assumed the leases, then the debtor would be required to cure any defaults and make all past due rent payments under the lease. Id.