On October 11, 2016, Chief Judge Brendan L. Shannon of the Delaware Bankruptcy Court issued a letter ruling in which he opined on the appropriate valuation of a fist lien.  A copy of the Opinion is available here.

While the ruling is short, it is important that lenders are cognizant of it.  Judge Shannon cites to a prior opinion he issued in which he held that “the operative date for valuation of residential property under § 1322(b)” is the petition date.  In re DiMauro, 548 B.R. 685, 689 (Bankr. D. Del. 2016).

The result in this case is that the proof of claim filed by the first lien lender is operative in valuing the property, and the payoff amount sought by the first lien lender is not.  This is the value used to determine whether second (and possibly third) liens should be stripped off.

John Bird practices with the law firm Fox Rothschild LLP in Wilmington, Delaware. You can reach John at 302-622-4263, or jbird@foxrothschild.com.


In a 9 page decision dated October 6, 2016, Judge Carey of the Delaware Bankruptcy Court granted the motion of Portland General Electric (“PGE”) for relief from the automatic stay of the Bankruptcy Code.  Judge Carey’s opinion is available here (the “Opinion”).  PGE moved that the stay be lifted so that it could initiate litigation against various debtor entities arising out of alleged breaches of a construction agreement between PGE and the Debtors called the “Turnkey Engineering, Procurement & Construction Agreement for Carty Generating Station” (the “EPC Contract”).
Continue Reading Abeinsa Holding Opinion – Motion for Relief from Stay Granted

Over three years ago, in September 2013, Pirinate Consulting Group LLC, in its capacity as Litigation Trustee (the “Trustee”) of the NewPage Creditor Litigation Trust, began filing complaints in the Delaware Bankruptcy Court seeking the avoidance and recovery of what the Trustee alleges are preferential transfers.  You can read our summary of the initial preference filings here: Pirinate Consulting, Trustee in NewPage Bankruptcy, Files Preference Actions.  Judge Gross’ opinion (the “Opinion”) is a reminder of the normal defenses in a preference suit.  That is right folks, three years later one of the most common actions in a bankruptcy is still in litigation.  A copy of the Opinion is available here.

The Opinion was issued in response to cross motions for summary judgment.  Citing the standard that applies in every court, Judge Gross reminded the litigants that “Where . . . there are cross-motions for summary judgment, the Court must ensure that the nonmoving party on each theory has the inferences to be drawn from the underlying facts viewed in the light most favorable to it as the party opposing the motion.”  Opinion at *4 (citing Mitsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 578-88 (1986).

Using this standard of review, Judge Gross quickly determined that wire payments the defendant received prior to delivery of the product were advance payments and did not constitute antecedent debt.  Judge Gross also determined that all of the other payments the Trustee sought to recover were protected by the ordinary course of business defense as “The average payment, median payment, mode and range of payment are nearly identical in the historical period and Preference Period.”  Opinion at *12.  Judge Gross closes this portion of the Opinion by shutting down the Trustee’s request for additional discovery, stating that “More discovery will not affect the payment records.”  id.

While many cases aren’t as clear as the Court makes this one appear, all of the defenses are similar from case to case.  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.

John Bird is a bankruptcy attorney with the law firm of Fox Rothschild LLP.  John is admitted in Delaware and regularly practices before the United States Bankruptcy Court for the District of Delaware. You can reach John at (302) 622-4263 or at jbird@foxrothschild.com.

In Rosenberg v. DVI Receivables XVII, LLC, 2016 WL 4501675 (3d Cir. August 29, 2016), the United States Court of Appeals for the Third Circuit held that Section 303(i) of the United States Bankruptcy Code does not preempt state law claims by non-debtors for damages arising from the filing of an involuntary bankruptcy petition.

The Petitioning Entities filed involuntary bankruptcy petitions against Mr. Rosenberg and his affiliated entities.  The involuntary petitions were dismissed because the entities were not Rosenberg’s creditors.  Rosenberg subsequently recovered compensatory and punitive damages under Section 303(i).

Rosenberg’s wife and several affiliated entities (the “Rosenberg Affiliates”) then filed suit in the Eastern District of Pennsylvania against the Petitioning Entities for tortious interference with contracts and business relationships.  The Rosenberg Affiliates alleged that the Petitioning Entities filed the involuntary petitions with the intent of causing the Rosenberg Affiliates to default on their mortgages and lose their properties.

The District Court dismissed the complaint on the ground that the Rosenberg Affiliates’ state law tortious interference claim was preempted by the involuntary provisions of the Bankruptcy Code.  The Third Circuit reversed.

The Court explained that “[i]n deciding whether Congress has occupied a field for exclusive federal regulation, we begin, based on concerns of federalism, with a sturdy presumption against preemption.”

The Third Circuit noted that although section 303(i) provides a remedy to the debtor, it “is silent as to potential remedies for non-debtors harmed by an involuntary bankruptcy petition.  This suggests that when Congress passed the provision it either did not intend to disturb the existing framework of state law remedies for non-debtors or (more likely) was not thinking about non-debtor remedies at all.  In either case, field preemption does not apply.”

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

In the recent decision of FBI Wind Down Inc. Liquidating Trust, by and through Alan D. Halperin, as Liquidating Trustee, v. Heritage Home Group, LLC, et al., Adv. Pro. No. 15-51899 (CSS) (Bankr. D. Del. Sept. 15, 2016) Judge Sontchi considered whether motion to compel the arbitration of several claims.  For the reasons set forth below, the Court denied the motion.


Heritage Home Group LLC (“Heritage”), purchased substantially all of the Debtors’ assets pursuant to a Sale Order. The Second Amendment to the Asset Purchase Agreement (the “Second Amendment” and the “APA”) required Heritage and the Sellers to engage in a purchase price reconciliation process in the sixty days after Closing.  The parties were unable to agree on the proper purchase price reconciliations. Thus, the Trustee, as successor-in-interest to the Sellers, filed the instant adversary proceeding. The Trustee asserted that, under the purchase price reconciliation provisions in the APA, Heritage owes the Liquidating Trust approximately $13,000,000. Heritage denied the Trustee’s accounting and asserts that the Liquidating Trust owes Heritage approximately $8,000,000. The merits of the parties’ dispute has not yet been adjudicated because § 3(a) and § 3(b) of the Second Amendment, which govern the reconciliation process, each contain an Accounting Arbitration Clause (the “Arbitration Clause”).

The parties have raised two disputes that might be subject to mandatory arbitration: (i) whether Heritage has the right to retain “Auction Clearing House Electronic Receipts & Deposits” (“ACHE-R/D”) earned by the Sellers shortly before Closing; and (ii) what accounting method—GAAP or the Sellers’ traditional practices—must be applied in calculating the purchase price reconciliations.

The parties disputed whether under §§ 3(a) and 3(b) of the Second Amendment, the disputes must be submitted to the Accounting Arbitrator for resolution. In objecting to the motion, the Trustee argued that the Court must first determine several “threshold legal issues” before these claims may be submitted to arbitration.  The Trustee asserted that the issues raised in his Complaint (1) are outside the scope of the Arbitration Clause and (2) are issues over which the Court expressly retained jurisdiction in the Sale Order.


The Court interpreted the Arbitration Clause as follows: (1) disputes over the calculation of reconciliation items, including disputes over how a set of accounting principles must be applied, are arbitrable while (2) disputes over the interpretation of the APA, including disputes over what rules the APA places on the Accounting Arbitrator, are not arbitrable. The Court has determined that this interpretation is the most reasonable—and only reasonable—interpretation after engaging in a three-step interpretative process.

The Court examined the parties’ disputes to determine if either dispute falls within the narrow scope of the Arbitration Clause.  The Court found that because both disputes are clearly disputes over the proper interpretation of the APA, the Court finds that neither dispute is arbitrable. As a result, the Court denied Heritage’s motion to compel arbitration.

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

On February 19, 2016, Judge Brendan L. Shannon of the Delaware Bankruptcy Court granted in part the motion of K. Ivan F. Gothner (the “Defendant”) to dismiss a complaint filed by JLL Consultants, the Liquidating Trustee (the “Trustee”) in the AgFeed bankruptcy.  I summarized that opinion in a prior post: Opinion in AgFeed USA – Another (Mostly) Successful Motion to Dismiss

Since publishing that post, the Trustee filed his amended complaint, to which the Defendant filed another motion to dismiss (the “Motion”).  On September 13, 2016, Judge Shannon issued an opinion (the “Opinion”) deciding this Motion.  The “Opinion” is available here.

Continue Reading Motion to Dismiss Second Amended Complaint – Another AgFeed Opinion

On August 29, 2016, the Third Circuit released a precedential opinion (the “Opinion”) which opined on whether filing an involuntary bankruptcy petition could qualify as tortious interference under state law.  The Third Circuit’s Opinion is available here.  This Opinion was issued in Rosenberg v. DVI Receivables XVII, LLC, Case No. 15-2622.  The District Court had ruled that the tortious interference claim was preempted by § 303(i) of the Bankruptcy Code.  The Third Circuit reversed and remanded this case back to District Court.  While the background and history of the underlying conflict is extensive, this decision was issued to resolve a narrow question of preemption law.  Opinion at *4.

Prior to the instant conflict, Maury Rosenberg and several companies were the target of involuntary bankruptcy petitions.  Mr. Rosenberg succeeded in having the involuntary petitions dismissed as the purported creditors were determined not to be their creditors.  After a jury trial in Florida District Court, he was awarded compensatory and punative damages totaling $6.1 million.

In August, 2013, Mrs. Sara Rosenberg and several entities, related to those against whom involuntary petitions were filed, brought suit to recover damages stemming from the involuntary petitions.  Opinion at *6.  Mrs. Rosenberg and the related entities alleged that they suffered extensive losses due to the filing of the involuntary bankruptcy petitions.  The defendants argued that these suits were preempted, and the District Court for the Eastern District of Pennsylvania agreed, dismissing the complaint.  Thereupon, Mrs. Rosenberg and the related entities appealed to the Third Circuit.  After oral arguments, the Opinion was issued.

According to the plain language of Section 303(i), a debtor can recover against involuntary petitioners.  However, the litigants in this case were not debtors.  As the Third Circuit stated, “As they were not debtors, the Rosenberg Affiliates cannot recover damages from the Defendants under § 303(i).”  Opinion at *8.  The Third Circuit then examines in detail the principle of federal preemption, holding that preemption does not apply in this case.  As provided by the Third Circuit, “we do not lightly infer from congressional silence the intent to deprive some persons of a judicial remedy…”  Opinion at *10.

This Opinion creates a split in the Circuits – the Ninth Circuit applied preemption more broadly in the case In re Miles, 430 F.3d 1083 (9th Cir. 2005).  Opinion at *13-14.  The Third Circuit found that the Miles decision was not persuasive on the issue of preemption.  Opinion at *14.  The Third Circuit’s reasoning is summarized in the last statement of its analysis: “Absent evidence that Congress actually meant for § 303(i) to be an exclusive remedy, we do not make the same inference.”  Opinion at *15.

John Bird practices with the law firm Fox Rothschild LLP in Wilmington, Delaware. You can reach John at 302-622-4263, or jbird@foxrothschild.com.

In the recent decision of Lehman Bros. Special Fin. Inc. v. Bank of Am. Nat’l Assoc. (In re Lehman Bros. Holdings Inc.), 2016 WL 3621180 (Bankr. S.D.N.Y. June 28, 2016),  the U.S. Bankruptcy Court for the Southern District of New York held that certain priority payment provisions in swap agreements do not constitute impermissible ipso facto provisions and that the distribution of liquidated swap agreement collateral is protected by the safe harbor in Bankruptcy Code Section 560.

The case involved synthetic collateralized debt obligation transactions (“CDOs”) structured by Lehman Brothers Special Financing (“LBSF”) in the years before the Lehman empire’s collapse.  On September 15, 2008, LBSF’s parent, Lehman Brothers Holdings, Inc. (“LBHI”) filed for bankruptcy.  LBHI’s bankruptcy filing caused LBSF to become a defaulting party under the CDOs, and gave the noteholders a priority claim on the collateral under the waterfall provisions.  LBSF did not file for bankruptcy until three weeks later.  During that three-week period, many Issuers terminated their swaps with LBSF based on the default caused by LBHI’s bankruptcy filing.  In most cases, the collateral was liquidated and distributed to noteholders prior to the occurrence of LBSF’s own bankruptcy filing (a “pre-pre transaction”).  In some cases, although termination occurred prior to LBSF’s bankruptcy, liquidation and distribution occurred afterwards (a “pre-post transaction”).

LBSF commenced an adversary proceeding against 250 defendant noteholders, Issuers, and indenture trustees, seeking to invalidate the priority of payment provisions as impermissible ipso facto clauses and to claw back approximately $1 billion in proceeds of the liquidated collateral distributed to the noteholders in both pre-pre and pre-post transactions.  The bankruptcy court granted the defendants’ motion to dismiss.

First, the court ruled that the CDO provisions that determined waterfall priority only when termination occurred were not impermissible ipso facto provisions under Bankruptcy Code sections 363(e)(1), 363(l) & 541.  On the other hand, the CDO provisions that gave LBSF priority in the waterfall from the outset, but deprived LBSF of this priority when there was an early termination based upon an LBSF event of default (such as its bankruptcy), were possibly impermissible ipso facto provisions.

Nevertheless, because the early terminations in this case all occurred before LBSF filed for bankruptcy (with only the collateral being liquidated postpetition in the pre-post transactions), the court ruled that none of the priority provisions violated the anti-ipso facto provisions of the Bankruptcy Code.  In this case, the court declined to adopt the “singular event” theory, and held instead that “any modification of LBSF’s rights that occurred prior to the LBSF Petition Date cannot be the basis of a violation of the anti-ipso facto provisions.”

Second, the court held that the distributions made pursuant to the priority provisions in the CDOs were protected by Bankruptcy Code section 560’s safe harbor.  The court observed that the common meaning of “liquidate” “include[s] the payment of the proceeds of the liquidation.”  Moreover, “[l]iquidation of a swap . . . must refer to something other than its termination.”  Accordingly, the court concluded that “section 560 protects the enforcement of the Priority Provisions and the distribution of the proceeds of the sale of the Collateral as part of the exercise of the right to liquidate the Swaps.”

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

On August 24, 2016, Judge Mary F. Walrath of the Delaware Bankruptcy Court overruling an objection to claim for reclamation.   The decision was issued in the Reichold Holdings US, Inc. Bankruptcy (Case No. 14-12237) in the Delaware Bankruptcy Court.  A copy of the Opinion is available here.

While the background to this dispute is laid out in detail in the Opinion, it can be easily summarized.  A prepetition lender had a lien on substantially all the Debtor’s assets, including inventory.  Covestro LLC (the “Claimant”) supplied goods to the Debtor within the 45-day reclamation period.  Claimant issued a reclamation demand to the Debtor within days of the Debtor’s bankruptcy filing and later filed a proof of claim for all goods provided within the reclamation period.  As part of the DIP financing, the prepetition loan was paid in full and the DIP lender obtained a first priority lien on all prepetition and postpetition property of the Debtor’s estate, including inventory.  The DIP loan was repaid from the sale of the Debtor’s assets and a plan of liquidation was confirmed.  Opinion *1-3.

The Liquidation Trustee objected to Covestro’s claim, arguing that its security interest was rendered valueless when the Prepetition Loan was repaid.  Opinion at *3.  However, Judge Walrath disagreed, holding that once the prepetition lien was repaid, the reclamation lien became the first priority lien.  “The function of a lien is to secure a debt; once that debt is repaid, the lien and the rights of the lien-holder terminate.”  Opinion at *8.  The DIP lien was expressly subject to reclamation rights.  Id.  Judge Walrath held that if the prepetition lien holder had foreclosed on the inventory, the analysis would be different.  However, “Covestro’s goods were not sold and their proceeds were not paid to the Prepetition Lender.”  Opinion at *9 (emphasis in original).

Judge Walrath concluded by opining that “Because Covestro’s rights arose before the DIP Lenders had any rights in the goods, the Court concludes that the DIP Lenders do not have prior rights in the goods.”  Id.  The Court thus overruled the Liquidating Trustee’s objection to the claim.

John Bird is a bankruptcy attorney with the law firm of Fox Rothschild LLP.  John is admitted in Delaware and regularly practices before the United States Bankruptcy Court for the District of Delaware. You can reach John at (302) 622-4263 or at jbird@foxrothschild.com.

On August 23, 2016, Judge Sue L. Robinson of the Delaware District Court issued an Order denying an appellant’s motion for stay pending appeal.   The decision was issued in a appeals arising from the Molycorp Bankruptcy (which is docketed, at case 15-11357 in the Delaware Bankruptcy Court).  The appeals are docketed in the District Court as Case Numbers 16-286 and 16-288.  A copy of the Opinion is available here.

The background of the conflict and the appeal are not the real issue of the Opinion, nor are they necessary for this post.  In short, the parties to the appeal (the “Parties”) disagree on the points of agreements they entered and the appropriateness of the order of the Bankruptcy Court.  What is important for this post, is the actions taken by the Parties after the filing of the appeal.  In particular, the Parties agreed to engage in mediation in September to resolve their disagreement about the percentage of control held by each Party.  Counsel for the appellee represented that it would take no action that would “disparately impact Oaktree.”  Then, on August 11, 2016, Oaktree received solicitation materials which it claimed forced it to pay $2.1 million to retain its 35% stake in the venture, or it would be diluted to a 5.8% stake.  According to the appellee, it had been authorized by the Bankruptcy Court to determine if and when to raise capital, and that the offering was the fairest method possible to raise capital.  Opinion at *4.  This is what lead Oaktree to file the motion for stay pending appeal, as it hoped to have the appeal decided (or at a minimum the mediation conducted) prior to being required to make further investments in this jointly held entity.

Judge Robinson detailed the four-factor test applied to motions for a stay pending appeal, citing to the Third Circuit’s Revel opinion for the principal that:

[T]he most critical” factors … are the first two: whether the stay movant has demonstrated (1) a strong showing of the likelihood of success and (2) that it will suffer irreparable harm – the latter referring to “harm that cannot be prevented or fully rectified” by a successful appeal. . . . Though both are necessary, the former is arguably the more important piece of the stay analysis. As Judge Posner has remarked, it isn’t enough that the failure to obtain a stay will be “a disaster” for the stay movant but only a “minor inconvenience to the defendant,” as “[e]quity jurisdiction exists only to remedy legal wrongs; [thus,] without some showing of a probable right[,] there is no basis for invoking it.

Opinion at *5 (quoting In re Revel AC, Inc., 802 F.3d 558, 568 (3d Cir. 2015)).  In a quick analysis, Judge Robinson determined that she could not “conclude that Oaktree has demonstrated a
reasonable chance of winning the appeal.”  Opinion at *6.  She also stated that she could not “identify any evidence of record that Oaktree will suffer injuries that cannot be remedied by money damages.”  Opinion at *7.  And with that, she summarily concludes that she could not grant the motion for relief from the automatic stay.

My $.02

A motion for relief from the automatic stay is equitable relief, and it is my experience that courts are reluctant to grant equitable relief when legal (aka financial) relief will make a party whole.  I would think this tends to work against investment concerns.  Money is, after all, fungible.

John Bird is a bankruptcy attorney with the law firm of Fox Rothschild LLP.  John is admitted in Delaware and regularly practices before the United States Bankruptcy Court for the District of Delaware. You can reach John at (302) 622-4263 or at jbird@foxrothschild.com.