In the recent decision of In re Molycorp, Inc., 562 B.R. 67 (Bankr. D. Del. 2017), Judge Sontchi held that a carve-out provision in a DIP financing order did not act as an absolute limit on the fees and expenses payable to counsel to the creditors committee in a case with a confirmed chapter 11 plan.

The DIP financing order contained a 250K carve-out for committee fees incurred in investigating claims against the lender.  After its investigation, the committee filed a motion seeking standing to pursue certain causes of action against the lender.  The parties then mediated and reached a global settlement agreement that paved the way for a consensual plan of reorganization.

After confirmation, the committee’s counsel requested $8.5 million in fees and 226K in costs.  The lender argued that the 250K carve-out in the DIP financing order constituted an absolute cap on fee payments.  The committee’s counsel responded that while the carve-out cap may have been relevant in an administratively insolvent case, it was irrelevant in a case with a confirmed chapter 11 plan.  The court agreed.

The court explained that “[t]he carve-out is essentially an agreement by the secured creditor to subordinate its liens and claims to certain allowed administrative expenses, permitting such professionals’ fees to come first in terms of payment from the estate’s assets. . . .  [W]hen there are insufficient unencumbered assets to pay professionals’ fees and no plan has been confirmed, professionals’ only recourse is the carve-out.”

Here, however, because a plan was confirmed, Bankruptcy Code Section 1129(a)(9)(A) required that, unless agreed otherwise, each holder of an administrative claim will receive cash equal to the allowed amount of such claim on the effective date of the plan.  Hence, “if the secured parties desire confirmation, the administration claims must be paid in full in cash at confirmation even it if means invading their collateral.”

The Court found that the carve-out language was “not different than a standard carve-out provision.  It does not connote in any way that the dollar-amount cap would operate as a complete bar against the allowance of administrative claims following plan confirmation.  In this respect, the dollar-amount cap was going to come into play if the attempts to confirm a reorganization plan had failed; it was not intended to come into play if a Chapter 11 plan was confirmed.”

Because the Court’s appointed fee examiner recommended (with minor adjustments) approval of the $8.5 million in fees and 226K in costs requested as reasonable compensation for actual and necessary services, the Court ordered their payment.

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 28, 2017, Judge Sontchi of the Delaware Bankruptcy Court issued an opinion (the “Opinion”) in the Money Center of America  bankruptcy – Bankr. D. Del., Case 14-10603.  The Opinion is available here.  This Opinion decided two separate, but similar, motions to dismiss filed by 2 entities owned by federally recognized Indian Tribes and sovereign nations (the “Tribes”).  Each of these Tribes owned a casino (through wholly owned entities) in which the Debtor placed ATMs and other cash advance services, in order to allow casino patrons ready access to funds.  The process that was followed in each case is that the Debtor would provide the ATM or service, the casino would advance the funds by providing payments and stocking the ATMs, and the Debtor would reimburse the casinos from the funds transferred by the patrons’ banks.  In this process, the Debtor would also charge the patrons a fee, funding its operations.

This was a process in which large sums of money flowed, but with little direct benefit to the casinos or the Debtor, as the majority of funds came from a patron’s bank and was paid to the patron.  Of course, I make no judgment as to how much additional profit this allowed the casinos to recognize, as the direct and initial transfers involved were to the patrons, through the casinos and Debtor.  Naturally, the Debtor was required to make frequent payments to the casinos as reimbursement for funds advanced and, following the Debtor’s bankruptcy filing and the appointment of the Trustee in this bankruptcy, significant preference and fraudulent conveyance lawsuits were initiated.

The Opinion

Judge Sontchi carefully weighs several issues in this Opinion, ultimately holding that (1) the Tribes sovereign immunity arguments are to be considered as Rule 12 motions, not as affirmative defenses [Opinion at *15], (2) the casinos enjoy the sovereign immunity of the Tribes [Opinion at *22], (3) the Bankruptcy Code does no abrogate the sovereign immunity [Opinion at *27], and (4) the filing of a claim by one of the Tribes will allow the Trustee’s action to proceed solely to determine if the preference action can recoup the amount of the claim [Opinion at *36].

This is a lengthy opinion, containing a large number of citations to controlling authority.  At no point did Judge Sontchi gloss over any of the case law supporting his holdings.  Accordingly, I consider this Opinion to be important reading material for any attorneys involved in preference litigation against foreign sovereigns.  It also makes me regret not having taken the class on “Native American Law” when in school – the issues involved are very interesting.

We have published a number of posts about preference actions on this blog.  The key issue of note here, is that many trustee’s merely look at a debtor’s check register and sue each and every recipient of transfers in the 90-day time period immediately preceding the debtor’s bankruptcy filing.  As this is what is allowed under the Bankruptcy Code, this is the procedure most frequently used by trustees.  Most of the time, the trustee involved has an informational problem and the only way to start talking with opposing parties in is to file suit.  I haven’t ever had a conversation go well when it starts, “you might owe me money and I’d like to talk to you about whether you do.”  But this is exactly the situation trustees often find themselves in.

If you are a named defendant in a preference action, the first step is to make sure you understand the law surrounding preference litigation.  Educate yourself, then have your lawyer start a dialogue with the Trustee’s lawyer.  The vast majority of preference actions settle or are dismissed once the parties understand whether there were actual preference payments or not.  If you are in the lucky position to have not yet had a client or customer go through bankruptcy, (1) count yourself lucky and (2) start making plans to protect yourself for when one of them does go under.  It isn’t pretty, but since most of us aren’t foreign sovereigns, we need to plan carefully toy reduce our preference exposure.

On February 21, 2017, Judge Silverstein of the Delaware Bankruptcy Court issued an opinion (the “Opinion”) in the Outer Harbor Terminal bankruptcy proceeding – Bankr. D. Del., Case 16-10283.  The Opinion is available here.  This Opinion decided the Debtor’s objection to a claim for breach of contract filed by Kawasaki Kisen Kaisha, Ltd. (“K Line”).  The claim objection objected both to the amount of the K Line claim, and to the very existence of the K Line claim.  The Opinion only addressed the claim’s validity and did not liquidate the claim.  That issue was reserved by Judge Silverstein for a later trial.  However, I’m of the opinion that the amount of the claim will be determined consensually, as most issues are in bankruptcy proceedings.

Background

In 2013, K Line entered into an agreement with the Debtor to provide stevedoring and terminal services at the Port of Oakland.  Opinion at *2.  Unfortunately, the Debtor was never profitable and, in 2016, declared bankruptcy.  With that action in mind, on January 21, 2016, the Debtor provided notice to K Line that it would be winding down operations and intended to cease handling vessels as of February 20, 2016 and cease handling gates as of March 19, 2016.  However, the Debtor serviced K Line through March 28, 2016.  In anticipation of the Debtor’s termination of services, on March 4, 2016, K Line found a new provider of services and entered an agreement accordingly.  K Line then filed a claim in this bankruptcy case, and the Debtor objected on November 4, 2016.  An evidentiary hearing was held January 12, 2017 and this Opinion followed.  Opinion at *2-4.

The Opinion

Judge Silverstein focused entirely on the Agreement and the actions of the parties, needing to look no further than the document and the testimony of the Debtor.  She cited to the following chain of logic in making her decision:  1) The Agreement allowed either party to terminate immediately upon certain events occurring, including bankruptcy, Opinion at *7; 2) The Agreement does not provide that termination is self-executing, Opinion at *8; 3) Neither Debtor’s counsel, nor the witness it presented at the hearing testified or argued that the Debtor communicated to K Line that the Agreement was terminated, Opinion at *8-9.

Judge Silverstein makes it clear that although the Bankruptcy Court is a court of equity, it will not rewrite contracts.  “Just as the Court cannot rewrite the Agreement to save ‘K’ Line from a bad bargain, it cannot rewrite the Agreement to save the Debtor from any perceived penalty resulting from its choice to be a good corporate citizen.”  Opinion at *10.  Judge Silverstein held that the announcements of upcoming work stoppage appear to have been a repudiation.  Opinion at *11.  Pursuant to California law, which controlled the Agreement, a party injured by repudiation can elect its remedy, either treating the repudiation as anticipatory breach and seek damages, or ignore the repudiation, await the time when performance is due and exercise remedies for the actual breach.  In this instance, however, neither party briefed the issue of anticipatory breach or damages.  Accordingly Judge Silverstein “grant[ed]” them the opportunity to brief the issue in connection with a damages trial.  Opinion at *12.

Contract law is a part of nearly every business transaction – from retaining employees, to selling goods or services, to finding ways to protect your assets and business opportunities.  While the Bankruptcy Court is a court of equity, at the end of the day, all of the judges have studied contract law (even if only in preparation for the bar), and will give parties to a contract the benefit (or loss) of their bargains.  It is my hope that all of you reading this post will not need to exercise contractual protections.  But in today’s volatile business environment, even if all the parties to a contract are acting in good faith, a good contract, and following it closely, is the best protection for your business.  Should you ever have a contract counter-party encourage you to push through an incomplete contract, it may do well to remind them, and yourself, that strong fences build strong neighbors.

In the recent decision of Spizz v. Goldfarb Seligman & Co. (In re Ampal-American Israel Corp.), 2017 WL 75750 (Bankr. S.D.N.Y. Jan. 9, 2017), the United States Bankruptcy Court for the Southern District of New York dismissed a preference complaint filed by a trustee of chapter 7 debtor headquartered in Israel, where the payment was made from the debtor’s Israeli bank to an Israeli supplier.  The Court held that Section 547 of the Bankruptcy Code does not have extraterritorial effect and the transfer did not originate in the U.S.

Within 90 days before bankruptcy, the debtor wired money from the debtor’s Israeli bank account to the supplier’s Israeli bank account, on account of an antecedent debt.  The chapter 7 trustee sued the supplier to avoid and recover the alleged preferential payment.  The supplier asserted that Section 547 could not be applied extraterritorially.

Judge Bernstein observed that the “presumption against extraterritoriality” is a “longstanding principle of American law that legislation of Congress, unless a contrary intent appears, is meant to apply only within the territorial jurisdiction of the United States.”  In Morrison v. Nat’l Australia Bank Ltd., 561 U.S. 247 (2010), the United States Supreme Court outlined a two-step approach to determine whether the presumption forecloses a claim.

First, the court asks “whether the statute gives a clear, affirmative indication that it applies extraterritorially.”  If not, the court must turn to the second step to determine if the litigation involves an extraterritorial application of the statute.  Second, the court determines “whether the case involves a domestic application of the statute, . . . by looking to the statute’s ‘focus.’ . . . [I]f the conduct relevant to the focus occurred in a foreign country, then the case involves an impermissible extraterritorial application regardless of any other conduct that occurred in U.S. territory.”

In applying this analysis, the S.D.N.Y. bankruptcy court first held that the avoidance provisions of the Bankruptcy Code (including Section 547) do not apply extraterritorially.  In so holding, the Court disagreed with the Fourth Circuit’s decision in French v. Liebmann (In re French), 440 F.3d 145 (4th Cir. 2006), which held that Congress intended international application of U.S. fraudulent transfer law.

Next, the S.D.N.Y. Bankruptcy Court ruled that the determination of whether the case involves a domestic or extraterritorial application of section 547 depends on whether the initial transfer came from the United States.  Because the transfer here occurred between a U.S. transferor headquartered in Israel and an Israeli transferee through Israeli bank accounts, the transfer occurred in Israel, and was not domestic.

Therefore, the court concluded that it could not be avoided, and dismissed the trustee’s preference complaint.

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 Miller v. Zurich American Ins. Co. (In re WL Homes LLC, et al.), Adv. No. 11-50839 (BLS) (Bankr. Del. Jan. 10, 2017), the Delaware Bankruptcy Court addressed the affirmative defense of recoupment asserted by an insurer in defense of an adversary proceeding seeking the return of insurance premium overpayments.

Background

The Trustee determined that WL Homes had overpaid its premium obligations for the 2007 to 2009 term by roughly $2.2 million.  The Trustee filed an adversary proceeding against Zurich, asserting that he is entitled to turnover of approximately $2.2 million in insurance premium overpayments – called a “return premium” – from Zurich American Insurance Company (“Zurich”).  The Trustee also brought preference claims and sought to disallow claims of defendant.

Zurich defended against turnover by asserting the affirmative defense of recoupment for amounts actually spent defending and settling construction defect claims against WL Homes as insured, and Zurich as insurer.  The Trustee moved for partial summary judgment.

Analysis

Judge Shannon denied the Trustee’s motion.  To start, the Court provided a concise summary of the law of recoupment. “Recoupment is an equitable remedy that permits the offset of mutual debts arising from the same transaction or occurrence.” Slip op. at 5, citing In re Communication Dynamics, Inc., 300 B.R. 220, 225 (Bankr. D. Del. 2003).

The Trustee argued that recoupment did not apply because the respective debts arose from different parts of the Zurich policy, and because the policy did not contain an express reimbursement clause.

The Court disagreed with the Trustee’s contentions, and found that recoupment applied to the Trustee’s claims.  The Court held that the SIR amount and the premium “are interdependent economic features of the insurance contract[]”, and “form the economic basis of the insurance contract formed between Zurich and WL.”  In addition, the Court found it was unnecessary for the policy to contain an express reimbursement clause for recoupment to 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 In re: Abeinsa Holding Inc. et al., Del. Bankr. Ct. Dec. 14, 2016), Case No. 1:16-bk-10790, the Honorable Kevin J. Carey confirmed clean energy developer Abeinsa Holding Inc.’s Chapter 11 plan, which is part of the $16.5 billion global restructuring for Spanish parent Abengoa SA.  Abengoa, with operations in about 50 nations, is a major figure in clean energy and environmental sustainability engineering.

The plan was confirmed over the objections of the U.S. Trustee’s office, which complained among other things of the liability releases contained in the plan.

The Court agreed with the U.S. Trustee that the liability releases contained in the Chapter 11 plan are broad.  However, the Court found that they do not violate the Bankruptcy Code and were necessary, negotiated-for components of the exit strategy.  Notably, no creditors objected to the releases, which the Court found to be of significance.

The Court found the liability releases to be the result of extensive bargaining, and essential to the deal in which Abeinsa’s parent and other entities would bring in enough new money to make the exit strategy feasible and not cripple a crucial component of Abengoa’s multilayered global restructuring strategy.

One key objection from creditor Portland General Electric Co. (“PGE”), which has a litigation claim against Abeinsa for more than $200 million in damages on breach-of-contract claims. PGE’s objection dealt with the complex structure of Abeinsa’s bankruptcy plan, and a measure that has parent Abengoa retaining ownership of its subsidiary companies that the creditor argues is in violation the Chapter 11 absolute priority rule, which places equity holders at the very bottom when it comes to order of recovery.

Judge Carey overruled PGE’s objection, finding that there is an exception to the absolute priority rule when a stakeholder brings new value to the case.  The Court found that Abengoa was doing so with a new value contribution of nearly $40 million, part of which will be used for creditor distribution.

Abeinsa’s plan, a major component of Abengoa’s global restructuring effort, calls for four separate subplans that will liquidate some Abengoa subsidiaries and restructure others with $1 billion in new investment being injected.

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 George L. Miller v. Edward Welke, et al. (In re United Tax Group, LLC), Adv. Pro. No. 16-50088 (LSS), the Delaware Bankruptcy Court considered a motion for judgment on the pleadings in connection with the Trustee’s complaint asserting preference and fraudulent transfer claims.

The Court found that the Trustee failed to adequately plead all counts necessary to give rise to a preference claim.  Specifically, the Court held that the Trustee failed to: (i) identify the transferee of each transfer, and (ii) identify the nature and amount of each alleged antecedent debt.  The Court also declined to consider the Trustee’s factual allegations raised in his answering brief.

As for the fraudulent transfer claims, the Court found that the Trustee failed to allege facts necessary to demonstrate that the debtor was insolvent at the time such transfers were made, which is an element of a fraudulent transfer claim under Section 548 of the Bankruptcy Code.  In addition, the Trustee failed to set forth a factual basis for his contention that the Debtor received less than reasonably equivalent value for certain of the transfers. The Court found that the Trustee’s allegations merely parroted the language of Section 548.

In light of the above, the Court granted dismissal of the Trustee’s claims, but granted leave for the Trustee to amend the complaint to adequately plead facts to support the Trustee’s claims.

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 Pacifica L51 LLC v. New Invs., Inc. (In re New Invs., Inc.), No. 13-36194, 2016 WL 6543520 (9th Cir. Nov. 4, 2016), the Ninth Circuit held that Section 1123(d) of the Bankruptcy Code legislatively overruled Great W. Bank & Tr. v. Entz-White Lumber & Supply, Inc. (In re Entz-White Lumber & Supply, Inc.), 850 F.2d 1338 (9th Cir. 1988), and required debtors to pay interest at the default rate to cure a default pursuant to a plan of reorganization.

The debtor defaulted on a mortgage.  The bankruptcy court confirmed a chapter 11 plan that allowed the debtor to cure the default by selling the property and using the sale proceeds to pay the loan off at the pre-default rate.  At the same time, the court required the debtor to escrow nearly $800,000 as a disputed claim reserve should an appellate court require the debtor to pay default interest to effectuate the cure.  On appeal, the Ninth Circuit reversed.

The Circuit Court ruled that “[t]he plain language of § 1123(d) compels the holding that a debtor cannot nullify a preexisting obligation in a loan agreement to pay post-default interest solely by proposing a cure.”  The Circuit Court stated as follows:

What § 1123(d) affects is how a debtor returns to pre-default conditions, which can include returning to a lower, pre-default interest rate. . . . [Under common law, the] borrower does not effectuate a cure merely by paying past due installments of principal at the pre-default interest rate. Rather, the borrower’s cure obligations may also include late charges, attorneys’ and trustee’s fees, and publication and court costs. . . .  It is only once these penalties are paid that the debtor can return to pre-default conditions as to the remainder of the loan obligation.

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 November 28, 2016, Judge Laurie Selber Silverstein of the Delaware Bankruptcy Court ruled on a motion for relief from the automatic stay (we she treated as a motion for relief from the discharge injunction) in the Altegrity bankruptcy, Case No. 15-10226.  The “Opinion” is available here.  The Opinion was issued following legal argument and, by agreement of the parties, based only upon undisputed facts.  Opinion at *1.

While various other arguments are addressed by Judge Silverstein, the primary issue within the Opinion boils down to two simple issues – (1) what is a “Claim” in bankruptcy, and (2) did all of the relief sought by the movant (who did not file a claim) constitute “Claims”.  Opinion at *11.

In the Opinion, Judge Silverstein adopts the broad interpretation of a Claim that is routinely used, any “right to payment” constitutes a Claim.  Holding that substantially all of the movant’s claims would be resolved through payment, and because the movant filed no claim in the bankruptcy case, Judge Silverstein denied the Motion in all respects but one – the movant can continue an existing suit to seek to obtain non-monetary relief, including the expungement of his commercial driving report (DAC Report).

A number of other interesting issues are briefly addressed in the Opinion, and I encourage you to follow the above link and read it for yourself.  It is an easy 19-page read.  I note that once again, the Delaware Bankruptcy Court continues to take an expansive view of “Claims” and would advise any party to a bankruptcy to take note of any claims bar date orders.  If a cash payment *could* resolve your grievance with the Debtor, it would be wise to file a claim out of an abundance of caution.

On August 29, 2016, the Third Circuit released a precedential opinion (the “Opinion”) which opined that a “[redemption] premium, meant to give the lenders the interest yield they expect, [does not] fall away because the full principal amount is now due and the noteholders are barred from rescinding the acceleration of debt.”  The Third Circuit’s Opinion is available here.  This Opinion was issued in an appeal from a decision made in the Energy Future Holdings Bankruptcy Case No. 14-10979.  The District Court and Bankruptcy Court both ruled that the make-whole premium did not survive bankruptcy, and this Opinion reversed those of the lower courts.

Because we represent a party at interest in the EFH bankruptcy, I won’t be providing a summary of this Opinion.  I will say, however, that this Opinion represents a major change in the way that redemption premiums will be considered in the Delaware Bankruptcy Court.  This is not an opinion that can be overlooked, and practitioners in the Delaware Bankruptcy Court should make sure they are familiar with the analysis applied by the Opinion written by Judge Ambro.