Starting on April 28, 2017, Craig R. Jalbert, as Distribution Trustee of the Corinthian Distribution Trust, filed approximately 122 complaints seeking the avoidance and recovery of allegedly preferential and/or fraudulent transfers under Sections 547, 548, 549 and and 550 of the Bankruptcy Code (depending upon the nature of the underlying transactions).  The Distribution Trustee also seeks to disallow claims of such defendants under Sections 502(d) and (j) of the Bankruptcy Code.

Corinthian Colleges and its affiliated debtors filed voluntary petitions for bankruptcy in the U.S. Bankruptcy Court for the District of Delaware on May 4, 2015 under Chapter 11 of the Bankruptcy Code.   On August 28, 2016, the Court confirmed the Debtors’ Third Amended and Modified Combined Disclosure Statement and Chapter 11 Plan of Liquidation.  The Corinthian Distribution Trust was established in accordance with the Plan and Confirmation Order.

The various avoidance actions are pending before the Honorable Kevin J. Carey.  As of the date of this post, the pretrial conference has not yet been scheduled.

For preference defendants looking for an analysis of defenses that can be asserted in response to a preference complaint, below are several articles on this topic:

Preference Payments: Brief Analysis of Preference Actions and Common Defenses

Minimizing Preference Exposure: Require Prepayment for Goods or Services

Minimizing Preference Exposure (Part II) – Contemporaneous Exchanges

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 March 2, 2017, Cal Dive Offshore Contractors, Inc. (“Cal Dive” or “Debtor”) filed approximately 136 complaints seeking the avoidance and recovery of allegedly preferential and/or fraudulent transfers under Sections 547, 548 and 550 of the Bankruptcy Code.

Cal Dive and its affiliated debtors filed voluntary petitions for bankruptcy in the U.S. Bankruptcy Court for the District of Delaware on March 3, 2015 under Chapter 11 of the Bankruptcy Code.  According to each complaint, Cal Dive “constituted a global marine contractor that provided highly specialized manned diving, pipelay and pipe burial, platform installation and salvage, and well-intervention services to a diverse customer base in the offshore oil and gas industry.”

The various avoidance actions are pending before the Honorable Christopher S. Sontchi.  The pretrial conference has not yet been scheduled.

For preference defendants looking for an analysis of defenses that can be asserted in response to a preference complaint, below are several articles on this topic:

Preference Payments: Brief Analysis of Preference Actions and Common Defenses

Minimizing Preference Exposure: Require Prepayment for Goods or Services

Minimizing Preference Exposure (Part II) – Contemporaneous Exchanges

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 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.

From December 15-21, 2016, the Seal123, Inc. Liquidation Trust filed approximately 68 complaints seeking the avoidance and recovery of allegedly preferential and/or fraudulent transfers under Sections 544 and/or 547, 548 and 550 of the Bankruptcy Code (depending upon the nature of the underlying transactions).  The Liquidation Trust also seek to disallow claims of such defendants under Sections 502(d) and (j) of the Bankruptcy Code.

The Seal123, Inc., and its affiliated debtors, filed voluntary petitions for bankruptcy in the U.S. Bankruptcy Court for the District of Delaware on January 15, 2015 under Chapter 11 of the Bankruptcy Code.   On October 30, 2016, the Court confirmed the Debtors’ First Amended Joint Plan of Liquidation.

The various avoidance actions are pending before the Honorable Christopher S. Sontchi.  The pretrial conference has been scheduled for February 28, 2017  at 10:00 AM at US Bankruptcy Court, 824 Market St., 5th Fl., Courtroom #6, Wilmington, Delaware.

For preference defendants looking for an analysis of defenses that can be asserted in response to a preference complaint, below are several articles on this topic:

Preference Payments: Brief Analysis of Preference Actions and Common Defenses

Minimizing Preference Exposure: Require Prepayment for Goods or Services

Minimizing Preference Exposure (Part II) – Contemporaneous Exchanges

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 Unsecured Creditors Comm. of Sparrer Sausage Co., Inc. v. Jason’s Foods, 826 F.3d 388 (7th Cir. 2016), the Seventh Circuit overturned the bankruptcy court’s application of the “bucketing” method to assess an ordinary-course defense to preference liability, concluding that range of invoice payment dates chosen as the baseline was arbitrarily narrow.

Jason’s Foods, a wholesale meat supplier, provided meat products to Sparrer Sausage, a sausage manufacturing company.  Their relationship stretched back two years before Sparrer filed for bankruptcy.  During the 90-day preference period, Sparrer paid 23 invoices from Jason’s totaling $586,658.  The creditors committee filed a complaint to recover the payments to Jason’s as avoidable preferences.

The bankruptcy court determined that before the preference period, Sparrer paid invoices from Jason’s within 16 to 28 days.  Of the 23 invoices that Sparrer Sausage paid during the preference period, 12 fell within this range, so the bankruptcy court concluded that these 12 payments were ordinary and thus nonavoidable.  The remaining 11 invoices were paid within 14, 29, 31, 37, and 38 days of the invoice date.  The court concluded that these payments, which totaled $306,110, were not ordinary and must be returned to the bankruptcy estate.  The district court affirmed, and Jason’s appealed.

Although Jason’s and committee stipulated to a historical period that covered all 234 invoices that Sparrer paid before the preference period, the bankruptcy court considered only 168 invoices.  The court cut off the historical period seven months before the start of the preference period based on its conclusion that that date “marked the beginning of the debtor’s financial difficulties” and that invoices paid after that date did not accurately reflect the norm when Sparrer was financially healthy.  The bankruptcy court based its finding on the fact that the percentage of invoices paid 30 or more days after issuance increased significantly after that date.  While acknowledging that the evidence of Sparrer’s financial distress was “hardly overwhelming,” and questioning the bankruptcy court’s decision to disregard the parties’ stipulation, the Seventh Circuit observed that the bankruptcy court “offered a reasoned explanation for his decision,” which could not be overturned as clear error.

On the other hand, the circuit court found clear error in the bankruptcy court’s application of the average-lateness method to conclude that invoices paid more than 6 days on either side of the 22-day average were outside the ordinary course.  The bankruptcy court “applied Quebecor World and its so-called ‘bucketing’ analysis to support this conclusion, but neither the facts nor the bankruptcy court’s analysis in that case bear any resemblance to this case.”

The Seventh Circuit observed that

H]ere a 16-to-28-day baseline range encompasses just 64% of the invoices that Sparrer Sausage paid during the historical period.  Even more problematically, the judge offered no explanation for the narrowness of this range.  Why exclude invoices that Sparrer Sausage paid within 14 days when these payments were among the most common during the historical period?  The same goes for invoices that Sparrer Sausage paid within 29 days.  Indeed by adding just two days to either end of the range, the analysis would have captured 88% of the invoices that Sparrer Sausage paid during the historical period, a percentage much more in line with the Quebecor World analysis.  Thus, a 16-to-28-day baseline appears not only excessively narrow but also arbitrary.

The circuit court pointed out that “Sparrer Sausage paid 9 of the 11 contested invoices within 14, 29, and 31 days of issuance.  These payments fall either squarely within or just outside the 14-to-30-day range in which Sparrer Sausage paid the vast majority of invoices during the historical period.  As such they are precisely the type of payments that the ordinary-course defense protects: recurrent transactions that generally adhere to the terms of a well-established commercial relationship.  Sparrer Sausage paid the other 2 invoices 37 and 38 days after they were issued, which is substantially outside the 14-to-30-day baseline.”

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 September 7-8, 2016, various debtors in the ADI Liquidation, Inc. (f/k/a AWI Delaware, Inc.), et al. bankruptcy proceeding filed approximately 332 complaints seeking the avoidance and recovery of allegedly preferential and/or fraudulent transfers under Sections 544 and/or 547, 548 and 550 of the Bankruptcy Code (depending upon the nature of the underlying transactions).  The Debtors also seek to disallow claims of such defendants under Sections 502(d) and (j) of the Bankruptcy Code.

Of the 332 avoidance actions, AW Liquidation, Inc. (f/k/a Associated Wholesalers, Inc.), filed approximately 294, WR Liquidation, Inc. (f/k/a White Rose Inc.) filed approximately 27 avoidance actions, and RT Liquidation Corp. (f/k/a Rose Trucking Corp.) filed 11 avoidance actions.

The ADI Liquidation Debtors filed voluntary petitions for bankruptcy in the U.S. Bankruptcy Court for the District of Delaware on September 9, 2014 under Chapter 11 of the Bankruptcy Code.   A hearing on the confirmation of the Debtors’ Second Amended Chapter 11 Plan of Liquidation is scheduled for September 30, 2016.

The various avoidance actions are pending before the Honorable Kevin J. Carey.  The pretrial conference has not yet been scheduled.

For preference defendants looking for an analysis of defenses that can be asserted in response to a preference complaint, below are several articles on this topic:

Preference Payments: Brief Analysis of Preference Actions and Common Defenses

Minimizing Preference Exposure: Require Prepayment for Goods or Services

Minimizing Preference Exposure (Part II) – Contemporaneous Exchanges

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.

Introduction

On September 6th and 7th, 2016, Nathan A. Schultz, as Distribution Trustee of the TER Trust (the “Trustee”) for the bankruptcy estate of Trump Entertainment Resorts, Inc. (the “Debtors”), filed 92 complaints in preference action 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, 548, 549 and 550 of the United States Bankruptcy Code.  The Trustee is represented by the law firms ASK LLC and Gibbons, P.C.

Background

The Debtors owned and operated two casino hotels located in Atlantic City, New Jersey: the Trump Taj Mahal Casino Resort (the “Taj Mahal”) and the Trump Plaza Hotel (the “Plaza”).  On October 2, 2015, the Court entered an order confirming the Debtors’ Third Amended Joint Plan of Reorganization Under Chapter 11 of the Bankruptcy Code as Modified (the “Confirmation Order” and “Plan,” respectively). [D.I. 1123].  The effective date of the Plan (the “Effective Date”) occurred on February 26, 2016. [D.I. 1902]. In accordance with the Plan and Confirmation Order, the TER Trust (the “Trust”) was established effective on the Effective Date of the Plan, and the Debtors and the Trustee entered into that certain Distribution Trust Agreement.

Pursuant to the Distribution Trust Agreement, the Trustee was tasked with prosecuting avoidance actions, including preference and fraudulent transfer actions.  The Debtor’s bankruptcy, as well as the preference actions, are before the Honorable Kevin Gross.

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.”

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 4, 2016, the Delaware Bankruptcy Court considered cross-motions for summary judgment in a preference action case styled as Pirinate Consulting Group, LLC v. Maryland Department of the Environment (In re NewPage Corp.), Adv. Pro. No. 13-52206 (KG).  This gem of an opinion is noteworthy in that it analyzes various defenses raised by a state agency to a preference complaint.

Background

Pirimate Consulting Group, LLC, as litigation trustee of the NP Creditor Litigation Trust (“Plaintiff” or “Litigation Trustee”) sought to avoid three separate payments as preferences under section 547(b) of the U.S. Bankruptcy Code (the “Code”) against Maryland Department of the Environment (“Defendant” or “MDE”).

The Debtors’ subsidiary, Luke Paper Company operates a mill (the “Luke Mill”) in Maryland that is regulated by various divisions of MDE.  Defendant asserted that “the State’s operating permit program has been in place for decades” and that the Debtors have “been paying the emissions based fee of the type at issue in this case . . . at least since 1997.”  Here, the Trustee seeks to avoid three separate fees paid to MDE.

Under Maryland law, all entities that operate “fuel-burning equipment, statutory combustion turbines, or . . . wood digesters” must obtain a permit.  Accordingly, the Debtors would remit an annual permit-to-operate fee (the “Permit Fee”) in order to maintain their license. The applicable Maryland statute provides that the fee is calculated based upon a “base fee of $200.00 plus an emission-based fee for each ton of regulated emissions from all installations at the plant or facility.”

On July 6, 2011, the Debtor paid the Permit Fee in the amount of $1,597,584 to MDE.  The Debtors have been paying the Permit Fee since at least 2007, and the amount of the fee has ranged from $328,047 to $1,597,584 in 2011.  In addition to the Permit Fee, the Debtors sought to avoid an asbestos license renewal fee in the amount of $750, and a reporting fee of $1,000 under the Federal Emergency Planning and Community Right to Know Act.

In defense, MDE cross-moved for summary judgment, arguing that the Asbestos Fee was not paid on account of an antecedent debt and that the transfers did not enable it to receive more than it would have in a hypothetical liquidation. Additionally, MDE asserts three affirmative defenses under section 547(c) of the Code – the contemporaneous exchange defense, the ordinary course of business defense, and the de minimis exception. Additionally, MDE argues that 28 U.S.C. § 959(b) prohibits a trustee from recovering environmental compliance fees.  Finally, MDE argues that the doctrine of sovereign immunity insulates it from liability in these proceedings.

Analysis

Asbestos Fee Not Recoverable

To start, Judge Gross found that the Asbestos was not made “on account of an antecedent debt.”  The Court explained that a transfer is deemed “on account of an antecedent debt” if the debtor incurs the liability prior to the alleged preferential transfer.” 11 U.S.C. § 547(b)(2); Stanziale v. S. Steel & Supply, L.L.C. (In re Conex Holdings, LLC), 518 B.R. 269, 277 (Bankr. D. Del. 2014). More specifically, courts have held that a debt “is deemed to have been incurred on the date upon which the debtor first becomes legally bound to pay.” Conex, 518 B.R. at 277.

The Court determined that the Debtors did not became legally bound to remit the Asbestos Fee before the Debtors’ payment of such fee.  In this regard, the Court observed that the Debtors had no obligation to renew the license before the expiration date.  The Court also found that MDE’s letter to the Debtors informing of the Debtors about the Asbestos Fee did not trigger an obligation for Debtors to make payment of that amount.  Notably, no services had been provided by MDE prior to submission of the letter.  Thus, the Court found that the Debtors’ payment was not on account of an antecedent debt, and thus not recoverable.

Transfers Protected by Ordinary Course of Business Defense

In analyzing the ordinary course of business defense under Section 547(c)(2), Judge Gross examined the following five factors: “(1) the length of time the parties engaged in the type of dealing at issue; (2) whether the subject transfers were in an amount more than usually paid; (3) whether the payments at issue were tendered in a manner different from previous payments; (4) whether there appears to have been an unusual action by the debtor or creditor to collect on or pay the debt; and (5) whether the creditor did anything to gain an advantage (such as additional security) in light of the debtor’s deteriorating financial condition.” Stanziale v. Indus. Specialists Inc. (In re Conex Holdings, LLC), 522 B.R. 480, 487 (Bankr. D. Del. 2014).

With respect to the first factor, the length of time the parties engaged in the type of dealing at issue, the record shows that MDE invoiced the Debtors for at least five (5) years prior to the Petition Date.  Thus the first factor weighed in favor of MDE.

Factor two, whether the subject transfers were in an amount more than usually paid, also weighs in favor MDE. The Asbestos Fee and the Report Fee were constant throughout the historical period – $750 and $1,000 respectively.  The Permit Fee varied considerably, but “[t]he record indicates that the formula for calculating the Permit Fee remained constant throughout the years,” which the Court concluded was the most relevant consideration with respect to this factor.

Factor three, whether the payments at issue were tendered in a different manner than the historical payments, weighed in favor of MDE as neither side has proffered any evidence to suggest payment had been made in a different manner.

Factor four, unusual actions by the debtor or creditor, also weighed in favor of MDE. There was no such evidence.  As to the fifth factor, there was no evidence that MDE attempted to exploit the Debtors’ distressed financial condition or rushed to collect its debt.  Thus, the Court found that the factors weighed in favor of MDE, and each of the transfers were shielded from recovery under the ordinary course of business defense.

Other Defenses

In addition, the Court found that the Asbestos Fee and Permit Fee were shielded by the contemporaneous exchange defense under Section 547(c)(1). Separately, the Court rejected MDE’s defense under 28 U.S.C. Section 959(b), along with MDE’s de minimis exception defense that each transfer should not be aggregated but determined separately whether they exceed the statutory floor of $5,000 under Section 547(c)(9).  Judge Gross noted the majority view that transfers should be aggregated, and there was no reason to depart from this rule especially because the Court separately found that each of the transfers were shielded from recovery under other defenses. Finally, the Court rejected MDE’s sovereign immunity defense, because the U.S. Supreme Court found that such defense is not a bar to preference actions against state agencies.  Cent. Va. Cmty. College v. Katz, 546 U.S. 356, 359 (2006).

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 June 16, 2016, the Official Committee of Unsecured Creditors (the “Committee”) of Kid Brands Inc., et al. (the “Debtors”), filed approximately 64 complaints seeking the avoidance and recovery of allegedly preferential and fraudulent transfers under Sections 547, 548 and 550 of the Bankruptcy Code.  The Committee also seeks to disallow claims of such preference defendants under Sections 502(d) and (j) of the Bankruptcy Code.

The Debtors filed voluntary petitions for bankruptcy in the U.S. Bankruptcy Court for the District of New Jersey on June 18, 2014 under Chapter 11 of the Bankruptcy Code.   On July 2, 2014, the Office of the United States Trustee for the District of New Jersey appointed the Committee.

The law firms of ASK LLP and Gellert Scali Busenkell & Brown, LLC represent the Committee in these various preference cases.  The pretrial conference has not yet been scheduled.

For preference defendants looking for an analysis of defenses that can be asserted in response to a preference complaint, below are several articles on this topic:

Preference Payments: Brief Analysis of Preference Actions and Common Defenses

Minimizing Preference Exposure: Require Prepayment for Goods or Services

Minimizing Preference Exposure (Part II) – Contemporaneous Exchanges

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