Preference Litigation

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In the recent decision of Gavin Salmonese, LLC v. Shyamsundar, et al. (In re AmCad Holdings, LLC, et al.) (Bankr. D. Del. June 14, 2016), Judge Walrath considered whether a liquidation trustee had standing to bring a claim for breach of fiduciary duty against the debtors’ former D&Os when the post-confirmation trust was the recipient of a wholesale assignment of causes of action, without specifying breach of fiduciary duty claims.

The answer is no.  The Court stated that “related to” jurisdiction post-confirmation is much more narrow and may only be exercised over matters which have a “close nexus to the bankruptcy plan or proceeding.” Binder v. Price Waterhouse & Co., LLP (In re Resorts Int’l, Inc.), 372 F.3d 154, 164–65 (3d Cir. 2004).  A chapter 11 plan that retains jurisdiction over a specific cause of action generally satisfies the close nexus requirement.  BWI Liquidating Corp. v. City of Rialto (In re BWI Liquidating Corp.), 437 B.R. 160, 166 (Bankr. D. Del. 2010).  However, a wholesale assignment of causes of action from the bankruptcy estate to a post-confirmation trust fails to establish a close nexus as to any specific cause of action. Insilco, 330 B.R. at 523-26.

Here, the Plan provides that the Court shall retain jurisdiction over “Causes of Action,” a term broadly defined to include:

all of the Debtors’ actions, causes of action, choses in action, liabilities, suits, debts, sums of money, accounts, reckonings, bonds, bills, covenants, contracts, controversies, agreements, promises, variances, trespasses, damages, judgments, third-party claims, counterclaims, and crossclaims, whether known or unknown, reduced to judgment or not reduced to judgment, liquidated or unliquidated, contingent or non-contingent, matured or unmatured, disputed or undisputed, secured or unsecured, assertable directly or derivatively, existing or hereinafter arising, in law or equity or otherwise, based in whole or in part upon any act or omission or other event occurring prior to the Petition Date, or during the course of the Bankruptcy Cases, through, and including the Effective Date, including but not limited to, the Avoidance Actions and Trust Claims.

The Court found that nowhere in the definition of “Cause of Action” or elsewhere in the Plan are specific breach of fiduciary duty claims against the Officer Defendants or Manager Defendants (the named defendants) mentioned.  However, the Court provided that even if the “Cause of Action” definition encompasses those claims, a wholesale assignment of claims to a post-confirmation trust is insufficient to establish a close nexus with respect to any individual claim.  Thus, the Court found that the Trust lacked standing to bring breach of fiduciary duty claims against the D&Os.

Further, the Court dismissed the preference claims.  The Complaint only alleged that “numerous Managers of the Debtor caused [AmCad Holdings, LLC] to repay the loans that those Managers made to the company.” (Adv. D.I. 1 at 10.)  The Complaint fails to indicate the loan, the date or amount of each payment of the loans, or who was repaid.  However, alleged preferential transfers must be identified with particularity to ensure that the defendant receives sufficient notice of what transfer is sought to be avoided.  Thus, the Court dismissed the Trust’s avoidance actions, and the disallowance of claims under Section 550.

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.

Introduction

From May 11 through May 17, Alfred Giuliano, the Chapter 7 Trustee (the “Trustee”) for the bankruptcy estate of Leading Edge Logistics, LLC (the “Debtor”), filed approximately 86 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 of the United States Bankruptcy Code. This post will briefly cover the Debtor’s bankruptcy proceedings.  The Trustee is represented by the law firm Subranni Zauber LLC.

Background

The Debtor was a privately-held global logistics management company that provided truckload transportation, specialized heavy haul transportation, freight forwarding, international shipping, intermodal, air/ocean, contract carriage, and warehousing.  At the time of the bankruptcy filing, one of the principal assets of the Debtor was its accounts receivable, which it valued at approximately $14 million.

The Trustee obtained Court authority to run the Debtor’s business for a short time while he liquidated the accounts receivable in an effort to maximize the recovery for the creditors of the Debtor.  Having handled the liquidation of all the remaining assets of the Debtor, the Trustee is also tasked with prosecuting litigation intended to increase the assets available to distribute to the company’s creditors.  This includes filing and prosecuting preference actions.  The Debtor’s bankruptcy, as well as the preference actions, are before the Honorable Mary F. Walrath.

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.”

From May 11 to May 13, 2016, SRC Liquidation, LLC International Holdings, LLC (“Liquidating Debtor”), unleashed yet another wave of preference actions, filing approximately 257 additional complaints seeking the avoidance and recovery of allegedly preferential and fraudulent transfers under Sections 547 and 550 of the Bankruptcy Code.  The Liquidating Debtor also seeks to disallow claims of such preference defendants under Sections 502(d) and (j) of the Bankruptcy Code.

The second wave of preference action filings brings the total preference actions filed in the SRC Liquidation bankruptcy to 393 in total.  To review a prior post concerning the first wave of preference actions filed by the Liquidation Debtor, click here.  These avoidance actions are pending before the Honorable Brendan L. Shannon.

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.  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.

On May 5, 2016, SRC Liquidation, LLC International Holdings, LLC (“Liquidating Debtor”), filed approximately 137 complaints seeking the avoidance and recovery of allegedly preferential and fraudulent transfers under Sections 547 and 550 of the Bankruptcy Code.  The Liquidating Debtor also seeks to disallow claims of such preference defendants under Sections 502(d) and (j) of the Bankruptcy Code.

SRC Liquidation, LLC (f/k/a SRC Liquidation Company f/k/a The Standard Register Company) and/or its related debtors (collectively, the “Debtors”) filed voluntary petitions for bankruptcy in the U.S. Bankruptcy Court for the District of Delaware on March 12, 2015 under Chapter 11 of the Bankruptcy Code.   On November 19, 2015, the Court entered an order confirming the Debtors’ Second Amended Chapter 11 Plan of Liquidation for SRC Liquidation Company and its Affiliates (the “Plan”).  The Plan became effective on December 18, 2015.

The law firms of ASK LLP and Bayard, P.A. represent the Liquidating Debtors 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, attached is a reference guide prepared on the subject: “A Preference Reference: Common Issues that Arise in Delaware Preference Litigation.”

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.

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.

Summary

In yet another straight-forward 15 page decision signed April 18, 2016, Judge Walrath of the Delaware Bankruptcy Court granted a defendant’s motion to dismiss a preference complaint, but granted the plaintiff leave to amend. Judge Walrath’s opinion is available here (the “Opinion”).  Numerous posts on this blog discuss other opinions issued by the Delaware Bankruptcy Court dealing with preference payments, as can be seen here. PREFERENCE OPINION POSTS

Background

My colleague, Carl Neff, published a blog post when THQ first started filing preference actions.  You can read it here: THQ Inc. Preference Actions Filed

THQ was a publisher of video games, including such franchises as Saints Row and Darksiders.  Unfortunately for fans of those series, however, THQ was unable to keep pace with its secured debt.  After it failed to make a loan payment, it filed for bankruptcy.  Prior to bankruptcy, THQ had engaged the Starcom defendants to provide media and marketing services.  On December 19, 2014, THQ, Inc., the Plaintiff, filed its Complaint seeking recovery of certain transfers as preference and/or fraudulent transfers from the Starcom Defendants.  The Defendant filed its Motion to Dismiss and after a complete briefing, the Court issued the Opinion.  Opinion at *3.

The Opinion

The motion to dismiss was made pursuant to Rule 12(b)(6).  In Delaware the primary precedents for motions to dismiss are Iqbal, 129 S. Ct. 1937 (2009)  and Twombly, 550 U.S. 544 (2007), both of which are cited by the Opinion at *4.  The Third Circuit has expanded on these precedents in its opinion Fowler v. UPMC Shadyside, 578 F.3d 203 (3d Cir. 2009).  The Third Circuit has articulated a two-part analysis to be applied in evaluating a complaint.  First, the court “must accept all of the complaint’s well-pleaded facts as true, but may disregard any legal conclusions.”  Second, the court must determine “whether the facts alleged in the complaint are sufficient to show that the plaintiff has a ‘plausible claim for relief.’” Opinion at *5 (quoting Fowler at 210-211).

The motion to dismiss argues that the Trustee failed to make any of the factual allegations required.  Judge Walrath  agreed “with the Movants that the Complaint does not adequately identify the transferors and the transferees, the nature of the antecedent debt, and the dates of the alleged transfers to the Additional Defendants. There are no specific allegations of what transfers were actually made to the Additional Defendants and by whom.”  Opinion at *8.

Judge Walrath then quickly granted the Motion to Dismiss and held that “the Plaintiff is not allowed to engage in discovery until it has properly pled its Complaint.”  Opinion at * 9.

My $.02

As was the case in prior opinions granting a motion to dismiss a preference complaint, the plaintiff’s request to allow an amended complaint to be filed was granted.  Considering that most of the plaintiffs handling preference litigation have filed hundreds of prior preference cases, I wonder if a time will come when the Court will begin to require mass-filing preference plaintiffs to pay the litigation costs of the defendants.

While this motion to dismiss may have only delayed the process, it succeeded in denying the Plaintiff an opportunity to go on a fishing expedition of discovery.  I don’t know whether this case will continue through to a trial or will be finalized through a settlement.  But I can say with certainty that for most preference litigants, most of the time, it makes financial sense to settle before incurring significant legal costs.  For a quick primer on preference litigation, please take a look at the Preference Reference which I co-authored.

In an 11 page decision signed March 29, 2016, Judge Walrath of the Delaware Bankruptcy Court revised a calculation of new value pursuant to an order from the District Court remanding the case. Judge Walrath’s opinion is available here (the “Opinion”).  Numerous posts on this blog discuss other opinions issued by the Delaware Bankruptcy Court dealing with preference payments, as can be seen here.  PREFERENCE OPINION POSTS.

This matter was remanded from the District Court on the appeal of the Bankruptcy Court’s decision dated July 17, 2013.  In that opinion, Judge Walrath had ruled that (i) $781,702.61 of pre-petition transfers to Prudential (the Defendant) were preferential; (ii) Prudential had a new value defense totaling $128,379.40; and (iii) the Trustee was not entitled to prejudgment interest.

After both parties appealed, the District Court ruled that post-petition new value was not protected and that the Plaintiff was entitled to pre-judgment interest.  Both parties rested after argument and without presenting any additional All that was left for Judge Walrath to do in this Opinion was to determine the total transfers protected pursuant to the new value defense and how much interest to award the Plaintiff.

This Opinion illustrates the careful deference that the District Court and Bankruptcy Court pay to the Opinions of the Third Circuit.  In particular in this case, the Bankruptcy Court cites to Hechinger Investment v. Universal Forest Products (In re Hechinger), 489 F.3d 568, 580-81 (3d Cir. 2007).  For a quick primer on preference litigation, please take a look at the Preference Reference which I co-authored.  As expected, we have paid particular attention in the Preference Reference to the opinions of the Third Circuit.

In the United States Bankruptcy Court for the District of Delaware, Peter Kravitz, as the Liquidating Trustee of the CWC Creditors Liquidating Trust, filed approximately 106 preference actions on March 15, 2016 seeking the avoidance and recovery of allegedly preferential and fraudulent transfers under Sections 547, 548 and 550 of the Bankruptcy Code, along with the disallowance of claims under Section 502(d) and (j).

CWC Liquidating Inc. (f/k/a Coldwater Creek Inc.) (the “Debtors”) filed voluntary petitions for bankruptcy in the U.S. Bankruptcy Court for the District of Delaware on April 11, 2014 under Chapter 11 of the Bankruptcy Code.  By order dated September 17, 2014, the Court entered an order (the “Confirmation Order”) confirming the Modified Third Amended Joint Plan Of Liquidation Of Coldwater Creek Inc. And Its Debtor Affiliates Pursuant To Chapter 11 Of The Bankruptcy Code (the “Plan”), which became effective on September 26, 2014 (the “Effective Date”).

In accordance with the Plan and the Confirmation Order, the Trust was established on the Effective Date of the Plan. Also on the Effective Date, as contemplated by the Plan and Confirmation Order, the Debtors and the Liquidating Trustee entered into that certain CWC Creditors’ Liquidating Trust Agreement (the “Liquidating Trust Agreement”)

The law firm of ASK Financial represents the Liquidating Trustee 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 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.

On March 14, 2016, Charles A. Stanziale, Jr., as the Chapter 7 Trustee of Simplexity, LLC, et al. (the “Debtors”) filed approximately 44 preference complaints seeking to avoid and recover alleged preferential transfers pursuant to Sections 547 and 550 of the Bankruptcy Code, and to disallow claims of the defendants pursuant to Section 502(d).

By way of background, the Debtors filed petitions for bankruptcy in the U.S. Bankruptcy Court for the District of Delaware on March 16, 2014 under Chapter 11 of the Bankruptcy Code.  By order dated January 7, 2015, the Debtors’ Chapter 11 cases were converted to cases under Chapter 7 of the Bankruptcy Code, currently administered under Case No. 14-10569.

The law firm of ASK Financial represents the Chapter 7 Trustee in these various preference cases.  The pretrial conference is set for May 4, 2016 at 10:00 a.m.  These adversary actions, as well as the Debtors’ bankruptcy proceeding, 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 that we have prepared on the subject: “A Preference Reference: Common Issues that Arise in Delaware Preference Litigation.”

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.

In the month of February 2016, Charles A. Stanziale, Jr., in his capacity as the Chapter 7 Trustee of BMT-NW Acquisition, LLC (“Debtor”), filed approximately 49 preference actions seeking the avoidance and recovery of alleged preferential actions under Sections 547 and 550 of the Bankruptcy Code.

By way of background, the Debtor filed a voluntary petition for relief under Chapter 7 of the Bankruptcy Code on February 14, 2014.  On the same day, Mr. Stanziale was appointed as the Chapter 7 trustee to the Debtor’s bankruptcy estate.

Defenses to a Preference Action

Preference actions are a form of litigation specifically provided for in Section 547 of the Bankruptcy Code, which allows a Debtor or Trustee to recover payments made by the Debtor within the 90 days prior to declaring bankruptcy.   Recognizing that these payments are not always made for inappropriate or “preferential” 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 readers looking for more information concerning claims and defenses in preference litigation, the below-linked reference guide prepared on this subject will prove helpful: “A Preference Reference: Common Issues that Arise in Delaware Preference Litigation.”

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.