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 Limitless Mobile, LLC bankruptcy proceeding (Delaware Bankruptcy Case No. 16-12685), a formation meeting has been scheduled for December 16, 2016 at 10:00 a.m. (ET) at the J. Caleb Boggs Federal Building, 844 King Street, Room 3209, Wilmington, DE 19801.  Click Here for a copy of the Notice of Formation Meeting for Official Committee of Unsecured Creditors issued by the Office of the United States Trustee.  Unsecured creditors interested in being considered for committee membership must complete a questionnaire and return it to the U.S. Trustee no later than December 14, 2016.

One way in which creditors can assert their interests is to attend the Formation Meeting and become a part of the official committee of unsecured creditors.  The creditors’ committee is one of the most active participants in a corporate bankruptcy, and has access to a significant amount of information not available to normal creditors.

Since the Limitless Mobile bankruptcy was filed earlier this month, the Delaware Bankruptcy Court has had an opportunity to consider and rule on many of the debtor’s initial motions.  On December 8th, the Bankruptcy Court entered the following orders:

12/08/2016  

31
(6 pgs)

Order Approving Retention And Appointment of Rust Consulting/Omni Bankruptcy as Claims And Noticing Agent (Related Doc # 4)(related document(s)4) Order Signed on 12/8/2016. (JohnstonJ, Julie) (Entered: 12/08/2016)
12/08/2016  

32
(4 pgs)

Order (INTERIM) (I)Authorizing The Debtor to Maintain And Renew Prepetition Insurance Policies And Pay All Obligations in Respect Thereof And (II)Granting Related Relief (Related Doc # 5)(related document(s)5) Order Signed on 12/8/2016. (JohnstonJ, Julie) (Entered: 12/08/2016)
12/08/2016  

33
(4 pgs)

Order (INTERIM) (I)Authorizing The Debtor To Pay Certain Prepetition Taxes And (II)Granting Related Relief (Related Doc # 6)(related document(s)6) Order Signed on 12/8/2016. (JohnstonJ, Julie) (Entered: 12/08/2016)
12/08/2016  

34
(7 pgs; 2 docs)

Order (INTERIM) (I)Approving Debtor’s Adequate Assurance of Payment To Utility Companies, (II)Establishing Procedures For Resolving Objections By Utility Companies, And (III)Prohibiting Utility Companies From Altering, Refusing, or Discontinuing Service And (IV)Setting A Final Hearing. (Related Doc # 7)(related document(s)7) Order Signed on 12/8/2016. (JohnstonJ, Julie) Additional attachment(s) added on 12/8/2016 (JohnstonJ, Julie). (Entered: 12/08/2016)
12/08/2016  

35
(6 pgs)

Order (INTERIM) (I)Approving Continued Use of Existing Cash Management System And Bank Accounts; (II)Waiving Certain United States Trustee Requirements; And (III)Granting Related Relief (Related Doc # 8)(related document(s)8) Order Signed on 12/8/2016. (JohnstonJ, Julie) (Entered: 12/08/2016)
12/08/2016  

36
(3 pgs)

Order (I)Authorizing Debtor To Honor or Pay Certain Prepetition Obligations To Customers And (II)Authorizing And Directing Financial Institutions To Honor And Process Checks And Transfers Related To Such Relief (Related Doc # 9)(related document(s)9) Order Signed on 12/8/2016. (JohnstonJ, Julie) (Entered: 12/08/2016)
12/08/2016  

37
(11 pgs; 2 docs)

Order (INTERIM) (A)Authorizing The Debtor To Use Cash Collateral of Existing Secured Lenders And Granting Adequate Protection For Use And (B)Prescribing The Form And Manner of Notice And Setting The Time For The Final Hearing (Related Doc # 19)(related document(s)19) Order Signed on 12/8/2016. (Attachments: # 1 Exhibit 1) (JohnstonJ, Julie) (Entered: 12/08/2016)
12/08/2016  

38
(47 pgs; 2 docs)

Order (INTERIM) (I)Authorizing Debtor To Obtain Postpetition Financing,(II)Granting Administrative Priority Claims To DIP Lender, And (III)Scheduling Final Hearing (Related Doc # 20) Order Signed on 12/8/2016.(Attachments: # 1 Agreement) (JohnstonJ, Julie) (Entered: 12/08/2016)
12/08/2016  

39
(2 pgs)

Order Granting Motion of Debtor To Pay Certain Pre-Petition Payroll, Severance, Employee Benefit And Contractor Wage Expenses. (Related Doc # 22)(related document(s)22) Order Signed on 12/8/2016. (JohnstonJ, Julie) (Entered: 12/08/2016)

The Limitless Mobile bankruptcy is before the Honorable Kevin J. Carey.  Limitless Mobile is represented by the law firm of Dilworth Paxson LLP.

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 December 2, 2016, Limitless Mobile, LLC (“Limitless” or the “Debtor”) filed a chapter 11 voluntary petition in the United States Bankruptcy Court for the District of Delaware.  The Debtor was formed in 2013 to provide broadband and wireless telecommunication services in certain rural counties in central Pennsylvania.  The Debtor is part of a worldwide corporate family referred to as the Limitless Group.  According to the First Day Declaration, Limitless intends to wind down its retail-side business and emerge from bankruptcy as a wholesale operator.

According to the Petition, the Debtor has an estimated $10 million to $50 million in assets, and $50 million to $100 million in liabilities.  The law firm of Dilworth Paxson LLP represent the Debtor in this chapter 11 case.  The Honorable Kevin J. Carey has been assigned to the case.

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.

Effective January 2, 2017, all telephonic court appearances before the Honorable Kevin Gross of the United States Bankruptcy Court for the District of Delaware will be through CourtSolutions LLC.  The alert was issued by the Court today on November 30th.  Click here for a copy of the notice.

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.

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.

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.

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.

Made-in-the-USA retailer American Apparel, LLC and its affiliated entities (“Debtors”) filed for Chapter 11 bankruptcy protection on Monday, Nov. 14th for the second time in just over a year, colloquially known as the “Chapter 22”.  The filing comes just about a year after the fashion retailer previously filed for bankruptcy, when the company exited court protection in early 2016 but quickly encountered trouble again.

Canadian clothing manufacturer Gildan Activewear has agreed to a $66 million deal to acquire intellectual property assets and inventory from American Apparel, including the chance to maintain some or all of the company’s Los Angeles production and distribution operations, according to a court filing.

According to chief restructuring officer Mark Weinstein, “[t]he company faced unfavorable market conditions that were more persistent and widespread than the debtors anticipated. These market conditions were particularly detrimental to retailers.”  According to Weinstein, American Apparel’s turnaround strategy “completely failed” as the company reported a 33% decline in year-over-year sales as of Sept. 30. Since its first bankruptcy, the company failed to optimize merchandising, bolster online sales, improve quality expeditiously and form a cohesive marketing plan, according to Weinsten.

With 110 stores in 28 states and the District of Columbia, American Apparel has dwindled from the time of its original bankruptcy filing, when it had about 8,500 employees at six factories and 230 stores worldwide.  The company listed about $215 million in debts. It had $497 million in net sales in 2015.

The First Day Hearing is today (11/15) at 9:00 a.m.  The bankruptcy proceeding has been assigned to the Honorable Brendan L. Shannon.

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 a lengthy opinion published November 7, 2016, Judge Sontchi of the Delaware Bankruptcy Court provided a thorough analysis of the interaction between the Stored Communications Act (“SCA”) and the Bankruptcy Code.  Judge Sontchi’s opinion is available here (the “Opinion”).  The Opinion was issued in the Chapter 15 case In re Irish Bank Resolution Corporation Limited, Case No. 13-12159.  In this case, the Chapter 15 foreign representative of Irish Bank Resolution Corporation Limited (the “Debtor”) sought entry of an order directing Yahoo! Inc. (“Yahoo”) to turn over all electronically stored information (“ESI”) in a specific email account belonging to an individual who had evaded the proceeding and failed to comply with discovery orders.

This is one in a series of several opinions which has ruled that the SCA prohibits certain disclosures.  Opinion at *37-38 (“Other courts have come to similar conclusions regarding judicially-manufactured consent over the steadfast objection of an email user. That is, that the SCA does not provide for a mechanism in civil litigation to compel disclosure of a user’s private email contents through a subpoena or a court order directed at the service provider when none of the parties to the communication gave their consent.”)

The SCA allows only a small number of people to consent to the disclosure of the contents of an email account.  And despite no other contact information existing for the owner of this account, as their real identity is unknown, the Court found itself constrained by the limits of the SCA.  This is a particularly offensive situation as the owner of the email account shut it down for the apparent purpose of avoiding service.  As Judge Sontchi stated, “the Foreign Representatives rightly indicate that the only logical conclusion is that Rasimov (or someone on his behalf) terminated it upon receiving the 2004 Motion.”  Opinion at *16 (emphasis added).  To get a full flavor of the efforts the Foreign Representative engaged in to try and obtain this discovery, I recommend you read the 13 pages of history laid out in the Opinion.

This Opinion supports the principle that the will of Congress,  as understood by the courts, will be upheld.  See, e.g., Opinion at *44.  “[T]he Court reaches its conclusion based on clear principles laid down by Congress in the Bankruptcy Code and the SCA.”  Thus, it is my opinion that the most certain way for Congress to ensure they make the laws, rather than having judge made law, is to make it very clear what the intent of the law is as well as any limitations when creating the record of the law’s enactment.  Many may argue that the SCA’s provisions were created in an effort to prevent the government from becoming “Big Brother”, but the unfortunate result of how courts have applied it, is that those who should have their communications uncovered can shelter behind its broad protection.

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.