On December 29, 2017, Life Settlement Absolute Return I, LLC (“LSAR”), along with Senior LS Holdings, LLC (“Senior LS”; collectively with LSAR, the “Debtors”), filed petitions for relief under Chapter 11 in the Bankruptcy Court for the District of Delaware (Case Nos. 17-13030 and 17-13031).

According to the Declaration in Support of the First Day Motions of Robert J. Davey, III (“Davey Declaration”), LSAR was formed as a special purpose vehicle to invest in life insurance policies in the life settlement market. LSAR has comprehensive agreements with third-parties for the provision of management, administrative and operational services.  Senior LR operates as a holding company for the policies.

According to the Davey Declaration, the Debtors have been unable to pay their existing debt, primarily because many insureds have outlived their actuarial life expectancy, prolonging LSAR’s receipt of cash from the death benefits of the policies.  Thus, it became financially difficult for LSAR to continue servicing premium payments on the policies.

The Debtors have have filed a number of first day motions, including a cash collateral motion, a joint administration motion, and a motion to maintain the Debtors’ bank accounts.  As of the date of this post, the first day hearing has not yet been noticed.  The cases have been assigned to the Honorable Mary F. Walrath.

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 her The Bottom Line 11 blog, Fox partner Mette Kurth notes an expected imminent push in the U.S. Congress for bankruptcy venue reform:

U.S. Capitol Building, Washington, D.C.I have barely unpacked my suitcases, and yesterday the Commercial Law League of America (CLLA) announced that a bankruptcy venue reform bill will be proposed this week in the U.S. Senate. The bill will to seek to change the venue rules for filing Chapter 11 business cases. If you want to view the CLAA’s press release, it is available here. (The CLLA previously supported S.314 (109th Congress 2005-2006) and H.R.2533 (112th Congress 2011-2012), which were not enacted.)

To read Mette’s full discussion of the debate over the reforms, which are set to be proposed the week of December 18, 2017, please visit her blog.

On her The Bottom Line 11 blog, Fox partner Mette Kurth examined a recent U.S. Court of Appeals for the Second Circuit decision in In re MPM Silicones (the Momentive case). The court followed the lead of the Sixth Circuit in establishing a two-step approach to setting the cramdown interest rate on debtor payments for secured claims:

Court Pillars
Copyright: bbourdages / 123RF Stock Photo

A simple proposition—that secured lenders are entitled to receive payments with a present value at least equal to the amount of their claim—has proven surprisingly difficult to apply as courts have pondered whether to follow a “formula approach” or a “market approach” to establish an appropriate “cramdown” interest rate. (A primer is available here if you are new to the debate.)

Secured lenders have scored a significant win in the recent Second Circuit decision in the Momentive case, In re MPM Silicones. Siding with the Sixth Circuit, the Second Circuit has decided that the prevailing market rate for comparable debt should be used—if there is an efficient market for such debt—and that the formula approach should be used only if no efficient market exists.

To read Mette’s full rundown of the decision and its impact, please visit her blog. Mette also provides background on cramdown interest rates in a separate post.

In a 32 page opinion entered December 5, 2017 Judge Gross of the Delaware Bankruptcy Court ruled on cross motions for summary judgment concerning an avoidance action in the Simplexity bankruptcy. Judge Gross’s opinion is available here (the “Opinion”).  This Opinion arises from a complaint brought by Charles A. Stanziale, Jr., as the Chapter 7 Trustee of Simplexity, LLC against the Sprint Corporation alleging that payments made by the debtor to Sprint of $3,842,951.86 were avoidable transfers.  Two issues were the subject of the joint motions for summary judgment,  (1) did the Trustee satisfy his burden of demonstrating that Sprint received more by the Transfers than it was entitled to under Chapter 7, and (2) is Sprint entitled to a new value defense for two transfers (of $505,151.53 and $125,000.00 respectively) made to Simplexity?

First, the analysis of Sprint’s recovery.  The primary issue of contention is whether the Trustee’s use of the “Add-Back” method was appropriate.

The Trustee performed a liquidation analysis using the add-back of analyzing a defendant’s position on the petition date given a hypothetical liquidating by 1) accounting for the debt that was still owed by the Debtors to the defendant on the petition date; 2) adding back in the transfers paid in the preference period to the outstanding debt (i.e., complying with Section 547(b)(5)(B)’s requirement of analyzing the situation as if ‘the transfer had not been made’); and 3) comparing that debt to the collateral [as] of petition date.

Opinion at *22.  Judge Gross held that the Trustee’s methods were appropriate, and that it was able to trace what Sprint’s recovery would have been in the chapter 7 bankruptcy both with, and without these payments as a result of Sprint’s liens.  Accordingly, he granted the Trustee’s summary judgment motion on this point.  He did, however, differentiate a few cases, so if you are in a similar situation, please read the entirety of this portion of the Opinion.  It’s a quality lesson in distinguishing case law.

Second, Sprint’s New Value.

In this portion of the Opinion, Judge Gross looks to the spirit of the new value defense provided by 11 U.S.C. 547, describing “the overarching principle of Section 547(c)(4)” as the provision by a creditor of “a beacon of light in a dark time.”  Opinion at *29.  Sprint made a mid-month payment (the $505,151.53 payment), which was not contractually required.  The Court determined that because this payment was not contractually required, it constituted new value, and was not a payment made on account of amounts due and owing by Sprint.  Opinion at *28.

The second allegedly new value payment, however, was related to a “Loyalty Trial Program”.  Opinion at *30.  Since neither party provided any evidence as to the Loyalty Trial Program and whether Simplexity was entitled to the $125,000 payment, Judge Gross denied both motions for summary judgment as to this payment.

This is a compelling Opinion if you are on either side of a new value defense.  This Opinion analyzes both the receipt of more than a creditor is entitled to under chapter 7, and how new value is treated in a situation when a creditor is also obligated to make a payment to the debtor.

On November 17, 2017, Real Industry, Inc., along with its subsidiaries and affiliates (collectively the “Debtors” or “Real Industry”), filed a petition for relief under Chapter 11 in the Bankruptcy Court for the District of Delaware (Case No. 17-12464).

According to the Declaration in Support of First Day Motions of Michael J. Hobey, liquidity issues and certain singular negative events have led to Real Industry’s bankruptcy filing. The Debtors operate an aluminum recycling and alloy production company based in Beachwood, Ohio.

Contemporaneously, Real Alloy Holding, Inc. and its U.S. subsidiaries filed petitions for voluntary Chapter 11 reorganization in the U.S. Bankruptcy Court for the District of Delaware.  However, Real Alloy’s operations in Germany, United Kingdom, Norway, Canada and Mexico and its Goodyear, Ariz. joint venture are not included in the filings.

The First Day Hearing is scheduled for Monday, November 20th at 1:00 PM at US Bankruptcy Court, 824 Market St., 5th Fl., Courtroom #5, Wilmington, Delaware.  The Debtors have have filed a number of First Day Motions, including, but not limited to, the following:

  • Motion to Pay Employee Wages and Maintain and Continue Certain Compensation and Benefit Programs Postpetition;
  • Motion for Continuation of Utility Service and Approval of Adequate Assurance of Payment to Utility Company Under Section 366(b);
  • Motion to Pay Critical Trade Vendor Claims and Authorizing the Debtors to Pay Certain Prepetition Claims of Shippers, Warehousemen, and Materialmen; and Authorizing Banks to Honor and Process Checks and Electronic Transfer Requests Related Thereto; and
  • Motion to Authorize Debtors to (A) Continue Performing Under Prepetition Hedging and Trading Arrangements and Honor Obligations Related Thereto, and (B) Enter Into and Perform Under New Postpetition Hedging Arrangements.

The cases have been assigned to the Honorable Kevin J. Carey.  The proposed claims and noticing agent is Prime Clerk LLC.

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 short opinion entered November 14, 2017 Judge Gross of the Delaware Bankruptcy Court denied a motion of an interested party to “Attend and Participate in the Rule 2004 Examinations to be Conducted by the Trustee”. Judge Gross’s opinion is available here (the “Opinion”).

This is a very short Opinion and resolves a very straight-forward issue.  Can a party in separate litigation take advantage of Bankruptcy Rule 2004 to obtain discovery from the opposing party?

The answer: No.

Citing multiple cases, Judge Gross explains that the “pending proceeding rule” provides that once an adversary proceeding or contested matter has been commenced, discovery must proceed under the federal discovery rules.  The cited opinions were: In re SunEdison, Inc., 572 B.R. 482 (Bankr. S.D.N.Y. 2017);  In re Wash. Mut., Inc., 408 B.R. 45 (Bankr. D. Del. 2009); In re Enron Corp., 281 B.R. 836 (Bankr. S.D.N.Y. 2002); 2435 Plainsfield Ave. v. Township of Scotch Plains (In re 2435 Plainsfield Ave.), 223 B.R. 440 (Bankr. D.N.J. 1998); In re Coffee Cupboard, Inc., 128 B.R. 509 (Bankr. E.D.N.Y. 1991).

As discussed in a previous post on this blog, 2004 discovery is most akin to fishing expeditions meant to determine whether or not litigation should be commenced.  You can read that post here: What are the Scope and Limitations of a Rule 2004 Examination?

In a 10-page decision signed November 6, 2017 in an adversary proceeding arising within the Physiotherapy Holdings bankruptcy (PAH Litigation Trust, case 15-51238), Judge Gross of the Delaware Bankruptcy Court denied a motion of the Litigation Trust (the “Trust”) to file an amended complaint, providing guidance on a number of different issues. Judge Gross’s opinion is available here (the “Opinion”).

The Defendants opposing the motion to amend had an uphill battle in this issue.  Judge Gross begins his discussion by stating, “Motions for leave to amend the complaint are granted liberally.”  Opinion at *2.  Judge Gross then provided a foreshadowing of the Defendants’ way out, stating, “The Court may, however, deny leave to amend if the proposed amendment is futile or untimely.”  Id.

The Court had established a deadline of September 30, 2016 for the amending of the complaint.  The Trust filed its motion approximately ten months after that deadline.  The Trust was thus required to satisfy the ‘good cause’ standard of FRCP 16(b)(4) in order to obtain approval of its motion.  Opinion at *2.

The  Trust argued that it satisfied the good cause requirement because the proposed defendants had “deeper pockets”.  Opinion at *3.  The Trust expressed concern that the current defendants have made distributions to their limited partners, the proposed defendants.  The Court held that “the Litigation Trust has not satisfied the ‘good cause’ requirement…  The fact that Defendants may not have sufficient assets to satisfy any judgments is not good cause to add the Proposed Defendants.”  Opinion at *4-5.

Judge Gross then turned to the motion’s request to amend the complaint to seek punitive damages.  There was an initial dispute as to whether the defendant should have raised choice of law arguments in their motion to dismiss.  Judge Gross opined that “there must be an actual conflict between the laws of different jurisdictions to engage in a choice of law determination.”  Opinion at *6 (quoting Rice v. Dow Chem. Co., 875 P. 2d 1213, 1216 (1994)).  Judge Gross held that the answer to which law controls depends on which state has the most significant relationship to the claim and the parties.  Opinion at *6-7 (following the precedent of Emerald Capital Advisors Corp. v. Bayerische Motoren Aktiengesellschaft (In re FAH Liquidating Corp.), 2017 WL 2559892, at *9 (Bankr. D. Del. June 13, 2017)).  Finding that Delaware law controls, and Delaware courts of equity do not allow for punitive damages to be awarded.  Opinion at *9 (“under Delaware law punitive damages are not available under principles of equity which Delaware courts apply.”)

And with that, Judge Gross denies the motion to amend the complaint.  The primary takeaway – if the Court sets a deadline to amend the complaint, make sure you hit the deadline.  Because the Court grants motions to amend “liberally”, had this motion been timely I imagine the result would have been very different.

Effective November 6, 2017, the U.S. Bankruptcy Court for the District of Delaware will start making audio recordings of certain proceedings available to the public through PACER, as well as the standard ECF notifications received by counsel.  The recordings themselves will be an attachment to a PDF document, and will be in MP3 format.

Initially it will only be for proceedings before Judge Kevin J. Carey, although it may expand to other Judges in the future.  Click here for the notification posted by the Clerk’s Office, and click here for instructions on accessing the audio files through ECF notification or PACER.

Included with the notification are details regarding confidential, sealed or personal information that may come up during a hearing and how that is being handled.  Short answer, counsel will have to move to seal the entire recording, as partial redactions are not possible.

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 Indian Harbor Ins. Co. v. Zucker, 860 F.3d 373 (6th Cir. 2017), the Sixth Circuit Court of Appeals held that a liquidation trustee’s suit against the debtor’s former directors and officers (D&Os) falls within the “insured-versus-insured” exclusion in the debtor’s liability insurance policy.

The liquidation trustee sued the D&Os for $18.8 million, alleging breach of fiduciary duties.  The insurance company filed a suit for a declaratory judgment that it had no obligation to cover any damages from the lawsuit because the trustee’s claims fell within on the “insured-versus-insured” exclusion, which excluded from coverage “any claim made against an Insured Person . . . by, on behalf of, or in the name or right of, the Company or any Insured Person,” except for derivative suits by independent shareholders and employment claims.  The District Court held that exclusion applied.  The Circuit Court affirmed.

The Sixth Circuit held that, “[a]s a voluntary assignee, the Trust stands in [debtor] Capitol’s shoes and possesses the same rights subject to the same defenses.  Just as the exclusion covers a lawsuit ‘by’ Capitol, it covers a lawsuit ‘by’ the Trust ‘in the . . . right’ of Capitol.”

The fact that the debtor became a new entity – a debtor in possession – upon filing for bankruptcy did not change the result because “this new-entity argument surely would not work before bankruptcy.  Capitol could not have dodged the exclusion by transferring a mismanagement claim to a new company – call it Capitol II – for the purpose of filing a mismanagement claim against the [D&Os].  No matter how legally distinct Capitol II might be, the claim would still be ‘by, on behalf of, or in the name or right of’ Capitol.  The same conclusion applies to a claim filed after bankruptcy.”

The Sixth Circuit acknowledged that the purpose of the “insured-versus-insured” exception was to prevent people within the insured company from “push[ing] the costs of mismanagement onto an insurance company just by suing (and perhaps collusively settling with) past officers who made bad business decisions.”  Nevertheless, it mattered not that the bankruptcy court approval of the plan transferring the causes of action provided “a safeguard against the collusive suits that insured-versus-insured exclusions seek to prevent” because it did “not eliminate the practical and legal difference between an assignee and a court-appointed trustee that receives the right to sue on the estate’s behalf by statute.”

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 decision signed October 25, 2017, Judge Shannon of the Delaware Bankruptcy Court issued an opinion requiring a professional to disgorge fees, pay a sanction of $25,000, and enjoined him from taking various actions in bankruptcy court. Judge Shannon’s opinion is available here (the “Opinion”).

The United States Trustee filed a Complaint for Injunctive relief, Fines and Civil Contempt against Robert F. Martin.  Mr. Martin has twice before been the subject of inquiry and action by the United States Trustee. First in 2011, the United States Trustee alleged that Mr. Martin was acting as a petition preparer in violation of 11 U.S.C. § 110. A Consent Order resolving that litigation was entered by the Court on March 28, 2012 (the “First Consent Order”) by which Mr. Martin agreed to disgorge fees and refrain from acting as a petition preparer in the future.

Two years later, the United States Trustee filed a new complaint against Mr. Martin, alleging that he had acted as a petition preparer in at least 19 cases in violation of the terms of the First Consent Order.  Mr. Martin again agreed to disgorge fees and to refrain from acting as a petition preparer in the future.

The United States Trustee alleged that Mr. Martin returned to his prior practice of encouraging homeowners to file for relief under Chapter 13, and assisting them in the process of filing bankruptcy in violation of § 110 of the Bankruptcy Code. Mr. Martin’s debtor clients were not adequately instructed  by Mr. Martin regarding the Chapter 13 filing and its potential consequences, and that his efforts constituted a violation of the provisions of Bankruptcy Code § 110 and the First and Second Consent Orders.

The Court held that “Mr. Martin’s business model is based upon practices that violate federal law and orders of this Court.”  Opinion at *14.  It then levied the above fines and directed that Mr. Martin was to refrain from taking any further actions in violation of Bankruptcy Code § 110.

While this is not the type of case normally discussed on this blog, it illustrates an important principle that I have seen play out several times in the Delaware Bankruptcy Court – each time you are penalized for the same bad act, the consequences get more severe.