On June 13, 2017, The Original Soupman, Inc. and its affiliates (collectively “Debtors” or “Original Soupman”) commenced voluntary bankruptcy proceedings under Chapter 11 of the Bankruptcy Code.  According to its petition, Original Soupman estimates that its assets are between $1 million and $10 million, and its liabilities are between $10 million and $50 million.

Shortly after the commencement of the bankruptcy case, the Debtors filed a number of first-day motions, including a critical vendor motion, and a DIP financing motion.  The first-day hearing to consider the interim relief requested in the various first-day motions is scheduled for June 20th at 2:00 p.m.  The case has been assigned to the Honorable Laurie Selber Silverstein.  The law firm of Polsinelli PC represents the Debtors in these bankruptcy proceedings.

A recent press release issued by the Debtors advises that Original Soupman obtain $2 million debtor in possession financing, and that operations of the Debtors will resume during the course of the bankruptcy. Stay tuned for further developments in this 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.

On June 13, 2017, Judge Kevin Gross of the Delaware Bankruptcy Court issued an opinion granting in part and denying in part BMW’s motion to dismiss a complaint filed by Emerald Capital Advisors Corp., in its capacity as trustee for FAH Liquidating Trust – established in the Fisker bankruptcy proceedings.  A copy of the Opinion is available here.

Judge Gross addresses a large number of issues in the Opinion, including extraterritorial transfers, the findings necessary to support a motion to dismiss, and the relevant statute of limitations.  The primary holding in the Opinion, was that for the majority of the causes of action alleged by the plaintiff, the statute of limitations has expired – resulting in granting the motion to dismiss as to $31,786,216.13 and denied to the remaining $793,761.87.  The one major caveat and the most interesting aspect of the decision involves the plaintiff’s claim for unjust enrichment.

Judge Gross spent less than two pages of the 26-page Opinion in denying the motion to dismiss as to the count of unjust enrichment in the complaint.  Judge Gross cited to Halperin v. Moreno, (In re Green Field Energy Svcs., Inc.), 2015 WL 5146161 at *10 (Bankr. D. Del. Aug. 31, 2015) in holding that a claim for unjust enrichment can survive a motion to dismiss where it is plausible that the plaintiff’s other claims may fail and leave the plaintiff without a remedy at law.

It is clear however, that at the pleading stage it is entirely acceptable to pursue alternative theories.  Lass v. Bank of Am., N.A., 695 F. 3d 129, 140 (1st Cir. 2012).  It is also well established that a plaintiff may plead alternative claims for relief even where the pleading contains claims for breach of contract and unjust enrichment.  Pedrick v. Roten, 70 F. Supp. 3d 638, 653 (D. Del. 2014) (citing Corbin on Contracts § 66.10 (2014) for the proposition that “[e]xpectancy damages and restitution will not ordinarily be given as concurrent remedies for the same injury, although they may be pleaded as alternatives”).   The unjust enrichment claim in Count V is significant because it keeps alive the claim for the entire amount which the Trustee has placed at issue, namely, $32,579,798.87.

Opinion at *25.  Clearly, the fact that the Bankruptcy Court is a court of equity is clearly on display in allowing the unjust enrichment count survive, specifically for the purpose of ensuring that a plaintiff has a remedy at law in the failure of its other claims.  In this case, claims totaling $31 million that would otherwise have been dismissed survive to be disputed another day.  I have little doubt that trustees who had not been including unjust enrichment counts in their preference complaints will quickly make an adjustment.

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 May 23, 2017, Don A. Beskrone, the chapter 7 trustee for the estate of PennySaver USA Publishing, LLC filed preference actions against 46 defendants.  PennySaver was an iconic company that specialized in the production, printing, and dissemination of a free weekly publication, offering coupons and classified ads to targeted audiences.

By 2013, the Debtors’ print circulation locally targeted 780 zones or regions and reached approximately 9.1 million California households every week. The Debtors’ website, PennySaverUSA.com, received 1 million unique visitors each month.  By 2015, the Debtors encountered financial difficulties, which arose from a number of causes including, among other things: (i) a decline in print advertising market that corresponded with a rise in electronic media and changing consumer habits, and (ii) a related inability of the Debtors to pay their debts as they came due.  Finally, on May 29, 2015 (the “Petition Date”), the Debtors filed for bankruptcy.  Accordingly, the Trustee had until May 29, 2017 to file preference actions in this case pursuant to the statute of limitations contained in the Bankruptcy Code.

These cases have been filed in the Bankruptcy Court for the District of Delaware.  The Trustee is represented by Ashby & Geddes, P.A.

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 May 17th, Tidewater, Inc. and its affiliated debtors (“Tidewater” or “Debtors”) filed for chapter 11 protection in the United States Bankruptcy Court for the District of Delaware.

On the same day, the Court entered an Interim Utilities Order (click here), which among other things sets forth deadlines for utility providers to object to the proposed adequate assurance procedures or the amount of adequate assurance.  The proposed Interim Utilities Order establishes the proposed amount of adequate assurance of payment to each utility provider of the Debtors under Section 366 of the Bankruptcy Code.  The adequate assurance amount proposed by the Debtors represents the average amount owed to such utility provider over a two-week period.

Any Tidewater utility provider looking to object to the proposed adequate assurance amount or the procedures should act quickly.  By way of brief background, Section 366 of the Bankruptcy Code was enacted to balance a debtor’s need for utility services from a provider that holds a monopoly of such services, with the need of the utility to ensure for it and its rate payers that it receives payment for providing these essential services.  See In re Hanratty, 907 F.2d 1418, 1424 (3d Cir. 1990). The amount of adequate assurance required is made on a case-by-case determination and, in making such a determination, it is appropriate for the Court to consider “the length of time necessary for the utility to effect termination once one billing cycle is missed.”  In re: Begley, 760 F.2d 46, 49 (3d Cir. 1985).

Per the interim order, a final hearing on the Debtors’ utilities motion has been scheduled for June 14, 2017 at 10:00 a.m.  Objections to the proposed final order must be filed on or before June 7th at 4:00 p.m.  This bankruptcy case is pending before Judge Brendan L. Shannon.

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 May 17, 2017, GulfMark Offshore, Inc. (“GulfMark” or “Debtor”) filed a voluntary petition for bankruptcy relief under chapter 11 of the Bankruptcy Code in the United States District Court for the District of Delaware.

According to the first day declaration of Brian J. Fox, the managing director of Alvarez & Marsal North America, LLC, the restructuring advisor to the Debtors, GulfMark will file a prepackaged plan of reorganization.  Through the plan, GulfMark will equitize $400 plus million of its unsecured bond obligations and bolster its liquidity through a rights offering in the amount of $125 million.

The declaration states that general unsecured creditors will not be impacted by the restructuring.  The Debtor’s Petition lists estimated assets of between $100 to $500 million, and its estimated liabilities of between $500 to $1,000 million.

The hearing to consider the Debtor’s proposed Disclosure Statement for the Debtor’s Plan of Reorganization has been scheduled for June 26th. The case has been assigned to the Honorable Kevin Gross.

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 May 8, 2017, Judge Gross ruled on a Motion to Compel Production of Documents in the Haggen bankruptcy.  Judge Gross’ opinion (the “Opinion”) addresses the conflict when a party is acting on another’s behalf and that entity claims “the oldest of the common law privileges”.  Opinion at *5.  A copy of the Opinion is available here.

In the Haggen bankruptcy, the Committee, the Debtors and the Defendants entered into stipulations granting the Committee derivative standing to bring an adversary proceeding against Defendants.  The Committee served discovery on the Debtors and the Debtors withheld nearly 1,000 documents on the basis of attorney-client privilege and attorney work-product doctrine.  The issue is as stated by Judge Gross: “[T]he Committee is acting on behalf of the Debtors. Yet it does not have access to all of Debtors’ documents which are or may be relevant to the matters it raises in the Complaint.”  Opinion at *5.

In the Opinion, Judge Gross analyzed three key precedents related to the issue of whether the Committee, acting in place of the conflicted Debtors, could obtain discovery from the Debtors:  Teleglobe Communications v. BCE, Inc. (In re Teleglobe Communications Corp.), 493 F. 3d 345 (3d Cir. 2007); Garner v. Wolfinbarger, 403 F. 2d 1093 (5th Cir. 1970) (“Garner”); and Commodity Futures Trading Comm’n v. Weintraub, 471 U.S. 343 (1985) (“Weintraub”).

Judge Gross’s analysis under Weintraub begins on page 6.  He concludes that “the Committee, suing on behalf of the Debtors, does not have access to privileged documents. The foregoing is true even though the Debtors are not operating and the Committee’s recovery, if any, may be on behalf of the estate as a whole. Weintraub therefore applies to chapter 7 trustees but not to Committees.”  Opinion at *8-9.

The discussion of Garner begins on page 9.  Judge Gross determined that if the Committee could show “cause” as to why the attorney-client privilege should be breached.  However, the finding of Garner was limited by Teleglobe.  The Teleglobe discussion begins on page 10.  In Teleglobe, the Third Circuit “added to the joint representation issue this: were the debtors insolvent or in the zone of insolvency when the privileged communication occurred?”  Opinion at *11.  Judge Gross ends his discussion of piercing the attorney-client privilege by denying the relief sought and stating that “If Debtors were insolvent at the time of the communications, the Committee must prove that they were. Perhaps the Committee will be able to prove insolvency at a later date but for now the Committee raises only conjecture and no proof.”  Opinion at *12.

To summarize, Judge Gross concludes that “Weintraub does not apply to the Committee but only to chapter 7 trustees; that Garner affords relief but only on a finding of insolvency; and that it is Teleglobe which requires insolvency without which there is no fiduciary duty owed to creditors.”  Opinion at *13

Judge Gross very quickly reviewed the arguments on the work-product doctrine, finding that as described by the Debtors and Defendants, documents withheld on the basis of the work product doctrine shall be produced, subject to the Debtors proving that they prepared the withheld documents in anticipation of litigation.  Opinion at *13.

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.

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 September 3, 2014, Brent Williams, the Plan Trustee (“Trustee”) for Touch America Holdings, Inc., filed a complaint initiating an adversary proceeding against, among others, AT&T Corp. (AT&T”).  In a 36 page decision dated April 25, 2017, Judge Carey of the Delaware Bankruptcy Court granted AT&T’s motion for summary judgment, bringing the litigation to an end.  Judge Carey’s opinion is available here (the “Opinion”).  The dispute hinged on a number of contracts entered into in Touch America’s bankruptcy, all of which had been approved by the Court.

Judge Carey’s Opinion

Judge Carey’s Opinion begins with a 20 page recitation of undisputed facts.  He then provides an overview of the standard for summary judgment before addressing the decisive contract language.  He begins with the primary factor that can prevent a summary judgment ruling in a contract interpretation case – ambiguity.  “In a dispute over the meaning of a contract, the threshold question is whether the contract is ambiguous.”  Opinion at *26 (quoting Lockhead Martin Corp. v. Retail Holdings, N.V., 639 F.3d 63, 69 (2d Cir. 2011)).  “If a contract is unambiguous, the court should assign the plain and ordinary meaning to each term and interpret the contract without the aid of extrinsic evidence.”  Id. (quoting Alexander & Alexander Servs. v. These Certain Underwriters at Lloyd’s, 136 F.3d 82, 86 (2d Cir. 1998)).

Despite the Trustee’s argument that there was ambiguity in one of the contracts at issue (which seems to undercut the Trustee’s argument for summary judgment), Judge Carey held that “the fact that something is not stated explicitly does not mean that the language of the contract is ambiguous. I do not find the pertinent language to be ambiguous, and will assign the plain and ordinary meaning to each term and interpret the contracts without the aid of extrinsic evidence.”  Opinion at *28.

After summarizing the extrinsic evidence provided by the parties, Judge Carey held that “the terms of the SPC Settlement Agreement, as well as the other agreements at issue, [are] unambiguous. Accordingly, I will not consider the extrinsic evidence introduced by any of the parties.”  Opinion at *35.  In one paragraph, he cited to each of the controlling contract provisions to resolve this conflict, holding that the explicit, unambiguous language of the contracts and agreements at issue warranted a ruling on summary judgment in favor of AT&T.

One of the key issues, is language included in one of the agreements pursuant to which assets were transferred to AT&T.   New York and other courts consistently maintain that the term “’related to’ … is clear and unambiguous.”  Opinion at *27 (quoting Coregis Ins. Co. v. American Health Found., 241 F.3d 123, 129 (2d Cir. 2001).).  One court has stated that such a provision “constitutes the broadest language the parties could reasonably use.”  Opinion at *28 (quoting Fleet Tire Serv. v. Oliver Rubber Co., 118 F.3d 619, 621 (8th Cir. 1997)).  While the Trustee suggested other possible meanings of the language, Judge Carey held that those arguments were insufficient to create an ambiguity, as the alternative interpretations are simply not reasonable.  Id.

If a contract calls for the broadest language that parties could reasonably use, it is likely that the party for whose benefit that language was used will win the day.  No matter how effective a litigator you employ, the attorneys drafting a contract have more impact on the outcome of future litigation.  It can seem expensive to have a comprehensive contracted created.  Yet, one has but to consider how much more this litigation would have cost if AT&T lost on its motion for summary judgment, to realize that the time of the drafters of these agreements was a worthwhile expense.

John Bird practices with the law firm Fox Rothschild LLP. You can reach John at 302-622-4263, or jbird@foxrothschild.com.

In a 24 page decision released April 13, 2017, Judge Walrath of the Delaware Bankruptcy Court denied a motion for summary judgment in a preference action brought by Charles Stanziale as the chapter 7 Trustee of Powerwave Technologies against Superior Technical Resources – Adversary Proceeding Case No. 15-50085.  Judge Walrath’s opinion is available here (the “Opinion”).  Judge Walrath held that “genuine factual disputes precluding summary judgment”.  Opinion at *6.  While we have summarized a large number of opinions on preference actions, this is one of the most informative opinions released by the Delaware Bankruptcy Court in recent memory.

The Opinion provides an in depth analysis of the most common defense to preference actions – the Ordinary Course of Business defense.  Judge Walrath discusses the Subjective test in detail and a quick overview of the Objective test, quickly passing over the New Value defense as “the Court must deny the Defendant’s Motion for Summary Judgment as to the new value defense until the ordinary course of business defense is determined.”  Opinion at *23.

Judge Walrath analyzes how a number of different factors contribute to a determination of whether a transaction was made in the ordinary course of business under the Subjective Test.  As she says, “[W]hether a given transaction was within the subjective ordinary course of business that had developed between the parties is a broad, fact-based inquiry requiring historic examination of the parties’ pre-preference period relations.”  Opinion at *10 (quoting Moltech Power Sys., Inc. v. Tooh Dineh Indus., Inc. (In re Moltech Power Sys., Inc.), 327 B.R. 675, 680 (Bankr. N.D. Fla. 2005)).  The factors she considers are:

  1. The Historical Period: “It is well-established that the historical period should encompass ‘the time period when the debtor was financially healthy.’” Opinion st *9 (citing Davis v. R.A. Brooks Trucking Co. (In re Quebecor World (USA), Inc.), 491 B.R. 379, 387 (Bankr. S.D.N.Y. 2013)).
  2. Ordinariness of the Transfers  “Payments made during the preference period do not have to ‘possess a rigid similarity to each past transaction’; however, there must be ‘some consistency.’” Opinion at *10-11 (quoting Menotte v. Oxyde Chem., Inc. (JLS Chem. Corp.), 424 B.R. 573, 581 (Bankr. S.D. Fla. 2010)).  Judge Walrath addresses five different methods for comparing transacitons within the preference period against those made prior to the preference period.
    1. Range Method: Judge Walrath opined that “there is a material issue of fact as to the proper baseline and the range method’s applicability.”  Opinion at *12.  Judge Walrath compared a number of different cases in which the Range Method was discussed.  In some, it was applied (see, e.g., Am. Home Mortg., 476 B.R. 124, 138 (Bankr. D. Del. 2012)), in others, it was determined to be too broad (see, e.g. Quebecor, 491 B.R. at 387).  Judge Walrath held that “there are genuine disputes of material fact regarding the range method’s appropriateness, which preclude summary judgment in this case.”  Opinion at *14.
    2. Batch Method: When multiple invoices are paid with each payment, a party can calculate the average age of invoices paid in each batch and, from these, derive a standard deviation range, which can then be compared to the payments made in the preference period.
    3. Days Sales Outstanding Method: The DSO Method involves multiplying the total amount of an invoice by the number of days that it took to be paid. That number is then divided by the total amount of the invoices in that batch.
    4. Inter-quartile Range Method: This method involves calculating the range and excluding the fastest and slowest paid quartiles (25%), and considering only the range that includes 50% of pre-preference payments.  There is no precedent in Delaware for the use of this methodology.
    5. Standard Deviation Method: This method involves calculating the average days between invoice and payment, and calculating the standard deviation of the average days to payment.  The argument is that all payments made within one standard deviation of the average are ordinary, and the remainder are not.
  3. Unusual collection activity: “Subsection 547(c)(2) protects those payments that do not result from unusual or extraordinary debt collection practices.” Opinion at *17 (citing McCarthy v. Navistar Fin. Corp. (In re Vogel Van & Storage, Inc.), 210 B.R. 27, 36 (N.D.N.Y. 1997)).  This includes a change in credit terms and defendant’s collection activities.

With all of these issues involving disputes of material fact, Judge Walrath opined that she was unable to issue summary judgment as to whether the subjective test protects any of the allegedly preferential payments from recovery.

Judge Walrath quickly moves through the objective test, holding that (1) a sufficiently detailed basis is needed to establish the relevant industry, (2) expert testimony is not required, and (3) there should be sufficient statistical data or supporting basis for the evidence related to the objective standard.  As the parties disagreed about the relevant industry or NAICS classification, summary judgment could not be entered on this issue either.

While this Opinion doesn’t create precedent that can be used to obtain a final resolution for defendants, it does define the issues that the Court will consider in ruling on a motion for summary judgment.  If you are a bankruptcy practitioner, or the defendant of a preference action, this Opinion should be considered required reading.

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.

Not uncommonly, a preference complaint fails to adequately allege that the transfers sought to be recovered by the trustee were made “for or on account of an antecedent debt owed by the debtor before such transfer was made”, as required under Section 547(b) of the Bankruptcy Code. Thus, when faced with a complaint to recover alleged preferential transfers, a defendant can proceed in one of two ways: (i) file an answer and raise affirmative defenses, or (ii) move to dismiss under Rule 12(b)(6).

Generally, if a motion to dismiss is filed on this basis, the Court will grant plaintiff leave to amend the complaint to adequately assert that such transfers are recoverable under Section 547(b) of the Bankruptcy Code.  But does the analysis change if the trustee files an amended complaint which continues to fail to meet pleading standards, and defendant once again moves to dismiss?

This question was addressed in the recent Delaware Bankruptcy Court decision of Solmonese v. Shyamsundar, et al. (In re AmCad Holdings, LLC, et al.), Adv. No. 15-51979 (Del. Bankr. Apr. 7, 2017).  There, the Liquidating Trustee commenced a lawsuit against defendants, which included former directors and officers of AmCad Holdings, LLC, et al. (“Debtors” or “AmCad”), for breach of fiduciary duty, preferential transfers, and claim disallowance.  The Court previously dismissed the original complaint because it lacked “related-to” jurisdiction over the fiduciary duty claims, and because the preference claims were not adequately pled.  The Liquidating Trustee was permitted to file an amended complaint to address the deficiencies as it related to the preference claims.

The Liquidating Trustee filed the Amended Complaint seeking to avoid and recover $651,496.50 of alleged preferential transfers made to Visagar M. Shyamsundar (“Defendant”) within one year of the petition date pursuant to sections 547 and 550 of the Bankruptcy Code.  Defendant again moved to dismiss, asserting that the Amended Complaint continued to fail to adequately allege that the transfers were made for or on account of an antecedent debt.

The Court granted dismissal as to five of the alleged transfers to Defendant for “car payments,” “payroll,” and “records storage”, totaling approximately $100,000. The Court held that the allegations did not support a claim that they were made in satisfaction of an antecedent debt owed to the Defendant.

In addition, the Court separately dismissed these transfers from the Amended Complaint because the Liquidating Trustee failed to satisfy his burden of demonstrating insolvency.  While insolvency is presumed within the 90 day period prior to the bankruptcy filing, the burden rests with a trustee to adequately allege insolvency for claims arising before such 90 day period.

Finally, the Court denied the Liquidating Trustee’s request to further amend as to the aforementioned transfers.  The Court noted that the Liquidating Trustee was put on notice of his deficiencies when the Court previously granted dismissal of the original Complaint, and did little to correct the deficiencies.  See Krantz v. Prudential Invs., 305 F.3d 140, 144 (3d Cir. 2002) (denying leave to amend previously amended complaint where motion to dismiss original complaint put plaintiff on notice of deficiencies, yet plaintiff failed to rectify them in his first amended complaint).  Accordingly, dismissal was granted with prejudice as to the five aforementioned transfers.

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.