U.S. Bankruptcy Court for the District of Delaware

Introduction

Charles A. Stanziale, Jr., is on a roll, filing preference actions in a number of cases within the Delaware Bankruptcy Court this month.  As the Chapter 7 Trustee (the “Trustee”) for the bankruptcy estate of EP Liquidation, LLC f/k/a Equinox Payments, LLC (the “Debtor”), he filed approximately 37 complaints to recover what he contends are assets of the Debtor’s estate.  These actions are made up of preference actions, fraudulent transfer and asset turnover 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 and 548 of the United States Bankruptcy Code. This post will briefly cover the Debtor’s bankruptcy proceedings.

Background

The Debtor was formed as HYI Acquisition, LLC to facilitate the purchase of the majority of assets owned by Hypercom Corporation, which was in the business of electronic payment solutions or the electronic point of sale business. The sale was considered to be a bargain purchase wherein the business was bought for less than the aggregate value of the assets.

The Debtor was a point-of-sale terminal manufacturer and in 2011, was reported to have the second largest terminal market base of installed terminals in the United States. However, the technology used by the Debtor in its products was scheduled to fall out of compliance with the Payment Card Industry Data Security Standard in 2014.

On February 6, 2014 the Debtor sold substantially all of its assets and business operations including certain equity ownership interests in SIA Equinox Payments Latvia and Netset Americos Centro Servicios, S. de R.L. de C. V, and the right to use its name to Brookfield Equinox, LLC pursuant to an Asset Purchase Agreement dated February 6, 2014. Included among the purchased Assets sold by the Debtor were all of the Debtor’s books and financial records (the “Sale”).

According to the last of the complaints filed by the Trustee, by the time the Trustee was appointed, the Debtor had run its bank accounts down to $4.06.  On February 24, 2014, the Debtor filed its chapter 7 petition for bankruptcy in the United States Bankruptcy Court for the District of Delaware.  The Trustee was appointed on February 24, 2014.  As the statute of limitations on these actions is 2 years from the appointment of the Trustee, he was cutting it close when filing the last of these actions – four were filed on February 24, 2016.

The Trustee handled the liquidation of all the remaining assets of the Debtor and is 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 Christopher S. Sontchi.  The Trustee/Plaintiff prosecuting the preference actions is represented by the law firms Billion Law and Forman Holt Eliades & Youngman LLC.

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.”

On February 17, 2016, the Bankruptcy Court published a notification that Judge Christopher S. Sontchi is seeking feedback from the bar on his performance.  As of March 1, 2016, the notice is still available on the website for the Delaware Bankruptcy Court: http://www.deb.uscourts.gov/news/survey-judge-christopher-s-sontchi.

According to the notice, Judge Sontchi wants to assess his level of performance as part of his “on-going commitment to provide the highest level of public service possible.”  He is seeking feedback from all attorneys who have appeared before him for the last 5 years.  The notice states that “The results are exclusively for Judge Sontchi ‘s use in improving his performance; the FJC will not provide the results to anyone other than the judge and the results will not be used in the reappointment process.”

To be frank, I have not heard of a judge actively seeking feedback in such a broad manner from those whom he has provided over.  I can’t imagine a criminal judge requesting feedback from everyone who appeared before him/her in the last 5 years; That would be painful.

In this case, however, Judge Sontchi’s actions are merely another example of the efforts of the Delaware Bankruptcy Court to continue to advance its practice and maintain its position as one of the preeminent bankruptcy circuits in our nation.

Not that I could possibly be biased…

On February 2, 2016, Hancock Fabrics, Inc. and 6 affiliates filed for relief under chapter 11 of the Bankruptcy Code.  The cases are jointly administered under Case Number 16-10296 and presided over by Judge Shannon.  The first day hearing was held on February 3, 2016.  The second day hearing is scheduled for February 22, 2016 at 1:00 p.m.

The majority of the information available about the Debtors comes from the Declaration of Dennis Lyons in Support of Chapter 11 Petitions and Request for First Day Relief (D.I. 4) (the “Declaration”).  On March 21, 2007, Hancock and its affiliates filed for bankruptcy for the first time.  Since that time, the Debtors have experienced a challenging business environment and have been burdened by significant legacy debt.  Declaration at *5.  The Debtors state that their intent in filing for bankruptcy is to “(i) gain access to liquidity, (ii) reduce pension and operational costs, (iii) realign its store locations and format and (iv) execute on one or more options to create value for stakeholders.”  Declaration at *6.  Pursuant with these goals, the Debtors have planned to undergo a very accelerated sales process, with a goal of having a final sale hearing on March 14, 2016.  Declaration at *7.

If you want to stay up-to-date on the filings in this case, I’d recommend you keep an eye on the website created by the claims and noticing agent, Kurtzman Carson Consultants LLC.  The website contains a copy of the bankruptcy docket, free to download and view.  The website is located at http://www.kccllc.net/hancockfabrics.  If you are a creditor of the Debtors, you may want to consider participating in the formation meeting, which has not yet been scheduled.  The formation meeting is the meeting at which the United States Trustee appoints a committee of unsecured creditors.  Being on the creditors’ committee is the best way for an unsecured creditor to stay involved in, and an active participant in, the bankruptcy proceedings.

In a 5 page opinion released January 21, 2016 in the Trump Entertainment Resorts case (Bank. D. Del. 14-12103), Judge Kevin Gross of the Delaware Bankruptcy Court denied the motion of Unite Here Health (“UHH”), the health care provider to employees who were members of union, Unite Here Local 54 (the “Union”).  Judge Gross’s opinion is available here (the “Opinion”).  Judge Gross has issued a number of opinions in this bankruptcy, and we have published several posts about the issues which have been decided.  Please review our prior posts for the background of the dispute between the Union and the Debtors:

Trump Entertainment Resorts Files for Chapter 11 Bankruptcy Protection in Delaware

Trump Entertainment – A Debtor’s Rejection of a Bargaining Agreement

Third Circuit Affirms Bankruptcy Opinion – Trump Entertainment

UHH claimed that because it was not served the Debtors’ motion to reject the CBA, it should be entitled to an administrative claim for health care benefits it provided through October 31, 2014.  The Debtors objected, arguing that because the Court granted its prior motion to reject the CBA nunc pro tunc to September 26, 2014, UHH is not entitled to an administrative claim for benefits it provided.

The Debtors conceded that it did not serve the motion to reject the CBA on UHH, but that UHH had actual notice of the Debtors’ motion to reject the CBA.  Opinion at *3.  The Court agreed that UHH had actual notice and thus was subject to the relief granted in the Court’s order allowing the rejection of the CBA.  The Court then cited Calpine Corp. v. O’Brien Envtl. Energy, Inc. (In re O’Brien Envtl. Energy, Inc.), for the proposition that “The burden of establishing an entitlement to an administrative claim is on the claimant to prove that the expense (1) arises from a post-petition transaction and (2) is beneficial to the debtor in operating its business.”  Opinion at *4 (citing 181 F.3d 527, 532-33 (3d Cir. 1999)).

Judge Gross held that UHH failed to meet the “heavy burden of demonstrating that the costs and fees for which it seeks payment provided an actual benefit to the estate and that such costs and expenses were necessary to preserve the value of the estate assets.”  Opinion at *4-5.  Judge Gross thus held that UHH was subject to the order allowing rejection of the CBA and was not entitled to an admin claim for the purported value of any health benefits it provided.

My primary takeaway from this Opinion is that actual notice “trumps” arguments of inadequate service.

On November 10, 2015, Millennium Lab Holdings and 2 affiliates filed for relief under chapter 11 of the Bankruptcy Code.  The cases are jointly administered under Case Number 15-12284 and presided over by Judge Silverstein.  The first day hearing was held on November 12, 2015.  The second day hearing is scheduled for December 10, 2015 at 11:00 a.m.

The majority of the information available about the Debtors comes from the Declaration of William Brock Hardaway in Support of the Debtors’ Chapter 11 Petitions and First Day Pleadings (D.I. 3) (the “Declaration”).  The other two debtors in these cases are Millennium Health, LLC and RxAnte, LLC.  The Debtors filed these chapter 11 cases as a prepack, intending to quickly shed a substantial amount of debt and continue their operations.

The Debtors in this case provided testing services, and the majority of their revenues were generated through Medicare reimbursements.  Declaration at *9.  This became an issue, however, when the Department of Justice began investigating Millennium.  In February, 2015, a Medicare Administrative Contractor informed Millennium that its Medicare billing privileges would be revoked on account of alleged administrative billing abuses relating to claims allegedly submitted by Millennium for services provided, after their dates of death, to 59 Medicare beneficiaries.  Declaration at *9.

In May, 2015, the Debtors were able to reach a settlement with the Federal and State governments, and began negotiations with their lenders to keep the business alive.  Declaration at *11-12.  The Debtors successfully negotiated with a majority of their creditors to achieve a consensus as to the restructuring.  They had hoped to reach an agreement with 97% of their creditors to effect an out-of-court restructuring, but having fallen short of that extremely high hurdle, filed for bankruptcy to complete their rehabilitation.  Declaration at *16-17.

This case is going to move fast, so if you have a claim or other grievance, you will need to move quickly.  If you want to stay up-to-date on the filings in this case, I’d recommend you keep an eye on the website created by the claims and noticing agent, Prime Clerk.  The website contains a complete copy of the bankruptcy docket, free to download and view.  The website is located at https://cases.primeclerk.com/millenniuminfo/.

On October 14, 2015, Affirmative Insurance Holdings, Inc. and 7 affiliates filed for relief under chapter 11 of the Bankruptcy Code.  The cases are jointly administered under Case Number 15-12136 and presided over by Judge Christopher S. Sontchi.  The first day hearing was held on October 19, 2015.  The second day hearing is scheduled for November 18, 2015 at 12:30 p.m.

The majority of the information available about the Debtors comes from the Declaration of Michael J. McClure in Support of the Debtors’ Chapter 11 Petitions and First Day Pleadings [D.I. 2] (the “Declaration”).  The Debtors offered non-standard personal automobile insurance (“NSPIA”) policies – policies that are provided to “drivers who find it difficult to obtain insurance from standard automobile insurance companies…”  These policies have a higher average premium, which “results from the increased frequency of loss costs…”

The Debtors’ bankruptcy petition lists assets of $10-$50 million and debt of $50-$100 million.  According to the Declaration, the NSPIA market segment is highly competitive and has few barriers to entry.  The Debtors have incurred losses from operations from 2008 until the present, and began selling portions of the business beginning in 2013.  While it is unclear from the Declaration whether the Debtors intend to liquidate or restructure, the significant NOLs (approximately $80 million) held by the Debtors may make them a prime takeover candidate.  The Debtors are represented by Polsinelli PC and McDermott Will & Emery LLP in these bankruptcy proceedings.

A formation meeting is scheduled for October 30, 2015 at 10:00 a.m. in the J. Caleb Boggs Federal Building, 844 King St., Room 5209, Wilmington, DE 19801.  The 341 Meeting is scheduled for November 18, 2015 at 2:00 p.m.

One way in which creditors can assert their interests is to attend the Formation Meeting and become a part of the creditors’ committee.  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.  There are, naturally, trade-offs to gaining access to this information (including limitations on a company’s ability to trade in securities of the debtor), but you will be far better informed of what occurs in the bankruptcy proceeding.

Another way creditors can assert their interests is to attend the Section 341 Meeting of Creditors to depose the debtor’s representative regarding the assets and liabilities of the bankruptcy estate.  Creditors may retain counsel to conduct such an examination of the debtor’s representative.  The Section 341 meeting of creditors is an integral component of a bankruptcy proceeding.

General topics that are discussed during a Section 341 meeting may include the following:

  • The nature and scope of a debtor’s assets and liabilities;
  • The amount of accounts receivable and accounts payable;
  • The extent that the debtor is able to repay its creditors;
  • Whether insurance remains active;
  • The condition and location of goods received in the 20-45 days before bankruptcy;
  • The debtor’s or trustee’s plan to reorganize its debt or liquidate its assets;
  • The debtor’s plan after it emerges from bankruptcy (not applicable to a Chapter 7 debtor);
  • Whether the debtor experienced any changes in revenue since filing for bankruptcy; and
  • Potential avoidance actions to be commenced by the debtor or trustee

On September 29, 2015, Judge Laurie Selber Silverstein of the Delaware Bankruptcy Court ruled on the objection of a distribution trustee to payment of the bankruptcy debtor’s investment banker.  This opinion caught my eye as it is unusual for objections to fee applications to merit written opinions.  The “Opinion” is available here.

In this case, the investment banker was seeking payment of a monthly fee (unopposed), a M&A fee (unopposed), a success fee (opposed), and related expenses (unopposed).  The investment banker appears to have successfully fulfilled its role in this case:  The debtors obtained DIP financing and a plan of reorganization was confirmed under chapter 11 of the Bankruptcy Code.  Considering the current bankruptcy climate, anything other than a 363 sale and conversion to chapter 7 is a success.  For a chapter 11 case to be confirmed – and within 4 months – is commendable.

Nevertheless, as part of the plan, a distribution trustee was appointed to be an active party in the post-effective date activities necessary in the bankruptcy.  One such activity was objecting to fee applications in order to maximize distributions to unsecured creditors.  Pursuant to the terms of the investment banker’s retention, the Success Fee was to award the investment banker for obtaining DIP financing.  However, the Success Fee would not be paid if the DIP financing was provided “as part of a contemplated sale transaction, and such sale transaction is consummated…”  Opinion at *5.

The Distribution Trustee argued that the change of control provided by the consummated reorganization plan qualified as a sale transaction.  His argument was compelling, particularly as an auction and sale hearing was held to approve the transaction which was the basis of the plan of reorganization.  However, Judge Silverstein held that the investment banker’s “right to a Success Fee is based upon the Retention Terms, not the characterization of the transaction for purposes of the Sale Hearing.”  Opinion at *4.  She held that had the Success Fee been withheld in the retention agreement upon the occurrence of a “Transaction,” that it would not be awarded in this case.  However, the term “sale transaction” was used.  There was no sale transaction here.  Instead, the change of control was effected through the plan process.

My $.02

This Distribution Trustee was put in a tough position.  He was not a part of the original contract drafting, but was tasked, after the fact, with trying to reduce the payment made to the investment banker.  If you are party to, or possibly affected by a contract, it is always best to have a seat at the table for its drafting.  Ideally, you’ll have an attorney sitting with you to make sure that you can have the best language possible – with an eye towards a result like the one achieved by the investment banker in this case.

From October 1, 2015 through October 31, 2015, the United States Bankruptcy Court for the District of Delaware will be instituting its annual process to review and consider comments to the Local Rules.  Per the Court’s announcement, all comments received will be discussed by the Local Rules Committee to ascertain if there will be a revision to the Local Rules, and any revisions will be effective as of February 1, 2016.

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 or at cneff@foxrothschild.com.

In the Boomerang Systems, Inc. bankruptcy proceeding (Delaware Bankruptcy Case No. 15-11729), a formation meeting has been scheduled for Thursday, August 27, 2015 at 10:00 a.m. (ET) at the J. Caleb Boggs Federal Building, 844 King Street, Room 2112, 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.  If you want to be considered for Committee membership, you MUST complete a questionnaire and return it to the U.S. Trustee no later than August 25, 2015 at 5:00 p.m. (ET).

One way in which creditors can assert their interests is to attend the Formation Meeting and become a part of the creditors’ committee.  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.  There are, naturally, trade-offs to gaining access to this information (including limitations on a company’s ability to trade in securities of the debtor), but you will be far better informed of what occurs in the bankruptcy proceeding.

Summary

In a 12 page decision released June 2, 2015, Judge Gross of the Delaware Bankruptcy Court gives us our first Delaware specific insight into how the U.S. Supreme Court’s Wellness opinion will be interpreted.  Judge Gross’ opinion is available here (the “Opinion”).  The Opinion was issued in the adversary proceeding SNMP Research Int’l. v. Nortel Networks Inc., Case No. 11-53454.  For a review of the Supreme Court’s Wellness Opinion, please take a look at this blog post authored by Carl Neff:  United States Supreme Court Expands Power of Bankruptcy Courts- Wellness Int’l v. Sharif.

In this Opinion, the Court addressed the “narrow but complex issue” of whether it has “authority to enter judgments or orders with respect to the claims of the plaintiff, a non-debtor, against a non-debtor defendant for what are clearly non-core claims…”  Opinion at *1.

Background

On January 14, 2009, Debtors filed petitions for relief pursuant to Chapter 11 of the Bankruptcy Code.  On November 2, 2011, SNMP filed its original complaint against Debtors, Avaya and others.  Over the last few years, SNMP filed both an amended complaint and a second amended complaint.  Each of the Complaints demanded a jury trial and further state:  This Court has jurisdiction over this adversary proceeding pursuant to 28 U.S.C. § 1334. The causes of action against Nortel are core. The causes of action against Avaya are not core within the meaning of 28 U.S. § 157(b), and SNMP Research does not consent to the entry of final orders by the Bankruptcy Judge in this proceeding as to causes of action against Avaya.  Opinion at *4.  At the same time, however, the complaints “contain 12 prayers for relief from ‘this Court,’ i.e., the Bankruptcy Court.”  Opinion at *5.

Judge Gross’ Opinion

Judge Gross begins his analysis by providing that all parties agree the claims against Avaya are non-core, which “might have ended the inquiry in SNMP’s favor had the United States Supreme Court not fortuitously issued a ruling only two days before oral argument in this matter which turned the focus from the nature of the claims solely to whether SNMP had consented to the Court’s jurisdiction and its authority to issue final orders and judgments.”  Opinion at *5-6.

Judge Gross included the following quote from the Supreme Court’s Wellness decision:  “This case presents the question whether Article III allows bankruptcy judges to adjudicate such claims with the parties’ consent. We hold that Article III is not violated when the parties knowingly and voluntarily consent to adjudication by a bankruptcy judge.”  Opinion at *6 (citing Wellness International Network, Ltd. v. Sharif, No. 13-935, 2015 WL 2436619, *3 (May 26, 2015)).

Avaya argues that SNMP has implicitly consented to the Bankruptcy Court’s authority by virtue of its action and failure to act in a timely manner.  Opinion at *6.  While Judge Gross did determine that Avaya made a “strong case for a finding that SNMP consented,” Opinion at *8, he ultimately held that SNMP made its intentions known and reserved its rights sufficiently, such that the requirement provided in the Wellness opinion was not met.  “[T]he Supreme Court’s emphasis on consent being ‘knowing and voluntary’ reinforces deliberation.”  Opinion at *9.

Judge Gross was not “willing to base a finding of implied consent on the filing of the Complaints in this Court when … SNMP expressly gave notice in the Complaints that … it was not submitting itself to the Court’s authority to enter final orders.”  Opinion at *9.

My $.02

While in this instance the Court held it did not have authority to rule based on implied consent, parties need to proactively reserve their rights, as bankruptcy courts don’t always make this finding.  The Opinion provides two examples of such situations: Schubert v. Lucent Technologies Inc. (In re Winstar Communications, Inc.), 348 B. R. 234, 251 (Bankr. D. Del. 2005) (party impliedly consented to bankruptcy judge’s final determination having sought judgment from the bankruptcy court); In re River Entertainment Co., 467 B.R. 808, 822-24 (Bankr. W.D. Pa. 2012) (party found to have consented to bankruptcy court’s adjudication of its claims after removing case to bankruptcy court and failing to timely move to withdraw the reference).  Opinion at *8-9.

If you or a client are ever in a situation when you don’t consent to the authority of the Bankruptcy Court, make sure you repeat your reservation of rights and denial of consent every chance you get.  And don’t wait too long if you are going to move to withdraw the reference.