Delaware preference action

On September 9, 2013, Furniture Brands International (“Furniture Brands”) and various related entities filed chapter 11 petitions for bankruptcy in the United States Bankruptcy Court for the District of Delaware.  We initially published a blog post about the filing here: Furniture Brands Files for Bankruptcy in Delaware Seeking to Sell Assets

On August 1, 2014, the Debtors’ confirmed chapter 11 plan became effective, thereby creating the FBI Wind Down, Inc. Liquidating Trust (the “Trust”) and appointing Alan D. Halperin as the Trustee.  We recently were informed that the Trustee has begun sending out preference demand letters, informing recipients that if they do not settle their liability, he will bring a preference lawsuit.  The Trustee will argue that the transfers, or 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.

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.”

If you have received one of these demand letters and would like to discuss your options, feel free to give us a call.  Note that until we are retained, however, we can only provide general advice as our conversation will not be protected by the attorney client privilege.

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.

In 6 pages of Findings of Fact and Conclusions of Law released December 19, 2014 in the Liberty Brands bankruptcy (Bank. D. Del. 09-50965), Judge Walrath’s ruling referenced Stern v. Marshall, 131 S.Ct. 2594 (2011).  Judge Walrath’s Findings of Fact and Conclusions of Law are available here (the “Opinion”).  Because of the continuing discussions caused by the Stern opinion, we wanted to touch briefly on the (very short) part of the opinion referencing Stern.  The Stern case was previously discussed in numerous posts on this site, including the following:

Judge Walsh Provides Analysis of Stern v. Marshall in DBSI Opinion

Stern v. Marshall: Effects on Delaware

Background

The Opinion ruled on the Motion of the Trustee for New Trial to Amend or Make New Findings of Fact and Conclusions of Law with respect to certain allegedly preferential transfers.  The motion sought reconsideration of the Court’s Proposed Findings of Fact and Conclusions of Law issued on September 25, 2014, arguing that certain transactions should be ruled preferences, despite the Trustee having failed to adequately argued that point.

The Opinion

Judge Walrath’s first analysis in the Opinion is contained in paragraph 6 in which she states “[t]he Bankruptcy Court does not have the constitutional authority to enter a final order on the preference action because DTW never filed a claim in this bankruptcy case.”  She then cited to the Stern holding that “a preferential transfer claim can be heard in bankruptcy when the allegedly favored creditor has filed a claim . . . . If, in contrast, the creditor has not filed a proof of claim, the trustee’s preference action does not ‘become[] part of the claims-allowance process’ subject to resolution by the bankruptcy court.” 131 S. Ct. 2594, 2617 (2011).

This is one of few recent opinions on how the Stern holding will affect preference litigation in Delaware.  It should be remembered, however, that while the Bankruptcy Court only has the power to issue Findings of Fact and Conclusions of Law, there has yet to be a Delaware District Court opinion ruling contrary to the Bankruptcy Court’s recommendations regarding preference litigation (in this post-Stern era).  This is just one more nuance to the defense (or prosecution) of preference actions that any lawyer in this practice area needs to be aware of.

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.

Introduction

In July of 2011, the Chapter 7 Trustee (the "Trustee") in the Ultimate Acquisition Partners (formerly "Ultimate Electronics") bankruptcy began filing complaints to avoid and recover payments which the Trustee alleged were avoidable transfers under section 547 of the United States Bankruptcy Code.  Earlier this month, the Trustee filed another round of preference complaints seeking to recover what he contends are preferential transfers.  This post will look briefly at the Ultimate’s business, why the company filed for bankruptcy and provide some general information regarding defenses to a preference action.

Reasons Ultimate Electronics Filed for Bankruptcy

Prior to going in to bankruptcy, Ultimate Electronics sold high-end home entertainment and consumer electronics throughout the western and mid-western United States.  Based in Thornton, Colorado, Ultimate Electronics employed approximately 1,500 employees before it filed for bankruptcy.  According to pleadings filed with the Delaware Bankruptcy Court, Ultimate attributed its bankruptcy filing to a "significant downturn in business at certain of the Debtors’ locations, coupled with refusal by certain of Debtors’ vendors to ship goods to the Debtors on open credit."  By filing for bankruptcy, Ultimate was hoping to close under performing stores, re-negotiate its leases and improve its profitability.

Conversion from Chapter 11 to Chapter 7

Plans quickly changed for Ultimate after the company filed for bankruptcy.  Nine days after filing for bankruptcy, on February 4, 2011, the company filed a motion with the Bankruptcy Court seeking approval of going out of business sales.  Within two months of filing the going out of business motions, Ultimate had sold substantially all of its assets.

On April 25, 2011, Ultimate Electronic’s DIP lender issued a "Termination Event" under Ultimate’s Final Cash Collateral Order (the "DIP Order").  Under the DIP Order, if the lenders’ termination notice is not contested within five business days, the automatic stay is lifted in favor of Ultimate’s DIP lender.  Ultimate filed its Motion to Convert to Chapter 7 one day after receiving the Termination Event.  The Bankruptcy Court converted Ultimate’s bankruptcy to a Chapter 7 liquidation on May 3, 2011.  The following day, Alfred T. Giuliano was appointed the Chapter 7 Trustee for Ultimate Electronic’s bankruptcy proceeding.

The Preference Actions

The Trustee in the Ultimate Electronics bankruptcy is represented by the law firm Pachulski Stang Ziehl & Jones LLP.  The bankruptcy proceeding, along with the preference actions filed by the Trustee, are before the Honorable Mary F. Walrath.  Judge Walrath is a former Chief Judge of the Delaware Bankruptcy Court. 

For reader’s looking for more information concerning preference litigation, attached is a booklet I prepared on the subject:  "A Preference Reference:  Common Issues that Arise in Delaware Preference Litigation."

Jason Cornell is a partner and bankruptcy attorney with the law firm Fox Rothschild LLP.  Jason is admitted and practices before the United States Bankruptcy Court for the District of Delaware.  You can reach Jason at 302 427 5512 or jcornell@foxrothschild.com.

Introduction

In January, Jeoffrey L. Burtch, the Chapter 7 Trustee (the "Trustee") in the ManagedStorage bankruptcy proceeding, commenced adversary proceedings in the Delaware Bankruptcy Court against various defendants.  As alleged in the complaints, the Trustee claims that the defendants received "preferential" payments from ManagedStorage (dba "Incentrix Solutions" or "Incentrix") and that the payments are subject to avoidance and recovery under the United States Bankruptcy Code (the "Bankruptcy Code").  This post will look at the Incentrix bankruptcy, why the company filed for bankruptcy as well as some of the issues that arise in preference litigation.

The Bankruptcy Proceeding

Incentrix filed Chapter 11 petitions for bankruptcy in February of 2009.  At the time the company filed for bankruptcy, it was based in Denver, Colorado and operated offices in Illinois, Washington, California, New Jersey, Pennsylvania, New York, Oregon, Texas, Colorado and the United Kingdom. According to a Declaration of Incentrix’s Chief Financial Officer (the "Declaration" or "Decl."), the company’s business consisted primarily of the resale of technology hardware and software products, as well as maintenance contracts.  Decl. at *3.  Aside from its resale business, the company also provided managed IT services.  Decl. at *3.

Continue Reading Chapter 7 Trustee in ManagedStorage (aka Incentrix Solutions) Files Preference Actions

On August 7,  2009, Meridian Automotive Systems ("Meridian") filed a voluntary petition for relief under chapter 7 of the United States Bankruptcy Code.  Soon after Meridian filed its petition for bankruptcy, the Office of the United States Trustee appointed George L. Miller to serve as the chapter 7 trustee (the "Trustee") for the Meridian bankruptcy estates.  Approximately one month before Meridian filed for bankruptcy, on July 6, 2009, Meridian entered in to an agreement to sell substantially all of its assets (the "Asset Purchase Agreement" or "APA") to Ventra Greenwich Holdings, Corp. ("Ventra"), and its related entities. 

A "typical" preference action includes allegations that in the ninety days prior to the debtor’s petition date, the debtor made one or more transfers to a creditor and such transfers constitute avoidable preferences.  The allegations in the Meridian preference complaints, however, take a different approach.  As alleged by the Trustee in the complaints,  under the Asset Purchase Agreement, Ventra assumed Meridian’s liabilities for certain account payables to trade creditors of Meridian.  See Trustee’s Complaint at *4.  The Trustee argues that the assumed liabilities under the APA include the antecedent debt that was owed by Meridian to various creditors.  Compl. at *4. 

The Trustee further argues that the liabilities assumed under the APA constituted a "transfer" as defined under the Bankruptcy Code, as the assumed liability:

… was an indirect mode of transferring property or an interest in property.  Specifically,  the Selling Debtors by the Indirect Transfers effectively transferred to the Defendant on the Closing Date its right to receive a portion of the sale price equal to the amount of the debt.  In addition the Indirect Transfers were transfers to or for the benefit of the creditor, in that the APA required that Ventra ‘pay discharge or perform when due’ the Defendant’s Assumed Liabilities.

Compl. at. *4.

Within the preference complaint, the Trustee cites a Seventh Circuit decision, Warsco v. Preferred Technical Group, 258 F.3d 557 (7th Cir. 2001), for the proposition that an avoidable transfer does not need to come directly from a debtor to a creditor.  Instead, transfers by a third party to a creditor on the debtor’s behalf may also be avoidable under the Bankruptcy Code.  Compl. at *4-5, citing Warsco 258 F.3d at 564.  Absent from the Trustee’s complaints are citations to case law from either the Third Circuit or District of Delaware on the voidability of transfers from a non-debtor third party to a creditor.

The Meridian bankruptcy, as well as the adversary proceedings commenced by the Trustee, are before the Honorable Mary F. Walrath.  Judge Walrath previously served as Chief Judge of the Delaware Bankruptcy Court.  The Trustee for the Meridian bankruptcy estate is represented by the law firm Cozen O’Connor.

For readers interested in more information concerning issues that arise in preference litigation, below are some prior posts I have written on the subject:  

Decision in Archway Cookies Grants Summary Judgment Based on Ordinary Course of Business Defense

Using the Solvency Defense in a Preference Action: In re Bernard Technologies

Recent Decision in Pillowtex Addresses Elements of the Ordinary Course of Business Defense in a Preference Action

Defending Avoidance Actions: The "Settlement Payment" Safe Harbor Receives Broad Interpretation Under In re Elrod Holdings

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Jason Cornell is an attorney with the law firm Fox Rothschild LLP and practices before the United States Bankruptcy Court for the District of Delaware.  You can reach Jason at 302 427-5512 or jcornell@foxrothschild.com.

Last month, Jeoffrey Burtch, the Chapter 7 Trustee (the "Trustee") in the Opus East bankruptcy filed approximately 90 preference actions against various defendants.  As stated in his complaints, the Trustee "seeks to avoid and recover … all preferential transfers of property made for or on account of an antecedent debt made to or for the benefit of the Defendant by the Debtor during the ninety-day period prior to the filing of the Debtor’s bankruptcy petition under 11 U.S.C. sec. 547 and 550."  This post will look briefly at the Opus East bankruptcy proceeding, as well as provide some general information concerning defenses to preference litigation.

Opus East, LLC ("Opus East") filed a voluntary petition for relief under the Bankruptcy Code on July 1, 2009.  Instead of filing a chapter 11 petition for reorganization, Opus East filed a chapter 7 petition for liquidation.  On July 2, 2009, the Office of the United States Trustee appointed Jeoffrey Burtch as Trustee.  Prior to filing for bankruptcy, Opus East developed residential and commercial properties.  According to court papers filed by one of Opus East’s lenders, Opus East originally intended to reorganize under chapter 11 and surrender various assets to the bank.  Once the company determined that it was unable to reach an agreement with its lenders, Opus East sought to liquidate under the Bankruptcy Code. 

Continue Reading Trustee in Opus East Bankruptcy Files Preference Actions in Delaware

In August, the Chapter 7 Trustee in the National Wholesale Liquidators ("NWL") bankruptcy filing approximately 90 preference actions.  Just recently,  the Trustee filed over 100 more preference actions in NWL.  In November of 2008, I wrote about the commencement of NWL bankruptcy (read my prior post concerning the NWL bankruptcy here).  As indicated in the prior post, NWL filed for bankruptcy in agreement with its lenders that it would either find a buyer while in bankruptcy, or convert and liquidate under Chapter 7 of the Bankruptcy Code.  The NWL bankruptcy converted to Chapter 7 on February 26, 2009. 

The Chapter 7 Trustee hired Archer and Greiner to represent him in this bankruptcy proceeding.  Pursuant to the summons filed with the most recent preference actions, the Court scheduled a pretrial conference on February 16, 2011.  These adversary actions, as well as the NWL bankruptcy proceeding, are before the Honorable Mary F. Walrath.  Judge Walrath previously served as Chief Judge of the Delaware Bankruptcy Court

Below are other posts I have written concerning avoidance actions in bankruptcy court:

Decision in Archway Cookies Grants Summary Judgment Based on Ordinary Course of Business Defense

Using the Solvency Defense in a Preference Action: In re Bernard Technologies

Recent Decision in Pillowtex Addresses Elements of the Ordinary Course of Business Defense in a Preference Action

Defending Avoidance Actions: The "Settlement Payment" Safe Harbor Receives Broad Interpretation Under In re Elrod Holdings

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Jason Cornell practices with the law firm Fox Rothschild LLP in Wilmington, Delaware.  You can reach Jason at 302 427 5512, or jcornell@foxrothschild.com

Introduction

Earlier this month, the Chapter 7 Trustee (the "Trustee") in the Consolidated Bedding bankruptcy commenced several avoidance actions under sections 547 and 548 of the Bankruptcy Code.  Consolidated commenced this bankruptcy proceeding on May 29, 2009, when it filed petitions for bankruptcy under Chapter 7 of the Bankruptcy Code.  Consolidated manufactured and sold mattresses under the trade name "Spring Air."  According to documents filed with the Delaware Bankruptcy Court, Consolidated ceased operations and terminated its employees prior to filing for bankruptcy. 

Events Leading to Bankruptcy

On May 13, 2009 (two weeks before filing for bankruptcy), certain lenders of Consolidated sent notices of default under the company’s loan agreement.  Soon after, the lenders accelerated Consolidated’s loan obligations and demanded repayment.  Approximately two weeks after sending the notice of default, Consolidated and its lender entered into a foreclosure agreement whereby the company agreed to sell substantially all of its assets to Spring Air International LLC.  After the sale to Spring Air International, Consolidated filed for bankrupty and the Trustee was appointed.

The Avoidance Actions

As of the date of this post, the Trustee has filed over 80 avoidance actions against various defendants.  These adversary actions, as well as the main case, are before the Honorable Brendan L. Shannon.  The Trustee is represented by Archer & Greiner and ASK Financial LLP. 

Below are other posts I have written on this blog concerning avoidance actions in Bankruptcy Court:

Decision in Archway Cookies Grants Summary Judgment Based on Ordinary Course of Business Defense

Using the Solvency Defense in a Preference Action: In re Bernard Technologies

Recent Decision in Pillowtex Addresses Elements of the Ordinary Course of Business Defense in a Preference Action

Defending Avoidance Actions: The "Settlement Payment" Safe Harbor Receives Broad Interpretation Under In re Elrod Holdings

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Jason Cornell practices with the law firm Fox Rothschild LLP in Wilmington, Delaware.  You can reach Jason at 302 427 5512, or jcornell@foxrothschild.com.

Introduction

On September 1, 2010, Judge Christopher S. Sontchi of the United States Bankruptcy Court for the District of Delaware issued a decision finding that the payment practices between a creditor and debtor satisfied the ordinary course of business defense.  Judge Sontchi’s decision is worth review as it provides a current look at one of the most common defenses to a preference action.  Better still, motions for summary judgment based on ordinary course of business often fail due to fact intensive nature of the defense.  It is helpful, then, to understand the reasons for the court granting summary judgment and the facts the court found significant.

Background

Archway Cookies ("Archway") filed for chapter 11 bankruptcy protection on October 6, 2008.  Approximately three months after filing for bankruptcy, the company converted to a chapter 7 liquidation and a chapter 7 trustee (the "Trustee") was appointed.  The Trustee commenced several avoidance actions, one of which was against Detroit Forming, Inc. ("DFI").  DFI manufactures plastic trays which it sold to Archway for approximately two years prior to the petition date.  Pursuant to the parties agreement, DFI shipped goods to Archway on net 20 day payment terms.  Opinion at *3.

Continue Reading Decision in Archway Cookies Grants Summary Judgment Based on Ordinary Course of Business Defense

Recently, the Chapter 7 Trustee (the "Trustee") in the HRP Myrtle Beach Holdings bankruptcy, filed several avoidance actions pursuant to sections 547, 548, and 549 of the Bankruptcy Code.  The avoidance actions, filed in the United States Bankruptcy Court for the District of Delaware, are before the Honorable Kevin J. Carey, Chief Judge of the Delaware Bankruptcy Court.  For those not familiar with the HRP bankruptcy proceeding, this post will look briefly at the nature of HRP’s business and why the case ultimately converted to a chapter 7 liquidation.

HRP Myrtle Beach Holdings, LLC ("HRP") is the parent company of various subsidiaries and affiliates that owned and operated the Hard Rock Park theme park, located in Myrtle Beach, South Carolina.  HRP marketed the theme park as the world’s first rock n’ roll theme park that highlighted the "culture, lifestyle and legends of rock music entertainment."  See HRP’s Declaration in Support of First-Day Pleadings (the "Declaration") at *3.  Situated on 140 acres, HRP considered the $400 million property the largest investment to date in South Carolina tourism.  Id. at *4. 

Despite its size and unique theme, HRP’s theme park suffered from low attendance following its opening in April 2008.  According to the Declaration, HRP blames poor attendance at its park on high energy and food costs, which in turn reduced overall consumer spending.  Declaration at *8.  In response to slumping sales, HRP filed for bankruptcy in September of 2008 hoping to restructure its debt and better develop its marketing and operations.  While in bankruptcy, HRP tried unsuccessfully to complete a sale of all of its assets under section 363 of the Bankruptcy Code.  Following the unsuccessful sale attempts, on January 2, 2009 HRP sought permission from the Bankruptcy Court to convert to a chapter 7 liquidation.  The Court approved the conversion to chapter 7 on January 6, 2009 and the Trustee was appointed soon after.

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Jason Cornell is a bankruptcy attorney who practices with Fox Rothschild LLP in Wilmington, Delaware.  You can contact Jason at 302 427 5512, or jcornell@foxrothschild.com.