On June 16, 2016, the Official Committee of Unsecured Creditors (the “Committee”) of Kid Brands Inc., et al. (the “Debtors”), filed approximately 64 complaints seeking the avoidance and recovery of allegedly preferential and fraudulent transfers under Sections 547, 548 and 550 of the Bankruptcy Code.  The Committee also seeks to disallow claims of such preference defendants under Sections 502(d) and (j) of the Bankruptcy Code.

The Debtors filed voluntary petitions for bankruptcy in the U.S. Bankruptcy Court for the District of New Jersey on June 18, 2014 under Chapter 11 of the Bankruptcy Code.   On July 2, 2014, the Office of the United States Trustee for the District of New Jersey appointed the Committee.

The law firms of ASK LLP and Gellert Scali Busenkell & Brown, LLC represent the Committee in these various preference cases.  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 bankruptcy attorney with the law firm of Fox Rothschild LLP.  You can reach Carl at (302) 622-4272 or at cneff@foxrothschild.com.

By way of update to the Capsule International Holdings preference action filings (see original post here), the Official Committee of Unsecured Creditors (the “Committee”) recently filed a Motion for Authority to Settle Classes of Preference Claim Controversies Pursuant to Bankruptcy Rule 9019(b) and to Modify Compromise Procedures (the “Motion”).  For a copy of the Motion, click here.

Through the Motion, the Committee seeks the authority to settle certain classes of claims without seeking Court approval under Section 9019(b) of the Bankruptcy Code.  Per the motion, the Committee has filed approximately 80 claims, seeking the recovering of approximately $21 million for the Debtors’ estate.

The deadline to object to the Motion is February 9th at 4:00 p.m. (ET), and the hearing date on the Motion is scheduled for February 16, 2016 at 1:00 p.m. (ET) at the United States Bankruptcy Court, 824 Market St., 5th Fl., Courtroom #6, Wilmington, Delaware.

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.

Many preference defendants are not aware of the fact that if their pre-petition contract with the debtor is assumed or assigned in the course of the bankruptcy, then such assumption/assignment will generally serve as a bar to recovery for receipt of alleged preferential transfers.

Under established Third Circuit law, the assumption or assignment of a contract prohibits recovery for pre-petition transfers made to such creditor during the 90 day preference period.  See Kimmelman v. Port Authority of New York and New Jersey (In re Kiwi Int’l Air Lines, Inc.), 344 F.3d 311, 321 (3d Cir. 2003) (holding that Section 547(b)(5) could not be satisfied if the executory contract at issue was assumed pursuant to a court order because “had the creditors not received the payments prepetition, they would have received amounts reflecting those sums, in any event, when the Bankruptcy Court approved the cures of assumed agreements.”).

Accordingly, a preference defendant should consult with counsel to determine if its pre-petition contract with the debtor has been assumed or assigned by court order, which may in turn serve as a complete defense to a threatened or pending preference action.

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 recent opinion of Burtch v. Revchem Composites, Inc. (In re Sierra Concrete Design, Inc.), Adv. No. 10-52667 (CSS), 2015 WL 4381571 (Bankr. D. Del. July 16, 2015), the Delaware Bankruptcy Court issued a memorandum opinion following trial on claims asserted by Jeoffrey Burtch, Chapter 7 Trustee of Sierra Concrete Design, Inc. (“Sierra” or “Debtors”), seeking recovery against Defendant Revchem Composites, Inc. (“Revchem”) for alleged preferential transfers under Sections 547 and 550 of the Bankruptcy Code.

In the memorandum opinion, the Court found that Revchem successfully established at trial that each of the payments received by Revchem from Sierra during the 90 day preference period were made in the “ordinary course” of the parties’ business relationship, and were thus shielded from recovery pursuant to Section 547(c)(2) of the Bankruptcy Code.

This opinion is notable because Revchem was able to establish this defense even though it received payments from Sierra during the preference period at a much faster rate (a standard deviation of 27.9 days) than during the pre-preference period.

This is so because, as testified by Revchem, Sierra was engaged in a construction project with tight timelines and needed product at a faster rate than normal.  Because the Debtors were at their credit limit and had to pay previous invoices before receiving new product, the Debtors were paying at a faster rate during the preference period.  Thus, the Court found that the accelerated payments during the preference period were made in the ordinary course of business and granted judgment for Revchem.

This decision is a “must-read” for preference action defendants, as it dispels the notion that transfers made at a faster rate during the preference period (as compared to the pre-preference period) cannot be protected by the ordinary course of business defense.  It is clear that the Court will examine and consider circumstances between the parties which lead to changes in rates of payment in determining whether such transfers can be shielded by Section 547(c)(2).

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.

On November 7, 2014, in the neighboring jurisdiction of the United States Bankruptcy Court for the District of New Jersey, Dots, LLC, et al. (“Debtors” or “Dots”) filed approximately 70 complaints seeking to avoid and recover alleged preferential transfers pursuant to Sections 547 and 550 of the Bankruptcy Code, to disallow claims of the defendants pursuant to Section 502(d), and seeking attorneys’ fees.

By way of background, the Debtors filed petitions for bankruptcy in the District of New Jersey on January 20, 2014.   The Debtors are operating their businesses and managing their properties as debtors-in-possession.

The law firm of Trenk, DiPasquale, Della Fera & Sodono, P.C. are special counsel to the Debtors in these various preference cases.  The pretrial conference has been scheduled for January 22, 2015 at 10:00 a.m.  These adversary actions, as well as the Debtors’ bankruptcy proceeding, are before the Honorable Donald H. Steckworth.

For readers looking for more information concerning preference litigation, including an analysis of defenses that can be asserted, 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 bankruptcy attorney 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 this prior post, the preference actions filed by Jeoffrey L. Burtch, Chapter 7 Trustee of the Capitol Infrastructure, LLC bankruptcy estates, from April 22 through 24th were discussed.  Since the filing of these preference actions, a Pretrial Conference has been set for July 22, 2014 at 2:00 p.m. at US Bankruptcy Court, 824 Market St., 6th Fl., Courtroom #3, Wilmington, Delaware before the Honorable Kevin Gross.

In pretrial conferences held before the United States Bankruptcy Court for the District of Delaware, the Court will enter a scheduling order governing the pending preferences actions.  This order will generally include deadlines to issue discovery, take depositions, file dispositive motions, along with the scheduling of trial and other relevant dates.  A template scheduling order that has been approved by the Court can be found on the Court’s website, or by clicking here.

It is important that preference defendants review a proposed scheduling order with counsel in order to determine whether the plaintiff’s proposed order comports with the standard terms of such orders approved by the Bankruptcy Court in the District of Delaware.

For readers looking for more information concerning preference litigation, including an analysis of defenses that can be asserted, 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 bankruptcy attorney 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.

On March 28, 2014, AFA Investment Inc. filed approximately 125 complaints seeking to avoid and recover alleged preferential transfers pursuant to Sections 547 and 550 of the Bankruptcy Code, to disallow claims of the defendants pursuant to Section 502(d), and seeking attorneys’ fees.  AFA Investment Inc., and various affiliated entities (the “Debtors”) filed petitions for bankruptcy in the District of Delaware on April 2, 2012.

By way of background, on July 2, 2013, the Court approved an Order approving the formation of an Advisory Committee for the purposes of management of prosecution of avoidance actions.  The Court confirmed the Debtors’ First Amended Joint Chapter 11 Plan of Liquidation on March 7, 2014.

The law firm of ASK LLP represents the Debtors in these various preference cases.  The pretrial conference has not been scheduled.  These adversary actions, as well as the Debtors’ bankruptcy proceeding, are before the Honorable Mary Walrath.  To review one of the complaints filed in these actions, click here.

For readers looking for more information concerning preference litigation, including an analysis of defenses that can be asserted, 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 bankruptcy attorney 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.

It’s your worst nightmare: you provided goods and services to a financially struggling company, only to find out that it filed for bankruptcy, leaving your company with a large unpaid balance.  Worst yet, after the debtor filed for bankruptcy, you receive a demand letter in the mail threatening a lawsuit if you do not return payments that you received from the debtor, even though you earned that money by providing goods or services to that entity.  What sense does that make?

Unfortunately, this is the reality that many companies face when transacting business with an entity in the months prior to its bankruptcy filing.  Section 547 of the Bankruptcy Code allows a debtor to avoid and recover transfers that it made in the 90 days prior to its bankruptcy filing, regardless of whether it received anything in return. This section was enacted to preclude a debtor from paying off its favorite creditor(s), while leaving nothing for the rest of the debtor’s creditors.  Hence the term preference payment.

Where does this leave your company after receiving a demand letter or complaint in the mail for the return of such alleged preferential transfers?  Rest assured, the Bankruptcy Code also provides numerous defenses that you can raise in response to such a demand.  This post provides a brief summary of the elements of, and common defenses to, preference claims.

Elements of a Preference Claim

To establish that a defendant received a preferential transfer under Section 547 of the Bankruptcy Code, plaintiff must prove the elements of 11 U.S.C. §547(b).  These elements include that payments were received by a creditor on account of an “antecedent debt”, and that the preferential payments must be made (i) while the debtor was “insolvent”, (ii) made within 90 days before the debtor filed for bankruptcy, and (iii) the payments provide the creditor with more payments than it would receive if the debtor had liquidated under a chapter 7 liquidation.  11 U.S.C. § 547(b).

An antecedent debt arises when a party receives a right to payment from the debtor for goods or services provided to the debtor.  This means that transfers which were “prepayments” do not qualify as preferential transfers under Section 547. To determine whether a payment falls within the 90 day preference period,  count back ninety days from the date the debtor filed for bankruptcy (the petition date).  For preference claims against “insiders” of the debtor, the preference period extends back one year prior to the petition date.

Finally, the plaintiff must show that the creditor received more than it would have received had it not received the payment, but instead received a distribution in a chapter 7 liquidation. This means that in order to show that a creditor received “preferential” treatment by the debtor,  the plaintiff must prove that the creditor’s payment was greater than what the creditor would have received had the debtor liquidated its assets under chapter 7 of the Bankruptcy Code.

Affirmative Defenses to Preference Litigation: Ordinary Course of Business, New Value and Contemporaneous Exchange

Even if the plaintiff can establish that the debtor made a preferential transfer as defined under the Bankruptcy Code, there are several affirmative defenses available to creditors under Section 547(c).  The more common defenses include the subsequent new value defense, ordinary course of business defense, and the contemporaneous exchange of new value defense, which are discussed below.

  • Ordinary Course of Business Defense – Section 547(c)(2)

The party receiving the payment may still avoid returning the money by proving the payment was made in the “ordinary course of business.” The ordinary course of business defense is the most widely used defense to a preference claim. Congress created the ordinary course defense in order to protect recurring, customary credit transactions that are incurred and paid in the ordinary course of business of the debtor and the debtor’s customers.

Under the 2005 amendments to the Bankruptcy Code, it is now easier for creditors to prove payments were made in the ordinary course of business. Under the amended provisions of the Code, a creditor that receives preferential payments must prove that payment was received in the ordinary of business of the debtor and creditor (the “subjective test”). Alternatively, if the creditor cannot prove that the payments were made according to ordinary business terms between the parties, it can still prevail by showing that the payments were made according to ordinary business terms (the “objective test”). Prior to the 2005 amendments, the creditor had to satisfy both the subjective and objective tests in order to satisfy the ordinary course of business defense.

  • Subsequent New Value Defense – Section 547(c)(4)

Exposure to a preference action can be reduced by the amount of “new value” provided by the defendant to the debtor subsequent to receipt of the preferential payment. To establish a new value defense, the creditor must show that it received a preference payment, the creditor then provided the debtor with new value in the form of subsequent goods or services.

  • Contemporaneous Exchange of New Value Defense – Section 547(c)(1)

Creditors can also defend against a preference claim by showing that the payment(s) received from the debtor were contemporaneous exchanges for subsequent new value.  The contemporaneous exchange defense requires the creditor who received the payments from the debtor provide the debtor with “new value” after receiving payment, which can include the value of goods or services.  Additionally, the creditor and debtor must intend for the payments to be a contemporaneous exchange.  Finally, the payments received by the creditor and the exchange of new value must actually be substantially contemporaneous.

Conclusion

The above is a brief introduction to the elements and core defenses of Section 547 preference actions.  Subsequent posts will explore in greater detail the various components of preference claims.  Besides looking at substantive legal issues, however, it is also important to understand the Local Rules and General Orders that govern the procedural flow of these cases from beginning to end.

Carl D. Neff is a bankruptcy attorney 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.

Summary

In a 28 page decision signed April 29, 2011, Judge Gross of the Delaware Bankruptcy Court determined that in order for a transfer to be considered “substantially contemporaneous” as used by Bankruptcy Code §547(c), it does not necessarily need to comply with the timing requirements of §547(e). Judge Gross’s opinion is available here (the “Opinion”).

Background

In 2004, J. Silver Clothing, Inc. (the “Debtor”) entered an agreement with the Connecticut Community Bank, N.A. (the “Bank”) by which the Debtor would receive a $1 million revolving credit loan in exchange for a first lien on all its assets, except real estate leases, and a guarantee from the Debtor’s chairman of the board, James Fuld (“Fuld”). The loan closed on December 1, 2004. Opinion at *4.

As part of perfecting its lien, the bank was required to file a UCC-1 Financing Statement (“UCC-1”). After submitting its first UCC-1 by mail on December 3, 2004 and having the Division of Corporations reject it for failure to properly list the Debtor’s address, the Bank submitted a second UCC-1 by mail on December 20, 2004. The Debtor, having heard that the UCC-1 was not yet on file, submitted its own UCC-1 by mail on December 30, 2004. The Division of Corporations stamped the Bank’s second UCC-1 as filed on January 4, 2005. Opinion at *5.

In an attempt to stave off bankruptcy, the Debtor repaid the Bank’s loan and sold several of its assets (repaying the loan and lifting the Bank’s lien was a requirement of the sale). The Debtor then filed for bankruptcy on February 25, 2005 and the case was converted to a chapter 7 bankruptcy on April 12, 2005.

The chapter 7 Trustee, brought a preference action against the Bank, claiming that because the lien was not perfected within the time limit set by Bankruptcy Code §547(e), the exchange of value (the lien for the loan) was not contemporaneous, as required to protect the transfer under 547(c).

Judge Gross’s Opinion

Judge Gross granted summary judgment in favor of the Bank. While the 1st and 6th Circuits treat 547(e) as a bright line rule that if a transfer extends beyond the time limit provided by § 547(e), then the exchange is not substantially contemporaneous, the majority of Circuit Courts do not treat 547(e) as a bright line rule. Opinion at *17.

Relying on a previous decision by Judge Walrath, Hayes Lemmerz, 329 B.R. 136, 140-41 (Bankr. D. Del. 2005), Judge Gross rejected the bright line rule in favor of a “totality of the circumstances” rule. To quote Judge Gross, “the Court concludes that Section 547(e) does not command the Court to apply the 10-day limitation inflexibly. Instead, the Court will examine all of the circumstances determining the parties’ intent.” Opinion at *19. And according to Judge Gross’s analysis, the exchange was contemporaneous as required by 547(c), disallowing the Trustee’s attempt to avoid the transfer.

While it is possible that you can take more than the time provided by 547(e) to perfect a lien, the last thing anyone wants is to lose a case by overlooking one section of the bankruptcy code. The order contains far more particulars than this one blog post could contain, and I encourage you to take the time to read it for yourself.

Summary

In a 15 page decision signed yesterday, April 5, 2011, Judge Sontchi of the Delaware Bankruptcy Court determined that when a company receives pleadings in a bankruptcy case, even if served on their “doing business as” name, they have received proper service. Judge Sontchi’s opinion is available here.

Background

Select AirCargo (“AirCargo”) had provided services to Advanced Marketing Services, Inc., (“AMS”) under the name PAC. AirCargo and PAC were the same company – identical in all but name. It’s exactly like when a person, like myself, goes by their middle name. Nothing is different but the name.

AMS and several of its affiliates entered Chapter 11 bankruptcy protection in December of 2006. In November of 2007, the Court confirmed their chapter 11 Plan, and Curtis Smith was appointed as the Plan Administrator. As the Plan Administrator, part of Mr. Smith’s job was to prosecute preference actions, including the action against PAC.

AirCargo had filed a claim in the bankruptcy case, so it had been receiving notices in the bankruptcy case. When Mr. Smith brought the preference action, he served the complaint on PAC. But AirCargo confused the documents related to the preference action with those related to the main bankruptcy case, and never filed an answer. Opinion at *4. Because no response was filed, Mr. Smith obtained a default judgment against PAC for the entire amount in controversy. Not until the U.S. Marshal’s Office levied Select AirCargo’s bank accounts for roughly $77,000, did they appear to realize what was happening and file a motion to vacate the default judgment. Opinion at *5-6.

Judge Sontchi’s Opinion

Judge Sontchi declined to vacate the default judgment and provided multiple reasons why service was proper on AirCargo. These reasons include: (1) AirCargo and PAC used the same address, (2) AirCargo did business with AMS under the name PAC, and (3) AirCargo filed its claim under the name PAC.

As to AirCargo’s defense that they confused the preference pleadings with those of the underlying bankruptcy, Judge Sontchi said “Select AirCargo was culpable in receiving, yet ignoring, numerous pleadings it received from the Plaintiff and orders from the Court.” In other words, mailings from the Court are never “Junk Mail”.