Introduction

Recently, over 180 adversary actions were filed in the MPC Computers bankruptcy.  The adversary actions fall generally in to two categories – preference actions filed by MPC’s Committee of Unsecured Creditors and breach of contract actions filed by MPC.  This post will look briefly at why MPC filed for bankruptcy and discuss what may happen next now that the adversary actions are underway.

Background on the MPC’s Business and Events Leading to Bankruptcy

As reflected in the declaration of MPC’s CFO,  Curtis Akey,  MPC (formerly Gateway) provided computer-based products and services to mid-sized businesses, government agencies and educational organizations (read here the Declaration of Gateway’s CFO in Support of Debtors’ Chapter 11 Petitions).  MPC-Pro, LLC acquired Gateway in October of 2007.  As a result of this acquisition,  MPC’s revenue rose to $895 million.  Six months after the acquisition, the company decided to stop manufacturing at its Tennessee facility and outsource a substantial portion of manufacturing to Flextronics at its Juarez, Mexico facility.

The Flextronics’ facility came on line slower than planned and with limited production.  On October 28, 2008, Flextronics informed MPC that it was discontinuing its supply of products and services to MPC.  As stated in the Akey Declaration, MPC’s purchase of Gateway, followed by the unsuccessful outsourcing to Flextronics and the overall lack of liquidity led to the present bankruptcy filing.

The Adversary Actions

According to the adversary complaints filed by MPC’s Creditors’ Committee, the Committee and MPC entered into a stipulation on October 12, 2010.  The stipulation appoints the Committee as representative of MPC and confers standing on the Committee for purposes of investigating and prosecuting avoidance actions under chapter 5 of the Bankruptcy Code.  Judge Walsh, the bankruptcy judge presiding over the MPC bankruptcy, approved the stipulation on October 21, 2010.

Unlike the preference actions, the breach of contract actions are brought directly by MPC (versus the Creditors’ Committee).  Through these actions, MPC alleges various defendants received goods from the Debtors which were never paid for.

Given the size and frequency of bankruptcy filings in Delaware, judges in the Delaware Bankruptcy Court often (but not always) enter uniform scheduling orders that provide parties with similar dates to serve discovery, complete motion practice, etc.. Scheduling orders in preference actions usually allow the parties 90 to 120 days to complete fact discovery and require the parties participate in mediation.  Click here to review a copy of one of the form scheduling orders posted to the Delaware Bankruptcy Court’s web page.

The MPC bankruptcy, including the adversary actions, are before Honorable Peter J. Walsh.  Judge Walsh is the former Chief Judge of the Delaware Bankruptcy Court.  MPC is represented by Reed Smith LLP and the Creditors’ Committee is represented by Drinker Biddle and Reath LLP.

Earlier this month Alfred T. Giuliano, the Chapter 7 Trustee for National Wholesale Liquidators, began filing various complaints seeking the avoidance and recovery of alleged preferential transfers.  On November 19, 2008, I wrote on this blog about the commencement of the National Wholesale Liquidators (“NWL”) bankruptcy (read my prior post concerning NWL here).  As indicated in the prior post, NWL filed for bankruptcy with an 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 preference actions, the Court has scheduled the first pretrial conference on December 8, 2010.  The Trustee appears to have filed approximately 90 preference actions so far, however, more may follow.  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.

Linens N Things recently filed over twenty preference complaints.  As stated in the complaints,  Linens seeks the avoidance and recovery of alleged preferential transfers pursuant to 11 U.S.C. section 547 of the Bankruptcy Code.  According to a summons, a pretrial conference is scheduled on June 12, 2009.

The Linens bankruptcy proceeding is before the Honorable Christopher S. Sontchi of the United States Bankruptcy Court for the District of Delaware.  Linens is represented by Richards Layton & Finger in Wilmington, Delaware.  To read other posts on this blog regarding issues that arise in preference litigation, click here.

Introduction

Two weeks ago,  preference actions were commenced against a long list of defendants in the New Century Mortgage (“New Century”) and Tweeter Home Entertainment (“Tweeter”) bankruptcies.  The plaintiff in the New Century preference actions is Alan M. Jacobs, the liquidating trustee authorized under New Century’s Second Amended Plan of Liquidation to commence and prosecute preference actions.  The preference actions in the Tweeter bankruptcy, on the other hand, were brought by the debtor instead of a liquidating trustee.

Summary of the New Century Bankruptcy

New Century filed for bankruptcy in Delaware on April 2, 2007.   According to New Century’s Declaration in Support of Chapter 11 Petitions (the “Declaration”),  New Century, through its subsidiaries, originated, purchased and sold mortgage loans nationwide.  New Century also serviced some of the loans they originated and sold.

New Century operated both wholesale and retail mortgage divisions. The wholesale division purchased loans through mortgage brokers and lenders. In the months prior to filing for bankruptcy, New Century’s wholesale division operated in 34 locations in 20 states. At the same time, New Century’s retail division, which originated loans directly with consumers, was operating out of 262 branch offices employing over 1,700 retail loan officers.

As stated in its Declaration, 86% of New Century’s loan origination were subprime loans in the year prior to filing for bankruptcy. Once housing prices begin to decline, New Century’s borrowers began to default in greater numbers.

Summary of the Tweeter Bankruptcy

Tweeter’s slide into bankruptcy was more gradual than New Century.  According to Tweeter’s Declaration in Support of Bankruptcy Petitions,  the company began experiencing operational losses for six years prior to filing for bankruptcy.  Tweeter contends that one of the largest factors to hurt is profitability was the increase in competition from “format stores” such as Walmart and Best Buy. As Tweeter’s competitors expanded their footprint in the video products market, competition grew and profit margins declined.  Tweeter’s problems worsened when Best Buy and Circuit City both expanded their in-home design and installation programs.

The Preference Actions

With a petition date of April 2, 2007, New Century filed its preference complaints on the eve of the statute of limitations.  Tweeter, on the other hand, has until June 11 before it runs up against the statute of limitations for preference actions (Tweeter filed for bankruptcy on June 11, 2007).  Tweeter, therefore, may file more preference actions in the months ahead.  The New Century preference actions are before the Honorable Kevin J. Carey, Chief Judge of the United States Bankruptcy Court for the District of Delaware.  The Tweeter preference actions are before the Honorable Peter J. Walsh, former Chief Judge of the Delaware Bankruptcy Court.

In prior posts, I have addressed issues relevant to preference litigation.  These posts address topics such as whether new value must remain unpaid to constitute a defense in a preference action.  To read prior posts on this blog regarding preference litigation click here.

Introduction

In January, Mortgage Lenders Network commenced over 65 adversary actions against various defendants, seeking the avoidance and recovery of preferential transfers (read one of the preference complaints here).  As reflected in its complaints,  Mortgage Lenders filed a chapter 11 bankruptcy petition in the Delaware Bankruptcy Court on February 5, 2007. During the ten years prior to its bankruptcy, Mortgage Lenders grew from a small mortgage company with seven employees, to a residential mortgage provider serving 47 states with over 1,700 employees. 

Given the commencement of Mortgage Lenders’ preference program, this post provides a brief summary of the elements and common defenses to preference claims.

Elements to a Preference Claim

In order to establish that a party received a preferential transfer, the plaintiff must prove that payments were received by a creditor on account of an “antecedent debt.” Further, 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.

 

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