On February 5, 2015, RadioShack 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: RadioShack Pulls the Plug.  On October 2, 2015, the Court confirmed the Plan of Liquidation in the RadioShack cases.  Pursuant to the Plan, the RSH Liquidating Trust was established, providing the Liquidating Trustee, Peter Kravitz, authority to prosecute preference actions.

From October 28, 2015 until the day this post was published, November 2, 2015, the Trustee has filed 383 (largely identical) preference actions.  The Trustee argues that the transfers, or payments, received by various defendants are avoidable and subject to recovery under 11 U.S.C. § 547 of the United States Bankruptcy Code.  In a majority of the complaints, the Trustee “acknowledges that some of the Transfers might be subject to defenses under Bankruptcy Code section 547(c), for which Defendant bears the burden of proof under Section 547(g).”

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 been sued 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.

On October 27, 2013, Green Field Energy Service, Inc. and a number of subsidiaries (the “Debtors”) filed for bankruptcy under Chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court for the District of Delaware.  We initially published a blog post about the filing here: Green Field Energy Files for Bankruptcy Protection in Delaware.

On May 12, 2014, a Liquidation Trust was established pursuant to the Debtors’ confirmed Plan of Liquidation.  At that time, Alan D. Halperin was appointed as the Trustee.  Over the period from October 21 to the time of writing this post on October 26, the Trustee has filed 60 preference actions.  Because the Bankruptcy Code allows preference actions to be filed within 2 years of the bankruptcy filing, the Trustee’s opportunity to file additional preference actions is quickly drawing to a close.

Note, that the Trustee has filed a motion to establish procedures governing the proceedings.  The objection deadline is November 6, 2015 and the hearing on this motion is November 30, 2015.  Entry of this order WILL affect the rights of all defendants to preference litigation brought in this bankruptcy.  Thus, even if you plan on attempting to settle with the Trustee, you should consider reviewing this motion.

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 are a defendant in one of these preference cases 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.

From December 17-19, 2014, THQ Inc. filed approximately 78 preference complaints seeking to avoid and recover alleged preferential transfers pursuant to Sections 547 and 550 of the Bankruptcy Code, and to disallow claims of the defendants pursuant to Section 502(d).

By way of background, THQ Inc. (the “Debtor”) filed a petition for bankruptcy in the U.S.Bankruptcy Court for the District of Delaware on December 19, 2012 under Chapter 11 of the Bankruptcy Code.  On July 16, 2013, the Debtor filed its Second Amended Chapter 11 Plan of Liquidation of THQ Inc. and its Affiliated Debtors, which was approved by the Court on July 17, 2013, and went effective on August 2, 2013.

Rosner Law Group and Andrews Kurth LLP represent the Debtor 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.

For reader’s looking for more information concerning claims and defenses in preference litigation, attached is a reference guide prepared on the subject: “A Preference Reference: Common Issues that Arise in Delaware Preference Litigation.”

In addition, 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 October 17, 2014, Charles M. Forman, the Chapter 7 Trustee of the Satcon Technology Corp. bankruptcy estate, filed a number of complaints seeking the avoidance and recovery of alleged preferential transfers pursuant to Sections 547 and 550 of the Bankruptcy Code.  To review a prior post concerning the filing of these complaints, click here.

Since the filing of these adversary actions, the Court has scheduled a pretrial conference for January 8, 2015 at 11:00 a.m.  At the pretrial conference, the Court will enter a scheduling order to govern relevant timelines of the litigation.  For a link to a standard scheduling order that can be found on the Bankruptcy Court’s website, click here.

Preference defendants should review any proposed scheduling order circulated by plaintiff’s counsel to determine to what extent the proposed order differs from the Court’s standard scheduling orders, and be prepared to object to the inclusion of any terms that materially differ.

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.  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 a prior post, we discussed the commencement of approximately 72 preference actions filed in the Quantum Foods bankruptcy proceeding by the Creditors Committee.  In the preference actions at issue, the Creditors Committee seeks to avoid and recover purported preferential transfers under Sections 547 and 550 of the Bankruptcy Code, and purported fraudulent transfers under Section 548 of the Bankruptcy Code.

Since the filing of these adversary actions, the Court has scheduled a pretrial conference for December 9, 2014 at 2:00 p.m.  The purpose of a pretrial conference, among other things, is to enter a scheduling order to govern relevant timelines of the litigation.  It is therefore important for any preference defendant to fully review any proposed scheduling order in advance with counsel to determine whether such deadlines and provisions are consistent with scheduling orders commonly entered by the Delaware Bankruptcy Court.

For a link to a standard scheduling order that can be found on the Bankruptcy Court’s website, click here.  The Court has routinely expressed concerns over scheduling orders proposed by plaintiff’s counsel that materially differ from the terms of the Court’s standard scheduling orders.

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 a prior post, we discussed that a number of preference actions were filed in the MCG Limited Partnership, et al. bankruptcy proceeding by the Chapter 7 Trustee.  Since this post, an additional 93 preference complaints were filed, bringing the total to 131.

Click here for an example of a preference complaint filed in these cases.

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, a discussion was provided in connection with requiring a company to prepay for its goods or services in order to limit potential preferential exposure.  If a company heading into bankruptcy cannot prepay for its goods or services, however, another measure which can be taken by vendors to minimize their preferential exposure is to require that payment be made “substantially contemporaneous” with the goods or services provided to the company.

Under Section 547(c)(1) of the Bankruptcy Code, a debtor or trustee may not avoid and recover transfers that are (a) intended by the debtor and defendant to be a contemporaneous exchange for new value given to the debtor, and (b) are in fact a substantially contemporaneous exchange.  What this means is that even if a payment made by a debtor during the 90 day Preference Period is not a prepayment, a creditor can defend itself from liability for such transfer if the parties intended for the debtor’s payment, and the goods or services provided, to be contemporaneous exchanges, and the exchanges were in fact made close to the same time.

Therefore, if your company is providing goods or services to a company in financial distress, it is prudent to require the company to prepay for its goods or services, or at a minimum, to require that payment be made as close as possible to the time that goods or services are provided.

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.

One question that clients often ask is what measures can be taken to reduce preferential exposure when dealing with a company that is sliding into financial insolvency.  Under Section 547 of the Bankruptcy Code, a debtor or trustee can seek to avoid and recover payments made to a vendor that provided goods or services to the debtor in the 90 days prior to the filing of bankruptcy.

It is important to take into account the fact that in order to demonstrate that a payment is “preferential”, the elements of Section 547(b) of the Bankruptcy Code must be met.  One of the elements that must be satisfied, among others, is that the transfer was made “for or on account of an antecedent debt owed by the debtor before such transfer was made”.  11 U.S.C. Section 547(b).

What this means is that the transfer must be in payment of goods or services previously provided to the debtor.  Accordingly, any transfer from the debtor to your company that is a prepayment cannot qualify as a preferential transfer by statute.  Therefore, in dealing with a company that is close to filing for bankruptcy, a good practice is to require that it pay up front for any goods or services.  Not only will this limit your preferential liability, but it will also allow your company to avoid having a large unpaid balance at the time of the debtor’s filing of bankruptcy, for which you may receive pennies on the dollar.

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 14 page decision signed September 30, 2013, Judge Walsh of the Delaware Bankruptcy Court provided a primer on one of the limitations of standing provided in the bankruptcy code in his opinion granting a motion to dismiss.  Judge Walsh’s opinion is available here (the “Opinion”).

Background

On May 21, 2004, the Circuit Court for Montgomery County, Maryland entered four separate judgments pursuant to a civil action against Richard and Graciela Redden (“Debtors”).  All four judgments were transferred on July 15, 2004 to the Superior Court of Delaware in New Castle County, at which time they became judgment liens against the primary residence of Debtors.

On August 12, 2004, the Debtors filed a joint Chapter 7 bankruptcy petition.  The order of discharge was entered on September 2, 2005.  Their case was reopened and they filed a complaint to avoid and recover a preferential transfer from one of the four judgment creditors.  The Court granted the Debtors motion to avoid the judgment lien and the case was again closed on October 29, 2006.  The other three judgment liens remained outstanding.

On November 3, 2009, the Debtors conveyed their residence to the plaintiffs in this case (“Plaintiffs”).  After the three remaining judgment creditors informed the plaintiffs of their intent to foreclose on the property, the Plaintiffs filed a motion to reopen the bankruptcy case and filed a complaint to avoid the three remaining liens.  The case was reopened and the judgment lien holders filed a motion to dismiss the adversary complaint.  Judge Walsh issued his opinion and order granting the motion to dismiss.

Judge Walsh’s Opinion

In granting the motion to dismiss, Judge Walsh provided direction concerning the Plaintiffs’ standing to avoid a preferential transaction and the statute of limitations for preference actions.

Standing

Judge Walsh begins his analysis of the Plaintiffs’ standing by reviewing §§ 522 and 547 of the Bankruptcy Code.  These sections provide the Trustee and Debtor in a bankruptcy standing to bring an adversary case to avoid preferential transfers.  Judge Walsh cites Hartford Underwriters Ins. Co. v. Union Planters Bank, 530 U.S. 1, 7 (2000), in which the Supreme Court considers the exclusivity implied by similar language in § 506 of the Bankruptcy Code.  Opinion at *5.  Judge Walsh states that “[t]he rights given explicitly to the trustee in § 547(b) preclude Plaintiffs, as non-trustees, from exercising avoidance power.”

Judge Walsh then considered whether the Plaintiffs might have derivative standing to pursue their preference claim.  He cited to the Third Circuit’s extensive analysis of derivative standing in The Official Comm. of Unsecured Creditors of Cybergenics Corp. v. Chinery (Cybergenics II), 330 F.3d 548, 558 (3d Cir. 2003).  In that case, The Third Circuit focused on the distinction between a suit to benefit the estate and a suit initiated for the moving party’s “own direct benefit.”  Opinion at *7-8.  In the instant case, however, Judge Walsh notes that the Plaintiffs’ complaint could have no possible effect on the bankruptcy estate, and thus determined this argument was not relevant for the Plaintiffs.

Statute of Limitations

Judge Walsh next considered the statute of limitations for preference actions.  11 U.S.C § 546(a) provides that an action to avoid a preference payment may not be commenced after the earlier of:

(1) the later of –

(A) 2 years after the entry of the order for relief; or

(B) 1 year after the appointment or election of the first trustee under section 702, 1104, 1163, 1202, or 1302 of this title if such appointment or such election occurs before the expiration of the period specified in subparagraph (A); or

(2) the time the case is closed or dismissed.

The Court quickly determines that the statute of limitations had long passed in this case.  Judge Walsh then examined the Plaintiffs’ request that the complaint relate-back to the preference action filed by the Debtor in 2006.  However, this complaint was not an amendment, and thus the relation-back doctrine was inapplicable.  Opinion at *12.

The Plaintiffs’ last argument was that the Court should equitably toll the statute of limitation.  However, the Plaintiffs did not explain why they waited three years from the purchase of the property to file their action.  Thus, a claim of equitable tolling was not supported.  Opinion at *14.  Judge Walsh also notes that a title search would have revealed the three lien claims.  Since the remedy of equitable tolling “is lost upon a lack of showing of diligence to preserve a claim” the Plaintiffs “cannot support a claim of equable [sic] tolling in their favor.” Opinion at *14.

In this era of computers and organized records, it is more important than ever to do your due diligence before purchasing a major asset, like property.  The Plaintiffs who filed this complaint would have been better served if they had hired an attorney before buying the property.  As any estate attorney I have spoken with will confirm, it is far less expensive and much more pleasant to prepare for the possible risks than it is to try and fix a deal after the fact.

Summary

In an 8 page decision signed January 6, 2012, Judge Walrath of the Delaware Bankruptcy Court allowed a plaintiff to amend a preference complaint to include additional transfers, even though the statute of limitations had expired. Judge Walrath’s opinion is available here (the “Opinion”).  Numerous posts on this blog discuss other opinions issued by the Delaware Bankruptcy Court dealing with preference payments, as can be seen here:  Preference Opinion Posts.

Background

The Debtors, filed for bankruptcy on November 25, 2008, and the Court converted the cases to chapter 7 and appointed the Trustee, Jeoffrey L. Burtch, on March 5, 2009. On November 19, 2010, the Trustee filed a complaint against Henry Production, Inc., d/b/a Pumps and Service (the “Defendant”) for recovery of any preference payments. In the original complaint, the Trustee specifically identified only one transfer as a preference payment, but included a spreadsheet showing all of the transactions between the Debtor and the Defendant. This spreadsheet included payments made within the preference period for which the Trustee was unable to identify a check or wire transfer payment (the “October Transfers”). Opinion at *2.

On July 6, 2011, in the course of discovery, the Defendant provided the Trustee with credit card receipts evidencing payment of the October Transfers. The Trustee then waited until November 8, 2011, well after the expiration of the statute of limitations to bring preference complaints, to file his motion to amend the complaint in order to include the October Transfers. The Defendant objected, and the Court issued the Opinion to decide the conflict.

Judge Walrath’s Opinion

As her opinions always do, this opinion of Judge Walrath begins with a legal analysis of the standard for the requested relief. Opinion at *4. She begins by citing the legal standard of FRCP 15(a), which provides that absent a few specific situations, leave to amend “should be freely given.” She then cites Coventry v. United States, 856 F.2d 514, 519 (3d Cir. 1988) for the proposition that the “potential for undue prejudice [to the other party] is the touchstone for the denial of the leave to amend.” Opinion at *4. Additionally, FRCP 15(c)(1)(B) provides that if the conduct set out in the original pleading gave rise to the additional claims in the amended pleading, the amendment will relate back to the date of the initial pleading. Opinion at *5.

The main argument of the Defendant in this matter is that the amendment should not relate back, as the October Transfers were made by a different method than the other alleged preference transfer and was not part of a payment schedule such that it would be considered to have arisen out of the same conduct, transaction, or occurrence. This argument finds some measure of support in MCB Greenhouse Co. v. CTC Direct, Inc., 307 B.R. 787, 792-93 (Bankr. D. Del. 2004). Opinion at *7.

Judge Walrath does not provide much credence to this defense, however, holding that the Defendant needed to show that it would be prejudiced if the amendment was allowed. Opinion at *7. Because the Trustee included the list of transactions, which included the October Transfers, in the complaint in which it made clear that it sought to avoid all preference transfers, the Defendant received adequate notice and would not be prejudiced by allowing the amendment to be related back to the time of the initial filing of the complaint. Judge Walrath then provided the Trustee 14 days to file an amended complaint.

When prosecuting or defending a preference action, it is very important to be aware of the relevant bankruptcy statutes and rules. However, lacking a knowledge of relevant case law can sink a party in a preference case. For this reason, it is vital that defendants and trustees, or their counsel, are well versed in current case law for the district and court in which a preference action is prosecuted.