Section 547 bankruptcy code

In the recent decision of Klauder v. Echo/RT Holdings LLC (In re Raytrans Holding, Inc.), Adv. No. 15-50273 (CSS) (Del. Bankr. Aug. 10, 2017), Judge Sontchi granted Defendants’ Motion to Dismiss the Trustee’s Second Amended Complaint, dismissing the Trustee’s claims in their entirety either under collateral estoppel or the doctrine of res judicata.

Procedural Background

Prior to the Raytrans bankruptcy proceeding, creditor Spring Capital Real Estate, LLC (“Spring Capital”) commenced a lawsuit in the Court of Chancery against Defendants Echo/RT Holdings LLC and Echo Global Logistics, Inc. (“Echo Defendants”) and RayTrans Distribution on October 31, 2012, seeking to void as fraudulent conveyances the transfers made to defendants by Holdings and RayTrans Distribution.

The Trustee joined the fraudulent transfer action commenced by Spring Capital in the Court of Chancery. On November 3, 2014, the Trustee asserted crossclaims against the defendants, pursuant to Del. Ch. R. 13(g), “seeking to assert the estate’s interest in, and to void as fraudulent conveyances, the transfers made to defendants by Holdings under Delaware and Illinois state law that were being challenged by Spring Capital. As recoverable by a creditor holding an unsecured claim.”

On December 31, 2013, the Court of Chancery dismissed Spring Capital’s claims with prejudice.  The Trustee then filed Amended Cross-Claims against the Echo Defendants, asserting slightly modified fraudulent transfer claims brought by Spring Capital, under both Delaware and Illinois law, that had also been dismissed by the Court of Chancery.  The Echo Defendants moved to dismiss the Trustee’s claims, which was granted on February 18, 2016, and the Court of Chancery both dismissed the Trustee’s entire Amended Cross-Claim with prejudice and denied the Trustee’s request for leave to amend (the “Dismissal Order”).  On December 12, 2016, the Delaware Supreme Court rejected the appeals filed by the Trustee and Spring Capital and affirmed the Dismissal Order.

Before the Court of Chancery granted the Motion to Dismiss, the Trustee filed the instant adversary proceeding against the Echo Defendants on April 24, 2015, asserting (i) three counts for avoidance of fraudulent transfers pursuant to 11 U.S.C. §§ 548 and 550, (ii) a count for avoidance of preferential transfer pursuant to 11 U.S.C. § 547, (iii) one count for recovery of an avoided transfer pursuant to 11 U.S.C. § 550, and (iv) disallowance of all claims pursuant to 11 U.S.C. § 502(d) and (j)

On November 7, 2016, the Trustee sought leave to amend his complaint. On December 28, 2016, the Court granted the Motion to Amend and the Trustee filed his Second Amended Complaint, now asserting two counts for avoidance of fraudulent transfers under Sections 544, 548, and 550 and added a new breach of contract claim (Count V) and a claim for attorneys’ fees (Count VIII). The original breach of contract claim (Count VI) and accounting claim (Count VII) remain in the Second Amended Complaint.

Analysis

The Court found that Counts I and II (for fraudulent transfer under Sections 544 and 548) were barred under the doctrine of collateral estoppel.  The Court of Chancery previously found that the APA was supported by reasonably equivalent value, and that the APA did not amount to a fraudulent transfer.

The Court likewise dismissed Counts III and IV, seeking the avoidance and recovery of preferential transfers under Sections 547 and 550 of the Bankruptcy Code.  Per the Opinion, the Trustee merely stated that Defendants were “insiders” of the Debtor, but offered no factual support for such a conclusion in the Second Amended Complaint.

Finally, the Court dismissed Counts V (breach of contract and judicial estoppel), VI (breach of contract), VII (accounting) and VIII (breach of guaranty and attorneys’ fees) under the doctrine of res judicata.  The Court noted that for the past three years, the Trustee and the defendants have been litigating before the Court of Chancery and then on appeal to the Delaware Supreme Court, and that the “basis of the entire adversary proceeding, and the prior Court of Chancery litigation, was the APA.”  Accordingly, the Court dismissed the Trustee’s Second Amended Complaint in its entirety.

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.

Background

Last month, the Chapter 7 Trustee in the Sunset Aviation bankruptcy began filing preference actions against various defendants seeking the recovery of alleged avoidable transfers.  The Sunset Aviation bankruptcy proceeding includes the consolidated bankruptcies of Sunset Aviation, Inc., JetDirect Aviation and Regal Jets, LLC.  The first bankruptcy commenced on February 25, 2009, when Regal Jets filed a petition for chapter 11 bankruptcy protection with the United States Bankruptcy Court for the District of Delaware.  On March 6, 2009, Sunset Aviation filed a petition for bankruptcy under chapter 7 of the Bankruptcy Code.  JetDirect filed its chapter 7 petition on May 1, 2009.  On June 10, 2009, the Regal bankruptcy proceeding was converted from a chapter 11 reorganization to a chapter 7 liquidation.  Soon after, the Office of the United States Trustee appointed the Chapter 7 Trustee.

Debtors’ Operations

Prior to filing for bankruptcy, Debtors provided a range of services for the private aviation industry.  These services included brokering the sales and rentals of private jets, in-flight catering, records management and aircraft utilization.  According to court filings by the Chapter 7 Trustee, although the Debtors were separate legal entities, the companies operated from the same headquarters, co-mingled assets and were generally viewed by their creditors as a single entity.  Based on these findings, the Trustee filed a motion to substantively consolidate the bankruptcy proceedings in July of 2010.  The Court granted the Trustee’s consolidation motion the following month.

The Preference Actions

As is common in avoidance actions, the Chapter 7 Trustee in Sunset Aviation seeks to recover pursuant to several different causes of action.  Pursuant to section 547 of the Bankruptcy Code, the Trustee seeks to avoid and recover transfers for the ninety days prior to the Debtors’ petition date – November 27, 2008 to February 25, 2009.  According to the complaints, the “preference period” is calculated based on the earliest bankruptcy petition date for the consolidated Debtors.

Conclusion

The Sunset Aviation bankruptcy is before the Honorable Peter J. Walsh.  Judge Walsh previously served as the Chief Judge of the Delaware Bankruptcy Court.  Cozen O’Connor and ASK Financial LLP serve as Plaintiff’s counsel for the Trustee.

Introduction

In January of this year, George L. Miller, the chapter 7 trustee (the “Trustee”) in the WL Homes bankruptcy, began filing avoidance actions against various creditors.  As alleged in the complaints, the Trustee seeks the recovery of what he deems are “preferential transfers” pursuant to 11 U.S.C. section 547(b) of the Bankruptcy Code.  This post will look briefly at the WL Homes bankruptcy, as well as provide information on common issues that arise in preference litigation.

Background on the Bankruptcy Proceeding

On February 19, 2009, W L Homes, also known as John Laing Homes, filed for bankruptcy in the United States Bankruptcy Court for the District of Delaware.  According to the Affidavit in Support of  First Day Bankruptcy Motions,  WL Homes sold over 1,300 homes in 2007, generating revenues of $948 million.  With the crash of housing market, the company’s home sales dropped to approximately 560 homes in 2008, with revenue declining to $287 million.

Prior to filing for bankruptcy, WL Homes had over 100 development projects underway ranging from entry level condos to multimillion dollar homes.  When the company originally filed for bankruptcy, its stated goal was to exit certain “non-core regions” and move forward with more successful developments in the southern California region.

Debtors’ Financials

In the days prior to bankruptcy, WL Homes’ secured debt totaled $350 million.  Debtors’ secured lenders include Wells Fargo, Bank of America, Wachovia, Indy Mac and KeyBank (among others).  At $140 million, Bank of America holds the largest amount of WL Homes’ secured debt.  According to W L Homes’ bankruptcy petition,  its largest unsecured trade creditors hold claims ranging from $331,000 to $118,000 for construction-related goods and services.

W L Homes was purchased by Emaar Properties in 2006 for $1.05 billion.  Emaar is a public joint stock corporation formed in Dubai and considers itself the “world’s largest real estate developer.”  Since buying W L Homes, Emaar has invested over $600 million in WL Homes for the purpose of asset acquisition.  Emaar cut-off funding to WL Homes in December of 2008.

Conversion to Chapter 7 and Sale of Assets

On May 7, 2009, the Official Committee of Unsecured Creditors for WL Homes filed a motion to convert the bankruptcy proceeding from a chapter 11 reorganization to a chapter 7 liquidation.  The WL Homes bankruptcy converted to a chapter 7 on June 5, 2009 and the Trustee was appointed soon after.  In August of 2009, the Delaware Bankruptcy Court approved the sale of substantially all of WL Homes’ assets to Emaar for $7 million.  With the sale completed, the Trustee will now seek to administer claims made against the bankruptcy estate and pursue various causes of action, including preference actions.

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.

In late August, the Official Committee of Unsecured Creditors (the “Committee”) in the Pacific Energy Resources bankruptcy, began filing adversary actions against various creditors.  The complaints filed by the Committee allege the defendants received preferential transfers and/or fraudulent transfers from the Debtor.  Prior to filing the adversary actions,  the Committee filed a motion with the Delaware Bankruptcy Court seeking standing to pursue the avoidance actions that would otherwise belong to the Debtor (the “Motion,” a copy of which is available here).  The Court granted the Committee’s Motion on April 19, 2010 with the consent of the Debtor.

Pacific Energy filed for bankruptcy protection on March 9, 2009.  Approximately three months later, on June 4, 2009, the Court entered an order approving Debtor’s postpetition financing.  As stated in the order, “… [t]he Prepetition Lenders and the DIP Lenders shall subordinate their unsecured deficiency claims to the claims of the general unsecured creditors solely with respect to the Settlement Proceeds, if any, and the proceeds of the avoidance actions under chapter 5 of the Bankruptcy Code …”  Under the DIP financing order, Debtor’s lenders agreed to allow the proceeds of the preference actions to go to the benefit of the unsecured creditors, instead of the secured creditors.  Motion at *2.

In its Motion, the Committee concedes that the Bankruptcy Code does not provide express authority for the Committee to prosecute claims belonging to the estate.  Motion at *4.  Instead, the Committee cites to section 1103(c)(5) of the Bankruptcy Code that permits a committee to perform “such other services as are in the interests of those represented.”  11 U.S.C. Sec. 1103(c)(5).  The Committee also cites section 1109(b) of the Bankruptcy Code that authorizes a creditors’ committee, as an interested party, to “appear and be heard on any issue” in a bankruptcy proceeding.  11 U.S.C. Sec. 1109(b).  Motion at *4.  Finally, the Committee cites the Third Circuit’s decision in Cybergenics for the idea that “sections 1109(b) and 1103(c)(5), taken together, evince a Congressional intent for committees to play a robust and flexible role representing the bankruptcy estate, even in adversarial proceedings.”  Official Comm. of Unsecured Cred. of Cybergenics Corp. v. Chinery, 330 F.3d 548, 566 (3d Cir. 2003).

With the avoidance actions now filed, the Court has scheduled a pretrial conference on November 3, 2010 at 1:30 p.m. The Pacific Energy bankruptcy, as well as the avoidance actions filed by the Committee, are before the Honorable Kevin J. Carey, Chief Judge of the United States Bankruptcy Court for the District of Delaware.

Introduction

Recently, the Plan Administrator for the Goody’s Family Clothing bankruptcy commenced adversary actions against various defendants in the United States Bankruptcy Court for the District of Delaware.  The Goody’s Plan Administrator was appointed pursuant to Goody’s plan of reorganization.  The Bankruptcy Court approved Goody’s plan on October 7, 2008, approximately four months after the company filed for bankruptcy.

Goody’s Second Bankruptcy Filing

Goody’s emergence from bankruptcy was short lived.  On January 13, 2009, the reorganized Goody’s filed another petition for bankruptcy in Delaware.  Goody’s second bankruptcy, also filed as a chapter 11 reorganization, began only three months after the company’s plan of reorganization was approved by the Court in the first bankruptcy proceeding.

The Preference Actions

The preference actions recently filed by the Plan Administrator seek the recovery of transfers made prior to the commencement of the first bankruptcy proceeding.  According to recent court filings, the Plan Administrator filed the preference actions in an effort to offset any avoidable transfers against  allowed claims under section 503(b)(9) of the Bankruptcy Code.  These adversary actions, along with both of Goody’s bankruptcy proceedings, are before the Honorable Christopher S. Sontchi.  Click here to review a prior post from this blog discussing a decision by Judge Sontchi in the Goody’s bankruptcy proceeding.