Section 547 of the Bankruptcy Code

Starting on September 5, 2017, the Official Committee of Unsecured Creditors on behalf of the bankruptcy estates of HH Liquidation, LLC and its affiliated debtors (“Debtors”) filed approximately 178 complaints seeking the avoidance and recovery of allegedly preferential and/or fraudulent transfers under Sections 547 and 550 of the Bankruptcy Code.

The Debtors filed voluntary petitions for bankruptcy in the U.S. Bankruptcy Court for the District of Delaware on September 8, 2015 under Chapter 11 of the Bankruptcy Code.  On September 21, 2015, pursuant to section 1102 of the Bankruptcy Code, the Office of the United States Trustee appointed the Official Committee of Unsecured Creditors.

The various avoidance actions are pending before the Honorable Kevin Gross.  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 partner with the law firm of Fox Rothschild LLP.  You can reach Carl at (302) 622-4272 or at cneff@foxrothschild.com.

On July 19-21, 2017, David W. Carickhoff, in his capacity as Chapter 7 Trustee of the Estates of Univita Holdings, et al., filed approximately 46 complaints seeking the avoidance and recovery of allegedly preferential and/or fraudulent transfers under Sections 547 and 550 of the Bankruptcy Code.

Univita Health, Inc. and its affiliated debtors filed voluntary petitions for bankruptcy in the U.S. Bankruptcy Court for the District of Delaware on August 28, 2015 under Chapter 7 of the Bankruptcy Code.  The cases are jointly administered pursuant to Rule 1015(b) of the Bankruptcy Rules.

The various avoidance actions are pending before the Honorable Mary F. Walrath.  The Pretrial Conference has been set for 10/4/2017 at 02:00 PM ET.

For readers looking for more information concerning claims and defenses in preference litigation, attached is a booklet prepared by this firm on the subject: “A Preference Reference: Common Issues that Arise in Delaware Preference Litigation.”

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.

In the recent decision of Spizz v. Goldfarb Seligman & Co. (In re Ampal-American Israel Corp.), 2017 WL 75750 (Bankr. S.D.N.Y. Jan. 9, 2017), the United States Bankruptcy Court for the Southern District of New York dismissed a preference complaint filed by a trustee of chapter 7 debtor headquartered in Israel, where the payment was made from the debtor’s Israeli bank to an Israeli supplier.  The Court held that Section 547 of the Bankruptcy Code does not have extraterritorial effect and the transfer did not originate in the U.S.

Within 90 days before bankruptcy, the debtor wired money from the debtor’s Israeli bank account to the supplier’s Israeli bank account, on account of an antecedent debt.  The chapter 7 trustee sued the supplier to avoid and recover the alleged preferential payment.  The supplier asserted that Section 547 could not be applied extraterritorially.

Judge Bernstein observed that the “presumption against extraterritoriality” is a “longstanding principle of American law that legislation of Congress, unless a contrary intent appears, is meant to apply only within the territorial jurisdiction of the United States.”  In Morrison v. Nat’l Australia Bank Ltd., 561 U.S. 247 (2010), the United States Supreme Court outlined a two-step approach to determine whether the presumption forecloses a claim.

First, the court asks “whether the statute gives a clear, affirmative indication that it applies extraterritorially.”  If not, the court must turn to the second step to determine if the litigation involves an extraterritorial application of the statute.  Second, the court determines “whether the case involves a domestic application of the statute, . . . by looking to the statute’s ‘focus.’ . . . [I]f the conduct relevant to the focus occurred in a foreign country, then the case involves an impermissible extraterritorial application regardless of any other conduct that occurred in U.S. territory.”

In applying this analysis, the S.D.N.Y. bankruptcy court first held that the avoidance provisions of the Bankruptcy Code (including Section 547) do not apply extraterritorially.  In so holding, the Court disagreed with the Fourth Circuit’s decision in French v. Liebmann (In re French), 440 F.3d 145 (4th Cir. 2006), which held that Congress intended international application of U.S. fraudulent transfer law.

Next, the S.D.N.Y. Bankruptcy Court ruled that the determination of whether the case involves a domestic or extraterritorial application of section 547 depends on whether the initial transfer came from the United States.  Because the transfer here occurred between a U.S. transferor headquartered in Israel and an Israeli transferee through Israeli bank accounts, the transfer occurred in Israel, and was not domestic.

Therefore, the court concluded that it could not be avoided, and dismissed the trustee’s preference complaint.

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.

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.

Introduction

Earlier this month, Qimonda Richmond, LLC and Qimonda North America Corp (collectively, the “Debtors”), filed adversary actions against various defendants in the United States Bankruptcy Court for the District of Delaware.  As alleged in the complaints, Debtors contend that the defendants received preferential transfers which are subject to avoidance under section 547 of the Bankruptcy Code.   This post will look briefly at why Qimonda filed for bankruptcy, plus provide a status regarding the preference actions.

The Bankruptcy Proceeding

Debtors originally filed petitions for bankruptcy in Delaware on February 20, 2009 (the “Petition Date”).   According to Debtors’ Affidavit in Support of its Bankruptcy Motions (the “Affidavit”),  Debtors were one of the largest producers of semiconductor “memory products” with operations in Europe, Asia and North America.  Qimonda AG specialized in the production of “dynamic random acess memory” (“DRAM”) memory products with end users such as HP, Dell, IBM and Sony.

Why Qimonda Filed For Bankruptcy

Beginning in March of 2007, the market price for Qimonda AG’s memory products began to drop due to decreased demand.  As more and more DRAM products came onto the market,  prices continued to fall.  According to Debtors’ Affidavit, DRAM prices dropped 85% in 2007 and 58% in 2008.  In an effort to restructure its business, Qimonda AG closed its Vermont operations in June 2008.  In October, Qimonda AG let go over 1,000 employees at its Richmond facility.  Two months later Qimonda was notified by the New York Stock Exchange that it was not in compliance with the NYSE’s listing standards as its market capitalization fell below $100 million.  Qimonda AG began insolvency proceedings in Germany on January 23, 2009 and this bankruptcy proceeding soon followed.

The Avoidance Actions

Preference actions are frequently brought by a liquidating trust or creditors committee of the bankruptcy estate.  In the Qimonda bankruptcy, the preference actions were filed by the Debtors instead of a third party.  According to the preference complaints, Qimonda continues to operate as a debtor in possession.  Qimonda is represented by Silverman Acampora LLP and Elliott Greenleaf.  The avoidance actions, along with the Qimonda bankruptcy proceeding, are before the Honorable Mary F. Walrath.  Judge Walrath previously served as Chief Judge of the Delaware Bankruptcy Court.  At the time of this post, there does not appear to be a date and time scheduled for the initial scheduling conference.

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.

Earlier this month, the Chapter 7 Trustee for the Rehrig International bankruptcy estate filed several preference actions against various defendants. As set forth in the complaints, the Trustee seeks to avoid and recover payments which he contends are preferential transfers, fraudulent conveyances and/or postpetition transfers. Rehrig filed for bankruptcy on September 5, 2008. Less than four months later, Rehrig’s Chapter 11 proceedings were converted to cases under chapter 7. Soon after the conversion to Chapter 7, the Office of the United States Trustee appointed George L. Miller as the Chapter 7 Trustee.

As is common in avoidance actions, the Trustee in Rehrig seeks an order disallowing the defendants’ claims pursuant to 502(d) of the United States Bankruptcy Code. Under 11 U.S.C § 502(d), the Bankruptcy Court “shall disallow any claim of any entity from which property is recoverable” under sections 547 and 548. Under 502(d), a defendant’s claim is temporarily disallowed if a creditor holds a debtor’s property.  Although a creditor’s claim can be disallowed under 502(d), section 502(h) of the Code grants a preference defendant an allowed claim for preference dollars paid back in to the estate as part of a settlement or judgment.

According to papers filed with the Court, a pretrial conference is scheduled in the Rehrig preference actions on November 18, 2010 at 1:30 p.m. The Chapter 7 Trustee is represented by Cozen & O’Connor.