Delaware Bankruptcy Litigation

Third Circuit Opinion Creates Precedent Important for Secured Creditors

L. John Bird — Wed, 16 May 2012 09:50:50 -0500

The Third Circuit released a precedential opinion on May 14, 2012 that can greatly impact bankruptcy debtors attempting to reorganize as well as their secured creditors. A copy of the opinion is available here (the "Opinion"). Because Fox Rothschild was directly involved in this case and argued before the Third Circuit, I will only be providing a brief summary of the Opinion.

Central to the Opinion is the Third Circuit's interpretation of 11 U.S.C. § 506(a), a portion of which is quoted in the Opinion as follows:

An allowed claim of a creditor secured by a lien on property in which the estate has an interest . . . is a secured claim to the extent of the value of such creditor's interest in the estate‟s interest in such property . . . and is an unsecured claim to the extent that the value of such creditor's interest . . . is less than the amount of such allowed claim. Such value shall be determined in light of the purpose of the valuation and of the proposed disposition or use of such property . . . .

Opinion at *13-14. The Third Circuit then confirmed the value given to the collateral by the Bankruptcy Court, which resulted in the second lien holder having its secured claim valued at 0 and the entire value of its claim treated as unsecured. For all of the specifics and details (which are quite important in this Opinion) please follow the link above or contact Michael Viscount, Joshua Klein or Samuel Israel.

John Bird practices with the law firm Fox Rothschild LLP in Wilmington, Delaware. You can reach John at 302-622-4263, or jbird@foxrothschild.com.

Notice: Order in AFA Investment, Inc. Has Substantial Effect on Creditors -- Guest Post Written by Jay Strock

L. John Bird — Mon, 14 May 2012 16:29:26 -0500

On May 8, 2012, the U.S. Bankruptcy Court for the District of Delaware (the “Court”) entered its Order (the “Order”) Establishing Procedures to Assert Claims Arising under Section 503(b)(9) of the Bankruptcy Code (“503(b)(9) Claims”) in the chapter 11 cases of AFA Investment, Inc. and its affiliated debtors (collectively, the “Debtors”) (Bankr. D. Del. 12-11127 (MFW)). While unusual, it is not an extraordinary step taken by the Court; however, the claims procedures and timing established by the Order could seriously affect certain creditors’ rights in the Debtors’ cases. A copy of the Order is available here .

Bankruptcy Code section 503(b)(9) provides creditors who delivered goods received by a debtor within 20 days from the bankruptcy petition date an administrative claim for those goods. This is significant because it allows for some pre-petition claims to move to the top of the bankruptcy priority list. Pursuant to Bankruptcy Code section 503 a creditor asserting an administrative claim must “file a request for payment of an administrative expense” then “after notice and a hearing, there shall be allowed administrative expenses . . .” 11 U.S.C. § 503(a) and (b). Generally, creditors file a motion requesting allowance of a 503(b)(9) Claim and after settling with the debtor or having a hearing on the motion are afforded the comfort and security of having a Bankruptcy Court order allowing the claim. In the Debtors’ case, the Court has allowed to Debtors to establish 503(b)(9) Claim procedures which require all 503(b)(9) creditors to file a modified proof of claim form and submit it, with all supporting documents, to the Debtors’ claims agent no later than 4:00 p.m. (EDT) on June 11, 2012. These procedures give all 503(b)(9) claimants only one month to review their records and submit their 503(b)(9) Claims.

In addition to the relatively short time to file a 503(b)(9) Claim, the Order does not provide a timeline for the Debtors to reconcile the 503(b)(9) Claims. Absent extraordinary circumstances 503(b)(9) Claims are not actually paid until a confirmed chapter 11 plan goes “effective”; however, having the order allowing a 503(b)(9) Claim affords a creditor comfort and certainty of amount and priority of their claim. In this case, creditors with administrative claims may very well be left with the uncertainty of creditors lower in the priority scheme and their claims may be subject to the uncertainty of objections/litigation. By entering the Order, the Court took away a 503(b)(9) Claims holder’s ability to control the process for the allowance of their claim and the comfort of having an order allowing that claim.

Based on the Court’s entry of the Order, any creditor that provided goods that were received or may have been received by the Debtors from March 13, 2012 through April 1, 2012 should carefully review the Order and the notice of the 503(b)(9) Claim bar date approved by the Court, and consult an experienced bankruptcy attorney. Please note that Fox Rothschild LLP has already filed papers on behalf of a 503(b)(9) creditor in the Debtors’ cases.

Jay Strock practices with the law firm Fox Rothschild LLP in Philadelphia, Pennsylvania and Wilmington, Delaware. You can reach Jay at 302-427-5510, or jstrock@foxrothschild.com.

Decision in Ultimate Acquisition Grants Motion to Dismiss, But Also Grants Leave to Amend the Preference Complaint

L. John Bird — Tue, 01 May 2012 13:48:12 -0500

Summary

In a straight-forward 9 page decision signed May 1, 2012, Judge Walrath of the Delaware Bankruptcy Court granted a defendant’s motion to dismiss a preference complaint, but granted the plaintiff leave to amend. 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.

Additionally, this opinion is very similar to that discussed in this prior post: Decision in Everything But Water, LLC Requires Preference Claimants to Identify Transferees Specifically in Granting Motion to Dismiss.

Background

The Debtors are comprised of two entities, Ultimate Acquisition Partners, LP and CC Retail. They operated under the name “Ultimate Electronics” and all checks were cut using this name, rather than identifying which Debtor was acting. Opinion at *2. Several payments were made to various creditors, including Mitsubishi Digital Electronics America, Inc. d/b/a Mitsubishi Digital Electronics (“Mitsubishi”) within the 90 day period before the Debtors filed for bankruptcy.

The Debtors filed for bankruptcy on January 26, 2011, and the Court converted the cases to chapter 7 and appointed the Trustee, Alfred T. Giuliano, on May 3, 2011. Mitsubishi filed several claims in the bankruptcy, including general unsecured claims, administrative claims, and 503(b)(9) claims. Opinion at *2. On July 19, 2011, the Trustee filed a complaint against Mitsubishi for recovery of any preference payments. On October 19, 2011, Mitsubishi filed the motion to dismiss that is decided by this Opinion.

The motion to dismiss argues that the Trustee is required to identify which of the two Debtors made the payments that the Trustee now seeks to avoid. Opinion at 4-5. Failing this, Mitsubishi argued, the complaint must be dismissed. Opinion at *4.

Judge Walrath’s Opinion

Judge Walrath’s analysis of the standard of review for a 12(b)(6) motion could be a cut/paste of the Everything But Water opinion mentioned above, citing the same authorities for the same principles. Jumping then, to Mitsubishi’s argument for dismissal: The Trustee fails to identify the transferor as required by Miller v. Mitsubishi Digital Elecs. Am. Inc. (In re Tweeter Opco), 452 B.R. 150 (Bankr. D. Del. 2011) and In re Valley Media, Inc., 288 B.R. 189, (Bankr. D. Del. 2003). Opinion at *4. Judge Walrath agreed with Mitsubishi and granted the motion to dismiss. Opinion at *5.

The Trustee’s complaint also argued that Mitsubishi’s claims and administrative expense claims, filed in the Ultimate Acquisition bankruptcy case, should be disallowed pursuant to 11 U.S.C. § 502(d). Opinion at *5-6. Section 502(d) provides that “the court shall disallow any claim of any entity from which” a transfer is avoidable “unless such entity or transferee has paid the amount, or turned over any such property, for which such entity or transferee is liable…” 11 U.S.C. § 502(d). However, because the Trustee’s preference complaint was dismissed, his 502 claim was not applicable and would also be dismissed. Opinion at *8.

Recent opinions published by the judges in the Delaware Bankruptcy Court seem to indicate that they are becoming more strict in their interpretation of pleading requirements, but generously allowing plaintiffs to amend insufficient complaints. Regardless of which side of a preference action you are on, knowledge of the ever changing local rules and precedents is vital to successful litigation or settlement.

John Bird practices with the law firm Fox Rothschild LLP in Wilmington, Delaware. You can reach John at 302-622-4263, or jbird@foxrothschild.com.

A Closer Look at the Bicent Power Bankruptcy

Jason Cornell, Esq. — Sun, 29 Apr 2012 17:44:32 -0500

Introduction

On April 23, 2012, Bicent Holdings LLC, and various related entities (collectively "Bicent" or the "Debtors") filed petitions for bankruptcy in the United States Bankruptcy Court for the District of Delaware. According to a Declaration of Bicent's CFO (the "Declaration" or "Decl."), the company's need for bankruptcy protection stems in part from the continued drop in prices for natural gas, followed by Bicent defaulting under its loan agreements. Decl. at * 12. This post will look in greater detail to the events that led to Bicent filing for bankruptcy. Further, it will provide a brief summary of the company's operations, debt structure and objectives while in bankruptcy.

Operations

Bicent is a privately held Delaware limited liability company. As a result of acquisitions that date back to 2007, Bicent currently owns and operates two electric power plants - one in Montana, and a second in California. Bicent's Montana electricity plant is a "coal-fired facility" which, according to Bicent, operates under a state-of-the-art control system and utilizes clean emissions systems. The company views its Montana plant as one of the cleanest burning coal-fired electricity plants in operation. Decl. at *5.

Whereas the Montana plant is coal-fired, Bicent's California facility is a natural gas-fired electric facility. This facility is located approximately 70 miles east of San Francisco and began operations in 1990. Decl. at *6.

Besides power generation, Bicent also operates a power management services company known as CEM. Based in Colorado, CEM provides operation and maintenance, design and construction management and other related services to power production companies. Through CEM, Bicent can build, operate and run power plants for its customers. Decl. at *7.

Events Leading to Bankruptcy

Bicent enters bankruptcy with prepetition debt totaling approximately $383 million. The company's debt arises under three credit agreements - a first lien credit agreement, a second lien credit agreement and a mezzanine credit agreement. According to Bicent, when it entered the credit agreements with its lenders, the company assumed it would continue to grow and would eventually refinance the credit agreement under favorable terms. Decl. at *12. Due to a substantial drop in the price of natural gas, however, Bicent's assets (specifically, the company's future earnings capacity) have also dropped, making it difficult for Bicent to refinance the loan agreements.

Earlier this year, Bicent was hit with a $22 million arbitration award. The arbitration arose from one of Bicent's contracts to build a power plant in Hobbs, New Mexico. Although Bicent is attempting to vacate the arbitration award, Bicent views the award as a significant legal proceeding which has adversely affected its business. Bicent estimates that it has lost in excess of $50 million due to the events underlying the arbitration. Decl. at *13. Most significant, however, was the fact that Bicent had to write-off certain receivables from the Hobbs project, which in turn triggered defaults under the company's loan agreements. Decl. at *15.

Objectives in Bankruptcy

Prior to filing for bankruptcy, Bicent and its lenders entered into a Restructuring Support Agreement. Under this agreement, Bicent intends to seek approval of a disclosure statement within the first 55 days of its bankruptcy proceeding and confirmation of its plan of reorganization within the first 105 days following the commencement of its bankruptcy petition.

Bicent's bankruptcy proceeding is before the Honorable Kevin Gross. Judge Gross is the Chief Judge of the Delaware Bankruptcy Court. Bicent is represented by the law firm Young Conaway Stargatt & Taylor. A copy of Bicent's Declaration in support of its bankruptcy petitions is available here for review. A copy of Bicent's bankruptcy petition is available here for review.

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Jason Cornell is a bankruptcy attorney with the law firm Fox Rothschild LLP. Jason practices before the United States Bankruptcy Court for the District of Delaware and the United States Bankruptcy Court for the Southern District of Florida. Should you have questions regarding a bankruptcy-related matter, you can reach Jason at 302 252 5833 or jcornell@foxrothschild.com.

U.S. Capital/Fashion Mall, LLC File Petitions for Bankruptcy in the Southern District of Florida

Jason Cornell, Esq. — Wed, 11 Apr 2012 20:07:49 -0500

Introduction

On February 24, 2012, U.S. Capital/Fashion Mall, LLC, and its parent company, U.S. Capital Holdings, LLC (collectively, "U.S. Capital"), filed chapter 11 petitions for bankruptcy in the United States Bankruptcy Court for the Southern District of Florida. U.S. Capital owns the Plantation Fashion Mall in Broward County, Florida. According to the company's Chapter 11 Case Management Summary (the "Summary" or "Summ.") filed with the Bankruptcy Court, U.S. Capital owns what it describes as a "major regional retail mall and office building located at the geographic center of Broward County ..." Summ. at *2.

Events Leading to Bankruptcy

U.S. Capital and its insurers have been involved in six years of coverage litigation following damage sustained by the mall during Hurricane Wilma. The company contends that hurricane damage it sustained from Wilma caused it to lose one of its major anchor tenants. In addition to hurricane damage, U.S. Capital was also forced to deal with fire safety issues which the company believes were left behind by the mall's previous owners. Ultimately, the City of Plantation forced the mall to cease operations and terminate its leases. Summ. at *2.

Following the shut down of the mall, U.S. Capital was able to negotiate lease termination agreements with the majority of its tenants. Two tenants, however, which operated restaurants on the property, filed lawsuits that were consolidated and taken to trial. In December of last year, one of the plaintiffs in the lawsuits obtained a judgment against U.S. Capital in excess of $3.5 million. The company expects that following post trial briefing, the second plaintiff will obtain a judgment in excess of $3.3 million. According to U.S. Capital, it is the lease termination actions which caused it to file for bankruptcy protection. Summ. at *3-4.

U.S Capital's Financials

According to its Summary, U.S. Capital Holdings, LLC, which owns U.S. Capital/Fashion Mall, LLC, has a value of $0. U.S. Capital/Fashion Mall, LLC, which owns the Plantations Fashion Mall property, has an appraised value of $49 million. The company also estimates that it owns insurance damage and bad faith claims worth between $9.4 and $14.4 million. Summ. at *8.

Objectives in Bankruptcy

U.S. Capital filed for bankruptcy protection with the hopes of securing debtor financing and proceeding with the redevelopment of what it calls the "321 North" project. The company also hopes that while in bankruptcy it can avoid certain judgment liens obtained against it and put together a plan of reorganization that will allow it to pay off unsecured creditors. U.S. Capital is represented by the law firm GrayRobinson, P.A.

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Jason Cornell is a bankruptcy attorney with the law firm Fox Rothschild LLP. Jason practices before the United States Bankruptcy Court for the District of Delaware and the United States Bankruptcy Court for the Southern District of Florida. You can reach Jason at jcornell@foxrothschild.com or (561) 804-4415.

Pinnacle Airlines Files for Bankruptcy in the Southern District of New York

Jason Cornell, Esq. — Thu, 05 Apr 2012 20:51:12 -0500

Introduction

On April 1, 2012, Pinnacle Airlines Corp. ("Pinnacle") and four of its subsidiaries, filed chapter 11 petitions for bankruptcy in the United States Bankruptcy Court for the Southern District of New York. Based in Memphis, Tennessee, Pinnacle is a regional airline carrier that provides air service to legacy carries such as Delta, United and US Airways. According to the Declaration of Pinnacle's Chief Operating Officer (the "Declaration"), Pinnacle provides over 1,300 daily flights from cities in the United States, Canada and Mexico. Decl. at *6.

Pinnacle's Business Model

Pinnacle provides regional air services using a fleet of jet and turboprop aircraft. The company uses two primary types of agreements with its larger airline customers - a capacity purchase agreement or a revenue pro-rate agreement. With a capacity purchase agreement, Pinnacle charges the larger carriers a fixed fee for flights regardless of the number of passengers who are booked on the flight. Under this type of agreement, the larger, "mainline" carrier pays Pinnacle's fuel, maintenance and ground costs. Historically, the capacity purchase agreements have been profitable for Pinnacle. Decl. at *3

Under a revenue pro-rate agreement, Pinnacle's compensation from the mainland carriers varies based on ticket sales. Equally important, under these agreements Pinnacle is required to pay fuel and other costs. Unlike the capacity purchase agreements, the pro-rate agreements create greater volatility in Pinnacle's costs and revenue streams. Decl. at *3.

Pinnacle employs over 7,500 people on either a full or part-time basis. Approximately 70% of the company's employees are represented by unions. Pinnacle's union employees generally fall in to one of four categories - pilots, flight attendants, ground operations and dispatchers. Decl. at *4.

Events Leading to Bankruptcy

Pinnacle attributes its bankruptcy filing to factors in the airline industry in general, as well as developments in its business in particular. Over the last ten years, the airline industry has been subject to increased security and fuel costs, while at the same time suffering from a decrease in demand for air travel due to the recession. According to Pinnacle, all "legacy" airline carriers have filed for chapter 11 bankruptcy protection. Decl. at *5.

Pinnacle experienced significant losses in 2008 followed by improved performance in 2009. In 2010, the company acquired Mesaba Aviation, Inc.. Pinnacle's consolidation of Mesaba in to its operations proved to take longer, and cost more, than originally expected. Going in to bankruptcy, Mesaba is still not fully integrated with Pinnacle and is not expected to be fully integrated until 2013. Decl. at *8.

Objectives in Bankruptcy

In its Declaration, Pinnacle lays out four parts of a business plan that the company hopes will allow it to emerge from bankruptcy. First, the company has reached an agreement with United whereby Pinnacle will wind down its regional air services for this carrier. Similarly, Pinnacle is a party to various "essential air service agreements" with the U.S. Department of Transportation. According to Pinnacle, the company intends to terminate these contracts this year. Decl. at *16. Delta Airlines has agreed to provide Pinnacle with over $74 million in debtor in possession financing. As part of this agreement, Pinnacle is required to produce an "acceptable long-term business plan" and achieve certain cost savings. Id. Finally, Pinnacle intends to seek wage reductions from its labor unions. Decl. at *17.

Pinnacle is represented in this bankruptcy proceeding by the law firm Davis Polk & Wardwell LLP.

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Jason Cornell is a bankruptcy attorney with the law firm Fox Rothschild LLP. Fox Rothschild is a full service law firm with offices nationwide, including New York, Delaware, California and Florida. You can reach Jason at (561) 804-4415 or jcornell@foxrothschild.com.

Solar Energy Developer, Solar Trust of America, Files Petitions for Bankruptcy in Delaware

Jason Cornell, Esq. — Tue, 03 Apr 2012 19:56:21 -0500

Introduction

On April 2, 2012, Solar Trust of America ("Solar Trust") filed chapter 11 petitions for bankruptcy in the United States Bankruptcy Court for the District of Delaware. As stated in the Declaration of Solar Trust's CEO (the "Declaration" or "Decl."), the company was started in 2005 by its corporate parent, Solar Millennium AG. Solar Millennium started Solar Trust intending to develop solar energy utility projects in the southwestern United States. In 2009, Solar Millennium created a joint venture company with Ferrostaal AG. This joint venture became the holding company for Solar Trust. Decl. at pgh. 7.

Solar Trust's Operations

As a company in the developmental phase, Solar Trust does not currently have any operational solar facilities. Instead, the company has several projects that are at different stages of development. One of Solar Trust's projects, the "Blythe Project," is located on over 7,000 acres of public land in Riverside County, California. Once completed, the Blythe solar power plant is expected to be one of the largest solar power plants in the world. Decl. at pgh. 15.

Solar Trust entered into a grant of right of way with the U.S. Department of Interior, Bureau of Land Management, for the land used for the Blythe Project. Under this right of way agreement, Solar Trust pays the federal government approximately $2.3 million in rent annually. Solar Trust also entered into a Large Generator Interconnection Agreement ("LGIA") with various California utilities. The LGIA will permit Solar Trust to connect to California's power distribution network. According to Solar Trust, its energy transmission rights under the LGIA are a highly valuable asset due to proposed network upgrades related to the Blythe Project. Decl. at pgh. 15.

Events Leading to Bankruptcy

Given that Solar Trust is in developmental stages, it does not produce operational revenues and instead depends on funding from its corporate parents. The company's parent companies finance the costs of project development and other related expenses. In December of last year, however, one of Solar Trust's parent companies, Solar Millennium AG, began insolvency proceedings in Germany. Once the insolvency proceedings began, Solar Millennium AG came under the control of a German insolvency administrator and thereafter stopped funding for Solar Trust. Decl. at pgh. 20.

Although Solar Trust originally tried to pursue an out of court sale of assets, such a sale became impossible due to the company's lack of cash and pending debt obligations. On April 1st, Solar Trust's rental payments came due for the right of way agreement for the Blythe Project. The April 1st payment was the second of two payments that were due under the agreement. The first rental payment was deferred to April 1st. Aside from the rental payments, several other obligations are also coming due. Decl. at pghs. 23-25.

Objectives in Bankruptcy

In the run up to bankruptcy, Solar Trust reached an agreement with NextEra Energy Resources to provide postpetition financing. NextEra has also expressed an interest in serving as a stalking horse purchaser of some of Solar Trust's assets. Using the funding provided by NextEra, Solar Trust intends to market its assets and proceed with a bankruptcy auction under section 363 of the Bankruptcy Code. Decl. at pgh. 28.

The Solar Trust bankruptcy is before the Honorable Kevin Gross. Judge Gross is the Chief Judge of the Delaware Bankruptcy Court. Solar Trust is represented by the law firm Young Conaway Stargatt & Taylor.

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Jason Cornell is a bankruptcy attorney with the law firm Fox Rothschild LLP. Jason practices before the United States Bankruptcy Court for the District of Delaware and the United States Bankruptcy Court for the Southern District of Florida. You can reach Jason at (561) 804-4415, or jcornell@foxrothschild.com.

For readers who are generally unfamiliar with corporate bankruptcy proceedings, some of my prior posts on "Bankruptcy Fundamentals" are available here for review.

Thin Margins and "Pink Slime" Are Among Some of the Factors Leading to AFA Foods' Filing for Bankruptcy in Delaware

Jason Cornell, Esq. — Mon, 02 Apr 2012 20:29:52 -0500

Introduction

On April 2, 2012, AFA Foods, Inc., and certain of its affiliates (collectively, "AFA"), filed petitions for bankruptcy in the United States Bankruptcy Court for the District of Delaware. AFA is a Delaware company with operations based out of King of Prussia, Pennsylvania. According to a court filing of the company's CEO (the "Declaration" or "Decl."), AFA operates meat processing facilities in California, Georgia, New York, Pennsylvania and Texas. Decl. at *3. AFA does not purchase or raise cattle. Instead, it purchases meat from third parties and produces various ground beef products which it sells to the fast food and retail food markets. Id.

AFA's Operations

AFA's revenues for 2011 totaled approximately $958 million. Going in to bankruptcy, the company listed $219 million in assets against $197 million in liabilities. Decl. at *4. AFA consists of nine companies - AFA Investment, Inc.; American Foodservice Corporation; American Fresh Foods, Inc.; American Fresh Foods, L.P.; AFA Foods, Inc.; American Fresh Foods, LLC; Fairbank Reconstruction Company; American Foodservice Investment Company, LLC; and United Food Group, LLC. Id. AFA Investment, Inc., serves as the parent company and is owned by Yucaipa Corporate Initiatives Fund II, LLC. Decl. at *5.

Events Leading to Bankruptcy

The meat processing industry, according to AFA, is a "highly competitive industry, marked by growing overcapacity." Decl. at *9. Despite having a good safety record and high quality products, AFA contends it has still struggled to achieve earnings over the last two years. The company competes against larger meat processors and smaller, independent processors as well. Id. The prices for AFA's products are based on USDA pricing indexes. The spread between product costs and indexed prices results in a thin profit margin which requires a "consistent level of output" to remain viable. Id.

Over the last couple of years, AFA has had trouble maintaining profitability due to decreased demand, increased costs and lower sales in certain retail food outlets. Decl. at *10. To respond to these pressures, the company began expanding its sales to retail customers, focusing on creating a broader customer base. According to AFA, its strategy was succeeding until controversy arose over its use of boneless lean beef trimmings ("BLBT"). Id.

BLBT is produced by separating lean meat from fat, resulting in a "beef product that is 93% lean." Decl. at *12. Part of the preparation process for BLBT requires that it be exposed to ammonium hydroxide gas. The ammonium hydroxide kills e-coli and other bacteria in the meat. Recent media reports drew attention to the use of BLBT in food products and referred to the product as "pink slime." Id. Because of the negative publicity associated with BLBT, AFA saw sales drop and costs increase as it was required to transition to products that did not contain BLBT. Decl. at *13.

Commencement of Bankruptcy

AFA soon found itself low on cash and unable to pay vendors. Through bankruptcy, AFA is able to seek postpetition financing and explore a sale of its assets under section 363 of the Bankruptcy Code. The AFA bankruptcy proceeding is before the Honorable Mary F. Walrath. Judge Walrath previously served as Chief Judge of the Delaware Bankruptcy Court. AFA is represented by the law firms Jones Day and Pachulski Stang Ziehl & Jones LLP. The case is proceeding under case no. 12-11127(MFW).

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Jason Cornell is a bankruptcy attorney with the law firm Fox Rothschild LLP. Jason practices before the United States Bankruptcy Court for the District of Delaware and the United States Bankruptcy Court for the Southern District of Florida. You can reach Jason at (561) 804-4415, or jcornell@foxrothschild.com.

Clinical Research Firm, Cetero Research, Files Petitions for Bankruptcy in Delaware

Jason Cornell, Esq. — Wed, 28 Mar 2012 18:51:48 -0500

Introduction

On March 26, 2012, Contract Research Solutions, Inc., and certain affiliates (collectively "Cetero"), filed chapter 11 petitions for bankruptcy in the United States Bankruptcy Court for the District of Delaware. In a declaration prepared by Cetero's Chief Financial Officer (the "Declaration" or "Decl."), the company stated that prior to filing for bankruptcy it had already secured bankruptcy financing, reached an agreement with certain lenders regarding a sale process and reached a "comprehensive plan support agreement" that the company believes will satisfy its administrative and priority claimants. Decl. at *3. This post will look at Cetero's business, why the company filed for bankruptcy and what the company's objectives are while in bankruptcy.

Cetero's Business Operations

Based in Cary, North Carolina, Cetero provides early phase clinical research through its labs in Florida, Missouri, North Dakota, Texas and Canada. Name-brand pharmaceutical and generic drug companies hire Cetero to provide testing services which are used in new drug applications submitted by the companies to the U.S. Food and Drug Administration. Decl. at *4. Part of the company's services include recruiting individuals to participate in pharmaceutical testing to measure the effectiveness of a drug company's product. In order to carry out the testing for Cetero's 200+ customers, the company maintains over 1,400 patient beds in its five testing facilities. Decl. at *5.

Events Leading to Bankruptcy

In 2009, Cetero discovered that six of its research chemists in its Texas lab had recorded incorrect date and time data in order to receive compensation for hours the chemists never worked. After discovering the falsified records, the company began an internal investigation which ultimately resulted in Cetero self-reporting the incident to the FDA. Decl. at *9-10. In July of 2011, the FDA issued a letter to Cetero regarding the FDA's concerns over Cetero's studies between 2005 and 2010. In its letter, the FDA stated that Cetero's investigations into the timekeeping practices of its chemists was inadequate and that the reliability of the company's studies could be affected. Decl. at 10.

Due to the falsified records, the FDA required Cetero to repeat certain testing to assure the accuracy of prior test results. The required re-testing created substantial costs for Cetero and triggered a declaration of default by the company's lenders. Decl. at *11-12. Cetero began a restructuring plan in 2010 which ultimately led the company to hiring an investment banker to explore a potential sale. Decl. at *12.

Objectives in Bankruptcy

Cetero's investment bankers began marketing the company in October of last year. Thirty-six parties were contacted as part of the marketing process. Six parties expressed indications of interest and three submitted bids. During the bidding process, Cetero's first lien lender conducted its own due diligence and submitted a credit bid that was higher than any other interested parties. After receiving the credit bid, Cetero negotiated post-bankruptcy financing with its lender. Through bankruptcy, the company will conduct a section 363 sale of assets with its lender serving as the stalking horse bidder.

The Cetero bankruptcy is before the Honorable Kevin J. Carey. Judge Carey recently completed his term as Chief Judge of the Delaware Bankruptcy Court. Cetero is represented by the law firms Young Conaway Stargatt & Taylor LLP and Paul Hastings LLP.

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Jason Cornell is a bankruptcy attorney with the law firm Fox Rothschild LLP. Jason practices before the United States Bankruptcy Court for the District of Delaware and the United States Bankruptcy Court for the Southern District of Florida. You can reach Jason at (561) 804-447 or jcornell@foxrothschild.com.

Auto Dealership Files Bankruptcy Following State Court Verdict

Jason Cornell, Esq. — Sat, 24 Mar 2012 20:48:33 -0500

On March 21st, Blue Springs Ford ("Blue Springs") filed a chapter 11 petition for bankruptcy in the United States Bankruptcy Court for the District of Delaware. Based in Blue Springs, Missouri, Blue Springs has operated as an authorized Ford dealership since 1978. Like most dealerships, the company sells and services Ford vehicles and provides general maintenance and repair services. See the Declaration of Blues Springs' President in Support of First Day Motions (the "Declaration" or "Decl.") at *2.

At the time it filed for bankruptcy, Blue Springs employed 124 people and had monthly payroll expenses of approximately $557,000. Decl. at *2. Blue Spring operates under a financing agreement with Ford Motor Credit Company. As of the petition date, Blue Spring had a secured debt obligation with Ford Motor Credit for approximately $7.9 million. The company's unsecured debt obligations total $2.1 million. Id. Blue Spring achieved $60.8 million in net revenues in 2011.

According to Blue Spring, its need to file for bankruptcy "is the direct result of the Debtor's involvement in pending state court litigation where the Debtor is vigorously defending itself." Decl. at *3. Prior to filing for bankruptcy, Blue Spring was sued in Missouri state court by a plaintiff alleging Blue Spring failed to fully disclose vehicle history regarding the sale of a used vehicle. The state court litigation went to trial in February 2010 which resulted in a jury verdict against Blue Spring in the amount of $171,520 in actual damages and $1.75 million in punitive damages.

Blue Spring sought unsuccessfully to have the state court judgment reduced, arguing that it was 54 times the amount of actual damages. With remittutur unsuccessful, Blue Spring appealed. Due to the size of the verdict, Blue Spring was unable to post bond pending the appeal. According to Blue Spring, negotiations regarding the a resolution of the state court matter have been unsuccessful. In order to try to protect itself from the judgment, Blue Spring filed for bankruptcy hoping to "preserve the value of its business and assets." Decl. at *4.

The Blue Springs bankruptcy is pending before the Honorable Mary F. Walrath. Judge Walrath previously served as Chief Judge of the Delaware Bankruptcy Court. Blue Springs is represented by the law firm Polsinelli Shughart P.C.

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Jason Cornell is a bankruptcy attorney with the law firm Fox Rothschild LLP. Jason is admitted and practices before the United States Bankruptcy Court for the District of Delaware and the United States Bankruptcy Court for the Southern District of Florida. You can reach Jason at (561) 804-4415, or jcornell@foxrothschild.com.

Pemco World Air Services Files Bankruptcy, Intending to Sell Aircraft Maintenance and Conversion Business

Jason Cornell, Esq. — Fri, 23 Mar 2012 20:22:48 -0500

Introduction

On March 5, 2012, Pemco World Air Services ("Pemco"), filed chapter 11 petitions for bankruptcy in the United States Bankruptcy Court for the District of Delaware. According to the Declaration of Pemco's CFO (the "Declaration"), Pemco describes itself as "an industry leader in maintenance, repair and overhaul for wide and narrow body aircraft and regional jets from around the world." Decl. at *2. In addition to maintenance and repair, Pemco also is one of the leading providers of narrow body aircraft cargo conversions. Id.

Pemco's Business Operations

Pemco provides its maintenance and overall services out of three service facilities located in Tampa, Florida; Dothan, Alabama; and Erlanger Kentucky. At its service facilities, the company provides customers with scheduled and unscheduled maintenance, interior refurbishment, interior and equipment installations as well as equipment repair and upgrades. Decl. at *3. Going in to bankruptcy, Pemco has 877 employees, approximately 25% of which are represented by the International Association of Machinists and Aerospace Workers AFL-CIO Local 1632. Id.

Pemco's Finances

At the time of its filing for bankruptcy, Pemco has approximately $31.8 million in senior secured debt which is held by Avion Services Holdings, LLC ("Avion"). Avion is an affiliate of Sun Aviation. Sun Aviation is a secured noteholder of Pemco, holding $5.6 million in subordinated secured notes. Decl. at *4.

Objectives While in Bankruptcy

Pemco lists several factors that it attributes to the need to file for bankruptcy. Since 9/11, the airline industry as a whole has been confronted with increased fuel and security costs. These increased costs have forced airlines to reduce airplane overhauls and conversions, which in turn have hurt Pemco's revenues. Decl. at *4-5. In response to these challenges, Pemco was able to reduce some of its operating costs, however, it ultimately was unable to generate enough cash flow to satisfy its debt obligations.

Now that the Pemco has filed for bankruptcy, the company intends to sell off its aircraft maintenance and conversion business through a bankruptcy auction. As for any assets that remain after the auction, Pemco intends to liquidate under the Bankruptcy Code. The Pemco bankruptcy proceeding is before Judge Peter J. Walsh. Judge Walsh previously served as the Chief Judge of the Delaware Bankruptcy Court. Pemco is represented by the law firm Young, Conaway, Stargatt & Taylor.

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For readers interested in more information on bankruptcy auctions, click here to read a prior post titled "A Closer Look at Bankruptcy Auctions."

Bahraini Investment Bank, Arcapita Bank BSC, Files for Bankruptcy in the Southern District of New York

Jason Cornell, Esq. — Wed, 21 Mar 2012 19:42:31 -0500

Introduction

On Monday, Arcapita Bank BSC ("Arcapita"), a Bahraini closed joint stock company, filed chapter 11 petitions for bankruptcy in the United States Bankruptcy Court for the Southern District of New York. As stated in the First Day Declaration of Arcapita's Executive Director (the "Declaration" or "Decl."), the company describes itself as a "leading global manager of Shari'ah-compliant alternative investments and operates as an investment bank," instead of a domestic bank licensed in the United States. Decl. at *3. Arcapita is based in Bahrain and operates under a wholesale banking license issued by the Central Bank of Bahrain. Id. This post will look briefly at Arcapita's business, why the company filed for bankruptcy as well as some of its objectives while in bankruptcy.

Business Operations

Arcapita began its business in 1996. By the time the company filed for bankruptcy, its operations had grown such that it now employs 268 people with offices in Bahrain, Atlanta, London, Hong Kong and Singapore. The company's core business focuses on investing on its own account, as well as on behalf of third parties, in investments that are compliant with Islamic Shari'ah rules and principles. Decl. at *3. In addition to investing, the company also manages approximately $7 billion in assets under investment. Id. Arcapita lists assets valued at $3.06 billion against liabilities of $2.55 billion. Id.

Events Leading to Bankruptcy

The global recession and the debt crisis in the Eurozone are the two primary factors leading to Arcapita's bankruptcy filing. Due to the recession, the company has seen its investment assets decline in value. At the same time, the recession has hampered Arcapita's ability to access much needed capital. Decl. at *8. The company is the borrower under a $1.1 billion Shariah-compliant debt facility that matures on March 28, 2012. Decl. at *6. Due to a lack of liquidity, Arcapita is unable to repay the debt facility when it comes due. Decl. at *8. Arcapita and its lenders have engaged in negotiations in an effort to reach an out of court restructuring of its debt. However, to date the company has been unable to achieve full consent from its lenders which is necessary to restructure. Decl. at *9.

Objectives in Bankruptcy

According to its Declaration, Arcapita filed for bankruptcy in order "to provide a forum for a global restructuring of their liabilities through a confirmed chapter 11 plan of reorganization." Decl. at *9. Soon after filing for bankruptcy in New York, Arcapita Investment Holdings Limited ("AIHL"), a debtor subsidiary incorporated in the Cayman Islands, sought relief from the Grand Court of the Cayman Islands. Decl. at 1-2. AIHL commenced a proceeding in the Cayman Islands hoping to preclude another party from taking action in the Cayman Islands that might "undermine" "the benefits offered by the United States Bankruptcy Code." Decl. at *10.

Arcapita is represented by the law firm Gibson, Dunn & Crutcher LLP.

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Jason Cornell is a creditor's rights attorney with the law firm of Fox Rothschild LLP. Fox Rothschild is a full service law firm with offices nationwide, including New York, Delaware, California and Florida. You can reach Jason at 561 804-4415 or jcornell@foxrothschild.com.

Ruling Confirms that Judicial Liens are Dischargeable in Chapter 7

L. John Bird — Fri, 16 Mar 2012 16:20:22 -0500

Summary

In an opinion issued March 16, 2012, Judge Sontchi of the Delaware Bankruptcy Court ruled that unpaid debts subject to a judicial lien are dischargeable in bankruptcy. Judge Sontchi’s opinion is available here (the “Opinion”). The Opinion, like all those published by Judge Sontchi, walks readers through the relevant law in making its final ruling; in this case determining what liens are dischargeable pursuant to the bankruptcy code.

Background

Tracey Chambers Coleman (the "Debtor") had debts of $12,381 arising from unpaid attorney fees, awarded in three separate orders (the "Orders"), which were incurred in the course of a custody dispute. This Orders were issued from 2008 through 2010. Opinion at *4-7. The Debtor filed a Motion to Avoid Judicial Lien (the "Motion") to which her former spouse objected. The Opinion was issued to decide the Motion.

Judge Sontchi’s Opinion

Judge Sontchi began his the Opinion with a discussion of Section 522(f)(1) as follows:

a debtor “may avoid the fixing of a lien on an interest of the debtor in property to the extent that such lien impairs an exemption to which the debtor would have been entitled under [section 522(b)], if such lien is - (A) a judicial lien, other than a judicial lien that secures a debt of a kind that is specified in section 523(a)(5).” Section 523(a), in turn, provides that a debtor’s discharge does not apply to any debt that is for a “domestic support obligation” which is defined in section 101(14A). “The elements that must be satisfied for a domestic support obligation to arise are as follows: (i) the payee of the obligation must be either a governmental unit or a person with a particular relationship to the debtor or a child of the debtor; (ii) the nature of the obligation must be support; (iii) the source of the obligation must be an agreement, court order, or other determination; and (iv) the assignment status of the obligation must be consistent with paragraph (D).” In re Anthony, 453 B.R. 782, 786 (Bankr. D. N. J. 2011)

Opinion at *2. In this case, Judge Sontchi held that the initial reasoning for the first two orders was insufficient to rule that they were support obligations. Opinion at *8-9. The final of the three Orders, however, "set forth a thorough basis for the Court's action in 2011." Opinion at *9. Judge Sontchi thus held that the third Order was thus a non-dischargeable domestic support obligation.

Judge Sontchi then analyzed the extent of the Debtor's non-exempt personal property, and determined it to be worth $4,355. As this is greater than the $3,000 that was non-dischargeable, the dischargeable portion of the judicial lien survives such that the entire $4,355 of non-exempt property was subject to the judicial liens established in the three prior Orders, with the remainder of the judicial liens being avoidable. Opinion at *10-11.

The Delaware Bankruptcy Court consistently issues thorough, well reasoned opinions. While the opinions of the Delaware Bankruptcy Court could be shorter, they are more likely to be upheld than opinions with less detail. This consistency and quality are not unique to the Delaware Bankruptcy Court, but they are qualities that are attractive for parties who desire final rulings that will be upheld in subsequent litigation.

John Bird practices with the law firm Fox Rothschild LLP in Wilmington, Delaware. You can reach John at 302-622-4263, or jbird@foxrothschild.com.

Consistency - A Hallmark of the Delaware Bankruptcy Court

L. John Bird — Thu, 15 Mar 2012 09:38:55 -0500

In a 17 page decision entered March 9, 2012, Judge Carey of the Delaware Bankruptcy Court granted a motion for relief from the Bankruptcy Code’s automatic stay to allow an undersecured creditor to exercise its remedies against a debtor’s collateral. A copy of Judge Carey's opinion is available here (the "Opinion"). The Opinion was issued in a case nearly identical to that discussed in this post: Dirt-for-Debt, or Just Dirt: Judge Carey's Latest Decision in All Land Investments, LLC.

The Debtor is related to that in the Dirt-for-Debt post. The creditor moving for relief from stay is the same. The experts are the same. Judge Carey’s decision and holdings are the same. If you like the feeling of déjà vu, by all means, read the opinion referenced in the Dirt-for-Debt post and this opinion both. If you are only going to read one, though, make it the Dirt-for-Debt opinion as Judge Carey provides more information regarding the debtors, and it makes for a better visualization of what happened.

John Bird practices with the law firm Fox Rothschild LLP in Wilmington, Delaware. You can reach John at 302-622-4263, or jbird@foxrothschild.com.

Dirt-for-Debt, or Just Dirt: Judge Carey's Latest Decision in All Land Investments, LLC

L. John Bird — Thu, 15 Mar 2012 08:53:26 -0500

Summary

In a 28 page decision dated March 9, 2012, Judge Carey of the Delaware Bankruptcy Court denied confirmation of a debtor’s plan and granted the motion to lift the automatic stay filed by a creditor with a lien against a majority of the debtor’s assets. Judge Carey’s opinion is available here (the “Opinion”). A Dirt-for-Debt exchange is one where a debtor conveys to a secured creditor the collateral securing its loan in full satisfaction of the creditor’s claim. A more important aspect of this term, however, is that it is very catchy (it got your attention - didn’t it?) and was used by Judge Carey in the Opinion.

Background

All Lands Investments, LLC, (the “Debtor”) had borrowed over $16,000,000 from RBS Citizens (“Citizens”) in order to purchase and develop a parcel of property here in Delaware (the “Subdivision”). Opinion at *3-4. While the Subdivision was the Debtor’s primary asset, it was also collateral for the loans from Citizens. Prior to declaring bankruptcy, the Debtor defaulted on its obligations to Citizens under the loan agreement, and the Delaware State Court had entered a final judgment in favor of Citizens for over $14,000,000. Opinion at *5. Three months later, the Debtor declared bankruptcy.

The Debtor recently filed a plan of reorganization (the “Plan”) that would provide Citizens with a secured claim for the value of the Subdivision with any debt beyond that value being a general unsecured claim. Opinion at *6. This naturally resulted in an appraisal argument between the Debtor and Citizens, as Citizens argued it would have a residual unsecured claim, and the Debtor argued that Citizens’ claim would be completely satisfied by the collateral. Opinion at *9. Regardless of which appraisal was selected by the court, this treatment would allow the Debtor to consider all of Citizens’ secured claims to be paid in full for purposes of voting on the Plan. Thus, for purposes of having the Plan confirmed, Citizens’ only possible ‘no’ vote would be that of an unsecured creditor, simplifying the cram-down process for the Debtor. – A cram-down is the process under 11 U.S.C. § 1129(a)(10) to confirm a plan despite a class of creditors voting ‘no’. It has a number of requirements, but the only one important to understanding this Opinion is that a class of creditors with higher priority than the one voting ‘no’ must be impaired and vote yes to the plan.

With that intent, the Debtor held out as impaired two classes of claimants apart from the general unsecured creditors, arguing that their acceptance of the Plan allowed the Debtor to cram-down the Plan over an objection by Citizens. Opinion at *18. Citizens argued the opposite, that the collateral was worth far less than its claim, and its resulting unsecured claim controlled the vote of the general unsecured creditors because of its size. Citizens also argued that the classes which the Debtor claimed were impaired were “artificially impaired” and therefore their votes do not satisfy the cram-down requirements. Opinion at *22-23.

Citizens also filed a motion for relief from the automatic stay to exercise its remedies against its collateral, arguing that it was not adequately protected because the Debtor had no equity cushion and was not making payments. Citizens also argued that the because the property was completely encumbered and the Debtor could not confirm a plan, the Subdivision was not necessary for the Debtor’s reorganization. Opinion at *27.

Judge Carey’s Opinion

The Opinion is lengthy, but can be summarized quickly. Judge Carey found the testimony of the expert presented by Citizens to be more persuasive, and assigned a value to the collateral well below the debt owed to Citizens. Opinion at *26. This meant that Citizens’ unsecured claim would control the vote of the unsecured creditors. Id. Judge Carey also ruled that the classes of creditor claimed by the Debtor to be impaired were artificially impaired, meaning that they would not be considered impaired for purposes of a cram-down analysis. Opinion at *24.

Judge Carey then moved to Citizens’ motion for relief from the stay. He referred to the record made at the confirmation hearing in holding that “Citizens met is burden of proof” and thus would be granted relief from the automatic stay. Opinion at *27. While the Opinion addressed additional items, they were not core to Judge Carey’s decision and in the interest of minimizing the length of an already too-long post, they have been omitted. In this case, the Debtor tried to trade dirt for debt, but with no other assets to speak of and an unconfirmable plan, the Court allowed proceedings to continue against the dirt without impacting the debt. A worst-case scenario for a debtor, but a nominal win for a debtor (which is still likely to be out-of-the-money on this deal).

John Bird practices with the law firm Fox Rothschild LLP in Wilmington, Delaware. You can reach John at 302-622-4263, or jbird@foxrothschild.com.

Opinion Issued in Carolina Fluid Handling

L. John Bird — Wed, 14 Mar 2012 14:18:01 -0500

On March 14, 2012, Judge Sontchi of the Delaware Bankruptcy Court issued an opinion in the Carolina Fluid Handling Intermediate Holding Corp. bankruptcy case. When a Fox Rothschild client is (or could be) affected by a ruling, rather than summarize the opinion, I will be providing a link to the opinion. The opinion is available here.

Unsecured Creditor Agent in Orleans Homebuilders Files Preference Actions

Jason Cornell, Esq. — Mon, 27 Feb 2012 21:50:45 -0500

Introduction

Earlier this month, JH Cohn, LLP ("Cohn" or "Plaintiff") began filing preference complaints against various defendants in the Orleans Homebuilders ("Orleans") bankruptcy proceeding. For those not familiar with the Orleans bankruptcy proceeding, Cohn was appointed as the "unsecured creditor agent" pursuant to order confirming Orleans' Modified Second Amended Joint Plan of Reorganization (the "Plan"). Pursuant to Orleans' Plan, Cohn filed the preference actions seeking both to avoid transfers it contends are avoidable transfers under the Bankruptcy Code, as well as disallow claims pursuant to 11 U.S.C. section 502(d). This post will look briefly at why Orleans filed for bankruptcy, as well as address some of the issues that arise in preference litigation.

Events Leading to Bankruptcy

I originally wrote about the Orleans bankruptcy proceeding in March of 2010, days after the company first filed petitions for bankruptcy. As I stated in my prior post, the Orleans bankruptcy provided a clear demonstration of the recession's effect on home builders throughout the United States. Orleans experienced strong home sales in 2006 with revenues reaching $987 million. However, by 2009, the company's sales had dropped to $335 million. In response to the decline in new home sales, Orleans cut its spec home production by half and stopped construction all together in the Florida and Arizona markets.

Steep declines in home sales, compounded by tightening in the credit markets, left Orleans with little option other than to file for bankruptcy. The company filed its Plan and Disclosure Statement in November of 2010. The Delaware Bankruptcy Court confirmed Orleans' Plan in December and the Plan became effective on February 14, 2011. As reported in the media, Orleans emerged bankruptcy as a privately held company with a controlling interest now being held by three of Orleans' former debt holders.

The Preference Actions

The preference complaints filed in Orleans generally consist of three counts that include causes of action for avoidance of preferences under 547(b) of the Bankruptcy Code, recovery of avoided transfers under 550(a) and disallowance of claims under 502(j). These causes of action represent the "typical" claims brought by a plaintiff in a preference action. There are many different defenses to the preference claims, however, two "typical" or more commonly used defenses (where the facts permit) are the "ordinary course of business defense" and the "new value" defense.

Ordinary Course Defense

Earlier this year, Delaware Bankruptcy Judge Christophe S. Sontchi issued a decision in the Sierra Concrete Design bankruptcy proceeding. That decision is worth review as it provides, among other things, a current summary of the ordinary course of business defense. On page 6 of Judge Sontchi's opinion, the Court provides some of the key factors to consider when assessing the ordinary course defense:

To establish the ordinary course of business defense the creditor must first prove that there was, indeed, an ordinary course of business between the parties or in the industry prior to the 90 day preference period. Key factors to consider in connection with the parties' behavior are the length of the parties' relationship, the number of transactions that occurred prior to the preference, the method of payment, the timing of payment, and the behavior relating to payment, i.e., did the creditor have to make dunning calls or otherwise push the debtor to make its payments. Admissible evidence relating to industry practice, rather obviously, is required to establish the industry standard.

Having established the existence of an ordinary course of business defense (either among the parties or in the industry), the creditor must prove that the transactions in the 90 day preference period materially complied with that pre-preference behavior. The factors to be considered are those discussed above. No one factor, however, is determinatve. The Court must consider the entirety of the parties' post-preference conduct in making its determination. Opinion at *6.

Conclusion

In the months ahead, the Plaintiff in Orleans bankruptcy will be seeking to recover what it contends are avoidable preferences under the Bankruptcy Code. Defendants who contend that they have a ordinary course of business defense should consider Judge Sontchi's opinion in Sierra Concrete Design (a copy of the opinion is available here).

The Plaintiff in the Orleans bankruptcy proceeding is represented by the law firms The Rosner Law Group and Neiger LLP. The Orleans bankruptcy proceeding is before Judge Peter J. Walsh. Judge Walsh previously served as the Chief Judge of the Delaware Bankruptcy Court.

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Jason Cornell is a partner and bankruptcy attorney with the law firm Fox Rothschild LLP. Jason is admitted and practices before the United States Bankruptcy Court for the District of Delaware and the United States Bankruptcy Court for the Southern District of Florida. You can reach Jason at 561 804 4415, or jcornell@foxrothschild.com.

Decision in AE Liquidation, Inc. Allows Preference Complaint to be Amended After the Expiration of the Statute of Limitations

L. John Bird — Thu, 23 Feb 2012 11:58:51 -0500

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.

John Bird practices with the law firm Fox Rothschild LLP in Wilmington, Delaware. You can reach John at 302-622-4263, or jbird@foxrothschild.com.

Washington Mutual's Plan of Reorganization has been Confirmed

L. John Bird — Fri, 17 Feb 2012 14:45:35 -0500

At approximately 10:15 this morning, Judge Walrath of the Delaware Bankruptcy Court made an oral ruling confirming Washington Mutual's chapter 11 plan of reorganization.

Over the last three and one-half years, hundreds of attorneys and other professionals have worked thousands of hours in an effort to help WAMU obtain a measure of relief from its debts so that it could emerge from bankruptcy protection with the ability to continue to operate. What has emerged from the process is a smaller, leaner company with a greatly reduced debt load.

In its efforts to reach confirmation, WAMU reached agreements with every class of debtors, as well as the equity committee, providing that they would all vote to approve the plan. Because there was no dissenting class, the absolute priority rule (which provides that no class of creditors, or equity, can receive any distributions until all classes ahead of them are paid in full) was not implicated. This rule applies only when there is a dissenting class, so WAMU's broad agreements neatly sidestepped this issue. This allowed WAMU to agree to provide current equity holders with approximately 95% of the equity of the new company. While it is not worth nearly as much as it was pre-bankruptcy, the fact that equity holders are receiving a distribution of this magnitude is almost unheard of in the modern bankruptcy era. Judge Walrath even referred to the substantial recovery equity holders would be receiving in her opinion, congratulating them on their efforts in the case.

It was a packed courtroom with chairs in the aisle and people standing near the door to be able to hear, but everyone involved in the case is happy to see an end to the intense litigation and a resolution that garnered an incredibly broad consensus.

John Bird practices with the law firm Fox Rothschild LLP in Wilmington, Delaware. You can reach John at 302-622-4263, or jbird@foxrothschild.com.

LSP Energy Files Petitions for Bankruptcy in Delaware

Jason Cornell, Esq. — Wed, 15 Feb 2012 16:21:10 -0500

Introduction

On February 10th, electricity operator LSP Energy LP ("LSP") filed chapter 11 petitions for bankruptcy in the United States Bankruptcy Court for the District of Delaware. As stated in court filings, LSP owns and operates an electricity plant located in Batesville, Mississippi. Aside from its gas-fired electric generation facility, LSP's assets consist primarily of 58 acres of land in which it operates its facility. See Declaration of LSP's President in Support of First Day Motions (the "Declaration" or "Decl.").

Events Leading to Bankruptcy

LSP runs three "gas-fired combined cycle electric generating units." Decl. at *3. In May of last year, one of the company's combustion turbines experienced a mechanical failure which triggered an interruption in operations. According to the company, the service interruption from the turbine has lasted longer, and with greater effect, than originally anticipated. Despite repairs, inspections and part replacements, the damaged turbine remains out of operation and is not expected to be back on line until March of this year. See Decl. at *4-5.

LSP's power generation problems went from bad to worse late last year. Whereas the company lost power in Turbine 1 in May, on October 10, 2011, the company experienced a second outage in the second of three turbines. Although the second outage was resolved on January 21, 2012, LSP estimates that the cost of repairs and lost revenues will total approximately $19 million, assuming Unit 1 is back online in March. This lost revenue is in addition to losses that are covered by insurance. Decl. at *5. LSP's losses have resulted in it being unable to fund its operations while at the same time service its debt. In order to address its "liquidity problem," the company sought protection under chapter 11 of the Bankruptcy Code. Decl. at *5.

Objectives in Bankruptcy

According to its Declaration, now that LSP is in bankruptcy, the company intends to sell the majority of its assets pursuant to section 363 of the Bankruptcy Code. Because of the "highly regulated nature" of the energy industry, the company anticipates that it will take at least six to eight months to complete a 363 sale. Decl. at *6. LSP has reached an agreement with some, but not all, of its secured lenders regarding the timing and procedures for the sale. Id.

The LSP Energy bankruptcy is before Judge Mary F. Walrath. Judge Walrath previously served as Chief Judge of the Delaware Bankruptcy Court. LSP is represented by the law firm Whiteford Taylor & Preston LLP.

For readers looking for more information regarding some of the procedural and substantive aspects of a bankruptcy auction, a prior post of mine is available here for review.

Jason Cornell is an attorney with the law firm Fox Rothschild LLP and practices before the United States Bankruptcy Court for the District of Delaware as well as the United States Bankruptcy Court for the Southern District of Florida. You can reach Jason at (561) 804 -4415, or jcornell@foxrothschild.com