Delaware Bankruptcy Litigation

Berkline/BenchCraft Plan Administrator Files Preference Actions

Jason Cornell, Esq. — Thu, 09 May 2013 12:36:10 -0500

Introduction

On April 24, 2013, Robert S. Bernstein, Plan Administrator for the Berkline/BenchCraft bankruptcy estates, began filing complaints with the Delaware Bankruptcy Court seeking to recover what he contends are preferential transfers. For those not familiar with preference actions, Bernstein contends that certain payments, or "transfers", made to creditors in the months prior to the Berkline bankruptcy are subject to avoidance and recovery pursuant to sections 547 and 550 of the Bankruptcy Code. According to court papers filed by Bernstein, a pretrial conference is scheduled for July 9, 2013 at 10:30 a.m..

Background

Berkline and various related entities filed chapter 11 petitions for bankruptcy on May 2, 2011. According to the Declaration of Berkline's Chief Restructuring Office (the "Decl."), Berkline was a "leading North American designer and manufacturer of upholstered and reclining furniture." Decl. at *2. Berkline manufactured home theater seating, sofas, love seats and sectionals which were sold in furniture stores, department stores, "big box" stores and on the internet. Two of the company's brands included the "Berkline" and "Benchcraft" lines of furniture. Id.

Reasons for Bankruptcy

Berkline attributes its bankruptcy to the recent economic recession and decline in the housing market, both of which caused the company to experience a significant decline in sales. As a result of the economic downturn, Berkline began streamlining operations through cost reductions and trimming underperforming units. Although the company's management believed they had implemented a successful reorganization plan, their efforts were not enough to overcome Berkline's tremendous debt. Decl. at *6.

Objectives in Bankruptcy

Prior to filing for bankruptcy, Berkline hired a Chief Restructuring Officer to locate a buyer of the company's assets. However, without the ability to obtain needed financing, the company was unable to complete an out of court restructuring. Decl. at *6. In March of 2011, Berkline's Board of Directors decided that the most effective way to maximize value for creditors was through a liquidation through chapter 11 bankruptcy proceedings. Decl. at *6-7. Once the company filed for bankruptcy, it eventually received approval of its Second Amended Chapter 11 Plan of Liquidation.

The Berkline bankruptcy and preference actions are before Judge Mary F. Walrath under lead case no. 11-11369 (MFW). The Berkline Plan Administrator, as plaintiff in the preference actions, is represented by the law firms Pachulski Stang Ziehl & Jones LLP and Bernstein-Burkley, P.C..

Defenses to a Preference Action

The Bankruptcy Code provides creditors with many defenses to preference actions. Included among these are the "ordinary course of business defense" and the "new value defense." For reader's looking for more information concerning claims and defenses in preference litigation, attached is a booklet I prepared on the subject: "A Preference Reference: Common Issues that Arise in Delaware Preference Litigation."

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. You can reach Jason at 302 427-5512 or jcornell@foxrothschild.com.

A Closer Look at the Synagro Technologies Bankruptcy

Jason Cornell, Esq. — Thu, 02 May 2013 18:22:57 -0500

Introduction

On April 24, 2013, Synagro Technologies ("Synagro") and various affiliates filed chapter 11 petitions for bankruptcy in the United States Bankruptcy Court for the District of Delaware. Synagro recycles biosolid and organic materials generated by municipal and industrial waste water treatment centers. The company describes its services to include "drying and pelletization, composting, incineration, alkaline stabilization, land application, collection and transportation, regulatory compliance, dewatering, facility cleanout services and product marketing." See Synagro's Declaration in Support of Chapter 11 Petitions and First Day Pleadings (the "Decl.") at *3-4.

Operations

Synagro began in 1986 as RPM Marketing, Inc. Although the company is currently headquartered in Houston, Texas, Synagro is moving its headquarters to White Marsh, Maryland. Synagro operates four divisions - facilities, services, rail and drilling. The facilities division provides waste water residuals management at fifteen different locations throughout the United States. Decl. at *4. Synagro's services divisioin provides waste treatment services at facilities owned by individual customers. Decl. at *5. The company recently acquired a drilling division that provides waste management services to oil and gas production companies. Finally, Synagro's rail division operates a fleet of rail cars and containers that dispose of over 500,000 tons of waste per year. Decl. at *6.

Reasons for Bankruptcy

In April of 2007, Synagro entered into a $390 million first lien credit agreement and $150 million second lien credit agreement. Decl. at *9-10. In early 2012, the company realized it was unlikely to meet its debt ratio requirements under the first and second lien agreements. Decl. at *15. According to Synagro, its high debt ratios were the result of "a challenging operating environment in late 2011 and early 2012." Id. During the latter part of 2012, Synagro began negotiations with its lenders to see if an out of court restructuring was possible. It was during these negotiations that the company realized that a traditional sale of assets would not satisfy its obligations under the second lien agreement and that a sale under section 363 of the Bankruptcy Code was necessary. Decl. at *16.

Objectives in Bankruptcy

Synagro started the sale process in November of 2012. Over one hundred potential purchasers were contacted to generate interest in purchasing the company. Of those contacted, five provided written indications of interest. Decl. at *17. On April 23, 2013, Synagro and EQT Infrastructure II Limited Partnership ("EQT") entered into an asset purchase agreement. The EQT purchase agreement is subject to better and higher offers and must comport with section 363 of the Bankruptcy Code. Decl. at *19. The company hopes to sell substantially all of its assets through a court-approved bankruptcy sale.

The Synagro bankruptcy is before the Honorable Brendan L. Shannon of the United States Bankruptcy Court for the District of Delaware. This case is proceeding under case no. 13-11041(BLS). Synagro is represented by the law firm Skadden, Arps, Slate, Meagher & Flom LLP.

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Jason Cornell is an equity partner with the law firm Fox Rothschild LLP. Jason is a creditors' rights attorney who 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 302 427 5512 or jcornell@foxrothschild.com.

Below are some additional posts Jason has written on Delaware bankruptcy litigation:

Ten Things Every Commercial Landlord Should Know About a Tenant in Bankruptcy.

Seeking Relief from the Automatic Stay in Delaware.

A Tale of Two Bankruptcy Auctions.

What Information is Required in a Chapter 11 Disclosure Statement?

Yarway Files for Bankruptcy, Citing Asbestos-Related Litigation

Jason Cornell, Esq. — Tue, 23 Apr 2013 15:26:53 -0500

Introduction

On Monday, April 22, 2013, Yarway Corporation filed a chapter 11 petition for bankruptcy in the United States Bankruptcy Court for the District of Delaware. According to papers filed by Yarway with the Bankruptcy Court, the company's origins go back to 1908 when it started manufacturing pipe clamps, steam traps and valves. See Yarway's Affidavit in Support of First Day Pleadings (the "Decl."), at *1. The company was privately owned until 1986, when it was sold to Keystone International, Inc.. Keystone was purchased by Tyco International Ltd. in 1997. Decl. at *2

Operations

According to its Declaration, Yarway "allegedly manufactured, distributed and/or sold asbestos-containing products, which ceased entirely by 1988." Decl. at *2. The company stopped its manufacturing operations entirely in 2003 when it sold its manufacturing facility to an unrelated third party. Id. Even after the company sold off its manufacturing assets, it remained in existence in order to "defend, process and satisfy asbestos-related claims asserted against it." Id. It's these asbestos related claims which are the basis for Yarway filing for bankruptcy.

Reasons for Bankruptcy

Yarway contends that its bankruptcy filing is the result of the continued flow of asbestos-related claims due to human exposure to the company's asbestos-containing products. The company places the asbestos claims in two primary categories: (1) claims stemming from exposure to Yarway's gaskets and packing that was manufactured between the 1920s to the 1970; and (2) claims relating to the manufacture of joint packing consisting of Teflon and asbestos from the 1940s to the 1970s. Decl. at *3.

Yarway is faced with a huge amount of asbestos-related litigation. The company contends that it was first named as a defendant in a lawsuit in 1991. In the last five years over 10,000 new asbestos-related claims have been asserted against the company. Since the beginning of Yarway's fiscal year (October 1, 2012), Yarway has received over 1,000 new asbestos claims. Decl. at *3. In the past five years, Yarway has paid over $128 million in settlement costs for asbestos claims. That number reached $18 million for this fiscal year alone. Id.

Objectives in Bankruptcy

Yarway contends that in 2012 it settled the last of its insurance policies known to provide coverage for asbestos-related claims. The company believes it has no additional insurance coverage for future claims. Decl. at *3-4. By filing for bankruptcy, Yarway hopes to "negotiate, obtain approval of, and consummate a plan for reorganization that establishes an appropriately funded trust to provide for the fair and equitable payment of legitimate current and future Yarway asbestos claims ..." Decl. at *4.

The Yarway bankruptcy is before Judge Brendan L. Shannon, under case no. 13-11025(BLS). Yarway is represented by the law firms Sidley Austin LLP and Cole Schotz Meisel Forman & Leonard.

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Below are some additional posts Jason has written on Delaware bankruptcy litigation:

Ten Things Every Commercial Landlord Should Know About a Tenant in Bankruptcy.

Seeking Relief from the Automatic Stay in Delaware.

A Tale of Two Bankruptcy Auctions.

What Information is Required in a Chapter 11 Disclosure Statement?

The Scooter Store Files for Bankruptcy in Delaware, Citing Government Regulations and Investigations

Jason Cornell, Esq. — Tue, 16 Apr 2013 15:45:27 -0500

Introduction

On Monday, April 15, 2013 (the "Petition Date"), The Scooter Store Holdings, Inc. (the "Scooter Store" or "Debtor"), and various related entities filed chapter 11 petitions for bankruptcy in the United States Bankruptcy Court for the District of Delaware. Based in New Braunfels, Texas, Scooter Store is one of the nation's largest providers of power wheelchairs, scooters, lifts, ramps and other related equipment. See Declaration in Support of Chapter 11 Petitions and First Day Motions (the "Decl.") at *3. Scooter Store began its operations in 1991. Since then, the company has served over 700,000 senior citizens and disabled persons through its equipment offerings and services. Id.

Company Operations and Debt Structure

At the height of its operations, Scooter Store employed over 2,400 employees in 48 locations throughout the United States. As of the Petition Date, however, the company had reduced its employees down to 300. Decl. at *4. In 2011, Sun Capital Partners purchased a majority voting interest in the company. Sun owns debts, preferred stock and warrants that represent over 66% of the voting ownership interest in the company. Decl. at *4-5. The company's debt includes a first lien loan agreement for $25 million, a second lien facility for $25 million and a third lien facility totaling $40 million. Decl. at *6.

Events Leading to Bankruptcy

Prior to bankruptcy, Scooter Store defaulted on each of its three credit facilities. Decl. at *7. The company entered into forbearance agreements with its lenders in December of 2012 and again in March of 2013. Id. Debtor attributes in bankruptcy filing, in part, to changes in Medicare laws and regulations. In 2011, Medicare changed the timing of its payments for mobility devices to a "13 month capped rental model." Decl. at *8. Under its business model, Scooter Store devoted significant amounts of cash to advertising, depriving it of the liquidity it needed to sustain the changes in timing and method of payment. Id.

Besides the changes in the timing of payment, Scooter Store has also suffered due to government investigations which have harmed both the company's finances and goodwill. The Debtor is the subject of a criminal investigation by the Department of Justice focusing on the company's former management. Decl. at *8-9. The company has also suffered from a civil investigation regarding its billing and reimbursement procedures. Decl. at *9.

Objectives in Bankruptcy

Scooter Store filed for bankruptcy intending to sell substantially all of its assets pursuant to section 363 of the Bankruptcy Code. Decl. at *10. Under the company's "Reorganization Milestones," Scooter Store hopes to establish a bid deadline of July 23, 2013, with an auction on July 25, 2013 and a closing on the sale on or before July 30, 2013. Decl. at *10.

The Scooter Store bankruptcy is before Judge Peter J. Walsh of the Delaware Bankruptcy Court. This bankruptcy is proceeding under Case No. 13-10904(PJW). Scooter Store is represented by the law firm Young Conaway Stargatt & Taylor.

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Below are some additional posts Jason has written on Delaware bankruptcy litigation:

Ten Things Every Commercial Landlord Should Know About a Tenant in Bankruptcy.

Seeking Relief from the Automatic Stay in Delaware.

A Tale of Two Bankruptcy Auctions.

What Information is Required in a Chapter 11 Disclosure Statement?

A Summary of the Rotech Healthcare Bankruptcy

Jason Cornell, Esq. — Mon, 08 Apr 2013 16:00:26 -0500

Introduction

Earlier today, Rotech Healthcare ("Rotech"), filed chapter 11 petitions for bankruptcy in the United States Bankruptcy Court for the District of Delaware. According to a declaration filed by Rotech's President and CEO (the "Declaration" or "Decl."), Rotech describes itself as "one of the largest providers of home medical equipment and related products and services in the United States ..." The numbers back it up ... Rotech provides medical equipment and services in all 50 states employing over 4,000 employees in 409 operating locations. Decl. at *3. Using the information provided in Rotech's court filings, this post will look at Rotech's business, why the company filed for bankruptcy and what Rotech's objectives are now that it is in bankruptcy.

Business History and Operations

Rotech Healthcare, Inc., and various related entities are the "debtors in possession" in the present bankruptcy proceeding. The Rotech entities that just filed for bankruptcy, however, are the successors to Rotech Medical Corporation ("RMC"). RMC started in the medical equipment industry in 1981. In 1997, RMC was acquired by Integrated Helath Services, Inc. ("Integrated"). When Integrated filed for bankruptcy in Delaware in February of 2000, it took all of its subsidiaries into bankruptcy with it, including RMC. Rotech was formed in March 2002 as part of the IHS plan of reorganization. Decl. at *8.

Over 87% of Rotech's revenues come from the respiratory therapy equipment and related services. Patients that require respiratory services often suffer from long term breathing disorders that require extended treatment. Patients that use Rotech products usually come to the company through hospital or doctor referrals. Once a patient is set up using the company's equipment, service technicians follow-up as proscribed by the doctor. The company provides 24 hour support service through a call center it operates in Murray, Kentucky. Decl. at *4.

Events Leading to Bankruptcy

Rotech attributes its present bankruptcy to high debt and low revenue. By that, in 2002 when the company formed as part of the Integrated bankruptcy, Rotech took on over $500 million in debt. Decl. at *13. The company emerged from the Integrated bankruptcy expecting to "services its debt with robust revenues from reimbursement by third-party payors." Id. Instead, Rotech has experienced over $1.2 billion in aggregate losses since 2005 due to permanent reductions in insurer reimbursement rates. Decl. at *15. According to Rotech, the drop in reimbursement rates stemmed frm The Medicare Prescription Drug, Improvement and Modernization Act of 2003; The Deficit Reduction Act of 2005; and, the Medicare Improvement for Patients and Providers Act of 2008.

Objectives in Bankruptcy

Towards the end of 2012, Rotech retained Barclays Capital to determine the feasibility of an out of court restructuring. According to Rotech, lenders were generally unwilling to provide the additional financing needed to reorganize outside of chapter 11. Once the company decided that it needed to file for bankruptcy, Rotech started seeking support for a plan of reorganization. Decl. at *18. Under a plan support agreement, Rotech hopes to restructure its debt through a pre-arranged chapter 11 plan. Decl. at *19. According to Rotech, the proposed plan provides that "trade creditors and vendors who agree to maintain or reinstate payment terms as existing prior to the commencement date will be paid in full upon the effective date of a plan."

The Rotech bankruptcy is before Judge Peter J. Walsh. The main case is proceeding under case no. 13-10741(PJW). Rotech is represented by Young, Conaway, Stargatt & Taylor.

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Below are some additional posts Jason has written on Delaware bankruptcy litigation:

Ten Things Every Commercial Landlord Should Know About a Tenant in Bankruptcy.

Seeking Relief from the Automatic Stay in Delaware.

A Tale of Two Bankruptcy Auctions.

What Information is Required in a Chapter 11 Disclosure Statement?

Pool Supplier, NAMCO, Files for Bankruptcy In Delaware

Jason Cornell, Esq. — Thu, 04 Apr 2013 19:09:09 -0500

Introduction

On March 24, 2013, NAMCO, LLC ("NAMCO") filed a chapter 11 petition for bankruptcy in the United States Bankruptcy Court for the District of Delaware. Based in Manchester, Connecticut, NAMCO sales swimming pool accessories and equipment throughout the Northeast and Mid-Atlantic United States. See Declaration of Lee Diercks in Support of Chapter 11 Petition and First Day Motion (the "Declaration" or "Decl.") at *2. In addition to selling pool supplies, NAMCO owns and operates a chemical repackaging center which allows the company to sell and distribute chemicals through its website. Id.

Operations

Going in to bankruptcy, NAMCO operates thirty-seven (37) stores in ten states. The company's stores range anywhere in size from 11,000 to 60,000 square feet. In addition to its retail stores, NAMCO operates in 190,000 square feet of office and distribution space and 40,000 square feet for its chemical repackaging center. Id. at *3.

NAMCO presently employs approximately 280 employees, none of whom are represented by unions. Sales for fiscal year 2011 reached $92 million, however, annual sales in 2012 dropped to $82 million. Decl. at *4. NAMCO attributes its declining sales to weakened demand in the pool and patio industry. According to NAMCO, the drop in demand, in turn, stems from "a poor housing market, an overall weak U.S. economy, complicated by unfavorable weather conditions ..." Id.

Objectives in Bankruptcy

In June of 2012, NAMCO entered into a debt agreement with Salus Capital Partners LLC. NAMCO has approximately $18.6 million in pre-bankruptcy secured debt. Of this amount, $9.3 million is drawn down on a revolver agreement with Salus. Decl. at *6. NAMCO is also a borrower under secured notes with a principal balance of $9.3 million. Id. The notes and revolving debt agreement are secured by substantially all of NAMCO's assets.

NAMCO defaulted on its debt agreements in December of last year. Since learning of the default, NAMCO has been working with its lenders regarding a potential sale of a portion of the company in exchange for an infusion of additional cash. Decl. at *9. Through negotiations, NAMCO and Salus were able to agree on a debtor in possession financing agreement which would provide the company with much needed cash while going through bankruptcy. Id. at *9. While in bankruptcy, NAMCO intends to use the Salus debtor in possession facility to either pursue a sale of the business or successfully reorganize. Id. at *15.

The NAMCO bankruptcy is before Judge Peter J. Walsh under case no. 13-10610(PJW). NAMCO is represented by the law firm Olshan Frome Wolosky LLP.

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Below are some additional posts Jason has written on Delaware bankruptcy litigation:

Ten Things Every Commercial Landlord Should Know About a Tenant in Bankruptcy.

Seeking Relief from the Automatic Stay in Delaware.

A Tale of Two Bankruptcy Auctions.

What Information is Required in a Chapter 11 Disclosure Statement?

Majestic Holdco Opinion Discusses Excusable Neglect

L. John Bird — Thu, 14 Mar 2013 13:06:22 -0500

Summary

In an 8 page decision signed February 21, 2013, Judge Gross of the Delaware Bankruptcy Court denied a Motion for Enlargement of Administrative Claim, holding that the movant failed to prove excusable neglect. Judge Gross’s opinion is available here (the “Opinion”).

The Opinion analyzes the motion pursuant to the excusable neglect factors provided in Pioneer Investment Services Co. v. Brunswick Assocs. Ltd. Partnership, 507 U.S. 380, 395 (1993) (“These include, as the Court of Appeals found, the danger of prejudice to the debtor, the length of the delay and its potential impact on judicial proceedings, the reason for the delay, including whether it was within the reasonable control of the movant, and whether the movant acted in good faith.”).

Background

The debtors in this case include Barden Mississippi Gaming, LLC (“Barden”), a casino operator located in Mississippi. Entergy Mississippi, Inc. (“Entergy”) provided electricity to a casino operated by Barden in Robinsville, Mississippi (the “Casino”). After discovering that the meter that measured the Casino’s power consumption was faulty, Entergy filed its Motion for Enlargement of Time and Payment of an Administrative Expense (the “Motion”) which led to the issuance of the Opinion.
The following chronology provided by the Court on pages 3-4 of the Opinion is the clearest history of a contested matter I have ever seen in an opinion (Barden Mississippi Gaming, LLC, or “Barden” is a Debtor subsidiary and Entergy is the movant):

April 7, 2003 - Entergy installed a meter at Barden’s Casino
November 23, 2009 - Debtors’ Petition Date
November 23, 2009 - Debtors’ Motion for Entry of Interim and Final Orders Determining Adequate Assurance of Payment for Future Utility Services
December 17, 2009 - Stipulation between Entergy and Debtors re: Adequate Assurance of Payment for Future Utility Services
January 4, 2011 - Bar Date for Pre-Petition Claims
February 25, 2011 - Cure Notice
March 11, 2011 - Plan’s Confirmation Date
December 1, 2011 - Effective Date of the Plan
January 18, 2012 - Bar Date for Administrative Claims
April 17, 2012 - Entergy discovers the meter’s error
September 6, 2012 - Entergy files its motions
September 27, 2012 - Order and Final Decree Closing Certain Chapter 11 Cases

Judge Gross’s Opinion

Judge Gross begins his discussion with a reference to Federal Rule of Bankruptcy Procedure 9006(b), which provides the court the authority to grant an enlargement of time after the expiration of the specified period where the failure to act was the result of excusable neglect. Opinion at *4. He then discusses the four factor test approved by the Supreme Court in the Pioneer Investment case. The factors are: (1) the danger of prejudice to the Debtor; (2) the length of the delay and its effect on court proceedings; (3) the reason for the delay, including whether the delay was within the movant’s reasonable control; and (4) whether the movant acted in good faith. Opinion at *5.

Judge Gross walked through each of the four factors, holding that (1) the length of time that had passed and the near completion of the bankruptcy case would prejudice the Debtors; (2) While the length of the delay did not necessarily weigh against Entergy, the fact that it waited five months after discovering the problem, while the bar date notices only provided 45 to 60 days of notice; (3) Because Entergy had sole control over the faulty meter, this factor weighs heavily against Entergy; (4) Lastly, no one disputes that Entergy is acting in good faith. Opinion at *6-8.

After this weighing of factors, Judge Gross determined that Entergy “did not prove, by a preponderance of the evidence, that is late filing was the result of excusable neglect.” He thus denied the Motion. Opinion at *8.

As predictable as the Delaware Bankruptcy Court is, litigants can be sure that relevant U.S. Supreme Court precedent will be followed. Thus it falls to the attorneys to make sure they are aware of, and couch their arguments in terms of, the precedent that applies to their case.

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.

Sportsman's Warehouse Reminds Us of Basic Contract Interpretation Principles

L. John Bird — Thu, 28 Feb 2013 22:27:14 -0500

Summary

In a 25 page opinion published February 7, 2013, Judge Sontchi applied black-letter contract interpretation principles in conjunction with the bankruptcy rules in holding that a landlord was not entitled to damages resulting from a debtor's breach of its lease. Judge Sontchi’s opinion is available here (the “Opinion”).

Background

Pursuant to a pre-petition lease that expired December 25, 2008 between a landlord (the "Landlord") and Sportsman's Warehouse ("Sportsman's"), Sportsman's was required to purchase the leased property "on or before the Initial Term Expiration Date of December 25, 2008." Opinion at *2. Without purchasing the property or vacating the leased property, Sportsman's filed for bankruptcy on March 21, 2009. In April, 2009, the Landlord and Sportsman's entered into an amendment of the lease. Opinion at *7. This amendment had a new term that extended through March 1, 2010. On July 30, 2009, the lease was assumed pursuant to Sportsman's plan of reorganization. This assumption occurred with a cure amount of $0. The plan then went effective on August 14, 2009. When the Debtor failed to provide notice that it would purchase the leased property by the March 1, 2010 expiration of the contract, the Landlord sued for breach of contract. Sportsman's then vacated the leased property by March 1, 2010. Opinion at *8-9.

Judge Sontchi's Opinion

While the motion practice involved between the Landlord and Sportsman's was long and detailed after the property was vacated, the ultimate decision of Judge Sontchi rested squarely on the language of the initial lease entered into by the Landlord and Sportsman's. The pre-petition lease used the term "Initial Term Expiration Date of December 25, 2008." The amendment of the lease did not address the term "Initial Term Expiration Date" or effect any explicit changes to the December 25th purchase date. Rather, the amendment contained the phrase, "The Lease shall remain in full force and effect and shall remain unaltered, except to the extent specifically amended herein." Opinion at *7.

While a number of additional arguments are raised by each party, and Judge Sontchi discusses them all, the case ultimately turns on the drafting of the contracts. Because the initial contract set a date certain, December 25, 2008, the failure of the lease amendment to address this point specifically meant that this aspect of the lease remained unchanged. Opinion at *24. Sportsman's failure to purchase the leased property was a breach of contract, but because the cure amount was set at $0 when the lease was assumed, and there was no objection raised, the Landlord was left without any recourse.

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.

Ormet Corporation Files for Bankruptcy in Order to Facilitate Sale of Assets

Jason Cornell, Esq. — Wed, 27 Feb 2013 22:04:00 -0500

Background

On February 25, 2013 (the "Petition Date"), Ormet Corporation and various related entities filed chapter 11 petitions for bankruptcy in the United States Bankruptcy Court for the District of Delaware. As stated in the company's Declaration in Support of First-Day Motions and Applications (the "Decl.") at *4, Ormet began in 1956 as an aluminum manufacturer at a facility along the Ohio River in Hannibal, Ohio. By 2004, the company had grown to eight facilities in six states with operations that included aluminum production, rolling, recycling and coating. Id.

Low prices for aluminum and high energy costs forced the company to file for bankruptcy protection in Ohio in January of 2004. The Bankruptcy Court for the Southern District of Ohio confirmed Ormet's plan of reorganization in December of 2004. Decl. at *5. As the company enters bankruptcy a second time, this time in Delaware, Ormet operates an aluminum smelter facility in Hannibal Ohio (256 acres) and a refinery in Burnside, Louisiana (1,100 acres). Decl. at *7. In the weeks leading up to bankruptcy, Ormet employed over 1,100 individuals, 977 of which are represented by the United Steel, Paper and Forestry, Rubber, Manufacturing, Energy, Allied Industrial and Service Workers International Union. Decl. at *8.

Reasons for Filing Bankruptcy

According to the company's Declaration, Ormet "is seeking the protections of chapter 11 of the Bankruptcy Code to provide breathing room to facilitate a sale of the Company's assets, maintain operations and maximize the value for the benefit of the Company, its estates, and the parties-in-interest." Decl. at *17. Ormet saw a substantial rise in the price of aluminum in 2010 and 2011. Based on the increase in prices, the company decided to re-start its Burnside Refinery in order to produce alumina, a key ingredient in aluminum production. Id. Since April of 2011, however, the company has watched aluminum prices drop over $900 per metric tonne. Id. For each $100 per tonne drop in the price of aluminum, Ormet experiences a $27 million drop in annual revenue. Id.

Aside from a drop in aluminum prices, Ormet is also experiencing a rise in costs for electricity, raw materials and employee related (pension) expenses. Decl. at *17. The company describes its financial situation over the last six months as a "perfect storm" that has resulted in a drop in liquidity. Id.

Objectives in Bankruptcy

Prior to filing for bankruptcy, Ormet implemented a program to improve liquidity by delaying payments for electricity and pension benefits. Decl. at *18. The company also embarked on a marketing campaign looking for a potential buyer of Ormet's assets or equity. Decl. at *19. Despite contacting 21 potential purchasers, none were willing to provide terms or conditions for a potential sale. Instead, Ormet received a single offer from an affiliate of its secured lender. That lender has put together an offer pursuant to a stalking horse purchase agreement. Id. Under the purchase agreement, Ormet's lender has agreed to purchase substantially all of the company's assets subject to higher and better offers. The lender will also provide an additional $30 million in new money which will provide the company with the postpetition financing needed to run a chapter 11 auction and seek related relief through the bankruptcy court. Decl. at *21.

The Ormet bankruptcy is before Judge Mary F. Walrath. Ormet is represented by the law firm Morris, Nichols, Arsht & Tunnell LLP. The case is proceeding under case no. 13-10334(MFW).

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Below are some additional posts Jason has written on Delaware bankruptcy litigation:

Ten Things Every Commercial Landlord Should Know About a Tenant in Bankruptcy.

Seeking Relief from the Automatic Stay in Delaware.

A Tale of Two Bankruptcy Auctions.

What Information is Required in a Chapter 11 Disclosure Statement?

Handy Hardware Seeks to Reorganize in Delaware Bankruptcy Court

Jason Cornell, Esq. — Tue, 26 Feb 2013 21:25:15 -0500

Background

On January 11, 2013, Handy Hardware Wholesale, Inc. ("Handy" or the "Debtor") filed a chapter 11 petition for bankruptcy in the United States Bankruptcy Court for the District of Delaware. As stated in Handy's court filings, the company is a wholesale purchaser of hardware supplies which it in turn sells to its members at a discount. See Declaration of Thomas J. Schifanella, Jr. in Support of Chapter 11 Petition and First Day Pleadings (the "Decl.") at *4. The company's members operate over 1,300 retail stores, lumber yards and home centers in 14 states in the United States, Mexico, South America and Puerto Rico. Id.. In order to purchase inventory for its members, Handy Hardware buys from over 1,300 vendors. By purchasing in bulk, the company is able to purchase inventory at a reduced cost and pass the savings on to its members. Id.

Events Leading to Bankruptcy

Handy Hardware began purchasing for its members in 1961. Over the years the company continued to add more members. In 1986, Handy began an expansion project wherein it expanded its Houston warehouse from 100,000 square feet to 560,000 square feet and built a second warehouse in Meridian, Mississippi. Decl. at *15. Whereas the Houston expansion was funded with cash, Handy funded the Meridian warehouse facility through a $20 million bond. Decl. at *9.

Handy took on the debt from the Meridian whereas as the country entered into a recession. As a result of poor economic conditions, the company was unable to grow at levels necessary to sustain operations of the Meridian facility. Decl. at *15. Although sales reached $240 million in 2011, increased operational costs and debt service generated an $8.4 million loss. Id.

Objectives in Bankruptcy

Given the loss associated with the Meridian warehouse, Handy decided to close that facility and re-route deliveries to its Houston warehouse. Decl. at *16. In November, Handy notified its employees at the Meridian warehouse that their positions would be eliminated effective January 31, 2013. Decl. at *15. Through bankruptcy, the company intends to restructure its debt with its lenders and emerge from chapter 11 proceedings with a consensual plan of reorganization. Decl. at *16. Handy is represented by the Delaware law firm of Ashby & Geddes, P.A..

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Jason Cornell is an equity partner with the law firm Fox Rothschild LLP. Jason is a creditors' rights attorney who is admitted and practices before the United States Bankruptcy Court for the District of Delaware. You can reach Jason at 302 427 5512 or jcornell@foxrothschild.com.

Below are some additional posts Jason has written on Delaware bankruptcy litigation:

Ten Things Every Commercial Landlord Should Know About a Tenant in Bankruptcy.

Seeking Relief from the Automatic Stay in Delaware.

A Tale of Two Bankruptcy Auctions.

What Information is Required in a Chapter 11 Disclosure Statement?

Personal Injury or Wrongful Death Claims against Chapter 11 Debtors: How to Proceed

L. John Bird — Fri, 22 Feb 2013 15:06:48 -0500

Summary

When a company files for bankruptcy, they gain a number of protections under federal law. One of these protections is the “automatic stay” provided by 11 U.S.C. § 362. The automatic stay makes it illegal to continue prosecuting, or to initiate, an action against the debtor who is in bankruptcy. Even if that debtor has injured you, it means that you cannot try to recover from them without getting the automatic stay lifted. As more large bankruptcy cases are filed in Delaware, it becomes increasingly important that persons injured by debtors understand the legal hoops that they have to jump through in order to recover for their injuries.

To aid in discussing this matter, imagine a situation in which a person (the “Injured”) is injured when hit by a truck belonging to the company (the “Debtor”). The Injured files a lawsuit in state court to recover and the Debtor files for bankruptcy protection in Bankruptcy Court for the District of Delaware (“DE Bankruptcy Court”). The last important assumption is that the Debtor, like most large companies, has insurance that can compensate the Injured. While many of the principles of this post will apply in other courts, it will be discussed specifically in the context of this purely hypothetical situation.

The Automatic Stay

11 U.S.C. § 362 (“Section 362”) provides that, with limited exceptions, when the Debtor files for bankruptcy, a stay is placed on actions that could otherwise be brought against it. Section 362 includes prohibitions against nearly any legal action that could be brought against the Debtor in any court other than the DE Bankruptcy Court. While there are exceptions, they are very specific and beyond the scope of this post. Rather, this post will focus on what a person who was injured by a Debtor should do in order to obtain a recovery.

The specific provisions of Section 362(a) which relate to our example are as follows:
“[A] petition filed under … this title … operates as a stay … of –
(1) the commencement or continuation … of a judicial, administrative, or other action or proceeding against the debtor that was or could have been commenced before the commencement of the case under this title, or to recover a claim against the debtor that arose before the commencement of the case under this title;
(3) any act to obtain possession of property of the estate or of property from the estate or to exercise control over property of the estate;

Thus, the Injured will find it very difficult to recover, since they are prohibited from bringing a new lawsuit against the Debtor or continuing to prosecute the lawsuit that has already begun. In some instances, a Debtor will declare bankruptcy days before a trial is scheduled to begin, freezing any litigation against it. While this is certainly frustrating for the Injured, there is a path to obtain recovery.

Relief from the Automatic Stay

In order to resume an existing lawsuit against the Debtor, or start a new lawsuit against the Debtor, the Injured must obtain relief from the automatic stay. This requires the Injured to file a motion for relief from stay and the judge presiding over the bankruptcy to grant the motion.

The relevant language from the Bankruptcy Code is found in Section 362(d), which provides in pertinent part as follows:
(d) On request of a party in interest and after notice and a hearing, the court shall grant relief from the stay provided under subsection (a) of this section, such as by terminating, annulling, modifying or conditioning such stay -
(1) for cause, including the lack of adequate protection of an interest in property of such party in interest.

Thus, the DE Bankruptcy Court is required to determine if there is “cause” to lift the stay. In making that determination, the DE Bankruptcy Court follows the analysis of the case Izzarelli v. Rexene Prods. Co. (In re Rexene Prods. Co.), 141 B.R. 574, 577 (Bankr. D. Del. 1992). The DE Bankruptcy Court places the initial burden on the Injured to establish that cause exists, and allows the Debtor an opportunity to rebut the Injured’s argument.

In the Rexene opinion, the DE Bankruptcy Court cites to the legislative history of Section 362 in its holding that ‘It will often be more appropriate to permit proceedings to continue in their place of origin, when no great prejudice to the bankruptcy estate would result, in order to leave the parties to their chosen forum and to relieve the bankruptcy court from any duties that may be handled elsewhere.’ Rexene Prods., 141 B.R. at 576 (quoting H.R. Rep. No. 95-595, 95th Cong., 1st Sess., 343-344 (1977)).

The DE Bankruptcy Court has adopted a three-prong analysis to determine whether there is cause to grant relief from the automatic stay. The court determines whether (i) any great prejudice to either the bankruptcy estate or the Debtor will result from continuation of the civil suit; (ii) the hardship to the Injured by maintenance of the stay considerably outweighs the hardship to the Debtor; and (iii) the Injured has a probability of prevailing on the merits.

A bankruptcy estate generally is not considered to have an interest in proceeds of liability insurance policies. Consequently, the DE Bankruptcy Court typically holds that a Debtor does not suffer prejudice or hardship if the Injured obtains stay relief to liquidate claims that are covered by such proceeds.

With respect to the third prong of the analysis regarding cause, the DE Bankruptcy Court held in Rexene that the required showing is very slight. The threshold for this third prong is even easier to meet where a movant’s claim would be covered by non-debtor sources. In cases following Rexene, the DE Bankruptcy Court has stated that under such circumstances, a bankruptcy court should not examine the merits of the movant’s claims. Rather, “all that is required is that the movant make more than a ‘vague initial showing’ that he can establish a prima facie case. In a case, [sic] such as this one where the claimant seeks only to liquidate its claims as a predicate to recovering against insurance and other non-debtor sources, to require a merits analysis would defeat the objective of economizing judicial resources and would frustrate the effort to resolve relief from stay motions expeditiously.” Santa Fe Minerals v. BEPCO. L.P. (In re 15375 Memorial Corp.), 382 B.R. 652, 691 (Bankr. D. Del. 2008).

In deciding whether to lift the automatic stay, the Delaware Bankruptcy Court has also considered general policies, including: 1) whether relief would result in a partial or complete resolution of the issues; 2) lack of any connection with or interference with the bankruptcy case; 3) whether the debtor's insurer has assumed full responsibility for defending it; 4) whether the parties are ready for trial in the other proceeding; and 5) impact of the stay on the parties and the balance of the harms. While these issues may provide additional support for the motion for relief from stay that the Injured will need to file, the DE Bankruptcy Court will typically consider them within the context of the Rexene analysis, so attorneys for the Injured should always consider the Rexene factors first.

Finally, 28 U.S.C. § 157(b)(5) provides that Personal Injury and Wrongful Death claims shall be tried in the district court. Thus, even if a bankruptcy court wanted to decide a personal injury matter, such a case cannot be tried in the bankruptcy court. I have had the opportunity to observe, on multiple occasions, the judges of the Delaware Bankruptcy Court tell debtors’ counsel that they will not decide personal injury matters. And while past performance is no guarantee of future results, it does provide a level of predictability here in Delaware.

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.

School Specialty, Inc., Files Bankruptcy in Delaware Seeking to Sell Substantially All of Its Assets

Jason Cornell, Esq. — Wed, 30 Jan 2013 14:09:14 -0500

Introduction

On January 28, 2013 (the “Petition Date”), School Specialty, Inc, (“School Specialty” or “Debtor”), along with various affiliated entities, filed chapter 11 petitions for bankruptcy with the Delaware Bankruptcy Court. According to the Declaration of School Specialty’s Chief Administrative Officer, the company is one of the largest suppliers of educational products, equipment and curriculum for public school systems in the United States. See Declaration of Gerald T. Hughes in Support of Chapter 11 Petitions and First Day Motions (the “Decl.”) at *3. This post will look at School Specialty’s business and finances, why the company filed for bankruptcy as well as what the company’s objectives are while in bankruptcy.

Business Operations

Based in Greenville, Wisconsin, School Specialty’s business falls in to two segments – school supplies and curriculum based products. Decl. at *3-4. The company’s school supplies segment includes “commodity-based” supplies, furniture and supplemental learning items such as classroom technology products. Decl. at *4. School Specialty generates over 70% of its revenue from its school supply business, offering both its own proprietary products and “branded products.” Decl. at *3. At the curriculum level, the company develops and publishes products used by educators in teaching a particular subject such as math, reading or science. Decl. at *4.

As of its Petition Date, School Specialty employed over 2,000 employees, a quarter of which are sales professionals and administrative support staff. Decl. at *5. In addition to its sales force, the Debtor’s marketing program relies on the publication of over 12 million copies of its catalog and sales through various websites. Id.

Debtor’s Financials

According to its Declaration, School Specialty generated revenues of $489 million in the first half of fiscal year 2013. Decl. at *6. The company’s revenues are extremely diverse. By that, no particular state or product offering accounts for a significant percentage of revenues. Instead, revenues are generated from school districts spread out across the country which purchase varying degrees of the Debtor’s products. Going in to bankruptcy, School Specialty has $193.6 million in outstanding secured debt under a revolving credit facility and term loan. Decl. at *8-9. The company also has $157 million in outstanding subordinated debentures which come due in 2026. Decl. at *11.

Events Leading to Bankruptcy

Despite its diverse revenue base, School Specialty must operate within a cyclical business cycle that is tied to the academic school year. Decl. at *13. This results in profitable months from May through October (when schools place orders for products), followed by months where the company operates at a loss. The cyclical nature of its business complicates School Specialty’s cash flow, budgeting and general finances. Id. Given that School Specialty sells primarily to public schools, the company’s revenues are correlated to a large degree to state and local budgets. Since the recession in 2008, state and local governments have delayed or suspended implementing new curriculum guidelines. This, in turn, has resulted in schools purchasing less instructional materials from the Debtor. Decl. at *14.

In the years leading up to bankruptcy, School Specialty implemented various programs geared toward reducing costs or improving business performance. Decl. at *14. Such measures included consolidating its call centers, reducing its workforce by 30% and renegotiating portions of its debt instruments. Decl. at *14-15. Despite these efforts, by January 4, 2013, the Debtor reported that it was not in compliance with the liquidity requirements of certain loan agreements. Soon after School Specialty filed for bankruptcy protection. Decl. at *17-18.

Objectives in Bankruptcy

In order to proceed in a chapter 11 bankruptcy proceeding, School Specialty would need to obtain postpetition financing. Leading up to bankruptcy, the company began negotiations with its prepetition lenders regarding bankruptcy financing. Eventually, a proposal was reached wherein the Debtor’s prepetition lender agreed to debtor financing of $144.7 million. Decl. at *19. This financing, however, was conditioned on Debtor’s agreement to conduct a sale of substantially all of its assets under section 363 of the Bankruptcy Code. Id.

As part of their negotiations with the lenders, School Specialty has agreed to an asset purchase agreement which will allow the lenders to credit bid a portion of their debt toward the purchase price of the company. Decl. at *20. The lenders bid, of course, is subject to higher and better offers pursuant to bid procedures and an auction that must be approved by the Bankruptcy Court.

The School Specialty bankruptcy proceeding is before Judge Kevin J. Carey. This case is proceeding under case no. 13-10125. School Specialty is represented by the law firm Young Conaway Stargatt & Taylor.

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Jason Cornell is an equity partner with the law firm Fox Rothschild LLP. Jason is a creditors' rights attorney who is admitted and practices before the United States Bankruptcy Court for the District of Delaware. You can reach Jason at 302 427 5512 or jcornell@foxrothschild.com.

Below are some additional posts Jason has written on Delaware bankruptcy litigation:

Ten Things Every Commercial Landlord Should Know About a Tenant in Bankruptcy.

Seeking Relief from the Automatic Stay in Delaware.

A Tale of Two Bankruptcy Auctions.

What Information is Required in a Chapter 11 Disclosure Statement?

Furniture Retailer, Carl's Patio, Files for Bankruptcy in Delaware

Jason Cornell, Esq. — Thu, 24 Jan 2013 16:21:11 -0500

Introduction

On January 21, 2013, Carl’s Patio, Inc., and various related entities, filed chapter 11 petitions for bankruptcy in the United States Bankruptcy Court for the district of Delaware. Carl’s Patio started in 1993 and describes itself in court filings as “one of the leading retailer merchandisers of upscale outdoor furniture and accessories in the country.” See Declaration in Support of Chapter 11 Petitions (the “Decl.”) at *2. At the height of operations, the company operated retail locations in both California and Florida. However, prior to filing for bankruptcy, the Debtor closed five of its underperforming stores in California and four in Florida. The company currently operates ten retail stores and a warehouse in South Florida. Decl. at *4. Aside from retail locations, Carl’s Patio also sells its products online. Decl. at *5.

Events Leading to Bankruptcy

Carl’s Patio sells products under its own private label – the “Fifth and Shore line,” as well as offering nationally branded merchandise. Although Carl’s sells national brands at a higher price point, the company enjoys a greater profit margin from its recently introduced private label. According to the company, it was the introduction of its private label which attributed to its net loss in sales for 2012. Specifically, in fiscal year 2011, Carl’s Patio generated a net income of $912,324 against sales of $34.3 million. In fiscal year 2012, however, the company generated a net loss of $1.8 million against sales of $29.9 million. This loss, according to the Declaration, was due “primarily to launching more collections in the Debtors’ Fifth & Shore private brand line than were necessary.” Decl. at *6.

In addition to excessive inventory, the Debtor also attributes its bankruptcy filing to the economic downturn in general as well as “unsuccessful strategic initiatives” aggravated by poor marketing and increased competition. Decl. at *10. In order to keep their doors open, the Debtor has had to rely on existing debt facilities and extending trade payables. Id. It was under these circumstances in which the company decided to hire outside restructuring professionals.

Marketing Efforts

As part of its restructuring efforts, Carl’s Patio approached potential purchasers who might be interested in buying the company. In October, Weinberg Capital submitted a letter of intent to purchase the company as a going concern. Decl. at *12. The parties executed a draft purchase agreement in December of 2012 wherein they agreed to a "stalking horse" purchase price of $4.1 million. Decl. at *13. As stated in its Declaration, Carl’s Patio believes the company cannot continue with operations without either a sale of its business or other restructuring. Decl. at *15.

The Carl's Patio bankruptcy is before Judge Kevin Gross. Judge Gross is Chief Judge of the Delaware Bankruptcy Court. Carl's Patio is represented by the law firm Bayard, P.A.

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Jason Cornell is an equity partner with the law firm Fox Rothschild LLP. Jason is a creditors' rights attorney who is admitted and practices before the United States Bankruptcy Court for the District of Delaware. You can reach Jason at 302 427 5512 or jcornell@foxrothschild.com.

Below are additional posts Jason has written on Delaware bankruptcy litigation:

Ten Things Every Commercial Landlord Should Know About a Tenant in Bankruptcy.

Seeking Relief from the Automatic Stay in Delaware.

A Tale of Two Bankruptcy Auctions.

What Information is Required in a Chapter 11 Disclosure Statement?

Penson Worldwide Files for Bankruptcy in Delaware

Jason Cornell, Esq. — Sat, 19 Jan 2013 16:44:39 -0500

Introduction

On January 11, 2013, Penson Worldwide ("Penson"), a clearing and settlement provider for the investment trading industry, filed chapter 11 petitions for bankruptcy in the United States Bankruptcy Court for the District of Delaware. In papers filed with the Bankruptcy Court, Penson describes itself as a company that provides "execution, clearing, custody, settlement, and technology products and services to financial firms." See Declaration of Bryce Engel in Support of Chapter 11 Petitions (hereinafter, the "Decl." ), at *3. After its start in 1995, Penson grew to become one of the largest independent securities clearing brokers in the United States. Through its subsidiaries, Penson also became one of the largest independent clearing brokers in Canada, Australia and the United Kingdom. Id.

Reasons for Bankruptcy

Penson attributes its need for bankruptcy protection to lower investor volume in the public markets, which in turn led to less commission fees and increased regulatory capital requirements. Decl. at *17. Penson's earnings and profitability are highly correlated to the strength and performance of global investment markets. The last couple of years have created "substantial economic uncertainty and prolonged volatility in the world's financial markets." Decl. at *16. In 2010, average daily trading volume in the stocks dropped by 5% and again fell by 8% in 2011. Decl. at *17. Less market participation means less revenue for Penson. The company's problems were compounded by increased competition and the loss of one of the company's largest institutional customers. Id.

Penson's Financials

Penson's revenues for 2011 totaled $217.3 million. Decl. at *3. A little under half of the company's revenues for 2011 came from clearing and commission fees, a quarter from interest income, 10% from technology products and 14% from other sources. Id. Penson's debt obligations include a $50 million revolving credit agreement, secured notes maturing in 2017 with a face value of $200 million and convertible notes maturing in 2014 with a face value of $60 million. The company is also party to various inter company notes. Decl. at *8-9.

Objectives in Bankruptcy

Prior to filing bankruptcy, Penson began negotiations with its note holders. Those negotiations resulted in a consensual agreement for the liquidation of Penson's business. Penson filed for bankruptcy with the intentions of implementing the previously agreed to "Joint Plan of Liquidation of Penson Worldwide, Inc., and Its Affiliated Debtors." Decl. at *23. The Penson bankruptcy proceeding is before Judge Peter J. Walsh. Penson is represented by the Delaware law firm Young Conaway Stargatt & Taylor.

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Jason Cornell is a creditor's rights attorney and partner with the law firm Fox Rothschild LLP. Jason is admitted and practices before the United States Bankruptcy Court for the District of Delaware. You can reach Jason at 302 427-5512 or jcornell@foxrothschil.com.

Preference Complaints filed in RG Steel Bankruptcy

Jason Cornell, Esq. — Tue, 08 Jan 2013 21:15:57 -0500

Introduction

Earlier this week, RG Steel Sparrows Point, LLC ("RG Steel"), began filing complaints to avoid and recover what it contends are preferential transfers under sections 547 and 548 of the United States Bankruptcy Code. For those not familiar with this bankruptcy proceeding, RG Steel originally filed chapter 11 petitions for bankruptcy in the Delaware Bankruptcy Court on May 30, 2012. At the time the company filed for bankruptcy, RG Steel was the fourth largest flat-rolled steel company in the United States. Operating at full capacity, RG Steel produced over 8 million tons of steel per year. This post will look at RG Steel's original business, why the company filed for bankruptcy and what are recent developments since the company has filed for bankruptcy protection.

Business Formation and Bankruptcy

At the time RG Steel and its affiliates filed for bankruptcy, the company operated steel production facilities in West Virginia, Maryland and Ohio. The company was formed in 2011 as a result of a stock purchase agreement with Severstal U.S. Holdings II, Inc., and various related entities. According to court filings, after RG Steel acquired Severstal it discovered a "working capital shortfall" resulting in liquidity problems and the company's ultimate bankruptcy filing. The company also attributed its bankruptcy to declining steel prices while its costs for raw materials continued to rise.

Objectives in Bankruptcy

Once in Bankruptcy, RG Steel filed various motions seeking authority to sell substantially all of its assets. After receiving approval from the Bankruptcy Court, the company commenced bidding procedures and bankruptcy auctions which allowed it to sell the majority of its assets. The asset sales allowed RG Steel to payoff its debtor in possession financing and first lien debt. With the sales out of the way, the company shifted its focus to attempting to recover assets through preference actions.

Defenses to a Preference Action

Bankruptcy Trustee in Ultimate Electronics Files More Preference Actions

Jason Cornell, Esq. — Thu, 27 Dec 2012 15:14:34 -0500

Introduction

In July of 2011, the Chapter 7 Trustee (the "Trustee") in the Ultimate Acquisition Partners (formerly "Ultimate Electronics") bankruptcy began filing complaints to avoid and recover payments which the Trustee alleged were avoidable transfers under section 547 of the United States Bankruptcy Code. Earlier this month, the Trustee filed another round of preference complaints seeking to recover what he contends are preferential transfers. This post will look briefly at the Ultimate's business, why the company filed for bankruptcy and provide some general information regarding defenses to a preference action.

Reasons Ultimate Electronics Filed for Bankruptcy

Prior to going in to bankruptcy, Ultimate Electronics sold high-end home entertainment and consumer electronics throughout the western and mid-western United States. Based in Thornton, Colorado, Ultimate Electronics employed approximately 1,500 employees before it filed for bankruptcy. According to pleadings filed with the Delaware Bankruptcy Court, Ultimate attributed its bankruptcy filing to a "significant downturn in business at certain of the Debtors' locations, coupled with refusal by certain of Debtors' vendors to ship goods to the Debtors on open credit." By filing for bankruptcy, Ultimate was hoping to close under performing stores, re-negotiate its leases and improve its profitability.

Conversion from Chapter 11 to Chapter 7

Plans quickly changed for Ultimate after the company filed for bankruptcy. Nine days after filing for bankruptcy, on February 4, 2011, the company filed a motion with the Bankruptcy Court seeking approval of going out of business sales. Within two months of filing the going out of business motions, Ultimate had sold substantially all of its assets.

On April 25, 2011, Ultimate Electronic's DIP lender issued a "Termination Event" under Ultimate's Final Cash Collateral Order (the "DIP Order"). Under the DIP Order, if the lenders' termination notice is not contested within five business days, the automatic stay is lifted in favor of Ultimate's DIP lender. Ultimate filed its Motion to Convert to Chapter 7 one day after receiving the Termination Event. The Bankruptcy Court converted Ultimate's bankruptcy to a Chapter 7 liquidation on May 3, 2011. The following day, Alfred T. Giuliano was appointed the Chapter 7 Trustee for Ultimate Electronic's bankruptcy proceeding.

The Preference Actions

The Trustee in the Ultimate Electronics bankruptcy is represented by the law firm Pachulski Stang Ziehl & Jones LLP. The bankruptcy proceeding, along with the preference actions filed by the Trustee, are before the Honorable Mary F. Walrath. Judge Walrath is a former Chief Judge of the Delaware Bankruptcy Court.

For reader's looking for more information concerning preference litigation, attached is a booklet I prepared on the subject: "A Preference Reference: Common Issues that Arise in Delaware Preference Litigation."

Overseas Shipholding Group Files for Bankruptcy in Delaware

Jason Cornell, Esq. — Sat, 17 Nov 2012 21:31:04 -0500

Introduction

On November 14, 2012, Overseas Shipholding Group, Inc. ("OSG"), filed chapter 11 petitions for bankruptcy with the United States Bankruptcy Court for the District of Delaware. OSG is a Delaware corporation and describes itself as a world leader in energy transportation. See Declaration of OSG's Sr. Vice President in Support of Chapter 11 Petitions (the "Decl.") at *2. The company was formed in 1969 as a result of the merger of five private companies. The company's initial growth focused on delivering oil from Alaska to the western United States and the U.S. Virgin Islands. In the last decade, however, the company has expanded its operations to include floating storage and offloading, as well as transporting liquefied natural gas ("LNG"). Decl. at *4. This post will look at OSG's business operations and financial structure, why the company filed for bankruptcy and what its objectives are now that its in bankruptcy.

Business Operations and Finances

OSG has offices in North America, Europe and Asia in order to serve as a global shipper in the energy industry. The company's vessels operate as either U.S. or non-U.S. flagged vessels. The U.S. flagged vessels are built in the United States and maintained by U.S. crews to serve only U.S. ports. The non-U.S. flagged vessels, on the other hand, provide international shipping using international vessels and crews. Decl. at *5. The company provides its customers with vessels through "charters". Under this model, OSG can "charter-in" a vessel owned by another company that provides services for its customers, or it can "charter-out" one of its own vessels to another entity for a specific voyage. Decl. at *6.

OSG operates a fleet of forty-one vessels that cover all of the five major fleet categories for crude oil vessels - VPlus, VLCC, Suezmax, Aframax and Panamax. Decl. at *6. The company's VPlus carriers are one of the largest tankers available, with a transportation capacity of 3.2 million barrels of crude oil. Id. In addition to transporting crude oil, OSG also provides lightering services. Lightering is the process where crude oil is removed from larger tankers and placed on to smaller tankers which can be transferred in to ports that do not accommodate large tankers. Decl. at *9.

Another major component of OSG's business is its "U.S. Flag" operations. OSG is one of the largest owner/operators of "Jones Act" vessels. The Jones Act, or Section 27 of the Merchant Marine Act of 1920, requires all goods delivered by water between U.S. ports be transported by ships flagged in the United States, built in the United States and crewed by citizens or permanent residents of the United States. Decl. at *11. OSG considers itself the "only major global tanker organization with a significant U.S. Flag Fleet." Id.

Events Leading to Bankruptcy

OSG attributes its bankruptcy to two factors - (i) a global decline in the demand for oil; and (ii) cash constraints due to maturing debt obligations. Decl. at *25. In recent years, OSG has had to deal with falling oil demand while at the same time experiencing more competition in the petroleum transportation industry. With less demand for oil, there has also been less demand for OSG's tankers. Changes in the nature of oil consumption are also affecting OSG's revenues. Countries that import oil from abroad are now relying more on domestic production and existing inventories. This drop in demand for foreign oil further depresses demand for tankers. Decl. at *27.

Aside from weakening demand, OSG has also had to deal with increased supply in the tanker industry. Before the 2008 recession, oil prices continued to rise, leading to additional orders for oil tankers. Once oil demand began to drop, the crude tanker charter rate fell in tandem. For example, in 2009 the charter rate for VLCC tankers was $28,000 per day. Decl. at *28. By 2011, the charter rate for this tanker fell to $14,900 per day, representing a drop of 47 percent. Id.

One of OSG's credit agreements is maturing in February 2013. Decl. at *29. Under this credit agreement, OSG is able to borrow up to $1.5 billion. Under a second credit agreement, OSG's borrowing capacity drops from $1.5 billion to $900 million. This $600 million drop in borrowing capacity comes at a time when OSG views the credit and capital markets as "all but closed" to the company. Id.

Objectives in Bankruptcy

OSG filed for bankruptcy hoping to seek protection from its creditors and successfully reorganize. Decl. at *30. The company believes that without filing for bankruptcy, it will face individual creditor actions which will harm its business as a going concern. The company also believes that bankruptcy is necessary in order to restructure its finances and provide it with additional liquidity. The OSG bankruptcy is before Judge Peter J. Walsh. OSG is represented by the Delaware law firm Morris Nichols Arsht & Tunnell LLP.

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Jason Cornell is an equity partner with the law firm Fox Rothschild LLP. Jason is a creditors' rights attorney who is admitted and practices before the United States Bankruptcy Court for the District of Delaware. You can reach Jason at 302 427 5512 or jcornell@foxrothschild.com.

Below are additional posts Jason has written on Delaware bankruptcy litigation:

Ten Things Every Commercial Landlord Should Know About a Tenant in Bankruptcy.

Seeking Relief from the Automatic Stay in Delaware.

A Tale of Two Bankruptcy Auctions.

What Information is Required in a Chapter 11 Disclosure Statement?

First Place Bank Holding Co. Files for Bankruptcy in Delaware

Jason Cornell, Esq. — Mon, 29 Oct 2012 19:34:30 -0500

Introduction

On October 29, 2012, First Place Financial Corp., the holding company for First Place Bank (collectively, "First Place Bank" or "First Place"), filed Chapter 11 petitions for bankruptcy in the United States Bankruptcy Court for the District of Delaware. Based in Warren, Ohio, First Place Bank is a federally chartered stock savings association that is insured by the FDIC. See Declaration in Support of First Day Motions (the "Decl.") at *2. First Place operates over 40 branches in Ohio, Michigan, Indiana, and Maryland and describes itself as one of the "largest thrift institutions in the state of Ohio." Decl. at *2. The company's business model focuses on investing customer deposits in residential mortgage, home equity, commercial and construction loans. Id.

Events Leading to Bankruptcy

First Place Bank is regulated by the Office of the Comptroller of the Currency (the "OCC"). However, prior to July 21, 2011, First Place was regulated by the Office of Thrift Supervision (the "OTS"). The OTS merged with the OCC effective July 21, 2011. Decl. at *3, fn.1. First Place has come under increased scrutiny by the OCC and OTS due to "excessive levels of adversely classified assets and inability to raise necessary capital ..." Decl. at *5. These bad debts and poor liquidity, in turn, arose from the housing crisis that began in 2008, with drops in housing prices, increases in loan defaults and high unemployment. Decl. at *3.

The OTS conducted examinations of the bank in August of 2010 and May of 2011. As a result of the examinations, First Place Bank was found to have been operating with high levels of bad debts, poor earnings and inadequate levels of capital. Decl. at *5. The OTS required First Place to enter into Supervisory Agreements that were intended to develop plans to address problems at the bank. Despite the Agreements, the bank's condition continued to worsen resulting in the OTS issuing a Cease and Desist Order on July 13, 2011. Decl. at *5. The Cease and Desist Order provided that if First Place Bank was unable to meet certain targets by December 31, 2011, the bank was required to submit a contingency plan that provided for a merger with another federally insured bank or voluntary dissolution. Decl. at *6.

Merger Attempts

Once First Place realized it was unable to satisfy the requirements of the Cease and Desist Order, it started considering ways in which to proceed with a merger or sale. In June of 2012, First Place's investment banker began marketing the company to qualified purchasers. Of the 44 potential purchasers identified by First Place, 15 expressed interest and 4 engaged in on-site due diligence. Decl. at *7. Of the four, only one entity, Talmer Bancorp, Inc., expressed an interest in acquiring First Place Bank. Decl. at *8.

Objectives in Bankruptcy

First Place and Talmer Bancorp ("Talmer") executed an asset purchase agreement on October 26, 2012. According to the bank, if the Bankruptcy Court approves the sale to Talmer, First Place will be able to comply with OTS and OCC regulations, jobs will be saved and the bank will get to continue serving its customers. Decl. at *8. Under the Sale Agreement, First Place would be recapitalized to $205 million and Talmer would acquire the bank for $45 million. Id. After First Place entered into the asset purchase agreement with Talmer, the bank filed its chapter 11 petitions for bankruptcy hoping that the Delaware Bankruptcy Court will approve the proposed sale and allow remaining assets to be administered for the benefit of creditors. Decl. at *10.

The First Place Bank bankruptcy proceeding is before the Honorable Brendan L. Shannon. The case is proceeding under Case No. 12-12961(BLS). A copy of First Place Bank's Petition for Bankruptcy is available here for review. A copy of First Place's Declaration in Support of First Day Motions is available here. First Place is represented by the law firm Bayard, P.A.

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Below are additional posts Jason has written on Delaware bankruptcy litigation:

Ten Things Every Commercial Landlord Should Know About a Tenant in Bankruptcy.

Seeking Relief from the Automatic Stay in Delaware.

A Tale of Two Bankruptcy Auctions.

What Information is Required in a Chapter 11 Disclosure Statement?

Raser Technologies Trustee Files Preference Complaints

Jason Cornell, Esq. — Thu, 25 Oct 2012 15:33:13 -0500

Introduction

Earlier this month, William Giovanniello, acting as the creditor trustee (the "Trustee") for Raser Technologies ("Raser"), began filing complaints seeking to avoid and recover what the Trustee contends are preferential transfers under 11 U.S.C. sec. 547. Often, defendants receive preference complaints and have little or no information about the underlying bankruptcy proceeding and the reasons for the commencement of the avoidance action. This post will look at Raser's business, why the company filed for bankruptcy and why the Trustee is pursuing the preference complaints.

Raser Technologies' Business

Raser filed chapter 11 petitions for bankruptcy on April 29, 2011 (the "Petition Date"). According to the company's Declaration in Support of Chapter 11 Petitions (the "Decl."), filed with the Delaware Bankruptcy Court, Raser was founded in 2002 to build geothermal electric plants and develop electric generating equipment for use in electric and hybrid electric vehicles. Decl. at *1-2. Raser traded as a public company on the New York Stock Exchange from October 2003 until the time of its delisting in November of 2010.

As part of its business model, Raser acquired "geothermal interests" in over 270,000 acres of land in the western United States. The company also acquired geothermal rights to over 100,000 acres of land in Indonesia. Once Raser acquired rights to a geothermal site, it conducted testing to determine whether the geothermal features warranted the construction of a power plant. If the company determined that a site had sufficient resources to support a power plant, Raser would construct plant facilities at the site that included injection wells, specialized turbines, transmission lines and pipelines. Decl. at *3.

Events Leading to Bankruptcy

Raser attributed its bankruptcy filing, in part, to the less than optimal performance of its one and only fully-operational energy plant. At the time of the Petition Date, Raser only operated one power plant ("Plant No. 1") which is located in southern Utah. Decl. at *3. The company's business requires substantial amounts of investment to complete the exploration and development phases of a geothermal electric facility. Plant No. 1, for example, required $120 million in development and construction costs. Id. From its inception, the company raised over $200 million to explore and develop geothermal sites. Decl. at *13.

Plant No. 1's performance was less than optimal. As of the Petition Date, this facility was generating 8 megawatts of electrical power, 2 megawatts of which were consumed by the plant's own energy needs. This level of production was well below the amount of electricity the facility was designed to produce. Raser attributes the under performance to several factors, most notable being "inefficiencies occurring as a result of the failure of certain equipment to perform to contractual specifications, and the costs to operate and maintain said equipment." Decl. at 13.

The failure of Plant No. 1 to operate at expected levels, coupled with the tight capital markets that existed from 2009 through the date it filed for bankruptcy, created a liquidity crisis for the company. Although the company sought investments from third parties, it was unable to raise the cash necessary to maintain operations and complete construction of other energy production projects. Decl. at *14.

The Bankruptcy Proceeding and Preference Complaints

Raser filed Chapter 11 petitions for bankruptcy on April 29, 2011. On August 30, 2011, the Delaware Bankruptcy Court entered an order confirming Raser's Third Amended Joint Plan of Reorganization. Pursuant to the Plan, the Creditor Trust was established and the Creditor Trustee was appointed to pursue the preference actions that were transferred to the Creditor Trust.

The Raser Technologies bankruptcy is before the Honorable Kevin J. Carey. Judge Carey previously served as the Chief Judge of the Delaware Bankruptcy Court. The Trustee pursuing the preference actions on behalf of the Creditor Trust is represented by the law firm Womble Carlyle Sandridge & Rice, LLP and Foley & Lardner LLP.

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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. You can reach Jason at 302 427-5512, or jcornell@foxrothschild.com.

Back Yard Burgers Files for Bankruptcy in Delaware

Jason Cornell, Esq. — Tue, 23 Oct 2012 19:59:41 -0500

On October 17, 2012, Back Yard Burgers, Inc. (the "Debtor" or "Back Yard Burgers"), filed chapter 11 petitions for bankruptcy in the United States Bankruptcy Court for the District of Delaware. Based in Nashville, Tennessee, Back Yard Burgers is a fast-food restaurant with 89 stores situated primarily in the southeastern United States. See Debtor's Declaration in Support of Chapter 11 Petitions (hereinafter, the "Decl.") at *2. Back Yard Burgers owns 25 of its restaurants. The remaining 64 locations are owned by franchisees who have entered in to franchise agreements with the Debtor. Id.

Back Yard Burgers opened its first restaurant in Cleveland, Mississippi in 1987. The company competes in the general fast-food market, however, it focuses on that segment of the market that offers black-angus hamburgers and chicken grilled on-site. Decl.at *4. From January to August of 2012, the company generated revenue of $18.4 million and sustained a loss of $2.4 million. Through franchising agreements, Back Yard Burgers generated $1.3 million in revenue for the first 8 months of 2012. Id.

Back Yard Burgers attributes several factors to its need for bankruptcy protection - declining sales, increased food costs and high lease rates. Decl. at *7. According to the Debtor, in the years prior to bankruptcy its food sales were negatively affected by the downturn in the U.S. economy. The company initially tried to address these issues without filing for bankruptcy protection, however, the Debtor contends that its prior attempts to reduce costs "were unsuccessful and actually exacerbated the problems." Decl. at *2.

The Debtor enters bankruptcy with several stores already closed. While in bankruptcy, Back Yard Burgers intends to reject certain leases and contracts which the company believes are not profitable. Decl. at *6-7. The Debtor blames part of its problems on franchisees who "failed to effectively operate their franchised locations" Decl. at *8. Back Yard Burgers purchased some of the underperforming franchised stores in an effort to improve operations. In doing so, however, the company assumed lease obligations that exceeded monthly sales for certain stores. Id.

Back Yard Burgers has operated at a loss for an extended period of time. To meet debt obligations, the company has relied on funding from some of its key investors. In the weeks prior to bankruptcy, the Debtor, its lender and certain investors entered in to a Plan Support Agreement. Under the Support Agreement, the parties agreed upon a restructuring of Back Yard Burgers that is intended to result in the confirmation of a consensual plan of reorganization. Decl. at *3.

The Back Yard Burgers bankruptcy is before the Honorable Peter J. Walsh of the United States Bankruptcy Court for the District of Delaware. Judge Walsh previously served as Chief Judge of the Delaware Bankruptcy Court. Back Yard Burgers is represented by Greenberg Traurig, LLP. A copy of Back Yard's Petition for Bankruptcy is available here for review. A copy of the company's Declaration in Support of Bankruptcy Petitions is available here.

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Jason Cornell is a partner with the law firm Fox Rothschild LLP. Jason is a creditors' rights attorney who is admitted and practices before the United States Bankruptcy Court for the District of Delaware. You can reach Jason at 302 427 5512 or jcornell@foxrothschild.com.

Below are additional posts Jason has written on Delaware bankruptcy litigation:

Ten Things Every Commercial Landlord Should Know About a Tenant in Bankruptcy.

Seeking Relief from the Automatic Stay in Delaware.

A Tale of Two Bankruptcy Auctions.

What Information is Required in a Chapter 11 Disclosure Statement?