Delaware Business Bankruptcy Report

Electric Car Maker Coda Holdings, Inc. Files Chapter 11 Bankruptcy

Eric J. Monzo, Esq. — Wed, 01 May 2013 18:23:31 -0500

On May 1, 2013, Coda Holdings, Inc. and its affiliated debtors (the "Debtors") commenced chapter 11 cases in the U.S. Bankruptcy Court for the District of Delaware. A copy of the Coda Holdings, Inc. chapter 11 petition may be found here. In support of the first day filings, Debtors offered the Declaration of John P. Madden. A copy of Mr. Madden's Declaration is found here. Mr. Madden is the Debtors' Chief Restructuring Officer.

According to Mr. Madden's Declaration, Debtors design, develop, and sell all-electric vehicles ("EVs"), electric drive propulsion systems, and stationary energy storage systems. Debtors' proprietary battery management system provides valuable energy storage, supply, protection and flexibility to users in a wide range of stationary and EV applications. Debtors cite difficulties in brings its CODA Sedan to the market, combined with the muted response to the vehicle once final production began that resulted in substantially greater expenses and lower revenues than anticipated as possible causes for the bankruptcy.

Debtors contend that they have been attempting to sell their assets since the fall of 2012 without success. On April 30, 2013, Debtors entered into a Restructuring Support Agreement with its supporting lenders that proposes a public auction designed to maximize the value of Debtors' assets and permit the orderly winding up of Debtors' affairs following a sale through a confirmed liquidation plan of reorganization. As set forth in the Madden Declaration, a group of lenders plans to extend debtor-in-possession financing and will serve as the stalking horse bidder in connection with a section 363 sale of the Debtors' assets, and to support a plan of reorganization that will provide for some value to the estate.

Debtors moved for joint administration of their chapter 11 cases for procedural purposes only. Debtors propose to appoint Kurtzman Carson Consultants LLC as claims and noticing agent. These motions and other first day motions are scheduled to be heard on May 3, 2013 at 10:00 am. The Coda Holdings, Inc. bankruptcy case has been assigned Case Number 13-11153-CSS. The cases have been assigned to Bankruptcy Judge Christopher S. Sontchi.

The SCOOTER Store Holdings, Inc. files Chapter 11

Eric J. Monzo, Esq. — Mon, 15 Apr 2013 14:25:28 -0500

On April 15, 2013, Texas-based The SCOOTER Store Holdings, Inc. ("Scooter") and 71 of its affiliates (collectively, "Debtors") each filed a voluntary petition for relief under chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the District of Delaware. A copy of Scooter's bankruptcy petition may be found here.

Debtors submitted the Declaration of Charles Lowrey, Scooter's Chief Financial Officer, in support of the chapter 11 petitions and first day motions. A copy of Mr. Lowrey's declaration may be found here. According to the Lowrey Declaration, Debtors are a major supplier of power wheelchairs, scooters and related assisted devices for those with mobility limitations. In February 2011, a majority voting interest in Debtors was purchased by affiliates of private equity firm Sun Capital Partners.

Debtors cite structural challenges and changes to various health care laws as causes for the bankruptcy. Debtors occupy 57 distribution centers in 41 states and also lease approximately 60 other offices, retail stores and other real estate. The combination of the financial and commercial damage resulting from changes to health care laws and government investigations have made it increasingly difficult for the Debtors to service their debt obligations. Debtors seek to sell substantially all of their assets through their bankruptcy proceedings pursuant to section 363 of the Bankruptcy Code.

As further detailed in the Lowrey Declaration, Debtors’ capital structure consists of a first lien revolving credit facility (the “First Lien Facility”), a second lien term loan facility (the “Second Lien Facility”, and a third lien term loan facility (the “Third Lien Facility”; each of the First Lien Facility, the Second Lien Facility and the Third Lien Facility, a “Credit Facility,” and collectively the “Credit Facilities”). Debtors also entered into a Security Agreement, dated as of June 14, 2012, in favor of Pride Mobility Products Corporation (“Pride”) pursuant to which Debtors granted a security interest in and a lien on certain inventory and proceeds thereof to secure certain obligations of Debtors to Pride (the “Pride Obligations”). Each of the First Lien Facility, the Second Lien Facility, the Third Lien Facility and the Pride Obligations are subject to separate intercreditor agreements (each an “Intercreditor Agreement,” and collectively the “Intercreditor Agreements”), which set forth the respective priorities of the Credit Facilities and the Pride Obligations. Due to current financial impairments, Debtors are currently in default under each of the Credit Facilities and have worked with the Administrative Agents under each Credit Facility to reach a consensual resolution and entered into Forbearance Agreements with respect to each of the Credit Facilities on March 13, 2013.

The Lowrey Declaration also offers background into the events leading to the chapter 11 cases. Debtors contend that the changes in recent years to various health care laws and regulations have had a severe negative impact to Debtors' operations. Debtors have been the subject of a criminal investigation by the Department of Justice and civil investigation relating to their former business practices, including billing and reimbursement procedures. According to the Lowrey Declaration, Debtors have been working with the Department of Justice and the Department of Health and Human Services Office of the Inspector General to provide requested information.

The cases have been assigned to Bankruptcy Judge Peter J. Walsh.

On April 16, 2013, the Court granted Debtors' motion for joint administration of the cases and all original docket entries are to be made in Scooter's case, Case No. 13-10904-PJW.

Rotech Healthcare Inc. Files for Chapter 11 Protection

Eric J. Monzo, Esq. — Wed, 10 Apr 2013 09:06:29 -0500

On April 8, 2013, Rotech Healthcare Inc. and over 100 of its affiliates (collectively, the "Company") filed for chapter 11 protection in the United States Bankruptcy Court for the District of Delaware. A copy of the chapter 11 petition filed by the Orlando, Florida-based company may be found here. According to the petition and the Declaration of Steven P. Alsene, the Company's President and Chief Executive Officer, offered in support of the Company's first day motions and applications, the Company has more than $100 million in assets and owes lenders and noteholders approximately $543.5 million.

As set forth in the Alsene Declaration, the Company is one of the largest providers of home medical equipment and related products in the United States. Since 2005, the Company has experienced over $1.2 billion in aggregate losses that it attributes to reductions in insurer reimbursement rates resulting from three different pieces of legislation: 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.

In response to its financial and operational challenges, in the fourth quarter of 2012, the Company retained Barclays Capital, Inc. to determine whether an out-of-court restructuring of the Company's balance sheet would be feasible. However, according to the Alsene Declaration, the Company's bankruptcy filing became necessary because of the lack of market interest in an out-of-court restructuring, coupled with the Company's increased need to service its long term debt obligations in light of declining revenues and operational challenges.

On March 15, 2013, a majority of holders of its First and Second Lien Notes (the "Consenting Noteholders") reached an agreement (the "Plan Support Agreement") to allow the Company to restructure and recapitalize to eliminate substantial secured legacy debt. Pursuant to the Plan Support Agreement, the Company agreed to reorganize its capital structure through a pre-arranged chapter 11 plan (the "Plan").

According to Mr. Alsene's Declaration, subject to the terms and conditions of the Plan, the Company anticipates that "(i) holders of the Term Loan Facility and the First Lien Notes will receive their pro rata share of an amended and restated term loan to be secured by a first priority security interest in substantially all of the reorganized Company’s assets; (ii) the Second Lien Notes will be converted into 100% of the common equity of the reorganized Company, subject to dilution by the equity interests issued under the Management Equity Incentive Program (thereby eliminating in excess of $300 million of secured debt); (iii) all the Company’s outstanding shares will receive a distribution of 10 cents per share (provided that the total amount paid on account of such interests does not exceed $2.62 million); provided, however, that if a senior class rejects the plan, the shareholders may receive less or nothing at all and (iv) 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 the Plan. Other unsecured claims will be paid in full if the aggregate amount of unsecured claims does not exceed $2,500,000 and except as otherwise set forth in the Plan."

As part of its first day filings that were heard on April 9, 2013, the Company moved for an Order directing the procedural consolidation and joint administration of the chapter 11 cases. The Bankruptcy Court granted this and other first day motion and applications. The docket for case number 13-10741-PJW should be consulted for all matters affecting this case. The cases have been assigned to Bankruptcy Judge Peter J. Walsh.

Central European Distribution Corporation Files Prepackaged Chapter 11 Bankruptcy

Eric J. Monzo, Esq. — Tue, 09 Apr 2013 15:29:08 -0500

On April 7, 2013, vodka producer Central European Distribution Corporation ("CEDC") and its affiliated debtors, CEDC Finance Corporation LLC ("CEDC FinCo LLC") and CEDC Finance Corporation International, Inc. ("CEDC FinCo" collectively, with CEDC and CEDC FinCo LLC, the "Debtors") filed voluntary petitions for relief under chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court for the District of Delaware. A copy of CEDC's chapter 11 petition may be found here.

According to the Declaration of N. Scott Fine, CEDC's Vice Chairman and Lead Director of the Board of Directors offered in support of the Debtors' petitions and first day filings (the "Fine Declaration"), CEDC is the direct parent of debtor CEDC FinCo LLC and indirect parent of debtor CEDC FinCo as well as numerous non-debtor operating subsidiaries organized under the laws of Poland, Russia and several other nations. According to their filings, Debtors are the largest integrated spirit beverages business by total volume in Central and Eastern Europe.

Debtors filed a joint prepackaged plan of reorganization (the "Plan") and disclosure statement (the "Disclosure Statement") on the petition date. As stated in the Fine Declaration, the Plan provides for the payment in full of all allowed general unsecured claims, other than claims arising from unsecured debt securities which are impaired and separately classified. According to the Fine Declaration, Debtors solicited votes on the Plan prior to commencing the cases and received overwhelming support for the Plan. If the Plan is approved, Roust Trading Ltd. ("Roust Trading"), CEDC's largest stockholder will obtain 100 percent of the outstanding stock. The Fine Declaration states that Roust Trading is controlled by Russian businessman Roustam Tariko.

As part of their first day filings that were heard on April 9, 2013, Debtors moved for an Order directing joint administration of the cases. The Court granted this motion and other first day motions and the cases have been consolidated for purposes of administration under Case No. 13-10738. The cases have been assigned to US Bankruptcy Judge Christoper S. Sontchi.

A combined hearing regarding the adequacy of the Disclosure Statement and Plan confirmation is scheduled for May 13, 2013. A copy of the Court's April 9, 2013 Order may be found here.

Dex One Corporation and SuperMedia Inc. File Voluntary Chapter 11 Petitions

Morris James Delaware — Tue, 19 Mar 2013 14:28:33 -0500

Dex One Corporation and SuperMedia Inc. and their respective affiliates filed voluntary chapter 11 petitions in the United States Bankruptcy Court for the District of Delaware to implement “pre-packaged” Plans of Reorganization as part of proposed merger.

On March 17, 2013 and March 18, 2013, Dex One Corporation and eleven affiliated debtors (collectively, “Dex One”) filed their voluntary chapter 11 petitions. A motion for joint administration of the Dex One cases under Case No. 13-10533-PJW has been filed and the cases have been assigned to Bankruptcy Judge Kevin Gross. Dex One Corporation is headquartered in Cary, North Carolina and employs approximately 2,200 people, according to the declaration of Mark W. Hianik, Dex One Corporation’s Senior Vice President, General Counsel and Chief Administrative Officer offered in support of Dex One’s first day motions (the “Hianik Declaration”). The Hianik Declaration provides that Dex One is a leading provider of proprietary and affiliate-provided marketing solutions to help local business and consumers connect with each other. According to the Hianik Declaration, Dex One filed these prepackaged chapter 11 cases to effect a merger transaction and resulting merger agreement signed on August 20, 2012 (the “Merger Agreement”), that will combine Dex One’s businesses and corporate structure with that of SuperMedia Inc. and its subsidiaries (collectively, “SuperMedia”). An overwhelming majority of Dex One’s secured lenders support the proposed Plan of Reorganization according to the Hianik Declaration.

Concurrent with the Dex One chapter 11 filings, on March 18, 2013, SuperMedia filed their chapter 11 petitions. A request for joint administration of the SuperMedia cases under Case No. 13-10545 has been filed. In support of their First Day Motions, SuperMedia offers the declaration of Samuel D. Jones, SuperMedia Inc.’s Executive Vice President, Chief Financial Officer and Treasurer (the “Jones Declaration”). According to the Jones Declaration, SuperMedia is one of the largest yellow page directory publishers in the United States as measured by revenue. As of December 31, 2012, according to the Jones Declaration, SuperMedia had approximately 3,200 employees which approximately 950 or 30% were represented by unions. As stated in the Jones Declaration, the chapter 11 cases will enable the consummation of the merger with Dex One. The proposed merger, according to the Jones Declaration, with establish a combined SuperMedia-Dex One organization as “an efficient and competitive leading provider of comprehensive marketing solutions” and will allow SuperMedia to address indebtedness through the operation of the combined company and resulting revenue.

In re Mervyn's Holdings, LLC, et al., Case No. 08-11586 (KG); WM Inland Adjacent LLC v. Mervyn's LLC, Adv. Proc. No. 09-50920 (KG) (January 8, 2013)

Morris James Delaware — Thu, 07 Mar 2013 15:00:14 -0500

Claims arising from indemnification provision in non-residential commercial lease, including requirement to keep property free of mechanics’ liens, that was rejected post-petition, are entitled to administrative priority pursuant to section 365(d)(3) of the Bankruptcy Code.

On January 8, 2008, debtors Mervyn’s Holdings, LLC, Mervyn’s LLC (“Mervyn’s”) and Mervyn’s Brands, LLC (collectively, the “Debtors”) executed a lease (the “Lease”) on a commercial property in San Bernardino, California (the “Premises”) owned by WM Inlands Adjacent LLC (“WM Inland”) and a construction agreement relating to prospective property improvements to the Premises, included as Exhibit C to the Lease (the “Construction Agreement”). Mervyn’s entered into an agreement with a general contractor Fisher Development Inc. (“Fisher”) to improve and renovate the Premises. The Lease and Construction Agreement required Mervyn’s to indemnify WM Inland for various liabilities occurring prior to, during and after the term of the Lease. These indemnification duties included a duty to keep the premises free of mechanics’ liens and pay WM Inland as additional rent all amounts and changes due under the Lease, including attorneys’ fees (the “Indemnification Obligations”).

On July 29, 2008 (the”Petition Date”), Mervyn’s filed voluntary petitions for relief under chapter 11 of the Bankruptcy Code. As of the Petition Date, Fisher, the general contractor, who had only received only partial payment for its work, stopped all work on the Premises. The general contractor then filed two mechanics’ liens against the rental property for an approximate total of $5.5 million. Fisher filed suit against WM Inland on October 8, 2008 to foreclose on the two liens. Debtors rejected the Lease effective November 21, 2008.

WM Inland filed two claims in Debtors’ bankruptcy comprising of: (1) a general unsecured claim for rejection damages and an administrative postpetition claim seeking indemnity for the pending litigation with Fisher; and (2) a claim for mechanics’ liens, rent, property taxes and attorneys’ fees. Debtors objected to the WM Inland claims on the grounds that the claims were overstated and/or misclassified. WM Inland eventually settled the litigation with Fisher for $1.7 million and WM Inland then asserted an administrative expense for the amount of its settlement.

The Court treated WM Inland’s claims as administrative expenses because the obligation to indemnify arose postpetition. WM Inland argued that its indemnification claim was an administrative expense pursuant to section 365(d)(3) of the Bankruptcy Code. Under section 365(d)(3), the debtor in possession must continue to perform postpetition obligations under the unexpired lease, until such lease is assumed or rejected. Debtors argued that the Indemnification Obligations were general unsecured claims because the obligation either arose from the rejection of the Lease or in the alternative, was a prepetition unsecured claim because it arose from the execution of the Lease and Construction Agreement and derived from the property improvements that occurred prior to the Petition Date. The Court disagreed.

The Court held that Debtors’ obligation to indemnify WM Inland arose from the postpetition filing of the mechanics’ liens against the Premises and therefore, pursuant to section 365(d)(3), was a claim entitled to administrative status. Once the general contractor recorded the mechanics’ liens (in September 2008) and WM Inland was sued by the general contractor, the terms of the Lease dictated that Mervyn’s was obligated to indemnify WM Inland. Although the conduct giving rise to the Indemnification Obligations Claim arose prepetition, the associated Indemnification Obligations claims arose after the Petition Date in July 2008 and before the effective date of the Lease’s rejection in November 2008, entitling it to administrative priority under section 365(d)(3). The Court relied upon the Third Circuit’s holding in Centerpoint Properties v. Montgomery Ward Holding Corp., (In re Montgomery Ward, LLC), 268 F.3d 205 (3d Cir. 2001) that, for purposes of section 365(d)(3) an obligation arises when the legally enforceable duty to perform arises under the lease. Therefore, the Court held that, although the conduct giving rise to the claim for indemnification arose prepetition, the obligation to indemnify WM Inland did not arise until the general contractor recorded the liens and sued WM Inland, which occurred postpetition.

Finally, the Court rejected Debtors’ argument that the indemnification claims were not entitled to administrative priority even if they arose postpetition because WM Inland could not meet its burden under section 503(b)(1) of the Bankruptcy Code in that WM Inland failed to show that the expense is an “actual, necessary cost and expense of preserving the estate” because section 365(d)(3) of the Code requires the Debtors to perform all obligations under the Lease “notwithstanding section 503(b)(1) of this title.” The Court concluded that this phrase operates as a carve-out exempting these expenses from the “usual burdens and procedures”. In re Goody’s Family Clothing, Inc., 401 B.R. 656, 667 (D.Del. 2009). According to the Court, because the Indemnification Obligations claim stemmed from post-petition obligations under section 365(d)(3), section 503(b)(1) was inapplicable.

In re: Open Range Communications, Inc., Case No. 11-13188 (KJC); Velocitel, Inc. v. Charles M. Forman, et al., Adv. Proc. No. 12-50476 (KJC) (February 12, 2013)

Morris James Delaware — Mon, 04 Mar 2013 09:45:15 -0500

Bankruptcy Court refuses to hold deposit account as creating a “resulting trust” for the exclusive benefit of third-party contractors based on language in loan agreement under Delaware law.

In January 2009, the United States of America, Department of Agriculture, Rural Utilities Services (“RUS”) entered into a loan agreement (the “Loan Agreement”) with Open Range Communications, Inc. (“Open Range” or the “Debtor”) to provide up to $267 million to Open Range for the construction of infrastructure necessary to provide broadband services to certain rural communities. Pursuant to the Loan Agreement, when Open Range satisfied certain conditions, RUS would deposit advances in an account at TD Bank, N.A. (the “Deposit Account”), out of which RUS would pay certain costs connected to construction of the broadband network, including third-party contractors.

On June 15, 2009, G4S Technologies LLC (“G4S”) and Open Range entered into a Master Services Agreement, as amended (the “MSA”), under which G4S would provide materials and services for construction of the broadband network. G4S was paid over $15.7 million by Open Range for work relating to construction under the MSA, but was still owed more than approximately $10.3 million under the MSA attributable to additional construction that was intended to be funded out of the loan proceeds. G4S submitted the appropriate documentation to Open Range to receive payment, but Open Range and/or RUS failed to remit payment to G4S.

Open Range filed its voluntary chapter 11 bankruptcy petition on October 6, 2011 (the “Petition Date”). As of the Petition Date, Open Range held, among other assets, $4.9 million in the Deposit Account. Pursuant to an Order dated October 11, 2012, those funds were transferred to an escrow account (the “Escrow Account”).

On February 24, 2012, Open Range’s chapter 11 case was converted to a chapter 7 case and, on February 27, 2012, Charles M. Forman was appointed as the chapter 7 trustee (the “Trustee”). On April 12, 2012, Velocitel, Inc. filed this adversary proceeding against the Trustee and RUS seeking a declaratory judgment regarding the rights of the parties to the Escrow Account. On May 14, 2012, the Trustee filed an answer to the complaint, along with counterclaims, cross-claims and a third-party complaint seeking, among other relief, a declaratory judgment that the Escrow Account was property of the estate. As a result of the Trustee’s third party complaint, other parties, including G4S, were added as third-party defendants to the adversary proceeding. G4S filed its answer to the third-party complaint, counterclaims and cross-claims against various parties, including RUS.

On July 24, 2012, RUS filed a motion to dismiss the cross-claims brought by G4S and Velocitel against RUS (the “Motion to Dismiss”). As discussed below, the Court granted the Motion to Dismiss and dismissed the cross-claims filed by G4S.

G4S argued that the funds in the Deposit Account, in whole or in part, were held in trust for remittance to G4S. As specifically set forth in its cross-claims, G4S requested a declaratory judgment that RUS had no interest in the Deposit Account because (i) the Loan Agreement required that funds in the Deposit Account be only for the purposes for which the advances were made, (ii) the Deposit Account was not property of the estate, (iii) G4S’s interest in the Deposit Account was senior to any interest of RUS or the Trustee.[1] In support of its argument, G4S argued that the funds held in the Deposit Account were held as a “resulting trust” under Delaware law and cited Official Comm. Of Unsecured Creditors v. Catholic Diocese of Wilmington, Inc. (In Re Catholic Diocese), 432 B.R. 135, 148 (Bankr. D.Del. 2010) in support of its position.

By distinguishing Catholic Diocese, Judge Carey refused to create a resulting trust and noted that a resulting trust is implied by law by looking to the intention of the parties and the nature of the transaction. While RUS intended to limit Open Range’s use of the funds, this alone, was insufficient to reflect any intent by the parties to create a trust in favor of third party contractors such as G4S. The Court concluded that the Loan Agreement, when viewed in its entirely, revealed that RUS and Open Range intended for the loan advances to be placed into a deposit account pledged to RUS as security for the loan. See section 5.4 of the Loan Agreement.[2] The Loan Agreement demonstrated the intent of the parties to establish a Pledged Deposit Account to be used for purposes as approved by RUS. While those purposes may have included payment of approved invoices from third-party contractors, there is no indication that the parties intended to establish a trust exclusively in favor of third-party contractors or that RUS intended to relinquish any right to the funds once placed into the Deposit Account.

[1] G4S also sought an accounting to determine the amount deposited into the Deposit Account to pay G4S. This cross-claim was withdrawn at oral argument.

[2] Section 5.4 of the Loan Agreement (with emphasis added by the Court) provided:

(a) The Borrower shall open and maintain a deposit account pledged to RUS (“Pledged Deposit Account”) in a bank … or other federal agency acceptable to RUS and shall be designated by the RUS name of the Borrower followed by the words “Pledge Deposit Account.” The Borrower shall promptly deposit proceeds from all Advances of the Broadband Loan … and other funds described on Schedule 1 hereto (hereinafter “Additional Funds”) into the Pledged Deposit Account. Moneys in the Pledged Deposit Account shall be used solely for the purposes for which the Advance was made, for the purposes as set forth in Schedule 1 hereto (hereinafter “Additional Purposes”) or for such other purposes as may be approved by RUS. Deposits and disbursements from the Pledged Deposit Account shall be made and recorded in accordance with Attachment 1 hereto, RUS Bulletin 1738-2, as amended and supplemented from time to time.

(b) First Lien on Pledged Deposit Account. The Borrower shall perfect and maintain a first and prior lien in the Pledged Deposit Account (pursuant to a deposit account agreement or similar or mechanism for perfecting as provided by applicable law) in form acceptable to RUS.

Conexant Systems, Inc. Files for Chapter 11 Bankruptcy After Negotiating Reorganization Plan Involving Asset Sale

Morris James Delaware — Fri, 01 Mar 2013 11:37:58 -0500

Conexant Systems, Inc. Files for Chapter 11 Bankruptcy After Negotiating Reorganization Plan Involving Asset Sale

On February 28, 2013 (the “Petition Date”), Newport Beach, California-based semiconductor maker, Conexant Systems, Inc. and its affiliated debtors (“Debtors”) filed for Chapter 11 protection in Wilmington, Delaware. According to the Declaration of Sailesh Chittipeddi, Conexant Systems, Inc.’s President and CEO offered in support of the Debtors’ Chapter 11 petitions and first day motions (the “Chittipeddi Declaration”), the Debtors filed their petitions because of declining revenue, increasing costs and significant debt obligations. According to the Chittipeddi Declaration, Debtors intend to sell their assets to QP SFM Capital Holdings Limited, an entity managed by Soros Fund Management LLC (the “Secured Lender”), through the Debtors’ proposed plan of reorganization (the “Plan”). Under the terms of the Plan, the Secured Lender will convert the secured portion of its existing senior secured notes claim totaling approximately $80 million into new equity and will hold a $76 million unsecured note. The Secured Lender will also provide Debtors with $15 million in senior secured debtor-in-possession financing. Holders of allowed unsecured claims will receive a pro rata share of $2 million provided that if the class of unsecured creditors votes in favor of the Plan, then the Secured Lender will waive its unsecured deficiency claim totaling approximately $114.5 million. A consolidated list of the creditors holding the 30 largest unsecured claims is set forth in the attachment hereto. Debtors seek to consummate the Plan within 120 days of the Petition Date.

The lead case is In re Conexant Systems Inc., Case No. 13-10367 and a motion directing joint administration of the cases has been filed. The cases have been assigned to Bankruptcy Judge Mary Walrath.

Ormet Corporation Files for Chapter 11 Protection

Morris James Delaware — Tue, 26 Feb 2013 16:07:21 -0500

Ormet Corporation Files for Chapter 11 Protection

On the evening of Monday February 25, 2013, Ormet Corporation and its subsidiaries, Ormet Primary Aluminum Corporation, Ormet Aluminum Mill Products Corporation, Specialty Blanks Holding Corporation, and Ormet Railroad Corporation (collectively, the “Debtors”), voluntarily filed for bankruptcy protection in Wilmington, Delaware. According to the first-day declaration of James Burns (the “Burns Declaration”), Ormet Corporation’s Chief Financial Officer and Secretary, offered in support of Debtors’ First Day Motion and Applications, the Debtors’ businesses include smelting operations located along the Ohio River in Hannibal, Ohio, which also serves as Ormet Corporation’s headquarters. Ormet Corporation is a holding Company with its wholly owned subsidiary, Ormet Primary Aluminum Corporation (“OPAC”), as the operating entity, which includes the smelter operations in Hannibal, Ohio and a refinery operation in Burnside, Louisiana.

According to the Burns Declaration, Debtors seek chapter 11 protection to provide breathing room to facilitate a sale of assets, maintain operations and maximize value for the benefit of the Debtors, their estates and other parties-in-interest. The Debtors forecast a need for significant additional cash during 2013 and accordingly, the Debtors made the decision to seek protection under the Bankruptcy Code to facilitate a sale of the Debtors’ assets to a purchaser who is willing, under certain terms and conditions, to contribute cash resources to continued operations.

The Debtors have filed a motion directing joint administration of the cases under case number 13-10334. The cases have been assigned to Bankruptcy Judge Peter J. Walsh.

American Bar Association National Conference of Bankruptcy Judges Report to the House of Delegates

Morris James Delaware — Tue, 19 Feb 2013 15:25:38 -0500

American Bar Association National Conference of Bankruptcy Judges Supports the Authority of the United States Bankruptcy Judges to Hear, Determine, and Enter Final Orders and Judgments in Core Proceedings Upon the Parties’ Express Consent and Believes Such Recommendation is Consistent with Article III of the United States Constitution.

Summary:

The ABA National Conference of Bankruptcy Judges (the “ABA NCBJ”) issued a recommendation evaluating Stern v. Marshall and concluding that a United States Bankruptcy Judge may adjudicate a Stern-type proceeding in the same manner as a non-core proceeding – that is, upon the express consent of the parties. In reaching this conclusion and in support of this recommendation, the ABA NCBJ compared the scenario to the well-established case law concerning magistrate judge authority, finding numerous similarities in the position of magistrate judges and that of bankruptcy judges.

Additionally, the ABA NCBJ noted that express consent satisfies the primary concerns associated with limiting certain actions to Article III judges. Specifically, the ABA NCBJ was satisfied that express consent satisfies the individual rights prong of Article III, which guarantees an impartial and independent adjudication “subject to waiver, just as are other personal constitutional rights.” Additionally, the ABA NCBJ was satisfied that the structural separation of powers interests were addressed where parties expressly consented to adjudication by a non-Article III tribunal.
Although the ABA NCBJ noted that implicit “consent” in the form of filing a proof of claim in the bankruptcy does not pass Constitutional muster pursuant to Stern v. Marshall, the ABA NCBJ determined that bankruptcy court adjudication with express consent was not only permissible, but also consistent with the interests of judicial economy and practicality in light of the volume of such cases passing through bankruptcy courts’ dockets.

Bankruptcy Court permits post-petition "lock-up" agreement and confirms plan

Morris James Delaware — Tue, 19 Feb 2013 15:11:14 -0500

In re: Indianapolis Downs, LLC et al., Case No. 11-11046 (BLS) (January 31, 2013)

Bankruptcy Court declined to designate the votes of the parties of a post-petition Restructuring Support Agreement (the “RSA”) (i.e., a lock-up agreement) and confirmed the Indianapolis Downs, LLC and Indiana Downs Capital Corp. (collectively, the “Debtors”) Modified Second Amended Joint Plan of Reorganization (the “Plan”). Confirmation was opposed by certain members of senior management and holders of equity and debt of the Debtors (the “Oliver Parties”). The Oliver Parties argued that the RSA constituted an impermissible post-petition solicitation of votes contrary to section 1125(b) of the Bankruptcy Code. The Oliver Parties also argued that the votes of the parties of the RSA should be designated pursuant to section 1126(e) of the Bankruptcy Code which would ultimately result in rendering the Debtors unable of securing adequate votes for confirmation of the Plan. The Court found that the RSA did not constitute an improper solicitation of votes and refused to designate the votes of the parties to the RSA.

Discussion:

By way of background, the Debtors operated a combined horse racing track and casino, or, a “racino” in Shelbyville, Indiana. The Debtors filed voluntary Chapter 11 petitions in the U.S. Bankruptcy Court for the District of Delaware (the “Bankruptcy Court”) on April 7, 2011 (the “Petition Date”).

The Debtors entered bankruptcy with substantial secured debt. The Debtors filings reflected outstanding first lien debt in excess of $98 million as of the Petition Date, second lien debt of $375 million, plus accrued interest and fees. A group of holders of the second lien debt (the “Ad Hoc Second Lien Committee”) actively participated in the matter both before and after the Petition Date. The Debtors also issued third lien debt of approximately $78 million (plus accrued interest). Fortress Investment Group, LLC (“Fortress”) held a substantial portion of the second and third lien debt. The second and third lien obligations are guaranteed by substantially all of the Debtors’ assets. The Debtors struggled to service their debt and Fortress, the Ad Hoc Second Lien Committee and the Debtors’ equity owners made formal and informal restructuring proposals to resolve the Debtors’ financial distress. Consensus was reached following months of negotiations between these parties as to a process that provided for a “parallel path” approach to reorganization. The plan contemplated would allow the Debtors to test the market to determine whether bids would be made for their assets that would be supported by the major creditor constituents. As an alternative, if these efforts failed to produce adequate offers, then the plan would be to permit the Debtors to proceed with a recapitalization. The RSA embodied this parallel path.[1]

The marketing efforts provided to be successful, culminating in a bid from Centaur LLC (“Centaur”) for the purchase of substantially all of the Debtors’ assets for a price of $500,000,001. The sale was approved by the Court by Order dated October 31, 2012.

The Oliver Parties argued that the RSA constituted a wrongful post-petition solicitation of votes on a plan prior to Court approval of a disclosure statement. To remedy its issue, the Oliver Parties requested that the ballots of the parties to the RSA not be counted pursuant to sections 1125(g) and 1126(e) of the Bankruptcy Code (and the result of which would cause the Debtors to lack sufficient votes to gain plan confirmation). By contrast, the Debtors and the Restructuring Support Parties disputed that developing and executing the RSA is a “solicitation” within the meanings of sections 1125 and 1126 and argued that the Court should narrowly define what constitutes solicitation based on case law (see e.g. In re Century Glove, 860 F.2d 94 (3d Cir. 1988); In re Heritage Organization, L.L.C., 376 B.R. 783 (Bankr. N.D. Tex. 2007)).

In agreeing with the Debtors and the Restructuring Support Parties, the Bankruptcy Court reasoned that “Congress intended that creditors have the opportunity to negotiate with debtors and amongst each other; to the extent that those negotiations bear fruit, a narrow construction of ‘solicitation’ affords these parties the opportunity to memorialize their agreements in a way that allows a Chapter 11 case to move forward.” Op. at 9. Further, the Bankruptcy Court explained that “[d]esignation of votes in this case would be demonstrably inconsistent with the purposes of the Bankruptcy Code” because “creditor suffrage is a bedrock component of Chapter 11” and “it would indeed be anomalous, in the absence of a showing of bad faith or wrongful conduct, to discount or ignore the votes of the overwhelming majority of the creditors and stakeholders, and deny confirmation of the plan.” Id.

The “interests that § 1125 and the disclosure requirements are intended to protect are not at material risk in this case.” Id. at 10. The parties here to the RSA were “all sophisticated financial players and have been represented by able and experienced professionals throughout these proceedings,” and as a result, the Court noted that it would “grossly elevate form over substance to contend that § 1125(b) requires designation of their votes because they should have been afforded the chance to review a court-approved disclosure statement prior to making or supporting a deal with the Debtor.” Id.

The “decision whether to designate a creditor’s ballot is within the sound discretion of the Court” and that in “situations where creditors have acted with the apparent goal of furthering their own self-interest and maximizing their recoveries, courts have been extremely reluctant to penalize such parties through designation.” Id. at 11. Accordingly, the Bankruptcy Court held that disallowance of the votes of the Restructuring Support Parties to the RSA was “neither required nor warranted.” Id. Here, the requirement that the parties to the RSA vote for the plan, and the provision of specific performance to enforce such a commitment, was “not dispositive” and that the parties “negotiated a deal and memorialized it” in the restructuring support agreement which predictably “contained a commitment to vote for a plan that embodied that deal.” Id. The Bankruptcy Court noted that “the filing of a Chapter 11 petition is an invitation to negotiate” and that “courts must be chary of construing those disclosure and solicitation provisions [of the Bankruptcy Code] in a way that chills or hamstrings the negotiation process that is at the heart of Chapter 11.” Id. at 12. Thus, when “a deal is negotiated in good faith between a debtor and sophisticated parties, and that arrangement is memorialized [by] a written commitment and promptly disclosed, § 1126 will not automatically require designation of the votes of the participants. Id.

Following resolution of the Oliver Parties’ Motion to Designate, the Court then overruled confirmation objections and confirmed the Pl

[1] The RSA provided for (i) specific terms of the dual track plan of reorganization, including the financial terms of, and creditor treatment under, a potential sale or in the recapitalization transaction; (ii) the requirement that the Debtors propose a plan of reorganization within a time frame set in the RSA; (iii) a prohibition upon any party to the RSA proposing, supporting or voting for a competing plan of reorganization; (iv) the requirement (enforceable by an order of specific performance) that the parties to the RSA vote “yes” for a plan that complies with the RSA. The RSA would become binding upon the Debtors only upon approval by the Court of a disclosure statement. The Court approved the Debtors’ Disclosure Statement after a hearing on June 21, 2012.

ATLS Acquisition, LLC and Various Affiliates File Chapter 11

Morris James Delaware — Tue, 19 Feb 2013 12:24:50 -0500

On February 15, 2013, ATLS Acquisition, LLC and 9 affiliates filed chapter 11 petitions in Delaware. The cases are being jointly administered under Case No. 13-10262 and have been assigned to the Honorable Peter J. Walsh.

According to the Declaration of Frank A. Harvey, the President and CEO of ATLS Acquisition, filed in support of the petitions, the Debtors are “the leading mail order provider of diabetes testing supplies.” In addition, “the Debtors also sell insulin pumps and insulin pump supplies, ostomy, catheter and CPAP supplies and operate a large mail order pharmacy.”

The Debtors cite to various events precipitating the filing, including disputes with Medco over payment of certain tax liabilities, previously unknown claims, and issues with certain alleged overpayments and audits of payments, which the Debtors believe are “substantially overstated.” Additionally, the Debtors allege that certain actions by parties have interfered with patient relationships and are negatively impacting the Debtor’s business operations.

Mr. Harvey notes that through the chapter 11 process, the Debtors are hopeful to stabilize the business, and intend to either pursue a plan of reorganization or pursue a sale of the Debtors.

Bankruptcy Court Grants Priming Lien To Debtors' Primary Contract Manufacturer To Secure Post-Petition Trade Credit And Authorizes Continued Use Of Cash Collateral Over Secured Creditors Objection

Morris James Delaware — Thu, 20 Dec 2012 14:11:16 -0500

In re: Satcon Technology Corporation, et al., Case No. 12-12869 (KG) (December 7, 2012)

After an evidentiary hearing, the Bankruptcy Court granted the Debtors’ Emergency Motion for Entry of an Order Authorizing (I) Entry Into a Settlement with Great Wall, (II) Incurrence of Post-Petition Trade Credit, and (III) Granting of a Priming Lien to Secure Post-Petition Trade Credit (the “Settlement Motion”) and the Motion of Debtors for Entry of Final Order Authorizing Use of Cash Collateral (The “Cash Collateral Motion”). The Court found that the Debtors’ settlement with its creditor, supplier and customer, Great Wall, provided Debtors with numerous benefits, including continued relations that would enable Debtors to continue operations and avoid immediate liquidation. Further, the Court granted the Cash Collateral Motion because, for among other reasons, the Secured Creditors’ interests were adequately protected. Following its ruling, the Bankruptcy Court permitted an oral stay of its ruling for two days (extended for another two days) to allow the appealing parties an opportunity to request a stay pending appeal from the District Court.[1]

The Court approved the Debtors’ settlement agreement with Great Wall under sections 363(b)(1) and 105(a) of the Bankruptcy Code and Bankruptcy Rule 9019. The Court concluded that the Debtors properly exercised their business judgment and found that the entry of a settlement with Great Wall was reasonable and in the best interest of their estates. The settlement agreement allowed the Debtors to continue to operate their business and avoid an immediate liquidation. The settlement agreement provided Great Wall with a Priming Lien on all of Debtors’ assets to secure the Postpetition Advances.

China Great Wall Computer Shenzhen Co., Ltd. (“CGW”) and Satcon Technology Corporation (“STC”) entered into an agreement (the “Contract Manufacturing Agreement”), dated February 6, 2012, pursuant to which CGW and its subsidiary Perfect Galaxy International Limited (collectively “Great Wall”), agreed to manufacture and supply certain products and sub-assemblies (collectively, “Satcon”). Great Wall was the Debtors’ primary contract manufacturer and supplied approximately 90% of the products and sub-assemblies used in Debtors’ business. Prior to the October 17, 2012 petition date (the “Petition Date”), the Debtors owed Great Wall approximately $26.2 million for product that had previously been delivered to Satcon (the “Prepetition Payable”) and Great Wall owed Satcon approximately $1.3 million for parts and materials purchased from Satcon. Great Wall was unwilling to extend credit in excess of $26 million to Debtors.

Debtors believed that the absence of a settlement agreement with Great Wall would prevent Debtors’ continued operations because Great Wall would not be willing to provide parts. Further, Debtors also lacked liquidity and were operating on cash collateral subject to an Order permitting the use of cash collateral on an interim basis (the “Existing Cash Collateral Order”). Debtors were unable to secure alternative credit. The Existing Cash Collateral Order provided for certain sale milestones that required the Debtors to actively market its assets.

After extensive negotiations, Debtors and Great Wall reached an agreement. The settlement with Great Wall provided for an offset of $1.4 million owed to Debtors against the Prepetition Payable. Great Wall agreed also to purchase certain spare parts from Debtors’ inventory by offsetting the purchase price against the Prepetition Payable. Debtors anticipated that the purchases and resulting offset would be $5 million. The settlement also contemplated application of three of the Debtors’ post-petition payments aggregating approximately $1.2 million to the Prepetition Payable. As a result of these transactions, the Prepetition Payable would be reduced to approximately $18.7 million and Great Wall would be willing to provide the Debtors with trade credit. Beginning in January 2013, the Debtors would begin paying Great Wall pursuant to an agreed payment schedule. Based on the Debtors’ projections, the Debtors would receive approximately $4.9 million in post-petition trade credit (the “Postpetition Advances”) through the week ending March 9, 2013 with the total balance owing to Great Wall at that time approximating $23.8 million.

As part of the settlement, Great Wall would be provided with a “priming lien” (the “Priming Lien”) under section 364(d) of the Bankruptcy Code on assets of the Debtors to secure the Postpetition Advances subject only to the Carve-Out (as defined in the Final Cash Collateral Order). Great Wall would also receive certain protections with regard to the intellectual property necessary to allow for sale and servicing of inventory purchased by them in the event that Satcon is not in the position to service such inventory. The Court reviewed section 364(d) of the Bankruptcy Code that permits a debtor to incur debt secured by a senior, or “priming lien” when, such in this case, there was adequate protection of the interest of the otherwise senior secured creditors. Silicon Valley Bank (the “Senior Secured Creditor”) and Horizon Credit I LLC and Velocity Venture Funding, LLC (together, the “Subordinated Secured Creditors”, and with the Senior Secured Creditor, the “Secured Creditors”) were owed approximately $21.1 million as of the Petition Date. According to the Debtors, based on the liquidation value of the Debtors’ assets, the Secured Creditors benefited from an equity cushion of at least $10.5 million. The Secured Creditors did not provide any additional liquidity other than the use of Cash Collateral and the Debtors submitted that the value of the Secured Creditors’ interests in the Debtors collateral far exceeded the value of their claims. The Court did not find the Secured Creditors’ argument that there was a post-petition deterioration of the collateral persuasive and did not find the Secured Creditors’ opinion as to valuation as credible as the opinion rendered by the Debtors because the Secured Creditors’ witness failed to include substantial assets, including international goods and work in progress in its valuation analysis. According to the Court, the equity cushion permitted the priming of the Secured Creditors’ liens and the Secured Creditors were adequately protected to the extent Great Wall provided the Postpetition Advances.

_____________________

[1] A notice of appeal was filed on or about December 11, 2012.

Court Grants Motion For Protective Order, Holding That Affidavits Of Debtor's Former Employees Prepared By Preference Defendants For Mediation Were Protected Attorney Work Product Under Rule 26(b)

Morris James Delaware — Thu, 20 Dec 2012 12:31:53 -0500

Burtch v. Luminescent Systems, Inc., et al. (In re AE Liquidation, Inc.), Case No. 08-13031 (MFW), Adv. Nos. 10-55460 (MFW), 10-55384 (MFW) (December 11, 2012) (J. Walrath)

On November 25, 2008, AE Liquidation, Inc. (the “Debtor”) filed a voluntary petition for relief under chapter 11 of the Bankruptcy Code, which case was subsequently converted to chapter 7 on March 5, 2009, at which time Jeoffrey L. Burtch (the “Trustee”) was appointed as trustee.

On November 18, 2010, the Trustee commenced preference actions against Luminescent Systems, Inc. and Astronics Advanced Electronic Systems Corp. (collectively, the “Defendants”). After the parties were directed to go to mediation, but before the mediation took place, the Defendants gathered affidavits from two former employees of the Debtor.

The mediation was ultimately unsuccessful, and the parties conducted discovery, during which the Defendants prepared a privilege log asserting that the affidavits and related documents were protected by the attorney work product doctrine and the mediation privilege. The Trustee disagreed, and the Defendants filed a Motion for a Protective Order, arguing that the affidavits and related documents were protected as: (1) documents prepared for the purpose of mediation under Federal Rule of Civil Procedure 16(c) and Local Rule of Bankruptcy Procedure 9019-5; (2) for good cause under Federal Rule of Civil Procedure 26(c)(1); and/or (3) as attorney work product under Federal Rule of Civil Procedure 26(b).

The Court disagreed with the Defendants’ first two arguments, but granted the motion on the basis of the third argument, finding that the affidavits were protected attorney work product for the reasons set forth in greater detail below.

First, the Court held that the affidavits, though not admissible as evidence under Local Bankruptcy Rule 9019-5 (providing that “[n]o person may rely on or introduce as evidence” documents prepared for the purpose of mediation), were not exempt from discovery under Local Bankruptcy Rule 9019-5, both by the express terms of Local Bankruptcy Rule 9019-5 (“[i]nformation otherwise discoverable or admissible in evidence does not become exempt from discovery…merely by being used by a party in the mediation”) and by the narrow scope of the limitations provided in the rule on the use of such documents (e.g., inadmissible as evidence).

Second, the Court swiftly disposed of the Defendants’ argument that the affidavits were undiscoverable for “good cause” under Fed. R. Civ. P. 26(c)(1), reasoning that the “Defendants made no proffer of good cause that disclosure of the affidavits and related documents would cause any embarrassment, oppression, or undue burden sufficient to protect the documents.”

Third, although the Defendants did not raise the attorney work product argument in their motion, the Court found that the privilege log, which was attached to the Defendants’ motion, was sufficient evidence to meet the Defendants’ burden of proof. In finding that the affidavits were protected by the attorney work product doctrine, the Court evaluated three factors: (1) whether the documents were created in anticipation of litigation; (2) whether the documents were ordinary or opinion work product; and (3) based on the type of work product, whether the party seeking discovery had overcome the attorney work product protection.

The Court found that the documents were “clearly prepared ‘in anticipation of litigation,’” as they were prepared in preparation for the mediation. Next, because the documents at issue consisted of affidavits and emails exchanged between the Defendants’ attorneys and two third-party witnesses, the Court found it unlikely that there were any protected attorneys’ opinions in the documents and held that they were ordinary, fact-based work product “not entitled to the heightened protection of opinion work product.” Finally, the Court held that the Trustee failed to overcome the attorney work product protection, concluding that the Trustee’s sole argument (that the documents would be used to impeach witnesses in depositions and at trial) was insufficient to overcome the protections to which the documents were entitled.

Accordingly, for the reasons set forth above, the Court granted the Defendants’ Motion for a Protective Order with respect to the affidavits and related documents.

Court Dismisses One Adversary Proceeding Filed By Trustee Due To Debtors' Previous Release Of Defendant And Denies Motion To Dismiss Adversary Proceeding Against Defendant Which Merged With Releasee After The Release

Morris James Delaware — Mon, 17 Dec 2012 11:11:07 -0500

Burtch v. Avnet, Inc. and Burtch v. Bell Microproducts, Inc., et al. (In re Managed Storage International, Inc.), Case No. 09-10368 (MFW), Adv. Nos. 12-50026 (MFW), 12-50028 (MFW) (November 26, 2012) (J. Walrath)

On February 4, 2009, Managed Storage International, Inc. and its related affiliates (the “Debtors”) filed voluntary petitions under chapter 11 of the Bankruptcy Code, along with a motion for approval of bid procedures and a motion to sell all of their assets free and clear of liens. Avnet, Inc. (“Avnet”) asserted a purchase money security interest in certain of the Debtors’ assets, including any accounts receivable or proceeds relating to those assets, at the February 26, 2009 bid procedures hearing and in a limited objection filed to the sale motion. The Debtors, Avnet, and the purchaser entered into a stipulation providing for the segregation of the proceeds of the Avnet collateral, which stipulation was approved by the Court.

Despite the stipulation, the Debtors failed to segregate the proceeds of the Avnet collateral, and Avnet filed a motion seeking turnover of its collateral from the purchaser. Avnet, the Debtors, and the purchaser entered into a second stipulation, whereby the purchaser paid Avnet $975,000 and the parties exchanged releases of each other’s predecessors, successors, and assigns from any and all claims relating to the Debtors and their chapter 11 cases. The second stipulation was submitted under certification of counsel and approved by the court on May 19, 2010.

Thereafter, the Court converted the Debtors’ cases to chapter 7 on November 3, 2010, and appointed Jeoffrey L. Burtch (the “Trustee”) as chapter 7 trustee. Around the same time, Avnet acquired Bell Microproducts, Inc. in a merger.

On January 12, 2012, the Trustee filed a complaint against Avnet seeking to avoid and recover $5,444,541.11 as an alleged preference and filed a separate preference action against Bell (and Avnet as its successor) seeking to recover $969,017.06 as an alleged preference. On March 30, 2012, Avnet and Bell filed motions to dismiss the Trustee’s complaints based on the release given to Avnet by the Debtors. The Court granted Avnet’s motion to dismiss and denied Bell’s motion to dismiss for the reasons set forth below.

First, the Court analyzed Avnet’s motion to dismiss, tackling each of the Trustee’s three arguments in turn: (1) the Trustee’s argument that he was not bound by the release, (2) the Trustee’s argument that the scope of the release did not include the preference claims, and (3) the Trustee’s argument that the release was not properly approved with notice and a hearing as required by Bankruptcy Rule 9019.

As an initial matter, the Court swiftly concluded that the release applied to the Trustee based on the “well-settled principal that a ‘Chapter 11 debtor-in-possession can enter into a binding agreement with a secured creditor, which will be enforceable against a subsequently appointed Chapter 7 trustee.’” Opinion at 8 (citing Armstrong v. Norwest Bank, Minn., N.A. (In re Trout), 964 F.2d 797, 801 (8th Cir. 1992) (additional citations omitted)). The Court was not swayed by the Trustee’s argument that the failure of the agreement to specifically state that the release applied to “any chapter 7 trustee in a superseding case” in the release of Avnet, when such language was included in the release granted to the purchaser, evidenced the parties’ intent not to bind the Trustee to the Avnet release. Instead, the Court interpreted the release according to general principles of contract construction and found that the use of the term “successor” in the release was sufficient to bind the Trustee.

The Trustee further argued that he should not be bound by the release due to the prejudice the estate would suffer in being deprived of a more than $5 million preference action and that there was no consideration for the release of this action.

The Court held that, in the absence of allegations of fraud, duress, coercion or mutual mistake, barring the prosecution of a potentially beneficial action by the Trustee was not sufficient to overcome the express terms of the release. Additionally, the Court was not convinced that “lack of consideration” constituted grounds for declining to apply the releases to the Trustee but, even if it did, the Court found that there was adequate consideration for the releases because Avnet accepted less than it claimed it was owed, the Debtors received general releases from Avnet and the purchaser, and Avnet halted its efforts to obtain an order of contempt against the Debtor for failing to comply with the Court’s order requiring segregation of Avnet’s proceeds.

Second, the Court turned to the Trustee’s argument that the preference action was not within the scope of the actions released by the Debtors. The Court disagreed, concluding that where a release is general on its face, “there must be evidence that the parties intended to exclude a specific cause of action from the general release for it not to be covered.” Opinion at 19.

Third, the Court addressed (in the context of the Trustee’s claims that the releases did not apply to him) the Trustee’s argument that the notice of the releases was insufficient by identifying various documents which notified parties in interest of Avnet’s motion to compel turnover of its collateral, the parties’ intent to submit a stipulation regarding the same under certification of counsel, and the order approving the stipulation, which provided adequate notice to parties in interest. The Court also reasoned that it could shorten notice on a Rule 9019 motion under Rule 9006(c) and that Rule 2002(a)(3) allowed the Court to dispense with notice altogether for “cause shown,” which cause the Court concluded it had. Accordingly, the Court dismissed the preference action against Avnet.

The Court denied Bell’s motion to dismiss, however, citing both a Third Circuit case (Medtronic Ave, Inc. v. Advanced Cardiovascular Sys., Inc., 247 F.3d 44 (3d Cir. 2001)) and an opinion from the bankruptcy court in the Northern District of Texas (Mims v. Compaq Computer Corp. (In re PC Serv. Source, Inc.), Adv. No. 03-3277, 2004 WL 3622644 (Bankr. N.D. Tex. Dec. 3, 2004)) for the proposition that the releases granted to Avnet did not extend to Bell, a company with which Avnet subsequently merged, for independent claims against Bell which arose prior to its merger with Avnet.

Coltec's Motion To Dismiss On Trustee's Causes Of Action Pursuant To Sections 547, 548, 549, And 550 Of Bankruptcy Code Granted; Motion To Dismiss Claims For Contribution For Debtors' Environmental Liability Under Section 107 Of CERCLA Denied

Morris James Delaware — Thu, 13 Dec 2012 14:39:18 -0500

In re Crucible Materials Corp., Case No. 09-11582 (MFW); Gellert v. Coltec Industries, Inc., Adv. Proc. Case No. 11-53884 (MFW) (October 31, 2012)

The Litigation Trustee (the “Trustee”) filed a Complaint against Coltec Industries, Inc. (“Coltec”) seeking indemnification from Coltec for environmental costs under a 1985 Purchase Agreement, judgment for contribution for the Debtors’ CERCLA liability and to avoid and recover pursuant to sections 547, 548, 549, and 550 of the Bankruptcy Code certain transfers associated with bond payments made by Debtors (the “Avoidance Claims”). In response, Coltec moved to dismiss the Trustee’s Avoidance Claims and the contribution claim made under section 107 of CERCLA for failure to state a claim under Federal Rule 12(b)(6) and Rule 9(b). The Court dismissed the Avoidance Claims, but denied the motion to dismiss as to claims under section 107 of CERCLA.

Onondaga Industrial Development Agency (“Onondaga”), in 1980, issued Pollution Control Revenue Bonds Series 1980 (the “Bonds”) to acquire, construct, improve and equip pollution control facilities in Onondaga County, New York (the “Project”). Onondaga leased the Project pursuant to a financial lease agreement (the “Financial Lease”) to Colt Industries, Inc. (“Colt”), the corporate predecessor of Coltec. Crucible Materials Corporation (“Crucible”) was incorporated in 1983 as a wholly-owned subsidiary of Colt Industries Operating Corp. (“CIOC”). In 1985, CMC Holding Company, Inc. (“CMC Holding”) and the Employee Stock Ownership Plan of Crucible (“ESOP”) bought Crucible’s stock from COIC pursuant to a purchase agreement (the “1985 Purchase Agreement”). Thereafter, CMC Holding and Crucible merged, with Crucible as the surviving company. Pursuant to this transaction, Crucible agreed to assume all of Colt’s obligations on the Bonds. Crucible then agreed to assume the Financing Lease and to be directly obligated to Onondaga to repay the Bonds (the “Assignment”). Although Crucible assumed the Financing Lease, Colt also remained obligated to Onondaga for repayment of the Bonds. Also pursuant to the 1985 Purchase Agreement, Coltec was required to indemnify Crucible for certain costs and damages that violated the Comprehensive Environmental Response, Compensation and Liability Act of 1980 (“CERCLA”).

Crucible operated the Project and made payments on the Bonds through April 1, 2009. Crucible and its wholly owned subsidiary, Crucible Development Corporation (“Debtors”) filed voluntary petitions under chapter 11 of the Bankruptcy Code on May 6, 2009. On September 25, 2009, the Court entered an Order (the “Sale Order”) authorizing the sale of certain of the Debtors’ assets which included the sale of the Project. As part of the sale, Crucible was ordered to pay Onondaga $2,723,332 of the purchase price in full satisfaction of the Bonds.

During the bankruptcy case, the Environmental Protection Agency (“EPA”) and the New York State Department of Environmental Conservation (“NYSDEC”), and Honeywell International, Inc. (“Honeywell”) filed proofs of claim against Crucible seeking payment for environmental response costs incurred in connection with the sites listed in the 1985 Purchase Agreement. Crucible settled these claims.

On August 26, 2010, the Court entered an Order confirming Debtors’ Second Amended Plan of Liquidation (the “Plan”). The Plan established a Litigation Trust to which the Debtors transferred all of their remaining assets, including causes of action. On November 30, 2011, the Trustee filed his Complaint seeking (1) indemnification from Coltec for environmental costs under the 1985 Purchase Agreement; (2) judgment against Coltec for contribution for the Debtors’ CERCLA liability; (3) to avoid and recover certain transfers associated with the Bond payments pursuant to sections 547, 548, 549 and 550 of the Bankruptcy Code; and (4) to disallow any claims held by Coltec in accordance with section 502.

On February 6, 2012, Coltec filed the Motion to Dismiss the Trustee’s Avoidance Claims and claims for contribution under section 107 of CERCLA for failure to state a cognizable claim under Rule 12(b)(6) and Rule 9(b).

Avoidance Claims: The Trustee sought to avoid as preferences or fraudulent conveyances certain payments that Crucible made under a Financing Lease prior to the bankruptcy filing. The Trustee also sought to recover certain sales proceeds that the Court ordered Crucible to pay Onondaga to satisfy the Bonds as unauthorized post-petition transfers.

In response to the allegations, Coltec asserted that the “ordinary course of business” defense was established because of a pattern of payment of Bonds that did not deviate from the payment pattern before or during the preference period. The Court held that the ordinary course of business affirmative defense could be asserted and considered by the Court in a motion to dismiss when it appears on the face of the complaint and it presents an “insuperable barrier to recovery by the plaintiff.” Cont’l Collieries v. Shober, 130 F.2d 631, 635-36 (3d Cir. 1942). The Court held that the Trustee’s preference claim failed as a matter of law because the Complaint itself established that Crucible was making periodic payments to Onondaga and that the alleged preference payment was made in the ordinary course of business.

As for the Trustee’s fraudulent transfers allegations, the Trustee alleged that the “two-transfer” theory of Debtor’s payment of the Bonds had the effect of being two transfers: one directly to Onondaga and another indirectly to Coltec. The Court rejected the “two transfer” theory under the circumstances because the purpose of the theory has been eliminated by statutory amendment. Under section 550, the trustee can recover under section 548 from the “initial transferee” or an “entity for whose benefit [a] transfer was made.” Here, the Complaint was sufficient because the payments made by Crucible to Onondaga benefitted Coltec and extinguished Coltec’s liability. However, the Complaint failed as to a showing of insolvency because the Trustee failed to plead with particularity that Crucible was insolvent during the period in which the payments were made as required by Rules 8(a) and 9(b).

Finally, with regard to allegations seeking recovery of post-petition transfers under section 549 of the Bankruptcy Code, the Court held that the sale explicitly required part of the proceeds of the sale to be paid to Onondaga to satisfy Crucible’s obligation under the Bond. The estate received value under the Sale Order because the payment of the Bonds was necessary to permit the sale of the estate’s property free of those encumbrances. Further, there was no reconsideration of the Sale Order and no one took an appeal. Accordingly, the payment of the Bonds was not an unauthorized transfer of any property of Crucible’s estate.

Claim Under Section 107 of CERCLA: Coltec argued that it cannot be liable under section 107 of CERCLA for response costs incurred by Crucible to the EPA, NYSDEC, and Honeywell as a result of Crucible’s settlement of their claims because Crucible did not incur any cleanup costs of its own but rather only reimbursed others for their incurred costs. The Court, reviewing sections 107 and 113 of CERCLA and following the U.S. Supreme Court’s opinion in United States v. Atlantic Research Corp., 551 U.S. 128 (2007) and the Third Circuit’s decision of Agere Sys., Inc. v. Advanced Envtl. Tech. Corp., 602 F.3d 204 (3d Cir. 2007), held that Crucible had not been subject to a section 107 claim because no civil action had been brought against it. Rather, the payments were made not merely for reimbursement, but also for costs to be incurred in the future. Accordingly, the Complaint alleged facts sufficient to sustain a claim under CERCLA section 107 and offered sufficient facts to prove that Crucible “incurred” costs as part of the settlement to fund “on-going” cleanup.

Court Holds That A Motion Concerning The Sale Of Assets Located In The United States Is Subject To The Legal Standards Governing A Transfer By A Trustee Outside The Ordinary Course Of Business (i.e. Whether The Transaction Is A Sound Exercise Of The Trust

Morris James Delaware — Wed, 05 Dec 2012 13:06:02 -0500

In re Elpida Memory, Inc., Case No. 12-10947 (CSS) (November 16, 2012) (J. Sontchi)

Elpida Memory, Inc. (“Elpida” or the “Debtor”) filed a petition for commencement of corporation reorganization proceedings under the Japan Corporate Reorganization Act (Kaishu Kosei Ho) in the Tokyo District Court, Civil Division (the “Tokyo Court”) on February 27, 2012. On March 23, 2012, the Tokyo Court entered its Court Decision on Commencement of Reorganization Proceeding (the “Commencement Order”), appointed Messrs. Yukio Sakamoto and Nobuaki Kobayashi as trustees (the “Trustees” or the “Foreign Representatives”) for Elpida’s corporate reorganization proceeding in Japan, and appointed Mr. Atsushi Toki as examiner of Elpida.

On March 19, 2012, Mr. Sakamoto filed a verified petition pursuant to sections 1504 and 1515 of the Bankruptcy Code commencing the Chapter 15 case in Delaware. On April 24, 2012, the United States Bankruptcy Court for the District of Delaware (the “Court”) entered an order recognizing the foreign main proceeding (the “Recognition Order”) in the Tokyo Court and recognizing the Trustees as Elpida’s foreign representatives.

Thereafter, in mid-September, the Foreign Representatives filed four motions under Section 363 of the Bankruptcy Code seeking authorization to enter into four related transactions: (i) one concerning certain patents being pledged to Apple Inc. (the “Apple Motion”); (ii) one concerning security agreements relating to DIP financing (the “DIP Financing Motion”); (iii) one concerning the sale of certain patents to Rambus Inc. (the “Rambus Motion”); and (iv) one concerning a license agreement with Micron Technology (“Micron”) relating to actions required to be taken with respect to the Rambus Motion (the “Micron Motion”).

The Steering Committee of the Ad Hoc Group of Bondholders (the “Steering Committee”) initially objected to all four motions, but withdrew its objections to the Apple Motion and the DIP Financing Motion, leaving only the Rambus Motion and the Micron Motion at issue. A hearing on the merits of the Rambus Motion and the Micron Motion is scheduled for December 4-5, 2012. However, at the request of the parties, the Court conducted a hearing on November 8, 2012 as to what legal standard would apply to the Court’s review of the motions and whether principles of comity would apply with respect to certain motions to seal various documents relating to the motions and responses thereto.

After a brief summary of Chapter 15 generally, the Court remarked that the Foreign Representatives clearly had the power to make the requests in the motions pursuant to Sections 363 and 1520 of the Bankruptcy Code, but queried aloud as to the applicable standard to be applied by the Court in evaluating such requests. The Court began its analysis with the plain meaning of the statutes and concluded quickly that “[t]he result under a plain meaning analysis is straight forward.” Section 1520(a) unequivocally states that “sections 363, 549, and 552 apply to a transfer of an interest of the debtor in property that is within the territorial jurisdiction of the United States to the same extent that the sections would apply to property of the estate.” 11 U.S.C. § 1520(a) (emphasis added). Thus, the Court held, Section 363 and, by implication, its standards are applicable to the transfer of assets located in the United States by a foreign debtor in a foreign main proceeding. The Court then summarized the “well-settled” standard under Section 363, which provides for the analysis of four factors in evaluating whether the sale of such assets represents the sound exercise of the trustee’s business judgment.

Although the Court determined that the language of the statute was clear, it went on to consider the legislative intent, remarking that, “[n]otwithstanding the Supreme Court’s repeated admonition that courts are to interpret statutes according to their plain meaning, one could argue that in Chapter 15 cases plain meaning should be subservient to legislative history or more general principles of comity.” The Court gleaned the legislative intent from the near verbatim adoption of Model Law Article 20 by Section 1520 of the Bankruptcy Code, first noting the “striking” parallels between the two and then evaluating the basic concepts and structure of Article 20. Specifically, the Court explained that Article 20 of the Model Law’s two basic concepts are to stop all collection actions by creditors and to prevent a debtor from disposing of assets pending further court order, which ends are expressly accomplished via “the laws of the ancillary forum – not those of the foreign main proceedings.” Based on these concepts and the structure for accomplishing them – namely, that the domestic court is tasked with the responsibility over assets within its jurisdiction – the Court concluded that the legislative intent was consistent with the plain language and similarly required an evaluation of whether the sale represented the sound exercise of the trustee’s business judgment.

Finally, the Court evaluated the applicability of the principles of comity and its limitations. Specifically, the Court found that, although it was recognized that a U.S. court should grant comity or cooperation to recognized foreign representative in insolvency matters, such recognition was limited where the relief requested would be “manifestly contrary to the public policy of the United States.” Noting that only two sections (Sections 1507 and 1509(b)(3)) specifically mention comity, that neither section was applicable, and that the section which applied to the requested relief (Section 1520) was mandatory and required the application of Section 363 to the analysis of the proposed sale, the Court concluded that the “principles of comity either do not apply or must defer to the plain meaning and legislative history.”

Bankruptcy Court Permits Trustee's Claims Against Debtor's Parent And Related Entities Based Upon Theories Of Breach Of Fiduciary Duty And Other Related Causes Of Action Under Delaware Law

Morris James Delaware — Thu, 01 Nov 2012 08:37:08 -0500

Burtch v. Opus, L.L.C., et al. (In re: Opus East, LLC), Case No. 09-12261; Adv. Proc. No. 11-52423 (MFW), October 12, 2012 (Walrath, J.)

Judge Mary Walrath dismissed five of sixty claims asserted by Jeoffrey L. Burtch, the Chapter 7 trustee (the “Trustee”) of the estate of Opus East, L.L.C. (“Debtor”), but provided the Trustee with leave to amend the Complaint as to those dismissed counts within 30 days. The Bankruptcy Court dismissed Counts 1, 41 and 56-59, based on allegations of piercing the corporate veil, fraud, and tortious interference of contract, but denied Defendants’ Rule 12 motion to dismiss as to remaining counts, including Counts 2-17, 42 and 50-55, based on allegations of breach of fiduciary duty and unjust enrichment.

The Trusteed sued Defendants, who were more than a dozen individuals and entities associated with other Opus entities relating to Debtor’s founder Gerald Rauenhorst. The Debtor was a Delaware limited liability company. The Trustee alleged that the Defendants permitted the Debtor to be continually undercapitalized from the time of its founding and was often out of compliance with its loan covenants. The Trustee further alleged that the Debtor transferred its profitable assets to other Opus entities, leaving the Debtor straddled with loans, and was never able to thrive on its own. The Trustee sought recovery relating to the assignment of “Presidents’ Deals” that allowed the presidents of certain Defendants to take certain construction projects from the Debtor for their own benefit. The Trustee alleged that Rauenhorst acted in his own self-interest prior to the bankruptcy filing on June 1, 2009 that entitles the Trustee to recovery based upon various theories of liability.

On June 30, 2011, the Trustee filed a complaint, as subsequently amended, that involved six (6) causes of action that were the subject of Defendants’ motion to dismiss: piercing of the corporate veil, breach of fiduciary duty and aiding and abetting breach of fiduciary duty, fraud, unjust enrichment, tortious interference and conversion.

Piercing of the Corporate Veil – The Trustee sought to pierce the corporate veil between the Debtor and Opus, L.L.C., alleging that the two entities were a “single economic entity” under an alter-ego theory, as required by Trevino v. Merscorp, Inc., 583 F.Supp. 2d 521, 528 (D.Del. 2008).[1]

Based on this test, the Bankruptcy Court concluded that the allegations of the Complaint were insufficient to support piercing the corporate veil between the entities. The allegations related to the corporate formalities between two defendants – Opus Corp. and Opus, L.L.C. While the Trustee was able to allege that Debtor was left undercapitalized and thus, allege one element of the single economic entity test, the Court nevertheless, dismissed Count 1 of the Amended Complaint because, as plead, it was insufficient to meet the Trevino test. [2]

Breach of Fiduciary Duty and Aiding and Abetting Breach of Fiduciary Duty – Defendants sought to dismiss nine (9) counts based on breach of fiduciary duty and nine (9) counts based on related aiding and abetting. To support their motion, the Defendants relied upon the LLC Agreement which contains a clause exculpating the Defendants for any breach of fiduciary duty of care and/or loyalty. The Court ruled that the Defendants owe the Debtor duties derived from Delaware common law, independent of the LLC agreement. Further, an exculpatory clause is an affirmative defense that does not generally form the basis under Rule 12(b)(6).

Fraud – The Bankruptcy Court dismissed the fraud counts (Count 58 and 59) because the Trustee failed to meet the heightened pleading requirement under Civil Rule 9(b). The Trustee failed to allege more than the Debtor’s parent entities would “be there” to support the Debtor financially. Without more, the Court dismissed the fraud counts.

Unjust Enrichment – The Bankruptcy Court denied the motion to dismiss as to Counts 52-55 because the Trustee’s claims were not based on a contract that governs the relationship between the parties that would provide the rights available therein. Rather, here, the fiduciary duties alleged to be owed under the LLC Agreement are the same under common law as under a corporate charter. Op. at 23. Citing William Penn P’Ship v. Saliba, the Court held that while such duties may be modified or eliminated by an LLC agreement, they are not created by it. 13 A.3d 749, 756 (Del. 2011). Therefore, the causes of action were not based on the parties’ contract.

Tortious Interference and Conversion – The Defendants argue that the Trustee lacks standing to bring a direct claim and failed to plead a derivative claim with particularity to survive their motion to dismiss. The Bankruptcy Court agreed. First, the Court concluded that the Trustee had no standing to bring a direct claim as the sole member of Opus East Management, L.L.C. (“OEM”), a wholly-owned subsidiary of the Debtor, but not the Debtor itself because “[a] shareholder has no personal or individual right of action against a third party for the acts causing injury to a corporation” Op. at 25, citing Continental Grp., Inc. v. Justice, 536 F.Supp. 658, 660 (D.Del. 1982). Next, the Court concluded that the Trustee’s failed to sufficiently plead that he was permitted to bring a derivative action on behalf of OEM. The Trustee failed to allege that he made a demand on OEM to bring a cause of action or explain any reason why he did not, in order to permit a derivative claim.

(1) According to the Court, the following factors must be sufficiently pled by the plaintiff: (1) undercapitalization; (2) failure to observe corporate formalities; (3) nonpayment of dividends; (4) the insolvency of the debtor corporation at the time; (5) siphoning the corporation’s funds by the dominant stockholder; (6) absence of corporate records; and (7) the fact that the corporation is merely a façade for the operations of the dominant stockholder or stockholders. Op. at 14 (citing Trevino, 583 F. Supp. 2d at 528-29; United States v. Pisani, 646 F. 2d 83, 88 (3d Cir. 1981)).

(2) Prior to deciding the issues relating to Trustee’s allegations as to piercing the corporate veil, the Court held that it would take a “permissive approach” to Rules 12(g) and 12(h)(2) and would heard arguments as to dismissal of certain counts of Trustee’s Amended Complaint in order to avoid duplication of motions and avoid unnecessary delays, although the Defendants’ original motion to dismiss did not include dismissal of this claim.

Court Grants Motion to Dismiss for Lack of Subject Matter Jurisdiction and Premature Request for Declaratory Relief

Morris James Delaware — Wed, 17 Oct 2012 10:52:10 -0500

Washington Mutual, Inc. v. XL Specialty Insurance Company (In re Washington Mutual, Inc.), Bankruptcy Case No. 08-12229 (MFW), Adv. No. 12-50422 (MFW) (October 4, 2012) (J. Walrath)

The background is relatively complex and is summarized in short-form here to include only facts applicable to the adversary proceeding. Washington Mutual, Inc. (“WMI”) is a bank holding company that formerly owned Washington Mutual Bank (“WMB”). In early 2008, WMI purchased $250 million of coverage under twelve insurance policies (the “2008-09 Policies”) for WMI and its directors and officers for claims made from May 1, 2008 to May 1, 2009. Shortly before the seizure of WMB by the Office of Thrift Supervision on September 25, 2008, WMI made a downstream capital contribution of $500 million to WMB (the “September 2008 Downstream”). WMI and WMI Investment Corp. (collectively, the “Debtors”) filed voluntary petitions for relief on September 26, 2008 under chapter 11 of the Bankruptcy Code.

The Official Committee of Unsecured Creditors investigated the September 2008 Downstream and, on October 13, 2011, sent a demand letter to the directors and officers of WMI (collectively, the “D&O’s”) asserting claims related to the September 2008 Downstream. In response to the demand letter, several of the D&O’s and WMI sought coverage for the asserted claims under the 2008-09 Policies, but on December 22, 2011, XL Specialty Insurance Company denied coverage.

On February 24, 2012, the Court confirmed the Debtors’ Seventh Amended Plan of Reorganization (the “Plan”), which, among other things, established a contingent reserve of $65 million for the D&O’s, of which $55 million was set aside for defense costs associated with the September 2008 Downstream claims. On March 15, 2012, the Trust filed a Complaint against the issuers of the 2008-09 Policies (the “Defendants”) for (1) breach of contract, (2) tortious breach of the duty of good faith and fair dealing, (3) a declaratory judgment that the Defendants are not subrogated to the indemnity claims of the D&O’s, and (4) equitable subordination of any subrogated claims the Defendants might have.

On May 7, 2012, the Defendants filed a motion to dismiss, arguing that, inter alia, the Court lacked subject matter jurisdiction over the first two claims and the relief sought in the second two claims was declaratory and premature. The Court agreed with the Defendants and granted the motion to dismiss.

First, the Court discussed the jurisdictional issues, finding first that it had jurisdiction to determine whether it possessed subject matter jurisdiction over the adversary proceeding. The parties were in agreement that, of the types of potential bankruptcy court jurisdiction (cases under title 11, proceedings arising under title 11, proceedings arising in a case under title 11, and proceedings related to a case under title 11), if the Trust’s claims fell within the Court’s jurisdictional grasp, it was only under “related to” jurisdiction. Noting that the Court’s jurisdictional reach post-confirmation is limited to claims having “a close nexus to the bankruptcy plan or proceeding,” such as one which “affects the interpretation, implementation, consummation, execution, or administration of a confirmed plan or incorporated litigation trust agreement,” the Court determined that it lacked jurisdiction over the first two claims.

The Trust argued that: (i) the “close nexus” test was satisfied by virtue of the fact that the creditors would receive more money from the $55 million reserve, (ii) the Defendants’ raising the “insured v. insured” exclusion required the Court to interpret the Confirmation Order, and (iii) the Plan expressly provided that the Court would retain jurisdiction “to determine any and all motions, adversary proceedings, applications, and contested or litigated matters that may be pending on the Effective Date.”

The Court rejected the Trust’s arguments, holding that (i) the “mere possibility of a gain or loss of trust assets” is insufficient to confer post-confirmation bankruptcy jurisdiction over “related” matters, particularly with respect to the Debtors’ case, in which the Plan provided for payment in full (with interest) to most unsecured creditors through a $7 billion distribution, which would not be substantially affected by the $55 million trust account, (ii) an interpretation such as that potentially required by the Defendants’ asserted “insured v. insured” defense does not rise to the level of “interpretation” required to confer post-confirmation jurisdiction because “the interpretation is not essential to the integrity of the Plan and its implementation” and because the interpretation could be accomplished by other courts of competent jurisdiction, and (iii) the Plan’s failure to specifically describe the cause of action at issue, in conjunction with the lack of required “close nexus,” rendered the general jurisdictional provision in the Plan ineffective.

Second, the Court held that the Trust could not (at least at this time) assert a claim for subrogation because such claim existed only to the extent of actual payment under the policies, and the Defendants refused to pay under the policies and had yet to file a proof of claim, much less an “allowed” claim subject to equitable subordination under 11 U.S.C. Section 510(c).

Accordingly, for the reasons set forth more fully above, the Court granted the motion to dismiss.

Ad Hoc Noteholder Committee's Fees Not Entitled To Administrative Priority Pursuant To 11 U.S.C. § 503((b)(3)(D) Even Though Debtors Stipulated To Their Administrative Priority

Morris James Delaware — Tue, 16 Oct 2012 14:29:12 -0500

In re: Tropicana Entertainment LLC, et al., No. 10-3970 (Third Circuit), August 31, 2012 (Ambro, Chagares and Aldisert) (2012 WL 3776531) (Not Precedential)

On December 12, 2007, the New Jersey Casino Control Commission revoked the gaming license of Tropicana Entertainment LLC and its affiliate debtors (“Debtors”) as a result of the gross mismanagement of one of its board members, William J. Yung. As a result of the license revocation, Debtors’ defaulted on their loan and suffered severe financial difficulty. The Ad Hoc Consortium of Senior Subordinated Noteholders (the “Consortium”) demanded that Yung resign. Yung refused and subsequently, the Debtors filed their Chapter 11 petitions for bankruptcy protection in the U.S. Bankruptcy Court for the U.S. District Court of Delaware on May 5, 2008.

On May 6, 2008, the Consortium filed an emergency motion for an appointment of a Chapter 11 trustee (“Trustee Motion”) in an effort to remove Yung from management and prevent further adverse regulatory action that may have reduced the value to Debtors’ estates. The Trustee Motion was resolved via settlement that resulted in Yung agreeing to resign from his management positions. The settlement agreement also included a clause in which Debtors acknowledged that the expenses incurred by the Consortium relating to the Trustee Motion “represented a substantial contribution to the Debtors’ estate.”

A plan of reorganization was negotiated over the following year and was confirmed on May 5, 2009. Thereafter, the Consortium filed an application for reimbursement of its expenses incurred in connection with the Trustee Motion (the “Application”), arguing that it was entitled to reimbursement of $2,434,474 in legal fees that it incurred because the amount represented a substantial contribution to the Debtors’ estate pursuant to 11 U.S.C. § 503(b)(2)(D) and (b)(4). The Bankruptcy Court denied the Application, finding that while the Trustee Motion “turned out to have a beneficial effect on the estates,” the “action was taken largely in the self-interest of the movants here and would have been taken whether there would have been estate reimbursement or not.” The District Court affirmed the Bankruptcy Court and the appeal to the Third Circuit Court of Appeals followed.

Affirming the District Court, the Third Circuit concluded that Consortium failed to present evidence that demonstrated that it would not have incurred their expenses but for the promise of reimbursement by the Debtors. In “determining whether there has been a ‘substantial contribution’ pursuant to section 503(b)(3)(D), the applicable test is whether the efforts of the applicant result in an actual and demonstrable benefit to the debtor’s estate and the creditors.” Lebron v. Mechem Fin. Inc., 27 F.3d 937, 944 (3d Cir. 1994). The Bankruptcy Court, applying Lebron, properly considered that the Consortium presented no evidence to suggest that it would not have prosecuted the Trustee Motion absent the promise of reimbursement of the estate and failed to overcome the presumption that it acted in its own self-interest.

To read more about the above, please click on the following link:

http://bankruptcy.morrisjames.com/2010/10/articles/case-summaries/substantial-contribution-claim-denied-where-motivated-by-self-interest/