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Showing 169 posts in Case Summaries.
In the on-going saga of the Conex v. Car-Ber Testing, Inc. adversary proceeding (see our prior post here), Judge Leonard P. Stark, of the United States District Court for the District of Delaware, denied the Chapter 7 Trustee’s request to allow a direct appeal to the Third Circuit Court of Appeals of the Bankruptcy Court's opinion that permitted the defendant in a preference action to use the new value defense – even though the “new value” had been paid post-petition. Stanziale v. Car-Ber Testing, Inc., Civ. No. 14-cv-179-LPS (D. Del. Mar. 23, 2015)
The basis of the underlying opinion was the Third Circuit’s opinion in the case of Friedman’s Litigation Trust v. Roth Staffing Companies LP, Case. No. 13-1712 (see our Friedman’s blog post here). More ›
On March 13, 2015, the United States District Court for the District of Delaware, in the case of Walnut Creek Mining Company v. Cascade Investment, LLC, Civ. No. 14-738-LPS (In re Optim Energy, LLC, Bankr. Case No. 14-10262-BLS), affirmed an order of the United States Bankruptcy Court for the District of Delaware which denied derivative standing to the debtor’s largest unsecured creditor, Walnut Creek Mining Company (“Walnut Creek”). Walnut Creek had sought to file an adversary proceeding seeking to recharacterize or subordinate Cascade Investment, LLC’s (“Cascade”) secured debt. Cascade had guaranteed the debtor’s debt to Wells Fargo. When the debtor breached the agreement, Cascade paid Wells, and, by virtue of a reimbursement agreement with the debtor, became a secured creditor of the debtor. More ›
On March 12, 2015, Judge Leonard P. Stark, of the United States District Court for the District of Delaware denied a defendant's motion to withdraw the reference from the Bankruptcy Court.
In the case of Richard W. Barry, as Chapter 11 Trustee v. Santander Bank, N.A., Civ. No. 14-677-LPS, Adv. Pro. No. 14-50020, (In re Liberty State Benefits of Delaware, Inc., Case. No. 11-12404), the Defendant had moved to withdraw the reference from the Bankruptcy Court to the District Court. The Defendant argued that withdrawal was appropriate under either the mandatory or permissive tests of 28 U.S.C. §157(d). The Complaint asserted violations of federal and state RICO acts, claims under the New Jersey Consumer Fraud Act, and common law claims for negligence, aiding and abetting breaches of fiduciary duty, and unjust enrichment. More ›
U.S. District Court of Delaware Reverses and Remands A Bankruptcy Settlement Effected With No Notice
On January 16, 2015, Chief Judge Leonard P. Stark of the United States District Court for the District of Delaware issued an opinion that reversed an order of the Delaware Bankruptcy Court that approved a settlement, and remanded to the Bankruptcy Court for further proceedings.
In the underlying bankruptcy case, debtor ManagedStorage International, Inc., and certain affiliates, filed bankruptcy in February 2009, and immediately filed a motion to sell substantially all of their assets. Avnet Inc. objected to the sale and asserted a purchase money security interest in certain of the assets. In order to resolve the objection, the debtors, creditors’ committee and Avnet entered into a stipulation requiring the debtor to segregate and maintain the Avnet collateral.
Nearly a year later, Avnet filed a motion asserting that the debtors had not segregated the collateral as required by the earlier stipulation and moved to enforce the earlier stipulation (the “Enforcement Motion”). The Enforcement Motion was noticed and set for a hearing. Shortly before the hearing, the debtors filed an agenda indicating that the Enforcement Motion was “going forward” but also indicating that the debtors, the buyer and Avnet were working on a stipulation (the “Stipulation”) to resolve the Enforcement Motion.
Ultimately, the negotiated Stipulation proposed that Avnet would be paid nearly $1 million, and included broad releases of Avnet by the debtors. On the scheduled day of the original hearing on the Enforcement Motion, the debtors filed an amended agenda, indicating that the parties would be submitting the Stipulation under certification of counsel, and that the hearing was cancelled. The amended agenda was served on all parties in interest – including the creditors’ committee.
Avnet filed the certification of counsel along with the proposed Stipulation, and the Bankruptcy Court entered an order approving the Stipulation the same day. There was no hearing.
Six months later, the Bankruptcy Court converted the cases from chapter 11 to chapter 7, and the Chapter 7 Trustee filed a preference action against Avnet under 11 U.S.C. §§ 547 and 550. Avnet filed a motion to dismiss the preference based upon the debtors’ broad releases granted to Avnet in the Stipulation. The Bankruptcy Court dismissed the preference action, and the Chapter 7 Trustee appealed.
Among other reasons not discussed here, the Chapter 7 Trustee challenged the Bankruptcy Court’s approval of the Stipulation on the basis that adequate notice of the Stipulation, including the broad releases, had not been provided. The District Court agreed, finding that “no notice was given for the Stipulation . . . and particularly of the broad language used in the general release provision.” In light of the fact that there was “no notice” of the terms of the Stipulation, the Bankruptcy Court had committed “a clear error of fact” in finding that it was “probable” that the unsecured creditors committee had notice of the Stipulation.
Moreover, the District Court held that the Bankruptcy Court had not evaluated the Stipulation under Fed. R. Bankr. P. 9019, while also acknowledging that the Bankruptcy Court had not been asked to do so. Critical to the District Court was that the Enforcement Motion did not deal with issues like releases. Rather, the Enforcement Motion only addressed disputed issues over segregation of collateral. Therefore “the interested parties which were not parties to the Stipulation . . . , did not assent to such a waiver.”
The District Court therefore remanded with instructions that the Bankruptcy Court consider the Stipulation in light of In re Martin.
While it remains to be seen if this case will impact how parties deal with each other when resolving motions, it might be wise to consider whether one’s resolution of a motion seeks relief that goes well beyond the relief sought in the motion itself, thus necessitating additional notice, or perhaps a 9019 motion. Otherwise, one may find that a last minute stipulation, submitted as a settlement, may later be challenged or possibly undone by a Chapter 7 Trustee.
Look here later for an update to this post once the Bankruptcy Court reviews the Stipulation on remand.
On December 18, 2014, Bankruptcy Judge Christopher Sontchi issued an opinion (a copy of which is found here) granting summary judgment in favor of defendant and against trustee who sought to avoid and recover $1,181,583.84 as preferential transfers pursuant to 11 U.S.C. sections 547 and 550. The Court granted the defendant's motion seeking summary judgment that the preferential transfers, if any, were not avoidable because they were made in the ordinary course of business under section 547(c)(2)(A) of the Bankruptcy Code. Specifically, based on the length of relationship between the debtor and defendant, the timing of payments, and the historical billing practices, the Court concluded that the alleged transfers were made in the ordinary course of business and are therefore not voidable pursuant to section 547(c)(2)(A).
Charles A. Stanziale, Jr. (the “Trustee”) of the bankruptcy estates of Conex International, LLC (“Conex”), formerly known as Conex International Corporation; Conex Holdings, LLC; and Advance Blasting & Coating (collectively, the “Debtors”) sought to avoid and recover seven transfers totaling $1,181,583.84 (the "Transfers") under Bankruptcy Code sections 547 and 550 against defendant Industrial Specialists Inc. a/k/a Industrial Specialists, LLC (the "Defendant") allegedly made in the 90 days preceding the Debtors' filing of Chapter 7 bankruptcy (the "Preference Period"). Following discovery, the Defendant moved for summary judgment under two theories that the preferential Transfers, if any, were not avoidable because they (i) were made in the ordinary course of business under section 547(c)(2)(A); and/or (ii) were barred by the Texas Construction Trust Fund Act. Because the Court determined that the Transfers were not avoidable based on section 547(c)(2)(A), the Court did not rule on whether the action was barred under the Texas Construction Trust Fund Act.
In support of its defense that the payments occurred in the ordinary course of business, the Defendant claimed that each transfer in the Preference Period was (i) received squarely within the historic range of days after invoice and was consistent with the parties’ prior course of dealings; (ii) was made on account of debts incurred by the parties in the ordinary course of business; and (iii) was a continuation of normal financial relations between the Debtors and Defendant. The Court noted that the determination of whether a creditor has met its burden under section 547(c)(2)(A) is a subjective test, “calling for the Court to consider whether the transfer was ordinary as between the debtor and the creditor.” Op. at 9-10. The Court then pointed to the "myriad of factors in this test, including: (1) the length of time the parties engaged in the type of dealing at issue; (2) whether the subject transfers were in an amount more than usually paid; (3) whether the payments at issue were tendered in a manner different from previous payments; (4) whether there appears to have been an unusual action by the debtor or creditor to collect on or pay the debt; and (5) whether the creditor did anything to gain an advantage (such as additional security) in light of the debtor’s deteriorating financial condition." Op. at 11. The Court noted that no one factor is determinative and it must "first determine what the ordinary course of business was and then compare the preferential transfers to it." Op. at 11.
The Court found that the parties had been doing business for approximately 16 months and this duration was sufficient for the Court to determine the ordinary course of business between them. Op. at 12. Next, in comparing the Transfers to the transfers made in the course of dealings between the parties prior to the Preference Period, the Court, while placing particular importance on the timing of payment, noted that "this inquiry is intensely fact specific" but small deviations in timing might not preclude a finding of ordinariness. Op. at 13. The Court disregarded the Trustee's "dollar-weighted days" ("DSO") analysis (see Op. at 13-15 for discussion), but rather looked to the 20 transfers made before the Preference Period and compared them to the Transfers. Even considering four "outlying" payments (made 95, 81, 78, and 77 days after invoice), which increased the difference in the average days to pay between the pre-Preference Period and Preference Period payments by 7 days, the Court found that the timing of the payments was still in the ordinary course of business.
Next, the Trustee asserted that the Defendant did not meet its burden because it did not identify the payee because payments not made out to any other entity other than the named Defendant should not be included in the historical period. The Defendant, however, submitted uncontroverted evidence in support of its name change to allow the Court to conclude that the payments made were to the same entity to be considered in its analysis. Finally, the Court found no evidence of change in the amount of the subject Transfers such that payments in the Preference Period were in an amount more than usually paid; nor that the Transfers were tendered in a different manner from previous payments; nor that the Defendant took any unusual action to collect such debts from the Debtor; nor that the Defendant did anything to gain an advantage as a result of the Debtor’s deteriorating financial condition.
Stanziale v. Industrial Specialists Inc. a/k/a Industrial Specialists, LLC (In re Conex Holdings, LLC), Adv. Proc. No. 12-51170 (CSS) (Bankr. D. Del. Dec. 18, 2014)
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Authored by Jeffrey R. Waxman
This article was originally published in American Bankruptcy Institute Journal, Vol. XXXIII, No. 3, March 2014.
The ABI Journal published a pair of articles in the March 2012 issue addressing the U.S. Bankruptcy Court for the District of Delaware’s decision in Friedman’s Liquidating Trust v. Roth Staffing Companies LP . This article provides an update following the recent decision of the Court of Appeals for the Third Circuit affirming the decisions of the bankruptcy and district courts.
Ninth Circuit Reverses § 524(g) Plan Confirmation, Upholds Injunction of Insurer Contribution Rights
Friedman's: The Gift That Keeps on Giving. Judge Christopher S. Sontchi Grants Summary Judgment For Defendant Based on Third Circuit's Affirmation Of His Honor's Friedman's Opinion
In a memorandum opinion filed December 27, 2013, Judge Christopher S. Sontchi, Bankruptcy Judge for the U.S. Bankruptcy Court for the District of Delaware, granted summary judgment for a preference defendant based upon the December 24, 2013 precedential opinion of the United States Circuit Court of Appeals for the Third Circuit, Friedman’s Litigation Trust v. Roth Staffing Companies LP, Case. No. 13-1712 (see our Friedman's blog post here).
Noting that Friedman’s had affirmed his opinion holding that preference analysis is fixed as of the petition date, Judge Sontchi held in Car-Ber that the fact that new value invoices incurred in the days leading up to bankruptcy had been subsequently paid, post-petition, by a third-party did not strip the ability of the preference defendant to use the invoices as new value in the preference action.
The plaintiff’s expert had opined that the defendant’s preference exposure exceeded $80,000, but the expert had given the defendant no credit for new value that had been provided to the debtor pre-petition, but had been paid by a third-party after the petition. If the new value was allowed to be used as a defense, the defendant would have no liability.
Noting that the Third Circuit had just recently affirmed the idea that the preference analysis should be fixed as of the petition date, Judge Sontchi gave no credence to the Trustee’s position. Moreover, Judge Sontchi rejected the Trustee’s argument that the Third Circuit’s opinion should be limited to wage claims. Instead Judge Sontchi held that the Third Circuit had carved out only two exceptions neither of which was implicated in Car-Ber. So Judge Sontchi entered summary judgment in favor of the defendant.
A copy of Judge Sontchi’s Memorandum Opinion is attached here.
Stanziale v. Car-Ber Testing, Inc. (In re Conex Holdings, LLC), Adv. Pro. No. 12-51132 (Bankr. D. Del. Dec. 27, 2013)
Happy Holidays to Preference Defendants: Third Circuit Holds Post-Petition Payments Do Not Reduce New Value Defense in Subsequent Preference Action
In this precedential decision by the United States Court of Appeals for the Third Circuit, the Court in Friedman’s Liquidating Trust v. Roth Staffing Companies LP (Case No. 13-1712) held that “where ‘an otherwise unavoidable transfer’ is made after the filing of a bankruptcy petition, it does not affect the new value defense.”
The opinion, filed December 24, 2013, examined closely two prior decisions of the Circuit: In re New York City Shoes, 880 F.2d 679 (3d Cir. 1989) and In re Winstar Communications, Inc., 554 F.3d 382 (3d Cir. 2009). The recent opinion found that the language of the new value test in New York City Shoes was mere dicta. The Court also recognized that in the Winstar case, the Court had called the New York City Shoes dicta a “holding.” However, the Court noted that articulation of the new value three-part test in New York City Shoes was wholly unnecessary to the decision either in that case or in Winstar. Accordingly, the Friedman’s Court found that it was not bound by either decision.
In its analysis, the Court focused on the “contextual indicators” in the Code that point to the petition date as being the operative cutoff date for the new value defense. First, the Court noted that Section 547 is captioned “Preferences” and concerns transfers made during that time period. “It would make sense that the calculation of the amount of the preference, and application of any new value reduced by subsequent transfers, would relate to that time period.”
The Court also agreed that the “hypothetical liquidation test” was to be performed as of the petition date. That too, points to the cutoff period being the petition date for purposes of calculating new value.
Likewise, the Court found persuasive the fact that the statute of limitations for preference actions begins to run as of the petition date. This “suggests that the calculation of preference liability should remain constant post-petition.” To hold otherwise means that the “calculation of preference liability could change depending on when the preference avoidance action was filed.”
The Court also examined the policies behind Section 547 of the Code, including the policy of encouraging trade creditors to continue deadline with troubled debtors, and to treat fairly those creditors who have replenished the estate after receiving transfers. Notably, the Court rejected the Liquidating Trust’s “double dipping” argument, i.e. the argument that the creditor, post-petition, receives payment and yet, at the same time gets to use the invoices (which were unpaid on the petition date) as new value. The Court noted that such an argument was misleading, as it implied that the creditor, when paid post-petition, was paid for goods or services never delivered or received.
This is a decision well worth a full read. Accordingly, we have attached a copy here. Happy Holidays.
Friedman's Liquidating Trust v. Roth Staffing Companies LP (In re Friedman's Inc.), Case No. 13-1712 (3d Cir.)