The realities of the bankruptcy venue provisions require potential debtors and their advisers to prudently weigh the legal significance of a bankruptcy filing in various courts. In a recent decision, U.S. Bankruptcy Judge Kevin Gross of the District of Delaware reviewed the Bankruptcy Code’s venue provisions and considered the various interests of a bankruptcy estate’s stakeholders when he transferred a “first-filed” bankruptcy petition from Delaware’s bankruptcy court to the court’s counterpart in the Northern District of Illinois, in In re Caesars Entertainment Operating (Bankr. D. Del. Feb. 2, 2015). Continue Reading
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).
In ruling that a direct appeal to the Third Circuit was unwarranted, the District Court’s opinion concluded that there is no conflicting law on the issue. Rather, the Friedman’s decision “squarely applie[d] to this case.” Op. at 6. “Appellant is not arguing the absence of controlling law; rather he is arguing the absence of a decision that adopts his position.” Op. at 5-6.
The Court also found lacking the Trustee’s argument that public interest was invoked because the underlying opinion could affect 16 other pending adversaries. “The fact that an appeal will affect other parties to Debtors’ bankruptcy does not establish an issue of public importance.” Op. at 6.
Finally, the Court was not persuaded that allowing a direct appeal would materially advance the case. [T]here is nothing extraordinary or urgent about this situation that recommends departing from the standard appellate process. The matter is primed for briefing before this Court; whereas, the Third Circuit must first review and accept a certification request before the appeal can proceed in that Court.” Op. at 7. “The Court does not find that certification will materially advance this case.” Op. at 7.
On March 23, 2015, Karmaloop, Inc., and one of its affiliates, KarmaloopTV, Inc., filed voluntary petitions under chapter 11 of the Bankruptcy Code in Delaware. Karmaloop is based in Boston Massachusetts. The cases are docketed as case 15-10635, and have been assigned to The Honorable Kevin Gross.
The Declaration of Brian L. Davies, Jr. was filed in support of the petitions and various first-day motions. Mr. Davies is the Managing Director at CRS Capstone Partners, LLC, and is currently engaged as the Chief Restructuring Officer of the debtors. Mr. Davies had previously served as the interim CFO for Karmaloop.
According to Mr. Davies’ declaration, Karmaloop was founded in 1999 and “specializes in the sale of global streetwear fashion and culture.” According to Mr. Davies, the debtors’ businesses “have fallen victim to the shift in retail purchasing that is occurring, especially among retailers in the young adult age bracket, as such consumers have moved away from purchasing traditional brands.” Mr. Davies also cites to lack of capital, inability to fully adapt to business strategies that result in better margin opportunities, and over-ambitious expansion efforts, as reasons for the debtors’ financial crisis.
The Davies Declaration notes that the debtors are in default under their prepetition senior facility. As a result of the “rapidly deteriorating liquidity position,” the debtors were forced to file chapter 11 with a goal of salvaging their brands and business through a going concern sale. To meet those objectives, Mr. Davies indicates in his declaration that the debtors’ prepetition senior lenders have proposed to provide debtor-in-possession financing.
In addition to the senior debt facility, the debtors have two levels of junior secured debt, according to Mr. Davies. Approximately $10 million is owed to Eastward Capital Partners V, L.P., and another $15 million of debt owed to other junior and subordinated secured lenders. In addition to certain trade debt, the Debtors also owe certain creditors unsecured amounts on promissory notes and loans. These total approximately $22 million.
ComCap Acquisition LLC, which is an affiliate of one or more of the pre-petition senior lenders, has agreed to act as stalking horse for the proposed 363 sale, according to Mr. Davies.
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.
In considering Walnut Creek’s motion for derivative standing below, the Bankruptcy Court had determined that Walnut Creek’s complaint had failed as a matter of law to state claims against Cascade. On appeal to the USDC, Walnut Creek claimed that the Bankruptcy Court had failed to consider certain factual allegations that supported the complaint. Cascade countered that the Bankruptcy Court had properly rejected the factual allegations in the proposed complaint and noted further that the expiration of the “challenge period” set forth in the final DIP order should foreclose the filing of any action to challenge Cascade’s prepetition debt. The USDC reviewed the Bankruptcy Court’s findings of fact for clear error and exercised plenary review over questions of law.
First the USDC confirmed that derivative standing requires a party to show three elements: (1) a colorable claim, (2) the trustee’s unjustifiable refusal to pursue the claim, and (3) the permission of the bankruptcy court to initiate the action. Below, the Bankruptcy Court had dismissed Walnut Creek’s motion because the Court found that the complaint did not articulate a colorable claim for recharacterization or equitable subordination. The USDC reviewed these findings de novo.
The USDC found that Walnut Creek’s allegation of inadequate capitalization of the debtor was “insufficient, standing alone, to state a claim for recharacterization.” Further, even with the additional allegations made by Walnut Creek to the extent that a prudent lender would not have guaranteed the debtor’s obligations to Wells Fargo, the USDC said that had “no impact on Cascade’s and the debtor’s intention at the time of the transaction. In short, the Cascade guarantee was required by Wells Fargo as a condition of the extension of the credit facility to the Debtor. While perhaps it might have been imprudent for Cascade to guarantee the debtor’s debt, it did not impact Cascade’s and the debtor’s intent at the time of the transaction for this to be a debt transaction and not a capital infusion.
Moreover, the USDC was not impressed that the debtor and Cascade had treated transactions in 2010 and 2011 as equity transactions. “How the Debtor and Cascade treated two transactions in 2010 and 2011 has no probative value as to their intent as of the time they entered into the Reimbursement Guaranty in 2007.”
Addressing Walnut Creek’s claim of equitable subordination, the USDC did not find any inequitable conduct on the part of Cascade. Noting Walnut Creek’s argument that “the inequitableness of the June 1, 2007 transaction was that Cascade designed the transaction to prioritize its interest ‘senior to trade creditors’ and ‘ahead of other bona fide creditors of the business,’ the Court was unpersuaded. “This merely describes the mechanics of secured versus unsecured lending.” Moreover, the Court observed, “[T]here is no dispute that Cascade actually bound itself as a guarantor to … Wells Fargo . . . , and – upon the Debtor’s default – actually paid the amount outstanding on that debt.”
As a result of the findings that Walnut Creek’s complaint failed to state claims for equitable subordination and recharacterization, the USDC affirmed the Bankruptcy Court’s order dismissing Walnut Creek’s motion for derivative standing. The USDC did not address Cascade’s additional defense that expiration of the DIP Order’s challenge period would also have precluded the filing of the adversary action.
On March 17, 2015, following the lead of Quicksilver Resources Inc., USA Synthetic Fuel Corporation filed its own voluntary chapter 11 case in Delaware. A copy of the petition is here. The case is docketed as case no. 15-10599, and has been assigned to The Honorable Mary F. Walrath.
The Declaration of Dr. Steven C. Vick was filed in support of the petition and other first-day motions. Dr. Vick is the CEO and President of USA Synthetic Fuel Corporation. According to the Vick Declaration, “The Debtors are an environmentally focused, development state energy company pursuing low-cost, clean energy solutions through the deployment of proven Ultra Clean Btu Converter technology.” The technology converts lower-value solid hydrocarbons, such as coal, into higher-value energy products.
Dr. Vick states in the declaration that in 2012 the debtors obtained approximately $36.6 million in aggregate principal amount of secured debt financing, and used those funds to procure land and other materials for ultimate construction of an Ultra Clean Btu Converter in Lima, Ohio.
Efforts to lauch a $700 million bond and equity offering were cancelled when the Debtors failed to make certain payments under their prepetition secured indebtedness as a result of liquidity issues, mounting liabilities to employees, tax authorities, professional advisors, an appraisal of a Coal Asset, and an SEC investigation into certain accounting practices and internal controls.
In August 2014, the Debtors received a term sheet from their prepetition secured lenders which suggested a transaction in which the lenders would purchase substantially all the assets of the debtors in a bankruptcy 363 sale. By March 2015, the debtors had found no viable alternative to the proposed transaction. As a result, the debtors have entered bankruptcy with the purpose of auctioning their assets off with the prepetition lenders acting as the stalking horse.
On March 17, 2015, Quicksilver Resources Inc., a Texas based oil and natural gas producer and developer, and 13 of its affiliates, filed chapter 11 bankruptcy petitions in the United States Bankruptcy Court for the District of Delaware. The petition lists assets of $1.2 billion and liabilities of $2.35 billion. The case is docketed as case no. 15-10585.
Vanessa Gomez Lagatta, Sr. VP, CFO and Treasurer of Quicksilver, filed a declaration in support of the petitions and first-day motions. In her declaration, Ms. Lagatta states that as of December 31, 2014, the debtors had approximately 585,000 net acres of oil and gas properties with proven reserves of 1.1 Tcfe and over 2000 net producing wells. She also notes that the debtors had, as of December 31, 2014, a consolidated net loss for the year of $103.1 million.
The Lagatta Declaration reveals that the debtors have 1.098 billion in secured debt facilities as of the petition date. The debtors also have three series of unsecured notes (the 2019, 2021 and Senior Subordinated notes), aggregating approximately $975 million in what the Legatta Declaration characterizes as “unsecured senior obligations.”
In the 3rd quarter of 2014, the debtors launched a marketing process for their assets. Notwithstanding their efforts, none of the bids produced any viable options for asset sales. The unsuccessful marketing process, coupled with the recent precipitous drop in commodity prices, potential springing maturities under various credit agreements, and near term liquidity shortfalls helped drive the decision to file the chapter 11 cases.
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.
In making a determination of what causes of action were core and which were non-core, the Bankruptcy Court found that 4 of the causes of action were non-core, and only one action was core. In the District Court, the Defendant argued that withdrawal of the reference was mandatory because it required “substantial and material consideration of federal non-bankruptcy law.” The Defendant also argued that permissive withdrawal was appropriate for “cause shown.”
In ruling on the Defendant’s motion, Judge Stark held that the alleged violations of “federal non-bankruptcy law”, i.e. RICO, were but a “minor portion of the Trustee’s overall complaint.” Moreover, the Court found that even if the RICO count was the primary allegation, Defendant had not met its burden of showing that a decision would require “substantial and material consideration of non-bankruptcy law.” Indeed, the Court found that the Motion to Withdraw was “devoid of any analysis regarding how the facts of the Trustee’s RICO claim will require more than a straightforward application of that law . . . .” Accordingly, the Court found that mandatory withdrawal was not warranted.
Turning to permissive withdraw, the Defendant argued that it would threaten judicial uniformity to permit the Bankruptcy Court to handle issues not involving bankruptcy law. The District Court was again unpersuaded, finding that, while 4 of the 5 matters were non-core (and therefore limiting the Bankruptcy Court to issuing findings of fact and conclusions of law, and no a final judgment), Judge Stark noted that “a Bankruptcy Court is capable of serving in a role similar to that of a magistrate for pre-trial issues in non-core proceedings.” Judge Stark also underscored that the Bankruptcy Court would have a better handle of the matters and issues in the case for addressing the pre-trial issues, given the court’s day to day administration of the bankruptcy case.
The District Court was also not swayed by the Defendant’s argument that withdrawing the reference would reduce forum shopping. The Trustee merely filed the case in the court where the bankruptcy case was pending. “Without more,” Judge Stark noted, “the Court cannot agree with [Defendant] that the Trustee’s actions constitute forum shopping.”
On March 12, 2015, The Standard Register Company, based in Ohio, and several affiliates filed a voluntary chapter 11 bankruptcy petition in Delaware. The case has been docketed as case no. 15-10541, and has been assigned to the Honorable Brendan Linehan Shannon.
In support of the filing, the company has filed the Declaration of Kevin Carmody. Mr. Carmody is identified as the Chief Restructuring Officer for the Company, having been appointed as such on February 27. Mr. Carmody is otherwise a Practice Leader in the professional services firm of McKinsey Recovery & Transformation Services U.S., LLC.
According to Mr. Carmody’s declaration, the Debtors have been working to transform their century old printing goods and printing services business “to achieve success in this new [electronic and web-based] media landscape.” In doing so, the debtors “diversified their services by adding integrated communications capabilities, including mobile and digital media . . . .”
Mr. Carmody expects that in bankruptcy, the debtors will sell their businesses as a going concern. Further, according to Mr. Carmody, the debtors have the full support of their prepetition secured lenders, including that their largest secured lender has agreed to act as a stalking horse for the sale process.
The Debtors have approximately 3500 full time employees, and operate out of 53 production and warehouse facilities in the United States.
According to the Carmody Declaration, the debtors’ operations generated revenues of approximately $904 million in 2014, and $974 million in 2013, while suffering net losses of $64 million and 7.4 million respectively.
On March 10, 2015, Allied Nevada Gold Corp. and thirteen (13) affiliates filed voluntary chapter 11 petitions in Delaware. The petition lists approximately $941.2 million in total assets and $663.7 million in total debts. The case has been docketed as case no. 15-10503, and has been assigned to The Honorable Mary F. Walrath.
According to the Declaration of Stephen M. Jones, CFO of Allied, filed in support of the petitions, the debtors are gold and silver producers engaged in mining, developing and exploring properties in the State of Nevada. They operate primarily through Allied and its wholly owned subsidiary Hycroft Resources and Development, Inc.
As of the bankruptcy filing, according to the Jones Declaration, the debtors had total principal outstanding funded indebtedness of (i) $75 million of borrowings and issued letters of credit under their credit agreement (ii) $58.3 million under a term and security deposit loan agreement, $5.1 million under a “Jacobs Promissory Note” (as defined in the Declaration) and $400 million under the Senior Notes (as defined in the Declaration). The debtors also have various capital lease obligations and trade debt.
The Declaration cites decreasing gold and silver prices, an overleveraged capital structure, exposure under certain cross currency swaps, and capital requirements and delay regarding the Hycroft Mill Expansion Project as reasons leading to the filings.
The debtors hope to reorganize under a pre-arranged plan and restructuring support agreement reached with certain consenting holders of Senior Notes.
On March 5, 2015, Chromcraft Revington, Inc.(“Chromcraft”) and Sport-Haley Holdings, Inc. (“Sport-Haley”) filed voluntary petitions for relief under Chapter 11 of the United States Bankruptcy Code. Copies of the petitions are linked here: Chromcraft petition and Sport-Haley petition. Debtors offer the Declaration of Samuel A. Kidston in support of their petitions. According to Mr. Kidston’s Declaration, Debtors seek to wind down and liquidate Chromcraft.
Chromcraft has two private sales of its property lined up, while it continues to look for buyers for its distribution and warehouse facilities. Through its pre-bankruptcy filing efforts, Chromcraft received two offers for its assets and entered into two separate asset purchase agreements. Chromcraft seeks to sell substantially all of its intellectual property and potentially other assets to Arts And Crafts Industries Ltd. Through an asset purchase agreement with Myron Bowling Auctioneers, Inc., Chromcraft seeks to sell substantially all of its furniture, fixtures and equipment. Chromcraft intends to sell its assets through private sales but will entertain higher offers received prior to the sale hearing. Chromcraft continues to market its two distribution and warehouse facilities for sale. Chromcraft owns a facility in Senatobia, Mississippi and another in Delphi, Indiana.
As of the bankruptcy filing, Chromcraft had outstanding secured debt totaling approximately $9 million and approximately $2 million in outstanding unsecured debt and other obligations. Chromcraft’s secured obligations are to Merchant Factors Corp. (“Merchant”). Mr. Kidston’s declaration indicates that Merchant has a lien on and a security interest in substantially all of Chromcraft’s assets, including Accounts, Books and Records, Inventory, Equipment, and Intangibles as provided in its loan agreements and a mortgages on certain real property.
The cases have been assigned to Bankruptcy Judge Kevin Gross for purposes of administration. Debtors have sought to jointly administer the two bankruptcy cases under case no. 15-10482 (KG).