Delaware Business Bankruptcy Report

Delaware Business Bankruptcy Report

ProNerve Holdings, LLC, A Colorado Based Provider of Intraoperative Neurophysiologic Monitoring (IOM) Files for Chapter 11 Protection

Posted in Delaware Chapter 11 Filings, Delaware Chapter 11 News, Judge Kevin J. Carey, United States Bankruptcy Court - District of Delaware

On February 24, 2015, ProNerve Holdings, LLC and 8 affiliated companies filed voluntary chapter 11 petitions in Delaware.  The case is docketed at 15-10373, and has been assigned to The Honorable Kevin J. Carey.

According to the Declaration of George D. Pillari filed in support of the petition, the Debtors are headquartered in a suburb of Denver, Colorado.  The Debtors provide IOM services to acute care hospitals, health systems, specialty hospitals, ambulatory surgical centers, surgeons and physician groups in more than 25 states.

The Debtors employ over 200 full-time and part-time employees, provided services in nearly 25,000 patient cases in 2014 and, in 2014, had net revenue of approximately $31 million and a net loss of approximately $9 million.

According to the Pillari Declaration, as of the petition date, the Debtors had aggregate outstanding principal amounts under their various loan commitments in excess of $43 million.  In addition, the Debtors have approximately $5.3 million of outstanding unsecured debt, comprised mostly of professional services, trade debt, employee severance and acquisition earnouts.

The Pillari Declaration points to efforts to increase market share through practice acquisitions since 2012 as one of the reasons precipitating the filing:  “Unfortunately, many of these strategic acquisitions have resulted in significant accrued liabilities on account of earnout obligations, which have affected ProNerve’s balance sheet, including its ability to timely service the loan commitments . . . . Additionally, there has been a high rate of turnover among ProNerve’s senior management, which has created operational difficulties.  For example, over the past 3 years, ProNerve has had four different CEOs . . . and four different CFOs.”

In the bankruptcy case, ProNerve anticipates attempting to sell substantially all its assets to a stalking horse bidder.  The bidder previously purchased the loan commitments and intends to credit bid for the assets.  The current form of asset purchase agreement proposes a purchase price of $35 million in the form of a credit bid, plus assumption of certain liabilities.  The Debtors are seeking permission for an auction to occur on March 27, with a sale order to be entered not later than March 31.

Allen Systems Group, Inc. and Certain Affiliates File a Prepackaged Chapter 11 Case

Posted in Delaware Chapter 11 Filings, Judge Kevin J. Carey, News, Plans, United States Bankruptcy Court - District of Delaware

On February 18, 2015, Allen Systems Group, Inc., ASG Federal Inc. and Viasoft International, LLC all filed voluntary petitions for relief under Chapter 11 of the United States Bankruptcy Code.  The cases are docketed at 15-10332, and have been assigned to The Honorable Kevin J. Carey.

As prepackaged cases, the Debtors have, simultaneously with their petitions, filed a disclosure statement and plan.  According to the Declaration of John C. DiDonato (the “DiDonato Declaration”), filed in support of the petitions and other first day pleadings, the chapter 11 plan is supported by the Debtors’ principal creditor constituencies, reflected by a plan support agreement.

According to the DiDonato Declaration the debtors intend to effect a balance sheet restructuring: under the Plan, the Domestic Credit Facility and Foreign Credit Facility will be repaid in full on the plan effective date, and Allen Systems Group, Inc. (“ASG”) will cancel certain Notes Claims in exchange for the Notes Claims Stock representing 41.5% of Reorganized ASG’s New Common Stock.  Other Eligible Holders of Notes Claims will receive subscription rights to participate in the Rights Offering to acquire their pro rata share of the Rights Offering Stock, representing the remaining 58.5% of Reorganized ASG’s New Common Stock.  According to the DiDonato Declaration, the Debtors’ general unsecured creditors, other than holders of Notes Deficiency Claims and Allen Claims (all as defined in the Plan), will be paid in full, and existing equity securities in ASG will be cancelled.

To fund the chapter 11 cases, the Debtors will seek a DIP loan of up to $40 million.  Details of anticipated exit financing facilities are set out on page 22 of the DiDonato Declaration.

Saladworks, LLC files Chapter 11 in Delaware

Posted in Delaware Chapter 11 Filings, Judge Laurie Selber Silverstein, United States Bankruptcy Court - District of Delaware

On February 17, 2015, Saladworks, LLC filed a chapter 11 bankruptcy case in Delaware.  The case has been docketed as case no. 15-10327 and has been assigned to The Honorable Laurie Selber Silverstein.

The petition lists assets and liabilities between $10 million and $50 million.  According to the Declaration of Paul Steck (the “Steck Declaration”), President and member of Saladworks’ board of directors, filed in support of the petition and various first-day motions, Saladworks is the nation’s first and largest fresh-salad franchise concept.  The debtor is currently a party to 149 franchise agreements.  The debtor is also a party to 141 franchise agreements where the franchisee has not yet opened the franchise.

The debtor’s equity owners are J Scar Holdings, Inc. (70%) and JVSW LLC (30%).  According to the Steck Declaration, the debtor has no secured bank debt, and no other known properly secured debt obligations.  The debtor lists approximately $8.02 million in unsecured debt obligations including some $870,000 in trade obligations.

Nearly 2 years ago, in March 2013, JVSW sent a written Put Notice to the debtor demanding repurchase of JVSW’s 30% interest as wells as other demands.  Litigation was subsequently commenced in the Delaware Chancery Court.  In December 2014, Metro Bank commenced 3 separate lawsuits in Pennsylvania seeking amounts owed under various loan agreements.  In two of the cases, Metro Bank obtained confession of judgments in a total amount approaching $2 million.  Garnishments subsequently issued against Debtor’s bank and accounts have been frozen.  The debtor is seeking to overturn the confessed judgments.

In the bankruptcy case, the debtor will seek to sell its business and obtain a stalking horse bidder to set the floor for a successful auction.

U.S. District Court of Delaware Reverses and Remands A Bankruptcy Settlement Effected With No Notice

Posted in Adversary Proceedings, Appeals, Avoidance Actions, Case Summaries, Judge Leonard P. Stark, Releases, Settlements, United States District Court - District of Delaware

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.

Altegrity, Inc., Global Provider of Risk Solutions, Files Chapter 11

Posted in Delaware Chapter 11 Filings, Judge Laurie Selber Silverstein, News, United States Bankruptcy Court - District of Delaware

Altegrity, Inc., who bills itself on its website as “The world’s leading brands in risk solutions, security, ediscovery, data recovery and employment screening,” filed for chapter 11 protection in Delaware on February 8, 2015.  It was joined by 37 of its affiliates.  The bankruptcy case is docketed as case no. 15-10226, and has been assigned to the Honorable Laurie Selber Silverstein.

A copy of the petition is here.  According to the Declaration of Jeffrey Campbell, President and CFO, Altegrity and its debtor and non-debtor subsidiaries makes up “a privately held global, diversified risk and information services company serving commercial customers and government entities.”  Together, they employ 3300 employees.  According to Mr. Campbell, for the last 12 months ending June 30, 2014, the Company generated approximately $1.4 billion in revenue on a consolidated basis.  As of that time, the debtors had approximately $1.7 billion in assets and $2.1 billion in liabilities on a consolidated basis.

According to Mr. Campbell, in August 2014, the debtors’ cash performance was “interrupted by an unforeseen business disruption relating to the companies’ USIS business, “which, until recently, provided background investigations and information management and security services to U.S. federal government agencies.”  The interruption stemmed from a “state-sponsored cyber-attack” and the subsequent notice received from the U.S. Office of Personnel Management (OPM) that temporarily suspended all work performed by USIS on a substantial OPM contract.  These actions “caused a substantial errosion in the USIS business, which caused the overall Company’s liquidity position and projected financial performance to deteriorate dramatically.”

Mr. Campbell explains in his affidavit that the debtors have “again achieved broad consensus among their funded debtholders around the terms of a financial restructuring that will allow their remaining businesses to continue uninterrupted.”  He notes that the debtors have entered into a Restructuring Support Agreement in which “holders of approximately 78% of their funded first lien debt and approximately 95% of their second and third lien debt have agreed to support a comprehensive restructuring that, among other things, provides the Debtors with $90 million of new capital, modifies key debt covenants . . . and reduces the amount of the Company’s overall indebtedness by approximately 40%.”

RadioShack Corporation Files Its Long-Awaited Bankruptcy Case

Posted in Delaware Chapter 11 Filings, Judge Kevin J. Carey, United States Bankruptcy Court - District of Delaware

RadioShack Corporation and 17 of its affiliates have filed its chapter 11 case in Delaware.  The case is docketed as Case No. 15-10197, and is currently assigned to The Honorable Kevin J. Carey.

The long-anticipated petition includes a list of the 50 largest creditors.  Wilmington Trust is indenture trustee for some $329 million in debt.  In the petition, the company lists total assets of $1.2 billion and total debts of nearly $1.4 billion.

In the Declaration of Carlin Adrianopoli filed in support of the first-day motions, Mr. Adrianopoli notes he is employed by FTI Consulting, Inc., but has been engaged as Interim Chief Financial Officer for RadioShack.  He notes in the declaration that RadioShack has more than 21,000 employees, 4,400 company-operated stores in the U.S., Mexico and Asia, and more than 1,100 dealer/franchise stores worldwide.  Three owned distribution centers in Texas, California and Maryland ship products to the U.S. retail locations and dealer outlets.  RadioShack leases its headquarters and retail store locations with an aggregate monthly rent of $21 million.

Mr. Adrianopoli’s declaration identifies $250 million in principal outstanding under a 2013 credit agreement, $250 million outstanding under a 2013 term loan, $330 million in aggregate principal and interest under notes due in 2019, $124 million owed for merchandise and other unsecured trade obligation as of December 31, 2014.

Anticipated efforts during the bankruptcy cases, according to the Adrianopoli declaration, will include seeking approval for $285 million in DIP financing, prompt closure and liquidation of 2,100 under-performing stores, marketing and sale of the balance of the business and assets, and a new commercial agreement with Sprint.

 

Women’s Clothing Retailer, Cache Inc., Seeks Protection Inside Chapter 11

Posted in Delaware Chapter 11 Filings, Judge Mary F. Walrath, News, United States Bankruptcy Court - District of Delaware

On February 4, 2015, women’s clothing retailer, Cache Inc., filed a chapter 11 bankruptcy case in Delaware.  The petition lists the top 30 unsecured creditors.  Two of the largest creditors are landlords Simon Property Group and General Growth Properties.  Reports indicate that Cashe is in default of about 50 of their retail leases.  According to the Declaration of Anthony Dipippa, Executive VP and CFO of Cache, which was filed in support of the bankruptcy, Cashe targets stylish and fashion conscious women ages 25 to 55 years old.  As of the end of January 30, 2015, Cashe operated 218 stores in 40 states, Puerto Rico and the U.S. Virgin Islands.  The company has a workforce of over 2500 employees, some of which are fulltime and others who are part-time.  According to Mr. Dipippa, net income declined from 2.1 million in F/Y 2011 to net losses of 34.4 million in F/Y 2013.  In August of 2014, the Board engaged an investment banking firm to explore strategic alternatives.  Simultaneously with its bankruptcy filing, Cashe has sought approval of its entry into an Agency Agreement with SB Capital Group, LLC and Tiger Capital Group, LLC, and is seeking to conduct an auction for the sale if its assets, either on a going concern basis or via chain-wide store closing sales and liquidation.  The case has been docketed in the Delaware Bankruptcy Court as case no. 15-10172, and has been assigned to The Honorable Mary F. Walrath.  First day motions are scheduled to be heard at 2:00 p.m. (eastern) on February 5, 2015.

The New Delaware Bankruptcy Local Rules Are Here!

Posted in Local Rules, Rules, United States Bankruptcy Court - District of Delaware

The 2015 edition of the Local Rules of Bankruptcy Practice and Procedure of the United States Bankruptcy Court for the District of Delaware are now live on the Delaware Bankruptcy Court’s website.  The new local rules became effective on February 1, 2015.

Among other changes, significant revisions appear in the rules relating to appeals.  Provision has also been made for appearances by supervised law students in certain matters.  Rules regarding scheduling conferences and discovery, as well as rules relating to filing documents under seal have all been substantively revised.  Finally, the Court has adopted more specific rules regarding protection of Personal Data Indentifiers.

Delaware Bankruptcy Court Grants Summary Judgment Based On Ordinary Course of Business Defense

Posted in Case Summaries, Judge Christopher S. Sontchi, Ordinary Course of Business, United States Bankruptcy Court - District of Delaware

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).

Summary:

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.

Discussion:

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)

URGENT: Delaware U.S. District Court Sets 6:00 p.m. Filing Deadline

Posted in Rules

Effective tomorrow, October 16, 2014, the filing deadline for pleadings filed with the United States District Court for the District of Delaware will be 6:00 p.m. prevailing Eastern Time. Per the letter from Chief Judge Leonard Stark, “the 6:00 p.m. Eastern Time deadline applies to every filing and service deadline in every case in the District of Delaware, other than initial pleadings.” The new rule also applies to exchanges of discovery requests and discovery responses, even if hand-delivered.

Bankruptcy practitioners should be advised that, per Chief Judge Stark, the new deadline DOES APPLY to bankruptcy appeals and any other bankruptcy-related cases to the extent those cases are on the District Court’s docket.