Delaware Business Bankruptcy Report : Delaware Business Bankruptcy Report : Morris James LLP Lawyers & Attorneys

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.

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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.  

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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.

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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.

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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”).

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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.

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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.

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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.  

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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.
 

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