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

In re: Jer/Jameson Mezz Borrower II, LLC, Case No. 11-13338 (MFW) (December 22, 2011) 

On October 18, 2011 (the “Petition Date”), debtor JER/Jameson Mezz Borrower II (“Mezz II”) filed its Chapter 11 petition on the eve of a UCC auction for Mezz II’s only asset; its membership interest in JER/Jameson Mezz Borrower I, LLC (“Mezz I”).  CDCF JIH Funding, LLC and ColFin JIH Funding, LLC (collectively, “Colony”) was Mezz II’s sole lender and issued a notice of intention to auction Mezz II’s asset prior to the bankruptcy filing because Mezz II failed to repay its debt on the maturity date. 

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Peak Broadcasting, LLC Files for Chapter 11 Protection.

The petition lists both assets and liabilities between $50 million to $100 million.  The case has been assigned to Judge Peter J. Walsh and is being administered under case number 12-10183.

According to the first-day Declaration of Todd Lawley, Chief Executive Officer and Managing Member of each of the Debtors since their formation at the end of 2006 and early 2007, as applicable, Peak Holding was formed in 2006 with the goal of becoming a radio broadcasting platform serving local, growing communities throughout the Western United States. 

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Acartha Group LLC and Two Affiliates File for Chapter 11 Protection.

According to the petition, Acartha estimates its assets between $0 and $50,000 and its liabilities between $1 million to $10 million. Later that day, Acartha filed an amended petition revising the creditor list and signature pages. 

The Acartha case has been assigned to Judge Brendan Linehan Shannon under case number 12-10123.  Acartha Technology Partners L.P. and MIC VII, LLC have also been assigned to Judge Shannon and are being administered under case numbers 12-10124 and 12-10125, respectively.  No first day motions or affidavits have been filed and there are no pending motions to consolidate the three cases.

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International Media Group, Inc. Files for Chapter 11 Protection.

AsianMedia Group LLC and five other affiliates (collectively with IMG, the "Debtors") also sought bankruptcy protection.  IMG lists both assets and debt of $100 million to $500 million in its petition.  The cases have been assigned to Judge Mary F. Walrath and the Debtors have filed motions to have the cases jointly administered under the International Media Group, Inc. case number (12-10140).  Those and other first-day motions are pending.

According to the first-day Declaration of Dennis J. Davis, the Debtors' Chief Restructuring Officer, the Debtors produce and broadcast various Asian- and English-language paid, syndicated and local television programming.  The Debtors serve communities in California and Hawaii.  The Debtors have hired Houlihan Lokey Capital, Inc. as financial advisers and Debtors commenced their Chapter 11 cases in order to conduct a sale of their business as a going concern pursuant to section 363 of the Bankruptcy Code.

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Coach Am Group Holdings Corp. Files for Chapter 11 Protection. 

The petition lists assets between $0 to $50,000 and liabilities between $1 million to $10 million.  Chief Judge Kevin Gross has been assigned the cases, in which motions to have the cases jointly administered under the Coach Am Group Holdings Corp. case number (12-10010) are pending.

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On January 4, 2012, Trident Microsystems, Inc. and Trident Microsystems (Far East) Ltd. filed for Chapter 11 protection in the U.S. Bankruptcy Court for the District of Delaware. The petition lists assets between $100 million and $500 million and liabilities between $10 million and $50 million. Judge Christopher S. Sontchi has been assigned the case, which is being administered as case no. 12-10069.

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Preference Liability “Fixed” As Of The Petition Date: Prepetition Invoices Subsequently Paid Under Critical Vendor Order Are Still “New Value”

In what may end up being a bit of a landmark decision, Judge Christopher S. Sontchi has opined that preference liability is “fixed” as of the petition date, and is not affected by subsequent events in the bankruptcy case.

 In this case, the debtor made about $80,000 worth of preferential payments to the defendant.  Defendant provided approximately $100,000 of new value within the meaning of 547(c)(4) and therefore had no preference liability. However, during the case, pursuant to a critical vendor order authorizing the debtor to pay prepetition debt, the defendant received payment on some of the prepetition invoices that constituted new value. In the subsequently filed preference action, the debtor claimed that any invoices paid under the critical vendor order could not be used as new value. In essence, the debtor contended that the defendant’s preference liability had been increased by virtue of receiving the post-petition payments on prepetition debt.

The Court disagreed. The Court noted that the Third Circuit’s decision in New York City Shoes, Inc. v. Bentley Int’l Inc., 880 F.2d 679 (3d Cir. 1989), while not directly on point, had defined the new value defense has having three parts: (1) the creditor must have received a transfer that is otherwise voidable as a preference under section 547(b); (2) after receiving the preferential transfer, the preferred creditor must advance “new value” to the debtor on a unsecured basis; and (3) the debtor must not have fully compensated the creditor for the “new value” as of the date that it filed its bankruptcy petition. This last point, the Court held, “clearly supports fixing the entirety of the preference analysis on the Petition Date.” Setting preference liability as of the petition date “is consistent with the purpose of the preference law – to reduce damaging, pre-petition opt out behavior and to level the pre-bankruptcy playing field for all creditors. Once the bankruptcy is filed the preference law becomes unnecessary. . . Neither the post-petition provision of new value by the creditor nor the post-petition payment of unpaid pre-petition new value affects the preference calculation.”

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Mata v. Eclipse Aerospace, Inc. & Production Line Group v. Eclipse Aerospace, Inc. (In re AE Liquidation, Inc.), Case No. 08-13031 (MFW), Adv. Pro. No. 08-51891 (MFW), Misc. No. 10-193-LPS (May 10, 2011) (J. Stark)

On August 4, 2010, the Bankruptcy Court denied plaintiff Production Line Group’s (the “Plaintiff” or the “PLG”) motion to dismiss its own complaint as lacking subject matter jurisdiction. The issues set forth in the Plaintiff’s motion to dismiss centered around a dispute concerning the status of certain aircraft which members of the Plaintiff’s constituency had purchased from the Debtor prior to the bankruptcy filing, and the ownership of which had yet to be determined. Although the PLG had entered into purchase agreements for the aircraft and made substantial down payments (typically 60% of the purchase price), there was some question as to whether the airplanes were property of the estate.

During the course of the bankruptcy (which was filed under chapter 11 and subsequently converted to chapter 7), a sale of substantially all of the Debtor’s assets was consummated, subject to the PLG’s rights in the airplanes. Thereafter, the PLG moved to dismiss the adversary proceeding it had filed in the bankruptcy case, claiming the Bankruptcy Court no longer had jurisdiction to determine the ownership of the airplanes. Post-sale, the PLG argued, the airplanes were either owned by the PLG or by Eclipse Aerospace, Inc., the purchaser of the Debtor’s assets, both of which were non-debtor parties. 

The Bankruptcy Court denied the motion, concluding that it had exclusive jurisdiction over at least one of the questions raised in the PLG complaint – namely, whether the airplanes constituted property of the estate prior to the sale. The PLG filed a motion for leave to appeal the Bankruptcy Court’s order, which the District Court denied for the reasons set forth below.

Discussion:

The District Court concluded that none of the three factors favoring interlocutory appeal were present, nor had the Plaintiffs presented any rationale which might persuade the Court to entertain the interlocutory appeal, and, accordingly, denied the motion for leave to appeal. Though the Bankruptcy Code does not identify the standard district courts should use in deciding whether to grant an interlocutory appeal, district courts typically follow the standards set forth under 28 U.S.C. § 1292(b), which govern interlocutory appeals from a district court to a court of appeals. 

Under the § 1292(b) standards, an interlocutory appeal is “permitted only when the order at issue (1) involves a controlling question of law upon which there is (2) substantial grounds for a difference of opinion as to its correctness, and (3) if appealed immediately, may materially advance the ultimate termination of the litigation.” At 5.

First, the District Court found that first factor did not favor the interlocutory appeal because the issue did not involve a controlling question of law, but rather was inextricably fact-based as it centered around “whether the property is or is not bankruptcy estate property…the very question presented by the Adversary Proceeding.” At 6.

Second, the District Court waived off the Plaintiffs’ concerns as mere disagreement with the Bankruptcy Court’s conclusions, which “does not create a substantial ground for difference of opinion.” At 8.

Finally, rather than materially advance the litigation towards termination, the District Court concluded that an interlocutory appeal would “only promote piecemeal determination of the questions raised in the adversary action and would likely create unnecessary delay.” At 9. Without any "circumstance or reason that distinguishes the case from the procedural norm and establishes the need for immediate review,” the case did not warrant interlocutory appeal and the District Court denied the Plaintiffs’ motion for same.

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 Logan v. Westchester Fire Insurance Company (In re PRS Insurance Group, Inc.), Case No. 00-4070 (MFW), Adv. Pro. No. 11-50467 (MFW) (March 30, 2011) (J. Walrath)

PRS Insurance Group, Inc. (“PRS”), along with certain of its subsidiaries, commenced cases under Chapter 11 of the Bankruptcy Code on January 19, 2001. Sean C. Logan serves as Trustee in the cases and, subsequent to the initial filing, the Trustee commenced chapter 11 cases on behalf of certain off-shore affiliates of PRS, including Enterprise Group Insurance Company Ltd. (“EGIC”). On March 2, 2007, the Court entered an order confirming the Joint Debtors’ Plan of Liquidation, which became effective on August 24, 2007.

On March 16, 2010, the Trustee, on behalf of EGIC, filed suit in the District Court for the Northern District of Ohio against Westchester Fire Insurance Company and ACE INA Holdings, Inc. (the “Defendants”) for breach of two reinsurance agreements and bad faith refusal to pay claims. The action was transferred to the District Court for the District of Delaware on October 28, 2010. The Trustee filed a motion to refer the action to the Bankruptcy Court on December 12, 2010, and the District Court granted the Trustee’s request but limited the referral to the determination of whether the action constitutes a core proceeding under the Bankruptcy Code. Though the Trustee asserted that the matter was a core proceeding under 28 U.S.C. § 157(b)(2)(E) because it is an “[order] to turn over property of the estate,” the Bankruptcy Court agreed with the Defendants that the matter was non-core.

Discussion:

Bankruptcy court jurisdiction is divided into “core” and “non-core” jurisdiction. Cases under title 11, proceedings arising under title 11, and proceedings arising in a case under title 11 are core proceedings. However, proceedings that are merely “related to” a case under title 11 are non-core. The Defendants argued, and the Court agreed, that the proceeding at bar was not within the Court’s jurisdiction “under” title 11 or “arising under” title 11 as the action was separate from the bankruptcy petitions and did not involve any steps in the bankruptcy cases.

Defendants further argued, and the Court again agreed, that the cause of action did not fall within the Court’s “arising in” jurisdiction, citing numerous courts that had held that an action by a debtor or trustee against the debtor’s insurer is a non-core proceeding. See, e.g., In re United States Brass Corp., 110 F.3d 1261, 1268 (7th Cir. 1997); Allied Prod. Corp. v. Hartford Accident & Indem. Co., 2003 U.S. Dist. LEXIS 2596, *5 (N.D. Ill. Feb. 24, 2003); In re Ramex Int’l, Inc., 91 B.R. 313, 315 (E.D. Pa. 1988); G-1 Holdings, Inc. v. Hartford Accident & Indem. Co. (In re G-1 Holdings, Inc.), 278 B.R. 376, 380 (Bankr. D.N.J. 2002). Reasoning that the action was for breach of two reinsurance agreements and bad faith refusal to pay claims – neither of which involved a dispute that could arise only in the context of a bankruptcy case – the Court declined to find core jurisdiction.

Finally, the Court was unpersuaded by the Trustee’s argument that the action may impact the size of the liquidating trust and remarked that “the Court may not even have ‘related to’ jurisdiction over the Trustee’s action” because “a court may only exercise jurisdiction [post-confirmation] where a claim has ‘a close nexus to the bankruptcy plan or proceeding’ and the matter at issue ‘affects the interpretation, implementation, consummation, execution, or administration of a confirmed plan or incorporated litigation trust agreement.’” “The mere potential to increase the assets of a post-confirmation trust is insufficient to establish the required ‘close nexus.’”

Accordingly, for the reasons set forth above, the Court held that the proceeding was non-core.

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