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

Forklift LP Corp. v. iS3C, Inc. (In Re Forklift LP Corp.), 363 B.R. 388 (Bankr. D. Del. 2007) (Judge Peter J. Walsh)

In connection with pending litigation over a failed post-petition software upgrade, the plaintiff asserted that even if its challenge to defendant’s right to payment was unsuccessful, the defendant’s administrative claim was subject to the provisions of the confirmed Plan, which, the plaintiff contended, resulted in defendant receiving less than full payment. Defendant moved for partial summary judgment on its right to receive payment in full, arguing that the Plan was ambiguous. The Court agreed, and held that the ambiguity in the Plan would not deny defendant its right to payment in full in light of the clear language of the Confirmation Order, the Disclosure Statement and the doctrine of judicial estoppel.

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Giuliano v. Fairfield Group Health Care Centers Ltd. P'ship (In Re Lexington Healthcare Group, Inc.), 363 B.R. 713 (Bankr. D. Del. 2007) (Judge Mary F. Walrath)

The Chapter 7 Trustee filed a complaint against a nursing home landlord under Section 542 of the bankruptcy code seeking turnover of a $2.2 million security deposit posted by the Debtor’s predecessor. The landlord filed a motion to dismiss under FRBP 12(b)(6) claiming that a turnover action under Section 542 may only be used to obtain property which is undisputedly property of the bankruptcy estate. Noting that the Trustee had not pled an absolute right to the security deposit, and that a genuine dispute existed over rights to it, the Court agreed and dismissed the turnover action.

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Integrated Water Res., Inc. v. Shaw Envntl., Inc. (In re IT Group, Inc.), 361 B.R. 417(Bankr. D. Del. 2007) (Judge Mary F. Walrath)

The Plaintiff in this adversary proceeding sought to amend its complaint to add a claim for breach of contract against the IT Trust. The Plaintiff asserted that the Trust had violated the terms of a settlement agreement and releases contained therein by assigning its claims against the Plaintiff to a third party. The Court granted the motion to amend, finding that there was no undue delay by the Plaintiff, there was no undue prejudice to the Trust, and that the proposed amendment was not futile.

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In re Global Home Prods., LLC, Case No. 06-10340 (KG), 369 B.R. 778 (Bankr. D. Del. 2007) (Judge Kevin Gross)

The debtors proposed bonus plans for management and certain sales staff, which were based on performance and incentives. The debtors’ unionized employees objected to the plan, characterizing it as a Key Employee Retention Plan (KERP), approval of which was subject to the rigorous requirements of 11 U.S.C. § 503(c). The court approved the plans, finding that section 503(c) was inapplicable, as the plans were primarily incentivizing, rather than retentive or in the nature of severance. Accordingly, the court measured whether the plans were formulated according to a proper exercise of the debtors’ business judgment, and finding that they were, approved them under the less exacting business judgment standard of 11 U.S.C. § 363.

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In re Scott Acquisition Corp., 364 B.R. 562 (Bankr. D. Del. 2007) (Judge Peter J. Walsh)

The Chapter 7 Trustee of the estate of debtors Scott Acquisition Corporation and Scotty’s Inc. filed a complaint against the debtors’ pre-petition counsel, asserting legal malpractice, breach of fiduciary duty and fraudulent transfer claims. The claims arose from a series of transactions between the debtors and insiders of the debtors, in which the defendants represented both the debtors and the insiders. The defendants filed a motion to dismiss the legal malpractice and breach of fiduciary duty claims, asserting that the trustee was estopped from prosecuting those claims by the equitable defense of in pari delicto. The United States Bankruptcy Court for the District of Delaware granted the motion, finding the in pari delicto defense barred those claims, but permitted the fraudulent transfer count to go forward.

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In re Am. Pad & Paper Co., 478 F.3d 546 (3d Cir. 2007) (Circuit Judge Dolores Korman Sloviter)

Steven Singer, the Chapter 7 Trustee of American Pad & Paper Co. and its co-debtors, was elected under 11 U.S.C. § 702 more than two years after the entry of the order for relief in the debtors’ cases. Singer was elected subsequent to the appointment of an interim trustee under section 701, who was appointed eleven days before the two-year anniversary of the entry of the order for relief.

Singer thereafter commenced avoidance actions against approximately 150 defendants, many of whom moved to dismiss on the basis that such actions were time-barred by 11 U.S.C. § 546(a), which requires that such avoidance actions by filed by the later of two years after the entry of the order for relief, or one year after the appointment of a trustee under section 702, 1104, 1163, 1202 or 1302, if that appointment occurred before the two years after the entry of the order for relief. The Bankruptcy Court dismissed those actions, and the District Court affirmed. The Third Circuit affirmed, finding that under the plain language of the statute, the actions were time-barred.

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Fruehauf Trailer Corp. v. Nat. Union Fire Ins. Co. of Pittsburgh, PA (In re Fruehauf Trailer Corp.), Case Nos. 96-1563–1572, Adv. Pro. No. 98-514, 2007 WL 676248 (Bankr. D. Del. March 2, 2007) (Judge Peter J. Walsh)

The defendants filed this motion to dismiss for failure to prosecute under Federal Rule of Civil Procedure 41(b), after a period of inactivity in the instant adversary proceeding of more than five years. The court denied the motion, finding that the plaintiff asserted cognizable claims, and that the most drastic sanction of dismissal was inappropriate. The Court held that giving the defendants the benefit of the doubt in all issues of fact that became vague as a result of the passage of time was sufficient to counter-balance the prejudice to defendants caused by the delay. In addition, the Court found that it was obliged to refer the matter to arbitration, pursuant to the agreement between the debtor and the defendants.

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Simon & Schuster, Inc. v. Advanced Marketing Servs. Inc. (In re Advanced Marketing Servs. Inc.), 366 B.R. 429 (Bankr. D. Del. 2007) (Judge Christopher S. Sontchi)

Simon & Schuster, a creditor of debtor Advanced Marketing Services, Inc., filed a reclamation claim against the debtor, and sought to have a temporary restraining order put in place to prevent the debtor from selling the S&S goods that were subject to the reclamation claim. The court denied the motion in a previously reported opinion. (here)

S&S then sought to pursue an appeal of the court’s interlocutory order denying the TRO motion, moved the District Court for leave to appeal, and requested that the Bankruptcy Court certify that the case was suitable for direct appeal to the United States Court of Appeals for the Third Circuit, pursuant to 11 U.S.C. § 158(d)(2). The Bankruptcy Court declined to decide the request, finding that, because the District Court and Bankruptcy Court were being asked to make an almost identical set of findings, judicial resources would best be used by deferring to the District Court to decide the motion for leave to appeal. Moreover, respect for the hierarchy of the courts warranted deference to the District Court.

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In re Valley Media, Inc., 226 Fed. Appx. 120 (3d Cir. 2007) (Circuit Judge Maryanne Trump Barry)

The Massachusetts Department of Revenue filed a proof of claim in the bankruptcy case of Valley Media, Inc., asserting that Valley owed the commonwealth for uncollected sales tax for goods drop-shipped on behalf of retailers by Valley to customers in Massachusetts. The United States Bankruptcy Court for the District of Delaware sustained the debtor’s objection to the claim, finding that the term “delivery” is defined in accordance with the Uniform Commercial Code, and further finding that such shipments were not a “delivery in the commonwealth” subject to sales tax under Massachusetts law. The United States District Court for the District of Delaware sustained the objection, and the Third Circuit affirmed.

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