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

Wahoski v. Classic Packaging Co. (In re Pillowtex Corp.), Adv. Pro. No. 05-30182 (KJC) (April 14, 2010) (J. Carey)

John Wahoski, as liquidating trustee of Pillowtex Corporation (the “Liquidating Trustee”) sought to recover $61,761.32 in allegedly preferential payments (the “Transfers”) from Classic Packaging Company (“Classic”), which had sold plastic bags and packaging printed with the Pillowtex brand names to the Debtors prior to the petition date.  The Liquidating Trustee was also pursuing a claim to recover allegedly fraudulent transfers. 

Classic filed a motion for summary judgment with regard to the Transfers, arguing that the ordinary course of business defense applied to each Transfer and a motion to dismiss arguing that the complaint did not set forth fraudulent transfer claims with sufficient specificity.  For the reasons articulated below, the Court denied the motion for summary judgment and granted the motion to dismiss.

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US Concrete, Inc., Case No. 10-11407 (PJW) (June 21, 2010) (J. Walsh)

In this case, the Court denied the Ad Hoc Equity Committee’s (“AHEC”) motion to appoint an official committee of equity holders because the Court was not convinced equity holders would receive any recovery and because the Court felt the equity holders did not require any additional representation.  In determining whether to appoint an official committee of equity holders, a court considers two factors: (a) whether there is a substantial likelihood that equity holders will receive a meaningful distribution under a strict application of the absolute priority rule, and (b) whether equity holders were able to represent their interests without an official committee.  The Court held in favor of the objectors on both counts.

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Jeoffrey L. Burtch, Chapter 7 Trustee, Factory 2-U Stores, Inc. et al., v. Milberg Factors, Inc., C.A. No. 07-556-JJF-LPS (D.Del. June 4, 2010) (Farnan, J.)

Plaintiff Jeoffrey L. Burtch (“Plaintiff” or Burtch”) is the Chapter 7 Trustee for Factory 2-U Stores, Inc. and its affiliates (collectively, “Factory 2-U”).  The eight defendants (“Defendants”) are engaged in the business of “factoring”.  Plaintiff filed a complaint against Defendants asserting four claims arising from alleged violations of the Sherman Act (“Complaint”).  Defendants moved to dismiss the Complaint.  Magistrate Judge Stark issued a “Report and Recommendation Regarding Motion to Dismiss the Complaint” on March 30, 2009 that was adopted by the District Court.  The District Court then entered an Order dismissing the Complaint.   Plaintiff sought to reopen the Order dismissing his Complaint and sought leave to file an Amended Complaint.

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DHP Holdings II Corp. v. Peter Skop Industries, Inc. (DHP Holdings II Corp.), Case No. 08-13422, Adv. No. 09-52811 (August 13, 2010) (J. Walrath)

On December 29, 2008 (the “Petition Date”), DHP Holdings II Corporation and several of its affiliates (collectively, the “Debtors”) filed voluntary petitions for relief under chapter 11 of the Bankruptcy Code.  Prior to the Petition Date, PSI purchased several products from the Debtors for which PSI had not remitted payment as of the Petition Date.  The Debtors commenced an adversary proceeding on November 20, 2009 to recover the amounts due under the invoices (a total of $123,261.00) it had submitted to PSI, for turnover of the property pursuant to section 542 of the Bankruptcy Code, for breach of contract, and to disallow any claims of PSI pursuant to section 502(d).

In PSI’s answer, it denies that it owes a debt to the Debtors because, inter alia, the Debtors fraudulently misrepresented their financial condition in order to induce PSI to purchase products, even though the Debtors were aware that they would not be able to satisfy their warranty obligations.  As a result, PSI argues that it possesses setoff and recoupment rights due to known warranty claims, anticipated warranty claims, and tort claims brought by customers who purchased the Debtors’ products from it.  PSI moved for permissive abstention, arguing that the twelve factors to be considered in granting permissive abstention weighed in favor of the Court abstaining.  The Court agreed for the reasons set forth more fully below.

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In re Stock Building Supply, LLC, et al., Case No. 09-11572 (MFW) (July 28, 2010) (Walrath, J.)

The court disallowed Somerset Properties SPE, LLC’s (“Landlord” or “Somerset”) claim for rejection damages because the new lease entered into between the parties contained a waiver of any right to rejection damages in the Debtor’s bankruptcy case.  Subsequent to the effective date of the plan for reorganization, the Debtor and Landlord entered into a new lease that contained a provision stating in relevant part:

Waiver of Proof of Claim.  In consideration of the Tenant entering into this new Lease, the Landlord hereby stipulates that it has not suffered any damages and hereby agrees that it has not suffered any damages and hereby agrees not to file any proof of claim in the Bankruptcy Case by reason of the rejection of the Prior Lease by the Tenant.  Landlord further waives any rights it may have to file any subsequent proof of claim for damages in the Bankruptcy Case.

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Charys Liquidating Trust v. McMahan Securities Co. (In re Charys Holding Company, Inc.), Case No. 08-10289 (BLS), Adv. No. 10-50213 (BLS) (August 27, 2010) (J. Shannon)

On or about October 11, 2006, Charys Holding Company, Inc. (“Charys”) entered into an agreement (the “Engagement Letter”) with McMahan Securities Co. (“McMahan” or “Defendant”) whereby McMahan agreed to serve as Charys’s “exclusive financial advisor and placement agent” in connection with a private placement by Charys of up to $150 million in senior convertible notes (the “Notes”).  The Engagement Letter also provided McMahan the option, which McMahan exercised, to place an additional 15% on the amount of the offering.  Charys later entered into an indenture agreement with the Bank of New York Mellon Trust Company, N.A., as trustee, and then issued $201,250,000.00 of Notes (the “McMahan Financing”).

Pursuant to the Engagement Letter, McMahan was to receive a fee of 4% of the gross proceeds of a placement up to $75 million, and 5% of aggregate gross proceeds in excess of $75 million, for a total of $9,312,500.00 on the proceeds, which equaled $201,250,000.00.  However, McMahan withheld $9,957,000.00 from Charys’s portion of the initial proceeds of $175 million and $1,434,635.42 from Charys’s portion of the additional proceeds of $26,250,000.00 (collectively, the “Transfers”), for a total of $11,391,635.42. 

Charys, along with Crochet & Borel Services, Inc. (together, the “Debtors”), filed for bankruptcy on February 14, 2008 (the “Petition Date”).  Once the plan was confirmed, two trusts (the Charys Liquidating Trust and the C&B Liquidating Trust, collectively referred to as the “Trusts” or the “Plaintiffs”) were established and certain of the Debtor’s assets, including avoidance actions, were transferred to the Trusts.  The Trusts instituted the instant adversary proceeding on February 12, 2010, in which it sought the difference between the amount agreed upon and the amount transferred to McMahan and alleged that McMahan’s fees exceeded the prevailing market rate for comparable investment banking services.

McMahan responded with a motion to dismiss, arguing that that: (1) the Engagement Letter contained a forum selection clause requiring the action to be commenced and litigated in Connecticut state court; (2) Charys failed to plead sufficient facts to establish its claims; and (3) Charys’s admission that the Transfers were made on account of an antecedent debt proved that the Transfers were in exchange for reasonably equivalent value.  The Trusts filed a response and an amended complaint.  McMahan filed a reply, and the Court declined to hear oral argument on the matter.

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Official Unsecured Creditors’ Committee of Broadstripe, LLC v. Capital Management, L.P. (In re Broadstripe, LLC), Case No. 09-10006 (CSS), Adv. No. 09-50966 (CSS) (September 2, 2010) (J. Sontchi)

On January 2, 2009 (the “Petition Date”), Broadstripe commenced its Chapter 11 cases by filing voluntary petitions for relief.  Sometime thereafter, the Official Unsecured Creditors’ Committee (“OUCC”) filed the instant Complaint in which it sought relief from Highland Capital (“Highland”) under twelve theories.  The Complaint centered around two events: (1) Highland’s objection to the Wave Sale, pursuant to which WaveDivision Holdings, LLC (“Wave”) committed to purchase two of Broadstripe’s three systems for $157 million; and (2) Highland’s alleged representation that it would finance the James Cable Asset Purchase Agreement (the “James Cable APA”) – pursuant to which Broadstripe, which represented in the James Cable APA that it had the financial capacity to consummate the sale, would purchase substantially all of James Cable’s assets for a purchase price to be determined later – and its subsequent refusal and failure to do so.

On September 2, 2010, the Court issued a memorandum opinion containing its findings of fact and conclusions of law with respect to its May 3, 2010 order denying Highland’s motion for summary judgment as to Counts One (recharacterization), Two (equitable subordination), Four (breach of duty of care), Five (breach of duty of loyalty), Six (aiding and abetting breach of duty of care), Seven (aiding and abetting breach of duty of loyalty), Eight (preference claims related to First Liens), Nine (preference claims related to Second Liens), Eleven (recovery of avoidance actions), and Twelve (disallowance of Highland’s claims pursuant to § 502(d)) and granting the motion with respect to Count Three (alter ego). 

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Ad Hoc Consortium of Senior Subordinated Noteholders v. Liquidating Landco Debtors (In re Tropicana Entertainment LLC), Case No. 08-10856 (KJC), Civ No. 09-771-SLR (September 22, 2010) (J. Robinson).

Tropicana Entertainment LLC and related entities (collectively “Tropicana”) encountered severe financial difficulty following the revocation of its gaming license in New Jersey and the threat of de-licensure in Indiana and Nevada, all of which was allegedly triggered by poor business decisions made by board member William J. Yung, III (“Yung”). The Ad Hoc Consortium of Senior Subordinated Noteholders (“Appellant”) urged Yung to step down from Tropicana’s board of directors, but Yung refused and Tropicana filed chapter 11 bankruptcy petitions on May 5, 2008 (the “Petition Date”).

The next day, Appellant filed an emergency motion for the appointment of a chapter 11 trustee (the “Trustee Motion”) in an effort to remove Yung from management. Several parties joined in the Trustee Motion, and the Trustee Motion was settled following the first day of trial when Yung agreed to resign from his management positions and Tropicana agreed to acknowledge Appellant’s substantial contribution to the bankruptcy estates by prosecution of the Trustee Motion. On July 31, 2009, Appellant filed its application for allowance of an administrative claim under 11 U.S.C. §§ 503(b)(3) and (b)(4) for $2,434,474 (the “Application”), representing the legal fees and expenses incurred by appellant in connection with the Trustee Motion. On September 10, 2009 the Bankruptcy Court held a hearing on the Application and orally denied the relief sought therein upon finding that the Appellant filed the Trustee Motion in its own self-interest. Appellant then filed the instant appeal to the District Court.

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Burtch v. Detroit Forming, Inc. (In re Archway Cookies), Case No. 08-12323 (CSS), Adv. No. 09-51429 (CSS) (September 1, 2010) (J. Sontchi).

On October 6, 2008 (the “Petition Date”), Archway Cookies LLC and Mother’s Cake & Cookie Co. (collectively, the “Debtors”) filed voluntary petitions under Chapter 11 of the Bankruptcy Code. The Debtors subsequently converted the case to one under Chapter 7 on January 9, 2009, and Jeoffrey L. Burtch was appointed the Chapter 7 Trustee (the “Plaintiff” or “Trustee”). On July 15, 2009, the Trustee commenced an adversary proceeding against Detroit Forming, Inc. (“DFI” or the “Defendant”) under 11 U.S.C. §§ 547 and 550 (the “Complaint”) seeking to avoid as preferential six (6) transfers totaling $180,648.17. In October 2009, DFI filed a motion for summary judgment, arguing that the alleged transfers were subject to the ordinary course of business defense. 

DFI is a manufacturer of plastic trays used in the food industry and, prior to the Petition Date, DFI provided plastic trays to the Debtors for over two years. The average number of days-to-payment from October 2006 through July 7, 2008 (the “Historical Period”) was 42 with a range of 21 to 177 days. The average number of days from July 8, 2008 through October 6, 2008 (the “Preference Period”) was 47 days, with a range of 33 to 64 days. The Court granted summary judgment on DFI’s behalf, holding that the ordinary course of business defense applied.

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In re WCI Communities, Inc., Case No. 08-11643 (KJC) (September 2, 2010) (J. Carey) 

WCI and related entities (the “Debtors”) filed for relief under chapter 11 of the Bankruptcy Code on August 4, 2008 (the “Petition Date”). As of the Petition Date, WCI was the lessee under two leases, hereafter referred to as the Ground Lease and the Welcome Center Lease (collectively, the “Leases”) of overlapping property with Kiva, Inc., the predecessor to Fremont Building Company (“Fremont”). The Leases were “net leases” that required WCI to pay all taxes and other charges owing with respect to the leased properties as “additional rent.” In its application, Fremont sought payment of one outstanding ad valorem tax obligation in the amount of $131,774.95, alleged to be due under both Leases.

However, effective February 27, 2009, the Leases were rejected by the Debtor. Accordingly, the Court undertook to determine when the obligation to pay the taxes under the Leases arose and whether payment of such taxes conferred a benefit on the estate.

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