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In re: J. Silver Clothing, Inc., Chapter 7, Case No. 05-10522 (PJW); Burtch v. Connecticut Community Bank, N.A. d/b/a The Greenwich Bank, Adv. Pro. No. 07-50814 (KG) (April 29, 2011) (J. Gross)

Summary:

The Chapter 7 Trustee (the “Trustee”) filed a Complaint seeking, inter alia, to avoid Debtor’s transfer of a security interest in substantially all of its assets to Connecticut Community Bank, N.A. d/b/a The Greenwich Bank & Trust Company (the “Bank”), which occurred with the preference period. The Court was first asked to determine whether the transfer met the requirements of section 547(c)(1). The Court determined that the transfer met both of the requirements of the subsection as the transfer was intended by the debtor and the creditor to be a contemporaneous exchange and was, in fact, a contemporaneous exchange.

Discussion:

The during the fall of 2004, the Debtor entered into a revolving credit loan in an amount that would not exceed $1 million (the “Loan”). The Loan closed on December 1, 2004. Debtor entered into a Loan and Security Agreement (the “Loan Agreement”) with the Bank and Debtor executed a Credit Agreement and Commercial Revolving Loan Note (the “Note”). The Bank required a first lien on all of Debtor’s business assets, excluding real estate. The Bank also required a guarantee from co-defendant James Fuld (“Fuld”). The guarantee provided a more timely closing, a lower interest rate and more favorable repayment terms.

The Bank’s first lien covered substantially all of the Debtor’s assets. To ensure its first lien position, the Bank caused Debtor to file UCC-3’s cancelling prior recorded security interests in Debtor’s assets and certificate that no liens existed in Delaware. The Bank also required Fuld to subordinate his notes. However, problems ensued when the Bank attempted to perfect its security interest in the Collateral. Bank’s counsel mailed its UCC-1 to the Delaware Division of Corporations on December 3, 2004, one day after the Bank made its first distribution under the Loan. The Division of Corporations rejected the First UCC-1 and on December 20, 2004, counsel mailed a second, corrected UCC-1. The Debtor filed its own UCC-1 on December 30, 2004. The Bank’s Second UCC-1 was filed on January 4, 2005. 

Thereafter, in mid-January 2005, the Debtor sold 29 stores for $1.4 million to Hoffman Acquisition Corp. (“Hoffman”). Hoffman required the Bank to release its lien on the Debtor’s assets. The sale closed on February 16, 2005 and as required by the Loan Agreement, Hoffman, on Debtor’s behalf, paid the Bank $485,569.95 (the “Repayment”) which the Debtor owed, thereby enabling the Bank to release its lien. Debtor then filed its petition under chapter 11 of the Bankruptcy Code on February 25, 2005. The case was subsequently converted to a chapter 7. The Trustee’s claims arise from the Loan and the Repayment.

The Court granted summary judgment in favor of defendants. The Court found that the Debtor’s transfer of the security interest in the Collateral to the Bank was intended by the parties as a contemporaneous exchange for the Bank’s $1 million credit loan to Debtor (under section 547(c)(1)(A)) and was in fact, substantially contemporaneous (under section 547(c)(1)(B)). First, the Court determined that the documents underlying the Loan supported a finding that the parties intended for the exchange to be contemporaneous. Not only did the Bank offer evidence that the Loan was contemplated only with a first priority lien on the Collateral and Fuld’s Guarantee, the Defendants also provided direct evidence that the Debtor intended and took action to provide the Bank with a first lien on the Collateral. The Debtor was required to file a UCC-3 and also filed a UCC-1.

Next, under section 547(c)(B), the Court refused to adopt a bright-line rule in interpreting section 547(e). The Court concluded that Section 547(e) does not inform the “substantially contemporaneous” requirement of section 547(c). Rather, the Court noted that the modifier “substantial” makes it clear that contemporaneity is a flexible concept which requires a case-by-case inquiry into all relevant circumstances. The Court looked to the totality of the circumstances, including reasons for the delay, the intent of the parties, and the possibility of fraud.

The Court also dismissed the remaining causes of action, including these alleging a fraudulent transfer. The Court concluded that the Bank had a valid, perfected security interest and was over secured. Therefore, there was no question that the Debtor received reasonably equivalent value for the repayment on the Loan. 

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In re: NEC Holdings Corp., et al., Chapter 11, Case No. 10-11890 (PJW); NEC Holdings Corp., et al. v. Linde LLC, et al., Adv. Proc. No. 11-51129 (PJW) (J. Walsh) (May 4, 2011, amended May 18, 2011)

The Court was asked to determine whether environmental claims were core or non-core. Debtors commenced an adversary proceeding against Linde LLC and related entities (“Linde”) seeking recovery of costs, contribution and declaratory relief relating to environmental liabilities of real property located at 400 Clermont Terrance in Union, New Jersey.

The Union property is the Debtors sole remaining substantial tangible asset. Linde was the prior owner of the Union property. The Debtors filed an adversary proceeding seeking recovery for costs and contribution and declaratory relief under CERCLA; contribution under the New Jersey Sill Act and contribution under the New Jersey Joint Tortfeasors Contribution Law. Debtors assert that the claims are core proceedings under section 157(b)(2)(A) and (O). The Defendants moved for a determination that the claims are non-core.

Discussion:

The Court first looked to the non-exhaustive list of core proceedings in section 157(b)(2) of the Bankruptcy Code. The Court then performed a claim-by-claim two-step test by reviewing whether the claim (1) invokes a substantive right provided by title 11 or (2) is a proceeding, that by its nature, could arise only in the context of a bankruptcy case. See In re Exide Technologies, 544 F.3d 196, 206 (3d Cir. 2008).

The Court did not accept the Debtors’ arguments that these claims were core. Debtors asserted that the claims fall under section 157(b)(2)(A) covering “matters concerning the administration of the estate” or section 157(b)(2)(O) covering “other proceedings affecting the liquidation of the assets of the estate or the adjustment of the debtor-creditor or the equity security holder relationship, except personal injury tort or wrongful death claims.” 

In ruling for Defendants, the Court held that the claims do not involve any substantive rights arising under the Bankruptcy Code. Further, the claims could arise outside of the bankruptcy context. Thus, even if the claims fit into section 157(b)(2)(A) or (O), they did not satisfy the two-step test for core proceedings. 

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In re: Trico Marine Services, Inc., Case No. 10-12653 (BLS) (April 15, 2011) (J. Shannon)

The Court was asked to decide the Debtors’ motion (the “Motion”) to determine the validity and priority of a certain make-whole premium (the “Make-Whole Premium”). In 1999, Debtor Trico Marine International issued notes (the “Obligation”) to finance the construction of two supply vessels (the “Vessels”). The Obligation was governed by the terms of a trust indenture (the “Indenture”) between TMI and Bank One Trust Company, N.A., the predecessor-in-interest to the indenture trustee Bank of New York Mellon Trust Company, N.A. (the “Indenture Trustee”).

The Indenture provided that the Obligation was subject to semi-annual mandatory sinking fund redemption payments (the “Mandatory Redemption Payments”). The Indenture was not secured by any of the Debtors’ property. Rather, the Obligation was guaranteed by the U.S Secretary of Transportation, on behalf of the Maritime Administration (“MARAD”) under the terms of a guarantee (the “Guarantee”).

Following the Petition Date, the Debtors liquidated certain assets and sold the Vessels (the “Sale”). In exchange for its consent to the Sale, MARAD required the Debtors to redeem the Obligation in full to ensure that the Indenture Trustee would not call upon the Guarantee. Upon closing of the Sale, the Debtors caused the Indenture Trustee to receive a payoff of $4,555,489 (the “Payoff”). 

Under the terms of the Indenture, the Obligation was also subject to the optional Make-Whole Premium that matured only if and when TMI elected, at its option, to redeem the Obligation, “in whole or in part, at any time, at the redemption prices.” The Indenture Trustee sought full and immediate payment of the Make-Whole Premium out of the Sale proceeds held in escrow.  Based upon the date of redemption, the Indenture Trustee asserted that the Make-Whole Premium owed was $511,849.01. 

Discussion:

The Debtors’ motion sought a determination that the Make-Whole Premium was not an allowable claim because it was an unmatured interest subject to disallowance under section 502(b)(2). In the alternative, the Debtors asserted that the Make-Whole Premium was, at best, a general unsecured claim – not covered by the Guarantee and therefore, not subject to MARAD’s lien under the Security Agreement.

The Court agreed with the Debtors’ alternative argument. The Court concluded that make-whole or prepayment obligations are in the nature of liquidated damages rather than an unmatured interest. The Guarantee did not cover the Make-Whole Premium. 

Furthermore, the Sale Order did not entitle the Indenture Trustee to full and immediate payment out of the reserved funds in the MARAD Escrow. The Court refused to interpret the Sale Order to allow the Indenture a new, senior lien. Rather, The Indenture Trustee was only entitled to its pro rata distribution under the Debtors’ plan for reorganization on account of its general unsecured claim for the Make-Whole Premium, to the extent that such claim was allowed. 

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In re: DBSI, Inc., Case No. 08-12687 (PJW); Zazzali v. Wavetronix LLC, et al., Adv. Case No. 10-55963 (March 4, 2011) (J.Walsh)

The trustees of the DBSI Estate Trust and the DBSI Litigation Trust (collectively, the Trustees) filed counts, set forth in the Complaint, against the Individual Defendants alleging theories including fraudulent conveyances, personal guaranty, breach of fiduciary duties, unjust enrichment and breach of contract concerning the DBSI enterprise’s business activities and specifically, those activities relating to DBSI’s investment in technology companies.  

The Complaint alleges that the investments were structured as loans from Stellar Technologies LLC (“Stellar”), a holding company majority-owed by DBSI Inc. (“DBSI”) and that these unproductive investments benefitted only the DBSI insiders by way of tax advantages that otherwise would have belonged to the DBSI companies. During the four years prior to the petition date, DBSI transferred over $10 million to Wavetronix LLC (“Wavetronix”) through a DBSI affiliate, DBSI Redemption Reserve (“DRR”). Stellar owned approximately 60% of Wavetronix and defendants David Arnold (“Arnold”) and Michael Jensen (“Jensen”) owed the remaining 40%. The individual defendants include Arnold, his wife Linda and Jensen (collectively, the “Individual Defendants”). A primary issue in this dispute was whether the funds transferred through DRR were capital contributions or loans to Wavetronix. The Trustees alleged that the transfers were loans. The Individual Defendants moved to dismiss the Complaint as failing to adequately plead any of the causes of action against them. The Court granted the motion. 

Discussion:

The Court dismissed each of the causes of action against the Individual Defendants. The Trustees were permitted to refile the Complaint as to the fraudulent conveyances (counts 1-6) and counts 15 (breach of fiduciary duties) and 16 (unjust enrichment). With regard to alleged fraudulent transfers, the Court cited AstroPower Liquidating Trust v. Xantrex Tech., Inc. (In re AstroPower Liquidating Trust), 335 B.R. 309, 333 (Bankr. D.Del. 2005) to require that the Complaint must set forth facts with sufficient particularity to apprise the defendants fairly of the charges made against them so that they can prepare an adequate answer. The Plaintiff, through the Complaint, must identify one of the following four factors: 1) the date of the transfer, the amount of the transfer, the name of the transferor, and the name of the transferee. See Giuliano v. U.S. Nursing Corp. (In re Lexington Healthcare Group), 339 B.R. 570, 575 (Bankr. D.Del. 2006). The Complaint failed to identify any transfers made to the Individual Defendants or for their benefit to sufficiently plead fraudulent transfer actions.  

The Court then turned to the remaining claims. With regard to the alleged breach of the personal guaranty (count 14), the Court reviewed the language set forth in the guaranty and determined that it covered claims made on or prior to December 31, 2008 and expired without any claims having been made during the duration. As such, the count was dismissed with prejudice. With regard to an alleged breach of fiduciary duty (count 15) and unjust enrichment (count 16), the Court concluded that the Trustees failed to provide any specific allegations. Finally, the Court dismissed count 17 (breach of operating agreement) with prejudice based on the language of the operating agreement that precluded Arnold or Jensen from being deemed delinquent.

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Burtch v. Huston (In re USDigital, Inc.), Case No. 09-10374 (CSS), Adv. Pro. No. 09-50469 (CSS) (January 5, 2011) (J. Sontchi)

On March 26, 2007 (the “Petition Date”), USDigital filed a voluntary Chapter 7 petition, subsequent to which Jeoffrey L. Burtch was appointed as successor interim Chapter 7 Trustee (the “Trustee”). The Trustee filed a complaint on March 18, 2009 seeking to avoid prepetition transfers and alleging breaches of fiduciary duty, aiding and abetting breaches of fiduciary duty, usurping corporate opportunity, corporate waste, unjust enrichment, accounting, disallowance of claims, equitable subordination, and recharacterization against NexGen Telecom, LLC (“NexGen”), Infinidi Media, Inc. (“Infinidi Media”), Stonebridge Marketing, LLC (“Stonebridge”), and directors of USDigital, Inc. (collectively, the “Defendants”).

On November 12, 2009, the Defendants filed a motion to dismiss, to which the Trustee objected on January 14, 2010. The Defendants filed a reply brief on February 12, 2010 and the Court entered its order and issued its opinion on January 5, 2011.

By way of background, USDigital was one of four separate, but interconnected, corporations formed between 2003 and 2006. The corporate quartet consisted of: (1) USDigital; (2) USDigital Television, LLC (“USDTV”); (3) NexGen; and (4) Infinidi Media. Each of these corporations shared the same source of capital, had many of the same directors and officers, and entered into transactions with one another. In relevant part, on June 13, 2006, USDTV executed a promissory note in favor of NexGen in the amount of $104,160.00 secured by set top boxes owned by USDTV, which transaction was documented by a security agreement (the “USDTV Security Agreement”). 

Following USDTV’s bankruptcy petition in 2007, USDigital and USDTV entered into an asset purchase agreement (the “APA”) for the sale of substantially all of USDTV’s assets to USDigital, as well as USDigital’s assumption of USDTV’s liabilities to NexGen including the USDTV Security Agreement, which sale was approved on September 12, 2006.

Discussion:

The Court’s ruling and rationale concerning each of the counts of the complaint are set forth below.

Count I: Preferential Transfers to NexGen

Count I of the Complaint alleged that USDigital made two preferential transfers to NexGen: (i) a security interest in the set top boxes, and (ii) a $44,421 payment for expense reimbursement for a payment NexGen made to ESPN on USDTV’s behalf. The issue with respect to both transfers was whether the payment was made “for or on account of an antecedent debt,” as required by 11 U.S.C. § 547(b)(2). The Court determined that neither payment was made on account of an antecedent debt because: (i) the transfer of the security interest occurred on the same day as USDigital incurred the obligation to make such transfer, both of which events either occurred on the date USDigital entered into the APA or on the date the Court approved the asset sale; and (ii) the expense reimbursement payment was made on August 8, 2006, comfortably before the Debtor became obligated to make such payment pursuant to the September 12, 2006 approval of the APA. Accordingly, Count I was dismissed.

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