In a positive decision for trade vendors and non-debtor suppliers, the Eleventh Circuit, in Auriga Polymers Inc. v. PMCM2, LLC, held that a Section 503(b)(9) post-petition priority payment received by a creditor for goods received during the 20 day period before the petition date did not diminish its subsequent new value preference defense.  40 F.4th 1273 (11th Cir. 2022).

Under Section 547(c)(4) of the Bankruptcy Code, preferential exposure can be reduced by the amount of “new value” provided by the defendant to the debtor subsequent to receipt of the alleged preferential transfer.

In this case, carpet manufacturer Beaulieu Group, LLC (“Beaulieu”) entered chapter 11 bankruptcy. One creditor, Auriga Polymers Inc. (“Auriga”), sold the debtor textiles.  It made a Section 503(b)(9) request for goods delivered within 20 days of the petition date, which provides for administrative expense priority. Priority claims are often paid in full, whereas unsecured creditors often receive pennies on the dollar.

Section 547(b) of the Bankruptcy Code authorizes the trustee to clawback (avoid) certain payments made to a creditor within 90 days preceding the petition date. However, under Section 547(c)(4), the trustee cannot clawback an otherwise preferential payment if the creditor supplied “new value” to the debtor after receiving such payment, which is (A) not secured by an otherwise unavoidable security interest, and (B) on account of which the debtor did not make an “otherwise unavoidable transfer” to the benefit of the creditor.

During the preference period, Beaulieu paid Auriga $2.2 million, after which time Auriga delivered additional goods. The trustee agreed that the Section 547(c)(4) new value defense served as a defense to all of the transfers except $421,119, the amount of Auriga’s Section 503(b)(9) claim. The trustee argued that such payment, even though received post-petition, constituted an “otherwise avoidable transfer” that would negate Auriga’s 547(c)(4) defense as to that amount.

The Eleventh Circuit disagreed. It examined Section 547 in context and concluded:

  • “Transfers,” as defined in the statute, must be made pre-petition;
  • “Preferences” refers to pre-petition payments; and
  • If “new value” must be delivered pre-petition, so must “otherwise unavoidable transfers”.

Therefore, because the Section 503(b)(9) claim was paid post-petition, it did not constitute an “otherwise unavoidable transfer”. Auriga’s new value defense was upheld.

For a discussion of various defenses that can be raised in response to Section 547 avoidance actions, the following article is a helpful read: A Primer on Defenses to Bankruptcy Preference Claims.

Carl D. Neff is a partner with the law firm of Pierson Ferdinand LLP, and practices in Delaware. You can reach Carl at (302) 482-4244 or at carl.neff@pierferd.com.

In a Chapter 13 bankruptcy, also known as a wage earner’s plan, individual debtors may be permitted to retain their property, and develop a plan to repay a portion or all of their debts. A debtor will propose a repayment plan to make installment payments to creditors over a 36 to 60 month period.

A creditor of a chapter 13 debtor may not pursue collection efforts after the bankruptcy petition is filed, and during the pendency of the plan.  This therefore means that a creditor will need to wait years to be repaid, and the plan may not even provide for full payment of the creditor’s claim.

What is a creditor to do in such a situation? One little known fact of a Chapter 13 case is that, under 11 U.S.C. § 109(e), a debtor may not have more than $419,275 in unsecured, liquidated, noncontingent debt (updated yearly to reflect changes in the consumer price index). Similarly, a debtor’s secured debt may not exceed $1,257,850.  You read that right: too much of these types of debt can disqualify a debtor from filing a Chapter 13 bankruptcy petition.

The Section 109(e) debt limit is often overlooked by trustees, creditors, and even debtors themselves.  A quick review of a debtor’s schedules will determine whether the debt limit has been exceeded.  If so, a creditor can move to dismiss the Chapter 13 bankruptcy case.  The debtor may then be given the option to convert the bankruptcy case to one under Chapter 7 or Chapter 11, each of which may be disadvantageous from the debtor’s perspective.

For example, unlike in a Chapter 13 case, the debtor’s assets may be liquidated in order to repay creditors in a Chapter 7 case.  Moreover, the debtor will be subject to the Chapter 7 Means Test Calculation, and will be required to complete Official Form 122A-1 and 122A-2.  If, for example, the debtor’s income (or contributions received from a spouse) is too high and creates a presumption of abuse, the debtor may fail the Means Test and the Chapter 7 case may be dismissed.

Therefore, it is important for any creditor in a Chapter 13 case to consult with a bankruptcy attorney to carefully consider whether the debtor has exceeded the debt limit under Section 109(e) of the Bankruptcy Code at the onset of the Chapter 13 case.

Carl D. Neff is a partner with the law firm of Pierson Ferdinand LLP, and practices in Delaware. You can reach Carl at (302) 482-4244 or at carl.neff@pierferd.com.

Preferred Communication Systems, Inc. (“PCSI” or “Debtor”) filed for chapter 7 bankruptcy before the United States Bankruptcy Court for the District of Delaware on July 28, 2021.

This bankruptcy proceeding constitutes a rare example of a debtor listing more assets than debt.  Per PCSI’s Schedules, the Debtor lists approximately $1.1 million in assets, and 607K in liabilities.  The majority of PCSI’s assets are comprised of a 2014 federal tax refund in the approximate amount of 844K.

The Section 341 meeting for PCSI is scheduled for August 25, 2021 at 10:00 a.m. via phone.  George L. Miller has been appointed as the Chapter 7 Trustee to the case.

Carl D. Neff is a partner with the law firm of Pierson Ferdinand LLP, and practices in Delaware. You can reach Carl at (302) 482-4244 or at carl.neff@pierferd.com.

Earlier this month, on July 8, 2021, Pipeline Foods, LLC and its affiliated debtors (“Pipeline”) filed for Chapter 11 protection in the United States Bankruptcy Court for the District of Delaware.  The debtors’ bankruptcy cases are jointly administered before the Honorable Karen B. Owens under Case No. 21-11002.

Pipeline’s Chief Executive Officer, Anthony Sepich, stated: “[t]he impact of the Coronavirus (COVID-19) pandemic coupled with the Company’s secured debt obligations have caused significant financial distress on our business.  As a result, we believe that a bankruptcy filing and a potential sale of the business, portions of the business, and certain of its assets is the best path forward to unlock value for the benefit of all creditors.”

Headquartered in Minneapolis, Minnesota, Pipeline has expanded through acquisitions over the past several years, including the acquisition of Organic Ventures, an ancient grains and specialty products business.

Pipeline’s strategy in the bankruptcy is to continue its operations, including operating within a cash collateral budget to pay employee wages and benefits without interruption and to use cash collateral.  Pipeline will also evaluate strategic alternatives, including a sale of its assets to maximize recovery for its creditors.  In this vein, Pipeline has requested authority to sell its commodities inventory by private sales outside of the ordinary course of business to facilitate the company’s use of cash collateral.  A hearing to consider this requested relief is scheduled for July 30, 2021.

Pipeline is represented by Saul Ewing Arnstein & Lehr, LLP, and the claims agent for Pipeline is Stretto.  Barnes & Thornburg LLP represents the Official Committee of Unsecured Creditors, which was formed on July 22, 2021.

Carl D. Neff is a partner with the law firm of Pierson Ferdinand LLP, and practices in Delaware. You can reach Carl at (302) 482-4244 or at carl.neff@pierferd.com.

Recently, on July 13, 2021, the Chief Judge of the United States District Court for the District of Delaware issued a Revised Standing Order lifting the requirement that face masks be worn in public areas of the courthouse by those who are fully vaccinated against COVID-19.  The Revised Standing Order impacts each of the courthouses of the District of Delaware and the Delaware Bankruptcy Court.  Per the standing order, judges retain the ability to require the use of masks within their courtrooms as they see fit.

Carl D. Neff is a partner with the law firm of Pierson Ferdinand LLP, and practices in Delaware. You can reach Carl at (302) 482-4244 or at carl.neff@pierferd.com.

On April 6, 2021, J. Kate Stickles was sworn in as the newest judge of the United States Bankruptcy Court for the District of Delaware.  Judge Stickles becomes the latest judge to join the Delaware Bankruptcy Court since Judges John T. Dorsey and Karen B. Owens were sworn onto the bench in 2019.

Judge Stickles has thirty years of experience, previously working for Cole Schotz P.C. and Saul Ewing LLP.  According to an Announcement issued by the Delaware Bankruptcy Court, Judge Stickles represented “debtors, creditors, official committees, examiners, post-confirmation trustees and other interested parties in Chapter 11 proceedings”, and has been recognized as a leading bankruptcy practitioner in Chambers USA since 2010.

The recent appointment of Judge Stickles brings the total number of judges in the Delaware Bankruptcy Court to seven.  Judge Stickles replaces former Judge Kevin J. Carey, who retired in 2019 and now works with the firm of Hogan Lovells. The Delaware Bankruptcy Court is one of the most active bankruptcy courts in the nation, leading the country in Chapter 11 filings in 2020.

Carl D. Neff is a partner with the law firm of Pierson Ferdinand LLP, and practices in Delaware. You can reach Carl at (302) 482-4244 or at carl.neff@pierferd.com.

Starting on February 18, 2021, Insys Liquidation Trust (“Insys Trust”), the liquidation trust appointed by the United States Bankruptcy Court for the District of Delaware to prosecute claims on behalf of Insys Therapeutics, Inc., filed approximately 53 complaints seeking the avoidance and recovery of allegedly preferential and/or fraudulent transfers under Sections 547, 548, 549 and 550 of the Bankruptcy Code, along with the disallowance of claims under Section 502(d) of the Bankruptcy Code.

By way of background, on June 10, 2019, Insys Therapeutics, Inc. and its affiliated companies (collectively, the “Debtors”) filed petitions in the United States Bankruptcy Court for the District of Delaware seeking relief under chapter 11 of the United States Bankruptcy Code. The Insys Trust was appointed to prosecute avoidance action claims on behalf of the estate.

The Insys Trust filed a Motion for an Order Establishing Streamlined Procedures Governing Adversary Proceedings Brought by Plaintiff Pursuant to Sections 502, 547, 548, 549 and 550 of the Bankruptcy Code (“Procedures Motion”).  Through the Procedures Motion, the Insys Trust has proposed procedures to govern mediation, pretrial conferences and discovery in each of the adversary proceedings filed in the Insys bankruptcy proceeding.

For a primer on various defenses that can be raised in response to avoidance actions filed to seek the recovery of transfers under Section 547 of the Bankruptcy Code, the following article is a helpful read: A Primer on Defenses to Bankruptcy Preference Claims.

Carl D. Neff is a partner with the law firm of Pierson Ferdinand LLP, and practices in Delaware. You can reach Carl at (302) 482-4244 or at carl.neff@pierferd.com.

Another energy company has succumbed to bankruptcy in the wake of the Covid-19 pandemic.

Nine Point Energy Holdings, Inc., a private exploration & production company focused on the Williston Basin, and its affiliates, including Foxtrot Resources LLC, filed for chapter 11 protection in the United States Bankruptcy Court for the District of Delaware, on March 15, 2021.  The Chapter 11 petition states that the company’s liabilities are between $100 million and $500 million.

The Denver-based oil and gas company plans to enter into an agreement for debtor-in-possession financing and a stalking horse credit bid, which the debtors anticipates to come from their secured lenders.

Nine Point was founded in 2017, and currently operates 205 oil and gas wells, which are largely located in the Williston Basin oilfield in North Dakota.  The predecessor of Nine Point, Triangle Petroleum Corporation, previously filed for chapter 11 bankruptcy protection in Delaware in 2016.

A first-day hearing is scheduled for March 17, 2021 at 2:00 p.m. to consider the Debtors’ first-day motions.  The case is assigned to the Honorable Mary F. Walrath, case no. 21-10570.

Carl D. Neff is a partner with the law firm of Pierson Ferdinand LLP, and practices in Delaware. You can reach Carl at (302) 482-4244 or at carl.neff@pierferd.com.

Champion Property Holdings, LLC and Anglin Cultured Stone Products LLC (“Debtors”) each filed for Chapter 11 bankruptcy protection with the Delaware Bankruptcy Court on February 10, 2021.

According to Debtors’ Petitions, their assets total between $100k – $500k, and their liabilities total between $1 million and $10 million.

A Subchapter V Trustee was appointed to the action.  A Subchapter V Trustee is generally responsible for facilitating a repayment plan and reaching a resolution with creditors. If there is a dispute, the trustee can operate in a manner that is similar to a mediator, to attempt to resolve disputes with creditors.

The Chapter 11 cases are assigned to Judge Dorsey.  The law firm of Gellert Scali Busenkell & Brown LLC represents the Debtors.

Carl D. Neff is a partner with the law firm of Pierson Ferdinand LLP, and practices in Delaware. You can reach Carl at (302) 482-4244 or at carl.neff@pierferd.com.

Wardman Hotel Owner LLC (“Wardman” or “Debtor”) filed for Chapter 11 bankruptcy on January 11, 2021, ending its management contract with Marriott International. The Chapter 11 petition was filed in the U.S. Bankruptcy Court for the District of Delaware.

The Wardman Park, one of the largest hotels in Washington, D.C. with 1,152 rooms, opened in 1918, during the Spanish Flu pandemic.

According to the Debtor’s chapter 11 petition, Wardman reports $100 to $500 million in both assets and liabilities.

Pursuant to the Debtor’s First Day Declaration, Wardman intends to conduct a sale of substantially all of its assets and wind down its remaining operations.

Carl D. Neff is a partner with the law firm of Pierson Ferdinand LLP, and practices in Delaware. You can reach Carl at (302) 482-4244 or at carl.neff@pierferd.com.