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 FisherBroyles, LLP, and practices in Delaware. You can reach Carl at (302) 482-4244 or at Carl.Neff@FisherBroyles.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 FisherBroyles, LLP, and practices in Delaware. You can reach Carl at (302) 482-4244 or at Carl.Neff@FisherBroyles.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 FisherBroyles, LLP, and practices in Delaware. You can reach Carl at (302) 482-4244 or at Carl.Neff@FisherBroyles.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 FisherBroyles, LLP, and practices in Delaware. You can reach Carl at (302) 482-4244 or at Carl.Neff@FisherBroyles.com.

The Consolidated Appropriations Act, 2021 (“CAA”) was signed into law on December 27, 2020.  As mentioned in this prior post, the CAA contains many amendments to the Bankruptcy Code which impacts creditors and other interested parties to a bankruptcy proceeding.

One such amendment impacts section 366 of the Bankruptcy Code.  Under Section 366 of the Bankruptcy Code, a debtor must provide adequate assurance of performance to the utilities provider in order to continue receiving utilities during the court of the bankruptcy case.  Section 366(b) states:

Such utility may alter, refuse, or discontinue service if neither the trustee nor the debtor, within 20 days after the date of the order for relief, furnishes adequate assurance of payment, in the form of a deposit or other security, for service after such date. On request of a party in interest and after notice and a hearing, the court may order reasonable modification of the amount of the deposit or other security necessary to provide adequate assurance of payment.

11 U.S.C. § 366(b).

In other words, prior to the enactment of the CAA, a utility provider may discontinue utility services to an individual debtor who failed to provide adequate assurance of payment during the bankruptcy case. “Assurance of payment” is defined in Section 366(c)(1)(A) of the Bankruptcy Code.

The CAA amends Section 366 of the Bankruptcy Code to prevent a utility provider from discontinuing utility services to an individual debtor provided that the individual debtor continues to pay all other post-petition utility payments, even if no adequate assurance of payment was provided.

The text of Section 366(d), the additional provision added to the statute by the CAA, is set forth below:

(d) Notwithstanding any other provision of this section, a utility may not alter, refuse, or discontinue service to a debtor who does not furnish adequate assurance of payment under this
section if the debtor—
(1) is an individual;
(2) makes a payment to the utility for any debt owed to the utility for service provided during the 20-day period beginning on the date of the order for relief; and
(3) after the date on which the 20-day period beginning on the date of the order for relief ends, makes a payment to the utility for services provided during the pendency of case when such a payment becomes due.

This provision sunsets in one year, December 27, 2021.

RELATED: Amendments to the Bankruptcy Preference Statute in the Consolidated Appropriations Act, 2021.

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

On December 27, 2020, the much-anticipated Consolidated Appropriations Act, 2021 (“CAA”) was signed into law.  The CAA contains several COVID-19-related amendments to the United States Bankruptcy Code, 11 U.S.C. §§ 101, et seq. (“Bankruptcy Code”), which may impact many types of creditors. The “Bankruptcy Relief” amendments are set forth in Title X of the CAA.

The CAA contains several amendments of significance to creditors, which will be discussed in subsequent posts. This post will focus on the CAA’s amendment to Section 547 of the Bankruptcy Code, which governs the recovery of so-called preferential transfers made in the 90 day period proceeding a bankruptcy filing for the benefit of a debtor’s estate (or one-year period for an insider).

RELATED: A Primer to Defenses Raised in Bankruptcy Preference Claims.

Preference Statute Amendments

The CAA amends the preference statute of the Bankruptcy Code, Section 547, to prohibit a debtor or trustee from avoiding payments made by a debtor during the preference period for “covered rental arrearages” and “covered supplier arrearages.”  This amendment may apply to landlords of nonresidential real property and suppliers of goods and services.

In order to qualify: (i) the debtor and the counterparty must have entered into a lease or executory contract before the bankruptcy filing; (ii) the parties must have amended the lease or contract after March 13, 2020; and (iii) the amendment to the lease must have deferred or postponed payments otherwise due under the lease or contract.

The bankruptcy preference statute exemption does not apply to the following types of payments: fees, penalties, or interest imposed in the post-March 13, 2020 amendment.

This provision sunsets two years after the enactment of the CAA, but the provisions will continue to apply to bankruptcy cases filed before the sunset date.

Stay tuned for further updates on the CAA’s amendments to the United States Bankruptcy Code.

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

On December 16, 2020, In-Shape Holdings, LLC and two affiliated debtors (together, the “Debtors” or “In-Shape”) filed voluntary petitions for relief under Chapter 11 of the United States Bankruptcy Code.  In-Shape Holdings, LLC is a health club operator in Stockton, CA.

The company reports $50 to $100 million in assets and more than $100 million in liabilities, including a first-lien revolving credit agreement of up to $17 million and $53 million in term loans.

In-Shape entered into an asset purchase agreement to sell substantially all of the Debtors’ assets with an existing lender and co-investors as the stalking horse, for a purchase price of a $45.3 million credit bid. The stalking horse would assume leases for up to 45 clubs.  In-Shape also entered into a deal to receive up to $30.3M in DIP financing, and asked the court to approve using those funds.

In-Shape had operated 65 clubs prior to the covid-19 pandemic, but has since terminated leases at 21 locations and plans to reject leases for another four clubs.  Top Five Tips for Commercial Landlords Dealing with a Tenant in Bankruptcy is an important read for commercial landlords dealing with a debtor in bankruptcy.

FisherBroyles does not represent the Debtors in this case.  If you have received a notice and have any questions, you should contact Debtors’ counsel.  This blog post is for informational purposes only.

In-Shape’s bankruptcy case was assigned case no. 20-13130 and is being jointly administered before the Honorable Laurie Selber Silverstein in the United States Bankruptcy Court for the District of Delaware.

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

Starting on October 14, 2020, NSC Wholesale Liquidating Trust (“NSC Trust”), the liquidation trust appointed by the by the United States Bankruptcy Court for the District of Delaware to prosecute claims on behalf of the NSC estate, filed approximately 62 complaints seeking the avoidance and recovery of allegedly preferential and/or fraudulent transfers under Sections 547, 548 and and 550 of the Bankruptcy Code.

By way of background, on October 24, 2018, NSC Wholesale Holdings, LLC and various of its subsidiaries filed voluntary petitions in the Delaware Bankruptcy Court. The Debtors continue to operate their businesses and manage their properties as debtors-in-possession.  The NSC Trust was appointed to prosecute avoidance action claims on behalf of the estate.

According to the summons issued in these actions, a pre-trial conference has been scheduled for January 19, 2021 before the Delaware Bankruptcy Court.

For a primer on various defenses that can be raised in response to a Section 547 demand, the following post is a recommended read: A Primer on Defenses to Bankruptcy Preference Claims.

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

Starting on October 8, 2020, Kmart Holding Corporation, Sears, Roebuck & Co. and other affiliated debtors of Sears Holdings Corporation (“Debtors“) collectively filed over 400 complaints in the United States Bankruptcy Court for the Southern District of New York, seeking the avoidance and recovery of allegedly preferential and/or fraudulent transfers under Sections 547, 548 and 550 of the Bankruptcy Code.

By way of background, on October 15, 2018 (the “Petition Date”), Sears Holdings Corporation and its debtor affiliates each commenced a case by filing a voluntary petition for relief under chapter 11 of the Bankruptcy Code.  According to the complaints filed in these actions, the Debtors were an integrated retailer with significant physical and intangible assets, as well as virtual capabilities, which operated a national network of stores and websites. Per the complaints, as of the Petition Date, the Debtors operated 687 retail stores in forty-nine (49) states, Guam, Puerto Rico, and the U.S. Virgin Islands under the Sears® and Kmart® brands and employed approximately 68,000 individuals, of whom approximately 32,000 were full-time employees and approximately 36,000 were part-time employees.

In the preference lawsuits filed, the Debtors seek to avoid potentially preferential claims under Sections 547 and/or 548 of the Bankruptcy Code, and seek to recover said preferential transfers under Section 550 of the Bankruptcy Code.  The Debtors also seek disallowance of each respective defendant’s claims under Sections 502(d) and (j) of the Bankruptcy Code.

The law firm of ASK LLP represents the Debtors in these actions.

For a primer on the various defenses that can potentially be raised in response to a Section 547 demand, the following post is a recommended read: A Primer on Defenses to Bankruptcy Preference Claims.

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

Your business provided goods or services to another company.  Shortly thereafter, that company then files for bankruptcy, and owes your business substantial sums of money.  After the filing of the bankruptcy action, you then receive a letter from counsel demanding that your business return all of the money the debtor paid to you in the 90 days before it filed for bankruptcy.

Can this really be true?

Unfortunately, it happens frequently.  Under Section 547(b) of the Bankruptcy Code, a debtor may avoid a transfer it paid to creditors, trade vendors, etc. made in the ninety days prior to its bankruptcy filing.  Under Section 550 of the Bankruptcy Code, a debtor may recover, for the benefit of the estate, the amount of the avoided transfer.  Simply put, Section 547 was enacted to prevent a debtor from picking and choosing its favorite creditors, while leaving pennies on the dollar for the rest of the debtor’s creditors.

Fortunately, there are several defenses that can be raised in response to a preference demand.  This article provides a brief summary of the elements of a preference claim, and defenses that can be asserted in response thereto.

Elements of a Preference Claim Under Section 547(b) of the Bankruptcy Code

First, what is a preference claim?

To establish that a defendant received a preferential transfer under Section 547(b) of the Bankruptcy Code, plaintiff must prove that the transfer was received by a creditor on account of an “antecedent debt”, and that the preferential payments must be made (i) while the debtor was “insolvent”, (ii) within 90 days before the debtor filed for bankruptcy, and (iii) the transfer provide the creditor with more sums than it would have received if the debtor had liquidated under a chapter 7 liquidation.

An antecedent debt is created when a creditor receives a right to payment from the debtor for goods or services.  In other words, a transfer that is a “prepayment” does not qualify as a preferential transfer under Section 547.  Keep in mind that for preference claims against “insiders” of the debtor, the preference period extends back one year before the petition date.

Finally, the plaintiff must show that the creditor received more than it would have received had the payment not been made, but instead the defendant received a distribution in a chapter 7 liquidation on account of such claim. Stated differently, to show that a creditor received “preferential” treatment,  the plaintiff must establish that the transfer was greater than the amount the defendant would have received had the debtor liquidated its assets under a bankruptcy brought under chapter 7 of the Bankruptcy Code.

Defenses to a Preference Demand

Second, what are the defenses to a preference claim?

Even if the debtor or trustee can establish that the debtor made a preferential transfer, there are several affirmative defenses available under Section 547(c).  The most frequently invoked defenses are: (i) the subsequent new value defense; (ii) the ordinary course of business defense; and (iii) the contemporaneous exchange of new value defense.  These defenses are briefly discussed below.

1.  Subsequent New Value Defense

Under Section 547(c)(4) of the Bankruptcy Code, potential exposure to a claim seeking the recovery and avoidance of a preferential transfer can be reduced by the amount of “new value” provided by the defendant to the debtor subsequent to receipt of the preferential transfer.

To establish a new value defense, the preference defendant must show that after it received a preferential transfer, it then provided the debtor with new value in the form of additional goods or services.

For example, Company A receives a payment from Company B sixty days before Company B files for bankruptcy.  Ten days later, Company A provides goods or services to Company B. The subsequent new value defense reduces the preferential exposure resulting from the preferential payment in the amount of the goods or services subsequently provided.

2. Ordinary Course of Business Defense

Another commonly invoked defense to a preference claim is the ordinary course of business defense, which is made available under Section 547(c)(2) of the Bankruptcy Code. A preference defendant may reduce its preferential exposure by establishing that the payment was made in the “ordinary course of business.” The ordinary course defense was implemented by Congress to protect transactions incurred in the ordinary course of business of the parties.

Under the Bankruptcy Code, a party may establish that the payment was received in the ordinary of business of the debtor and defendant (the “subjective test”). On the other hand, if the defendant is unable to prove that the payment was made according to ordinary business terms between the parties, it can still prevail by demonstrating that the payment was made according to ordinary business terms.  This is known as the “objective test.”

3.  Contemporaneous Exchange of New Value Defense

Finally, creditors can also defend against a preference claim by demonstrating that the transfer received from the debtor was a contemporaneous exchange for new value.  11 U.S.C. § 547(c)(1). Known as the contemporaneous exchange defense, it requires the party receiving the preferential transfer to provide the debtor with “new value”, and the parties must intend for the transfer to be a contemporaneous exchange.  Per its name, the transfer received and the exchange of new value provided must, in fact, be substantially contemporaneous for this defense to apply.

Wrap-Up

The above primer is a brief introduction to the elements and affirmative defenses of preferential claims asserted under Section 547 of the Bankruptcy Code. Of course, it is crucial to understand applicable developments in case law, the relevant provisions of the Bankruptcy Code and the Federal Rules of Bankruptcy Procedure, and the local rules of the Bankruptcy Court in which the claim has been brought.  As always, experienced local counsel should be retained in order to defend against a claim seeking the recovery of a preferential transfer.

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