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.

The Delaware Bankruptcy Court issued a notice stating that the comment period for its Local Rules is currently open.  Per the notice, the comment period is open from October 1 through October 30, 2020.

A current version of the Local Rules of the Delaware Bankruptcy Court, effective February 1, 2020, can be found here.

Carl D. Neff is a bankruptcy 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.

There has been no shortage of significant bankruptcy filings in 2020 as a result of the ongoing pandemic.  Large companies such as J.C. Penney, Brooks Brothers, Lucky Brand, GNC, subsidiaries of Regus, and others, have all filed for bankruptcy protection, citing the coronavirus for sharply reduced sales at their brick and mortar stores.

These filings and others have had strong implications for commercial landlords across the country.  Accordingly, this article provides a much needed “Top 5” tip list for commercial landlords to consider when their tenant files for bankruptcy.

Tip No. 1 – Respect the Automatic Stay Under Section 362(a) of the Bankruptcy Code

Once a debtor files for bankruptcy, the automatic stay of Section 362(a) of the Bankruptcy Code immediately takes effect.  This is a very powerful tool that protects a debtor during the pendency of a bankruptcy proceeding.  In a voluntary bankruptcy petition, the stay automatically becomes effective, without the need for a hearing or court approval.

As such, a commercial landlord should not take any action to violate the automatic stay.  This would include filing a lawsuit against the debtor, taking action to continue a pending lawsuit against the debtor, making demands to collect unpaid rent, etc.  If, for example, a landlord filed an eviction action prior to the bankruptcy filing, then it must seek and obtain an order lifting the automatic stay before it can take any further action in the litigation.  Failure to adhere to the protections of the automatic stay may subject a landlord to sanctions and punitive damages.

Tip No. 2 – Recognize that a Debtor Must Timely Pay Post-Petition Rent While Occupying the Leased Property

While a debtor continues to occupy a leased property during the pendency of a bankruptcy action, the debtor must comply with all of its obligations under the lease.  This includes timely paying rent owing to the landlord that is due after the filing of the bankruptcy action.

If the debtor does not timely pay its rent while continuing to occupy the premises after the bankruptcy filing, then the landlord may file a motion for an administrative claim with the bankruptcy court.  An administrative claim is afforded the highest priority under the Bankruptcy Code, and such claims are paid before general unsecured creditors.

Tip No. 3 – Timely File a Proof of Claim With the Bankruptcy Court for All Amounts Owing to the Landlord

It is very important that a landlord file a proof of claim with the bankruptcy court.  Often times, in the months leading to a bankruptcy filing, the tenant-debtor will fall behind in its rental payments.  Shortly after the bankruptcy petition is filed, a debtor is required to file schedules of assets and liabilities with the bankruptcy court, which lists all debts owed by the debtor before the filing of the bankruptcy petition.  If the amounts owed to the landlord are not listed, or the amount listed is incorrect, then a proof of claim must be timely filed by the landlord.

In each bankruptcy case, a “general bar date” is set to file a proof of claim, with notice being provided to all creditors.  A proof of claim for pre-petition debts owed by the debtor must be filed before the bar date in accordance with the instructions provided in the notice.  Failure to do so may result in the claim being struck by the court.

Tip No. 4 – Be on the Lookout for the Debtor to Assume, Assign or Reject the Lease

During the pendency of a bankruptcy action, a debtor has the choice to either assume the lease, assign the lease to a third-party, or reject the lease.  These actions trigger important deadlines of which any landlord should be keenly aware.  If a debtor assumes or assigns the lease, then it is responsible to pay all “cure costs” associated with the lease.  This includes all back-owed rent (including pre-petition rent), and in many jurisdictions, other amounts owed under the contract, including interest, late fees, and potentially attorney fees, if provided for under the lease.  When a debtor moves to assume or assign a lease, it must also provide notice of the proposed cure cost.  If the cure cost is not correct, then a landlord must timely file an objection to the cure amount with the bankruptcy court.

By contrast, if the debtor seeks to reject the lease, then the landlord must file a claim with the court for all “rejection damages” owed by the debtor for terminating the lease.  This would include all rent owed to the landlord for the remainder of the lease, which may be subject to caps set forth in the Bankruptcy Code.  Often times, the rejection notice will provide a landlord with a short turnaround time to file a rejection claim, usually 30 days.  These types of damages are generally treated as unsecured claims.

Tip No. 5 – Take Steps to Protect the Landlord

There are several ways in which a landlord may better protect itself before a debtor files for bankruptcy.  These steps include obtaining a personal guaranty of the lease, requiring a letter of credit, and a security deposit.  A personal guaranty from additional individuals or entities is one way to maximize recovery. Provided that a lease guarantor is not in bankruptcy, nothing in the Bankruptcy Code prevents a landlord from taking action against a guarantor to a debtor-tenants’ lease.

A letter of credit is also a useful tool, which permits a landlord to draw down on the proceeds of the letter of credit in the event of default.  A letter of credit often times is not considered property of the bankruptcy estate.  There is a split of authority as to whether a lost profit damage claim of a landlord for the remainder of the lease term is capped under the Bankruptcy Code.

Finally, a security deposit is always recommended.  While generally considered property of the debtor’s estate, a landlord may be permitted to exercise its rights of set-off of its claim against the security deposit.  This may place the landlord in a superior recovery position than general unsecured creditors.

Bonus Tip – Retain Experienced Bankruptcy Counsel

There is no substitute for retaining experienced and local bankruptcy counsel to protect a landlord’s rights during the pendency of a bankruptcy case.  As demonstrated above, there are many notices, orders, and accompanying deadlines set forth in bankruptcy filings that must be followed, and can easily be missed by a non-attorney not familiar with the Bankruptcy Code or the local rules of the particular jurisdiction in which the bankruptcy action is filed.  Retaining experienced counsel at the onset of the bankruptcy case can help commercial landlords avoid common pitfalls and maximize their recovery against their debtor-tenant.

Carl D. Neff is a bankruptcy 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 United States Bankruptcy Court for the District of Delaware issued an Order establishing Bar Dates for filing proofs of claim in Subchapter V Cases.  The Bar Dates are set at the filing of the case for creditors and governmental units. The Bar Dates are 60 days and 180 days, respectively from the date of the order of relief and they should be included in the Notice of Commencement of the case.

A copy of the General Order can be found here.

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 September 1, 2020, the United States District Court for the District of Delaware issued a Standing Order Re: Criminal and Civil Jury Selections; Jury Trial; and Transition to Phase 2.  Per the Standing Order, the Delaware District Court will move into Phase 2 starting September 15, 2020, which permits the District Court to conduct jury trials at the discretion of the presiding judge.

On September 3, 2020, the Delaware Bankruptcy Court issued a Notice Regarding Transition to Phase 2, pursuant to which the Bankruptcy Court will likewise move into Phase 2 starting September 15, 2020.  Per the Notice, hearings will continue to be held remotely unless ordered otherwise by the presiding judge.

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.