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Delaware Bankruptcy Court Finds It Has Constitutional Adjudicatory Authority to Enter a Final Confirmation Order Containing Nonconsensual Third Party Releases

In re Millennium Lab Holdings II, LLC, No. 15-12284 (LSS), 2017 WL 4417562 (Bankr. D. Del. Oct. 3, 2017)

Following the United States Supreme Court’s ruling six years ago in Stern v. Marshall, 131 S. Ct. 2594 (2011), the constitutional adjudicatory authority of bankruptcy courts to enter final orders has been challenged in a variety of proceedings, leading to varied interpretations of the reach of the Stern decision.  In Millennium, the Delaware Bankruptcy Court was asked on remand from the Delaware District Court whether it had the constitutional authority to enter a final order confirming a plan that contained nonconsensual third party releases, i.e. releases of claims asserted by a non-debtor party against another non-debtor party.  While bankruptcy courts in the Third Circuit have consistently held that they have subject matter jurisdiction to consider nonconsensual third party releases and that such releases are permitted if the evidentiary record satisfies the standards set forth in Gilman v. Continental Airlines (In re Continental Airlines), 203 F.3d 203 (3d Cir. 2000), and its progeny, the issue of a bankruptcy court’s constitutional authority to grant them with finality is a matter of first impression.  In a lengthy and detailed opinion in which the Honorable Laurie Selber Silverstein examined, among other things, the constitutional adjudicatory authority of bankruptcy courts since the United States Supreme Court’s decision in Northern Pipeline Construction Company v. Marathon Pipe Line Company, 458 U.S. 50 (1982), Her Honor answered the District Court’s question in the affirmative.  According to Judge Silverstein, bankruptcy courts possess the constitutional authority to enter a final order confirming a plan that contains nonconsensual third party releases.  Even if they do not, however, the Court found that the objecting party forfeited and waived its right to assert the Court’s lack of authority under the specific facts and circumstances presented.  All that remains now in this keenly watched matter is the inevitable appeal. Read More ›

In One of Her Honor’s Last Decisions as a Delaware District Court Judge, The Honorable Sue L. Robinson Clarifies the Distinction Between “Advance Payments” and “Payments on Account of an Antecedent Debt”

Pirinate Consulting Group, LLC v. Kadant Solutions Division (In re NewPage Corp.), No. 16-955 (SLR), 2017 WL 2964803 (D. Del. 2017)

In this appeal to the United States District Court for the District of Delaware, Judge Sue L. Robinson examines the distinction between “advanced payments” required under a contract and payments “on account of an antecedent debt” for purposes of section 547(b) of the Bankruptcy Code. Read More ›

The Bar Date Is Like A Statute Of Limitations; It Must Be Followed

In re Nortel Networks Inc., No. 09-10138 (KG), 2017 WL 2821535 (Bankr. D. Del. June 29, 2017)

In this Opinion, the United States Bankruptcy Court for the District of Delaware (the “Bankruptcy Court”) rendered a seemingly “harsh” decision necessitated by the “unreasonable relief” requested.  Op. at 16.  Seven years after the September 30, 2009 deadline to file proofs of claim (the “Bar Date”), SNMP Research International, Inc. (“SNMPRI”) and SNMP Research, Inc. (“SNMPR”, and together with SNMPRI, “SNMP”) moved for authority for SNMPRI to file amended proofs of claim and an order adding SNMPR as a claimant. Read More ›

Third Circuit Holds That Layoffs Must Be Probable (Not Just Possible) for WARN Act Liability

Varela v. AE Liquidation, Inc. (f/k/a Eclipse Aviation Corp.) (In re AE Liquidation, Inc.), No. 16-2203, 2017 WL 3319963 (3d Cir. Aug. 4, 2017)

As we have discussed prior, under the Worker Adjustment and Retraining Notification (WARN) Act, employers may be liable if they do not give fair warning to their employees before a mass layoff.  Liability can be avoided if, among other things, the “mass layoff is caused by business circumstances that were not reasonably foreseeable at the time that notice would have been required.”  20 C.F.R. § 2102(b)(2)(A).  The question for the Third Circuit Court of Appeals in this appeal was what makes a business circumstance “reasonably foreseeable.”  Does an event need to be “probable” (i.e. more likely than not) or simply “possible”?  Every Circuit Court deciding the issue as well as the Delaware District Court and the Delaware Bankruptcy Court have adopted the probability standard, and by this Opinion, the Third Circuit joined the club.  In doing so, the Court noted that the probability standard strikes the appropriate balance of the WARN Act’s employee protections and employer burdens and also highlighted a concerning result if the lower threshold “possibility” test was adopted.  More specifically, because it is quite possible that a company in financial distress will close or effect a layoff, every company in or near bankruptcy would be forced to send a WARN notice to their employees that is not only costly, but also likely to cause panic and accelerate their own demise.  As explained by the Court, the WARN Act was not meant to impose such a burden on an employer and thus, “a layoff becomes reasonably foreseeable only when it becomes more likely than not that it will occur.”  Op. at *11. Read More ›

Decisions by Third Circuit and Delaware Bankruptcy Court Clarify that “Receipt” under Section 503(b)(9) Requires Physical Possession

Haining Wansheng Sofa Co., Ltd. v. World Imports Ltd. (In re World Imports, Ltd. et al.), No. 16-1357, 2017 WL 2925429 (3d Cir. Mar. 8, 2017) and In re SRC Liquidation, LLC, No. 15-10541 (BLS), 2017 WL 2992718 (Bankr. D. Del. July 13, 2017)

In two recent Opinions, the Third Circuit Court of Appeals and the Delaware Bankruptcy Court clarified that the word “received” in section 503(b)(9) of the Bankruptcy Code requires a showing that goods were delivered into the physical possession of a debtor or its agent within the 20 days before a debtor’s petition date (the “20-Day Period”).  Under the Third Circuit’s holding in Haining Wansheng Sofa Co., Ltd. v. World Imports Ltd. (In re World Imports, Ltd. et al.) and the Bankruptcy Court’s holding in In re SRC Liquidation, LLC, neither receipt of goods by a common carrier nor receipt by a debtor’s customer as the result of a drop shipment within the 20-Day Period satisfy the standard required to render a claim eligible for administrative priority.   The decisions reinforce courts’ strict construction of section 503(b)(9). Read More ›

Bankruptcy Court Fails to Find Wholesaler-Debtor Constructively Received Goods Delivered to Third Parties Twenty Days Before Bankruptcy; 503(b)(9) Claim Reclassified

In re ADI Liquidation, Inc., No. 14-12092 (KJC), 2017 WL 2712287 (Bankr. D. Del. June 22, 2017)

In this Opinion, the Delaware Bankruptcy Court examined whether a debtor, formerly known as Associated Wholesalers, Inc. (“AWI”), constructively received goods that were ordered by and delivered to its customers from claimant, Bimbo Bakeries USA, Inc. (“BBU”) during the twenty day period prior to AWI’s petition date (the “Twenty Day Goods”).  While the goods were never in AWI’s physical possession, AWI’s customers remitted payment for the goods to AWI, which then remitted payment to BBU after retaining a percentage.  BBU filed a large section 503(b)(9) claim on account of the Twenty Day Goods, to which AWI objected.  The question for Judge Carey was whether AWI constructively received the Twenty-Day Goods given its substantial involvement in facilitating the sales transactions between BBU and AWI’s customers.  If the answer was yes, the Court would have expanded the meaning of constructive receipt beyond the customary situation in which a third party recipient is a bailee for the debtor.  The Court, however, answered no and in doing so, drew parallels to “drop-ship transactions.”  A “drop-ship transaction” is a transaction in which a buyer purchases goods from a middleman, who in turn forwards the purchase order to a third party, who then fulfills and ships the order directly to the buyer.  In these situations, courts have found that the middleman does not take constructive possession of the goods.  And while the Delaware Bankruptcy Court found the AWI-BBU transaction similar, it also found the situation a step further removed given that AWI’s customers ordered their goods directly from BBU.  Accordingly, AWI never received the goods nor made the sales.  For those reasons, the Bankruptcy Court sided with AWI and permitted the reclassification of BBU’s section 503(b)(9) claim to a general unsecured claim. Read More ›

Creditors Committee Suing on Behalf of Estates Is Unable to Invade Debtors’ Attorney-Client Privilege Without a Showing of Insolvency

Official Comm. of Unsecured Creditors of HH Liquidation, LLC v. Comvest Grp. Holdings, LLC (In re HH Liquidation, LLC), No. 16-51204 (KG), 2017 WL 1906585 (Bankr. D. Del. May 8, 2017)

This adversary proceeding was commenced derivatively by an Official Committee of Unsecured Creditors (the “Committee”) against the Haggen, Inc. debtors’ officers, directors, and non-debtor affiliates (collectively, the “Defendants”) for, among other things, fraud and fraudulent transfers.  During the course of discovery, the Committee filed a motion to compel production of over 2,000 documents withheld by the debtors and the Defendants based on attorney-client privilege (the “AC Privileged Documents”).  Importantly, one law firm jointly represented the debtors and the Defendants at the time of the communications.  While the Honorable Kevin Gross of the Delaware Bankruptcy Court recognized the odd scenario presented, one in which the Committee was suing non-debtor entities on behalf of the debtor but was without access to the very documents the debtor would use if pursuing the action, the Court would not compel the production of the AC Privileged Documents. Read More ›

Insider’s Scoop: An Rare Examination of Challenge Period and Release Provisions in a Final DIP Order

In re Outer Harbor Terminal, LLC, 16-10283 (LSS) (Bench Ruling, May 5, 2017)

In issuing this Bench Ruling, the Honorable Laurie Selber Silverstein of the Delaware Bankruptcy Court had the unusual opportunity to analyze and parse challenge period and lender release provisions contained in a final DIP order.  Examining the plain language of the provisions in light of the entire context of the DIP documents before it, the Court concluded that a creditors committee’s investigation period expired long before it was formed by the United States Trustee.  Her Honor also held that the general releases granted to the DIP lenders in all their capacities did not extend to claims the debtor may have against affiliates of the DIP lenders that were separate and apart from the DIP lender’s relationship with the debtor despite the fact that those affiliates were included as released parties. Read More ›

Battle Between Prepetition Lender and Consignor Over Inventory Continues – Bankruptcy Court Holds Parties Cannot Contract to Subject Relationship to UCC

TSA Stores, Inc. v. M J Soffe, LLC (In re TSAWD Holdings, Inc.), No. 16-50364 (MFW), 2017 WL 892329 (Bankr. D. Del. Mar. 6, 2017)

Prior to the petition date, consignment vendor M J Soffe, LLC (“Soffe”) sold approximately $5.4 million of goods to the Sports Authority debtors (the “Debtors”) pursuant to a Pay by Scan Agreement.  That agreement expressly provided that the arrangement between Soffe and the Debtors qualified as a “consignment” as such term is defined in section 9-102(a)(20) of the Uniform Commercial Code (“UCC”).  During the bankruptcy proceedings the Debtors sold the Disputed Goods, and litigation arose between Soffe and the Debtors’ prepetition secured creditor, Wilmington Savings Fund Society, FSB (“WSFS”), over entitlement to the proceeds.  On one hand, WSFS asserted that it had a superior security interest in the Disputed Goods under Article 9 of the UCC because Soffe failed to properly perfect a security interest.  On the other, Soffe argued that Article 9 of the UCC was inapplicable because the facts underlying the relationship between itself and the Debtors did not satisfy the definition of a “consignment” under section 9-102(a)(20) of the UCC and, in the absence of a governing UCC, applicable state law entitled it to the superior interest.  WSFS moved for partial judgment on the pleadings, relying in part on the express language of the Pay by Scan Agreement, but the Bankruptcy Court denied its motion, finding that a disputed issue existed as to the applicability of Article 9.  According to the Bankruptcy Court, the UCC expressly permits parties to opt-out of the UCC and vary the effect of its provisions by agreement but it does not permit parties to contract around defined terms.  Parties may limit their legal relationship but such limitations are not without their boundaries.  Changing the UCC’s definitions – i.e. changing the meaning of the statute’s terms – is only appropriate for legislatures.  And while WSFS argued that Soffe’s arguments should be estopped and that the Court’s holding would render the Pay by Scan Agreement’s UCC provision superfluous and thus inconsistent with contractual interpretation canons, the Court was not persuaded, noting that it cannot enforce a contractual term inconsistent with or prohibited by the UCC. Read More ›

Stern Requires More Than Subject Matter Jurisdiction, Bankruptcy Court Must Also Have Constitutional Adjudicatory Authority to Approve Nonconsensual Third-Party Releases in a Plan

Opt-Out Lenders v. Millennium Lab Holdings II, LLC, No. 16-110-LPS, --- F.Supp.3d ----, 2017 WL 1032992 (D. Del. Mar. 17, 2017) corrected and superseded by 2017 WL 1064997 (D. Del. Mar. 20, 2017)

In this Opinion, the United States District Court for the District of Delaware (the “District Court”) examines the bankruptcy court’s authority post-Stern v. Marshall, 131 S. Ct. 2594 (2011), to enter a final order releasing and permanently enjoining a non-debtor’s state law fraud and federal RICO claims against non-debtors absent consent.  Following two recent United States Supreme Court cases—Stern and Wellness Int’l Network, Ltd. v. Sharif, 135 S. Ct. 1932 (2015)—it is clear that parties have a constitutional right to have state law claims adjudicated by an Article III court.  “Despite the District Court’s general referral of bankruptcy matters to the Bankruptcy Court, the extent of the Bankruptcy Court’s adjudicatory authority depends on the type of proceeding before it and is subject to the bounds of [these] constitutional limitations . . . .”  Op. at 3.  For core proceedings (i.e., those that “arise under title 11” or “arise in a case” under title 11), bankruptcy judges can enter final orders.  When a matter is non-core (i.e., “related to” the bankruptcy case), however, absent consent of the parties, bankruptcy judges have authority only to hear the matter and submit proposed findings of fact and conclusions of law to the district court. Read More ›