Simplexity, LLC v. Sprint Corp. (In re Simplexity, LLC), 578 B.R. 255 (Bankr. D. Del. 2017)
In this Opinion, the Delaware Bankruptcy Court addressed when a security interest is determined for purposes of stating a preference claim under section 547(b)(5) of the Bankruptcy Code. Distinguishing an earlier ruling by the Court in the context of insurance premium financing, Judge Kevin Gross ruled that security interests generally must be determined as of the petition date rather than the transaction date. Judge Gross also set forth guidelines for how the valuation should be conducted using an “add back” method.
Under the facts of the case, the Chapter 7 Trustee (the “Trustee”) for Simplexity, LLC, et al. (the “Debtors”) sued defendant Sprint Corporation (“Sprint”) to avoid and recover $958,198.58 of preferential transfers the Debtors allegedly made to Sprint in the 90 days before the Debtors’ petition date. Op. at 256-261. Among the arguments in its defense, Sprint asserted that the Trustee failed to state a claim under section 547(b)(5) of the Bankruptcy Code because Sprint was a fully secured creditor at the time of each transfer as a result of a purchase money security interest (“PMSI”) it held in equipment in the Debtors’ possession. Id. at 263-64. Sprint’s position was based in significant part on the Court’s previous ruling in Forman v. IPFS Corp. of the South (In re Alabama Aircraft Indus.), 2013 WL 6332688 (Bankr. D. Del. Dec. 5, 2013), in which the Court held that an insurance premium financier’s security interest in an unearned premium must be determined on the transaction date. Id.
However, the Trustee distinguished Alabama Aircraft and other authorities cited by Sprint. It argued that those cases are limited to circumstances involving diminishing or floating liens. Where collateral has a more stable value, the Trustee argued that the history behind section 547(b)(5) – in particular the Supreme Court’s decision in Palmer Clay Products Co. v. Brown, 297 U.S. 227 (1936) – mandates valuation of security interests as of the petition date. To rule otherwise, the Trustee asserted, would conflate the statutory requirements of section 547(b)(5) with the defenses available under section 547(c). Id. at 264-66.
The Court agreed with the Trustee. While acknowledging that a different result might ensue in a case involving a floating lien, Judge Gross found the limited scope of Sprint’s PMSI required valuation of the related collateral as of the petition date. Id. This ruling then left open the issue of how the valuation would be determined. Sprint argued that section 547(b)(5) required the Trustee to trace the proceeds of Sprint’s collateral to show them insufficient to pay Sprint in full for the alleged transfers, and that the Trustee failed to meet this burden. However, the Court rejected Sprint’s position in favor of a simpler “add back” valuation advocated by the Trustee. Under this method, the Court compared the value of Sprint’s collateral to the Debtors’ liabilities to Sprint as of the petition date, and then “added back” the amount of the alleged preference transfers to the Debtors’ liabilities. Utilizing this approach, the Court found the value of Sprint’s PMSI was clearly less than the amounts it was owed by the Debtors. As a result, Judge Gross found the Trustee had sustained his burden under section 547(b)(5). Id. at 266-69.
Antone Corp. v. Haggen Holdings, LLC (In re Haggen Holdings, LLC), No. 15-1136 (GMS), 2017 WL 3730527 (D. Del. Aug. 30, 2017)
In this Opinion, Judge Sleet of the Delaware District Court affirmed the holding of Judge Gross of the Delaware Bankruptcy Court that profit sharing provisions contained in leases are per se unenforceable anti-assignment provisions under section 365(f)(1) of the Bankruptcy Code. The provision at issue on appeal entitled the landlord to fifty percent of any “net profits” of the subject lease should the debtor-tenant assign it. In connection with its proposed sale in bankruptcy, the debtor-tenant sought to do exactly that, and the landlord objected absent receipt of the profit sharing payment. Despite the landlord’s contention that the provision was a bargained-for element given in exchange for provisions benefiting the debtor-tenant, the provision was determined by both Courts to fall squarely within the meaning of section 365(f)(1) and, thus, unenforceable as a matter of law as it “restrict[ed], or condition[ed]” assignment. See 11 U.S.C. § 365(f)(1) (“[N]otwithstanding a provision in an executory contract or unexpired lease of the debtor, or in applicable law, that prohibits, restricts, or conditions the assignment of such contract or lease, the trust may assign such contract or lease under paragraph (2) of this subsection.”). Such findings were buttressed by both Courts’ determinations that the profit sharing provision prevented the debtor-tenant from realizing the full value of the lease in its sale, thus thwarting a fundamental bankruptcy policy underpinning both section 365(f)(1) and the case law invalidating profit sharing provisions – namely, the encouragement of debtors to maximize estate value for the benefit of all creditors.
Crystallex Int’l Corp. v. Petroleos de Venezuela, S.A., 879 F.3d 79 (3d Cir. 2018)
In an Opinion that may also have repercussions in bankruptcy law, the Third Circuit Court of Appeals recently held in Crystallex Int’l Corp. v. Petroleos de Venezuela, S.A. that transfers by a non-debtor cannot be fraudulent under title 6, section 1304 of the Delaware Code (the “Delaware Uniform Fraudulent Transfer Act” or “DUFTA”). Notwithstanding that the transfers at issue were allegedly orchestrated by a debtor with the express purpose of defrauding a creditor and notwithstanding the transferor’s intentional and knowing participation in the alleged scheme, the Third Circuit found the allegations insufficient to state a claim of a transfer “by a debtor,” and, accordingly, held that the language of DUFTA constrained it from finding a fraudulent transfer under the statute. The Third Circuit noted its holding should also apply to fraudulent transfer claims under the Bankruptcy Code because DUFTA and section 548 of the Bankruptcy Code are “virtually a carbon copy” and “the result under Delaware law should be the same as the outcome under the Bankruptcy Code.” 879 F.3d at 86 (citation omitted). Read More ›
In re Ultimate Escapes Holdings, LLC, 682 Fed. Appx. 125 (2017)
In re Ultimate Escapes Holdings, LLC, No. 12-50849 (BLS), 2015 WL 1590132 (Bankr. D. Del. Feb. 5, 2015)
In affirming the decisions of the courts below, the Third Circuit in its Opinion of In re Ultimate Escapes Holdings, LLC not only provides a refresher on Delaware’s entire fairness and business judgment standards; it also sends a comforting signal to officers and directors faced with difficult decisions when a company is in financial distress and on the verge of bankruptcy. Read More ›
Merit Mgmt. Group, LP v. FTI Consulting, Inc., 583 U.S. __ (2018)
U.S. Bank Nat’l Ass’n v. Vill. at Lakeridge, LLC, 583 U.S. __ (2018)
On February 27, 2018, the United States Supreme Court issued its unanimous holding in Merit Management Group, LP v. FTI Consulting, Inc. The Opinion, delivered by Justice Sotomayor, addressed a Congressional limitation placed on a trustee’s power to avoid certain transfers, such as preferential transfers under 11 U.S.C. § 547 or constructively fraudulent transfers under 11 U.S.C. § 548(a)(1)(B). Additionally, on March 5, 2018, the Supreme Court issued another unanimous Opinion in U.S. Bank National Association v. Village at Lakeridge, LLC, delivered by Justice Kagan with concurrences filed by Justices Kennedy and Sotomayor. The narrow issue before the U.S. Bank Court was the correct standard of appellate review to be applied to a bankruptcy court’s determination of whether a particular person qualifies as a non-statutory insider. Read More ›
We’re back! Thank you for your patience while the Delaware Bankruptcy Insider worked behind the scenes to address website matters. While not all of the issues are completely resolved, the Insider will re-start blogging and bring to you its analysis regarding some recent Supreme Court rulings. It will also analyze the other important rulings from the Delaware District Court and Delaware Bankruptcy Court that have been made over the last few months. Thanks again for your patience and loyalty. Read More ›
Hi loyal Delaware Bankruptcy Insider readers! For the next month, our blog will be transitioning to a new web host. During this time, please pardon our appearance and any issues that may arise when trying to access documents and links embedded in our posts. If you are unable to access any documents or links (or if any other issues arise), please do not hesitate to contact Karen Owens at email@example.com. Thanks! Read More ›
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 ›
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 ›
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 ›