Mac Acquisition LLC (dba Romano’s Macaroni Grill), along with eight affiliates and subsidiaries, has filed a petition for relief under Chapter 11 in the Bankruptcy Court for the District of Delaware (Lead Case No. 17-12224). According to the First Day Declaration, Mac enters Chapter 11 with a prepacked plan of reorganization and a Restructuring Support Agreement with two of its largest secured creditors. Mac also enters Chapter 11 with proposed debtor-in-possession financing in the amount of $5 million. In the Petition, Mac reports between $10 – $50 million in assets and $50 – $100 million in liabilities. Donlin Recano is the proposed claims and noticing agent. The cases have been assigned to the Honorable Kevin Gross.
Ideal Diamond Trading Limited (f/k/a Jade Crown Trading Limited), a diamond trader based in Hong Kong, has filed a petition for relief under Chapter 11 in the Bankruptcy Court for the District of Delaware (Case No. 17-12202). Ideal is an affiliate of Exelco North America, Inc. (Lead Case No. 17-12029) and it is expected that Ideal’s case will be jointed administered with Exelco. Ideal’s Petition estimates its assets and liabilities to be between $10 – $50 million. Donlin Recano is the claims and noticing agent for the Exelco cases. The Exelco cases have been assigned to the Honorable Kevin Gross.
Upcoming Committee Formation Meeting: Wednesday, October 11, 2017 10:00 AM
Case Name: 17-12082 (KJC)
Location: Delaware State Bar Association, 405 N. King Street, 2nd Floor, Wilmington, DE 19801
Upcoming Committee Formation Meeting: Friday, October 13, 2017 10:00 AM
Case Name: 17-12100 (LSS)
Location: Sheraton Suites, 422 Delaware Avenue, Wilmington, DE 19801
Upcoming Committee Formation Meeting: Thursday, October 12, 2017 10:00 AM
Case Name: 17-12029 (KG)
Location: Delaware State Bar Association, 405 N. King Street, 2nd Floor, Wilmington, DE 19801
GST Autoleather, Inc., a manufacturer of leather interior products for automobiles based in Southfield, Michigan, along with five of its subsidiaries and affiliates, has filed a petition for relief under Chapter 11 in the Bankruptcy Court for the District of Delaware (Lead Case No. 17-12100). The petition reports $100 million to $500 million in both assets and liabilities. According to reporting from Debtwire, GST was shopping itself for sale prior to the filing. No First Day Declaration or Motion to Appoint a Claims and Noticing Agent have been filed. The cases have not yet been assigned to a Judge.
Appvion, Inc., a manufacturer of specialty, high value added coated paper products headquartered in Appleton, Wisconsin, has, along with five of its affiliates and subsidiaries, filed a petition for relief in the Bankruptcy Court for the District of Delaware (Lead Case No. 17-12082). The petition reports $413,430,904 in assets and $714,758,194 in liabilities. According to the First Day Declaration, Appvion’s filing was caused by negative industry trends and an unsustainable debt overhang, and Appvion intends to pursue a balance sheet restructuring. Appvion has also filed a motion to approve $85 million in debtor-in-possession financing from a group of its first lien lenders. Prime Clerk LLC is the proposed claims and noticing agent. The case has been assigned to the Honorable Kevin J. Carey.
Undersecured creditors face unique challenges because they are neither fully secured nor fully unsecured. Beyond the obviously undesirable issue of being upside-down on their deal, undersecured creditors often are exposed to preference liability for those payments they received in the 90 days prior to the debtor filing bankruptcy. This is especially true where an aggressive trustee is looking to create value or where an opportunistic trustee sees a chance to make a quick buck.
Bankruptcy Code section 506 states that a creditor with a claim that is secured by property of the estate has a secured claim up to the value of their collateral and an unsecured claim for the remaining portion of their claim. Thus, an undersecured creditor’s claim is split, or bifurcated, into secured and undersecured portions. Fully secured creditors enjoy protection from preference claims by virtue of the fact that payments received in the preference period do not allow them to receive more than they would in a hypothetical chapter 7 liquidation because their fully secured status allows them to get paid in full.
Undersecured creditors face an additional challenge from the unsecured portion of their claim because payments they receive in the preference period may allow them to recover more than they would have in a hypothetical liquidation chapter 7 liquidation. While undersecured creditors have the same preference defenses available to them as an unsecured creditor, such as receiving payments in the ordinary course or that they provided new value, those defenses may not give quite the same level of comfort as a fully secured claim. In applying the language of the Bankruptcy Code, the Fifth Circuit in El Paso Refinery provided a two part test for undersecured creditors.
In Krafsur v. Scurlock Permian Corp. (In re El Paso Refinery), 171 F.3d 249 (5th Cir. 1999), the chapter 7 trustee sought to avoid payments made from the debtor to its supplier of crude oil. The supplier of crude oil shared a floating lien on accounts receivable, inventory, contract rights, and proceeds with the debtor’s prepetition lender pursuant to an intercreditor agreement. The bankruptcy court ruled that the intercreditor agreement worked as a partial assignment of approximately 55% of the prepetition lender’s interest in the collateral. The bankruptcy court went on to rule that the same portion of the payments received in the preference period were proceeds from the oil supplier’s own collateral, and, therefore, 55% of the alleged preferential preference payments were unrecoverable. The district court affirmed and both parties appealed.
The Fifth Circuit reversed and held that none of the payments the oil supplier received were preferential. In reaching this conclusion, the Fifth Circuit utilized the “improvement in position” or the “greater percentage” test interpreting section 547(b)(5) of the Bankruptcy Code. The goal of this test is to determine if, by virtue of the payments in the preference period, the creditor received a greater recovery on its debt than it would have otherwise received in a hypothetical chapter 7 liquidation. While this test is well established for unsecured creditors, the Fifth Circuit conformed its application of the test for undersecured creditors.
The Fifth Circuit stated that for undersecured creditors, two issues need to be resolved: “(1) to what claim the payment is applied and (2) from what source the payment comes.” The Fifth Circuit refers to these issues as the “Application Aspect” and the “Source Aspect,” respectively. In order to satisfy the Application Aspect of the test, the payments must be applied to the secured portion of the undersecured creditors claim, and the undersecured creditor must correspondingly reduce the secured portion of its claim. If the undersecured creditor does not correspondingly reduce the secured portion of its claim, the payment is considered a payment on the unsecured portion of the claim. To satisfy the Source Aspect of the test, the payments the undersecured creditor receives must come from its own collateral. The Fifth Circuit reasoned that a creditor which merely receives its own collateral cannot be receiving any more than it would have in a hypothetical liquidation, and creditors with an interest in accounts receivable or other cash equivalents are automatically receiving a payment from their own collateral.
As a result of the language referring to undersecured creditors generally, it was unclear whether this test was meant to replace or supplement the existing hypothetical liquidation analysis under section 547(b)(5) for undersecured creditors. The Fifth Circuit addressed this ambiguity in Garner v. Knoll, Inc. (In re Tusa-Expo Holdings Inc.), 811 F.3d 786 (5th Cir. 2016).
In Tusa-Expo, a chapter 7 trustee brought an action to avoid payments made to an office furniture supplier by an office furniture dealer. The office furniture supplier had first-priority lien on certain of the debtor’s accounts receivable and a second-priority lien on all other and after acquired property. The bankruptcy court, in a belt and suspenders approach, punted on determining whether to conduct the analysis in El Paso Refinery or a section 547(b)(5) hypothetical chapter 7 liquidation analysis and conducted both. The bankruptcy court subsequently found that under both analyses the payments received by the office furniture supplier in the preference period were not preferences. The district court affirmed, albeit for different reasons.
The Fifth Circuit resolved the issue regarding the proper standard to apply by stating that a court could alleviate the need to conduct a typical hypothetical liquidation analysis by conducting the analysis under El Paso Refinery first. If under the El Paso Refinery analysis the payments are not found to be preferential, that analysis is dispositive of the preference issues. In the event that the El Paso Refinery standard is not met, the trustee is still required to establish that the undersecured creditor received more than would have received in a hypothetical chapter 7 liquidation. As a result, the Fifth Circuit made clear that the El Paso Refinery analysis is a threshold which is intended to aid a section 547(b)(5) analysis rather than replace it. In so concluding, the Fifth Circuit affirmed the holdings of the bankruptcy and district courts.
Tusa-Expo addresses the issues left open by El Paso Refinery and makes clear that the analysis in El Paso Refinery is merely a shortcut to potentially avoid a hypothetical chapter 7 liquidation analysis. While the test in El Paso Refinery and the clarifying holding in Tusa-Expo do not change the outcome for a hypothetical liquidation analysis under section 547(b)(5), they do provide an additional and valuable front on which to challenge a trustee’s preference claims. For those undersecured creditors that do not have an interest in the debtor’s accounts receivable or other cash equivalents, Tusa-Expo makes clear that that they still have the same tools available as any other creditor accused of receiving preferential payments. While this holding is not a boon for undersecured creditors without an interest in accounts receivable or the like, it does clear up any unnecessary confusion about the scope and applicability of the standard in El Paso Refinery.
Exelco North America, Inc., a diamond wholesaler based in Wilmington, DE, along with three affiliates, has filed a petition for relief under Chapter 11 in the Bankruptcy Court for the District of Delaware (Lead Case No. 17-12029). Exelco, North America is the American affiliate of Antwerp, Belgium-based Exelco NV, which has also filed a petition for relief. Exelco NV recently made headlines when the Belgian bank KBC Group NV seized assets from Exelco NV’s headquarters in July. KBC Group was subsequently ordered to return those assets by a Belgian court. Exelco North America’s petition reports $0 to $50,000 in assets and $1 million to $10 million in liabilities Exelco NV’s petition reports $10 million to $50 million in assets and $50 million to $100 million in liabilities. No First Day Declaration has been filed yet. Donlin Recano is the proposed claims agent. The cases have been assigned to the Honorable Kevin Gross.
Upcoming Committee Formation Meeting: Tuesday, September 26, 2017 10:00 AM
Case Name: 17-11962 (KJC)
Location: U.S. Trustee Office, 844 King Street, Suite 3209, Wilmington, DE 19801