Prospector Offshore Drilling S.à r.l., and 3 of its affiliates, has filed for chapter 11 bankruptcy protection in the United States Bankruptcy Court for the District of Delaware (Lead Case No. 17-11572).  The entities are affiliates of the Paragon debtors that filed for chapter 11 on February 14, 2016.  The petition lists between $1 and $10 billion in both assets and liabilities.  The First Day Declaration can be found here.  KCC is the proposed claims agent.  The Debtors are requesting the joint administration of these cases.  The Honorable Christopher S. Sontchi will be presiding over these cases.

 

Contact Norman L. Pernick and Nicholas J. Brannick for more information.

In an era when goods or materials often originate from suppliers or manufacturers outside the United States, bankruptcy courts are grappling with when “receipt” of goods occurs for the purpose of 503(b)(9) claims.

While often times pre-petition claims receive only pennies on the dollar, Section 503(b)(b)(9) of the Bankruptcy Code provides creditors with an administrative expense claim for goods (not services) that a debtor receives in the 20 days before bankruptcy that often times results in a dollar-for-dollar recovery. Section 503(b)(9) is generally recognized as an alternative (and more desirable) remedy to reclamation rights – which are addressed under Section 546(c) of the Bankruptcy Code.

I previously addressed what steps to take to ensure that you are Getting the Most Bang for Your 503(b)(9) Bucks.  One of the pre-requisites to establishing entitlement to this valuable claim is demonstrating first that the debtor “received” the goods in question during the 20-day period.  An interesting issue arises in the context of “FOB” shipping arrangements.  “FOB” – or free on board – in the context of international shipping means that the buyer and seller agree at what point the risk of loss for the goods is shifted from the seller to the buyer – whether it is FOB destination (meaning it occurs upon delivery) or FOB shipping point/origin (meaning it occurs when the goods are placed on the ship in the port of origin).

Why does this matter? Because – as addressed in last week’s opinion by the United States Court of Appeals for the Third Circuit in In re World Imports, Ltd., et al., — F.3d —-, 2017 WL 2925429 (3d Cir. July 10, 2017), No. 16-1357, creditors may use FOB origin to ship to a debtor.  The goods may be placed on a ship outside the 20-day period, but the debtor receives the goods (i.e., in-hand physical possession) within the 20-days.  The question becomes when are the goods “received” for the purpose of establishing the very valuable Section 503(b)(9) claim:  if outside the 20-day period, there is often little, if any, potential for a meaningful recovery, but if within the 20-day period, and provided the other elements of Section 503(b)(9) are met, a creditor can obtain a dollar-for-dollar recovery for those goods.

“Receipt” is not defined by the Bankruptcy Code.  The Third Circuit and the 2 lower courts from which the Third Circuit appeal emanated addressed what “receipt” in the context of an FOB origin arrangement means for establishing a Section 503(b)(9) claim.

The Bankruptcy Court for the Eastern District of Pennsylvania held in favor of the debtor and its Official Committee of Unsecured Creditors, finding that in an FOB origin arrangement, “receipt” of goods occurs at the point of origin when the goods were placed on the ship (which was outside the 20-day period), and when title and risk of loss of goods shifted to the debtor.  See, In re World Imports, Ltd., 511 B.R. 738 (Bankr. E.D. Pa. 2014).  This determination was affirmed by the District Court.  See In re World Imports, Ltd., 549 B.R. 820 (E.D. Pa. 2016).  The lower courts each rejected the creditors’ arguments that the courts should look to state law, i.e., the UCC definition of “receipt” – which requires the customer’s physical possession of the goods, looking instead to an international treaty, the Convention on Contracts for the International Sale of Goods (as adopted by the United States) (“CISG”), finding it created an exception.  Although “receipt” is also not defined in the CISG, it recognizes international commercial terms – like FOB, which provide for the transfer of risk of loss/damage to goods at the time the goods are placed on the ship. The lower courts both found that this transfer of title and risk was determinative of “receipt” for purposes Section 503(b)(9).

On July 10, 2017, however, the Third Circuit in In re World Imports, Ltd. reversed the lower courts, finding that receipt did not occur until the goods were physically in the debtor’s possession, which occurred within the 20-day period, enabling the creditors to succeed in meeting the prerequisite element that the goods were “received” within the 20-day period as required by Section 503(b)(9).  The Third Circuit began its analysis with examining the definition of “receipt.”  The Third Circuit considered how the UCC defines “receipt” – as well as Black’s dictionary and how the Third Circuit previously interpreted the term in the context of Section 546(c) of the Bankruptcy Code – the provision governing reclamation – all of which required physical possession. See, e.g., In re Marin Motor Oil, 740 F.2d 220, 224-25 (3d Cir. 1984).

Given the relationship between Section 503(b)(9) and the reclamation scheme (noting that 503(b)(9) is an exemption to that scheme), and the Third Circuit’s standing precedent that “receipt” in the context of reclamation requires physical possession, the Court found that “receipt” for Section 503(b)(9) also required “taking physical possession.”  In so finding, the Third Circuit dismissed arguments that “constructive receipt” under the terms of FOB origin shipping should determine “receipt” for bankruptcy purposes.  A key element to this finding was the Third Circuit’s prior determination that a carrier (like the ship) does not serve as a debtor’s agent for purposes of “receipt.”  See In re Marin Motor Oil, 740 F.2d at 222.  Notably, the Third Circuit in its prior decision in In re Marin Motor Oil, supra, addressed “constructive receipt” finding that “constructive receipt” occurred when the debtor’s agent took physical possession of the goods from the common carrier – not (the day prior) when the seller placed the goods in the hands of the common carrier.  Id.

The Third Circuit also based its decision on the UCC’s explicit distinction of “receipt” and “delivery – observing that while a supplier may be contractually obligated to “deliver” goods, that does not necessarily mean a buyer receives them – and that delivery and receipt can occur at two separate times.  Moreover, given its recognition that Section 503(b)(9) and the reclamation scheme under the Bankruptcy Code have generally borrowed from the definitions of the UCC, the Court did not believe it appropriate to look to other federal law, e.g. the CISG, for contextual meaning, as there was no explicit connection in that definitional scheme to that of the Bankruptcy Code.

Ultimately, and notwithstanding that parties may, in fact, contract for title and risk of loss to pass to a debtor-buyer days prior and in another country – “receipt” for Section 503(b)(9) does not occur until the goods are physically in a debtor’s possession.  The Third Circuit reversed and remanded to the lower court for further proceedings to permit the claims to receive the favored administrative status.

This issue may arise in a number of contexts – including domestically.  Creditor-vendors are well-advised to carefully examine the underlying facts in preparing their claims.  While establishing “receipt” is just one facet of proving your Section 503(b)(9) claim, the Third Circuit’s recent decision adds color and context for creditors to better understand how to establish these valuable administrative claims. This recent decision may enable a larger number of creditors to assert administrative expense claims against a debtor’s estate.  This will also necessarily increase a debtor’s administrative expenses where the debtor relies on goods or materials shipped from overseas, which may negatively impact a debtor’s ability to successfully emerge from bankruptcy.

Upcoming Committee Formation Meeting:  Tuesday, July 18, 2017 10:00 AM

Case Name: 17-11502 (KG)

Location: Delaware State Bar Association, 405 N. King Street, 2nd Floor, Wilmington, DE 19801

Notice of Formation Meeting for Official Committee of Unsecured Creditors can be found here.  See the petition for relief under Chapter 11 here.

Contact Norman L. Pernick and Nicholas J. Brannick for more information.

Upcoming Committee Formation Meeting:  Wednesday, July 12, 2017 10:00 AM

Case Name: 17-11460 (CSS)

Location: The Double Tree Hotel, 700 N. King Street, Salon C, Wilmington, DE 19801

Notice of Formation Meeting for Official Committee of Unsecured Creditors can be found here.  See the petition for relief under Chapter 11 for relief First Day Declaration and the Debtors joint Chapter 11 Plan of Reorganization.

Contact Norman L. Pernick and Nicholas J. Brannick for more information.

 

Short Bark Industries, Inc. a contract manufacturer of military apparel for the Department of Defense, governmental agencies and law enforcement and industry, headquartered in Vonore, Tenn., filed a petition for relief under Chapter 11 in the Bankruptcy Court for the District of Delaware (Case No. 17-11501).  Short Bark reports $10 million to $50 million in both assets and liabilities.  The case has been assigned to the Honorable Brendan Linehan Shannon.

Contact Norman L. Pernick and Nicholas J. Brannick for more information.

True Religion Apparel, Inc., a company that designs, markets, sells and distributes premium fashion apparel through wholesale and retail channels, and four of its affiliates, has filed for chapter 11 bankruptcy protection in the United States Bankruptcy Court for the District of Delaware (Lead Case No: 17-11460).  The Petition lists between $100 and $500 million in both assets and liabilities.  The Debtors are entering chapter 11 with a Restructuring Support Agreement (attached to the First Day Declaration) that is, according to the First Day Declaration, supported by the Ad Hoc Group and the Equity Parent.  The Debtors filed a Plan that, if confirmed and implemented, allows the Debtors to right-size their balance sheet and provide a viable path forward.  The Debtors seek the joint administration of these cases and authority to enter into a new $60 million senior, secured DIP Facility with Citizens Bank.  Prime Clerk LLC is the proposed  claims agent.  The Honorable Christopher S. Sontchi will be presiding over these cases.

Contact Norman L. Pernick and Nicholas J. Brannick for more information.

Upcoming Committee Formation Meeting:  Thursday, July 6, 2017 10:00AM

Case Name: 17-11375 (BLS)

Location: The Double Tree Hotel, 700 N. King Street, Wilmington, DE 19801

Notice of Formation Meeting for Official Committee of Unsecured Creditors can be found here.  See the petitions for relief under Chapter 11, First Day Declaration and the press release.

Contact Norman L. Pernick and Nicholas J. Brannick for more information.

TK Holdings, Inc., a subsidiary of Takata Corporation, and eleven (11) of its subsidiaries and affiliates have filed petitions for relief under Chapter 11 in the Bankruptcy Court for the District of Delaware (Lead Case No. 17-11375).  The First Day Declaration cites the massive recall (over 124,000,000 units worldwide) of Takada’s phase-stabilized ammonium nitrate airbag inflators as the primary cause of its filing.  The First Day Declaration also explains that Takata Corporation (TKJP) and its Japanese subsidiaries will be commencing proceedings under the Civil Rehabilitation Act of Japan in the Tokyo District Court.  According to a press release on June 25, TKJP and TK Holdings have reached an agreement in principle for the sale of substantially all of their assets to Key Safety Systems, headquartered in Sterling Heights, MI, for approximately $1.588 billion.  Prime Clerk, LLC is the proposed claims and noticing agent.  The cases have been assigned to the Honorable Brendan Linehan Shannon.

Contact Norman L. Pernick and Nicholas J. Brannick for more information.

Upcoming Committee Formation Meeting:  Tuesday, June 27, 2017, 10:00am

Case Name: 17-11313 (LSS)

Location: Office of the US Trustee 844 King Street, Room 3209 Wilmington, DE 19801

Notice of Formation Meeting for Official Committee of Unsecured Creditors can be found here.  See the voluntary petitions for relief and the press release.

Contact Norman L. Pernick and Nicholas J. Brannick for more information.

Keystone Tube Company, LLC and four affiliates, including A.M. Castle & Co. (OTC: CASL), HY-Alloy Steels Company, Keystone Service, Inc. and Total Plastics, Inc., have filed chapter 11 petitions before the United States Bankruptcy Court for the District of Delaware (Lead Case No. 17-11330).  The debtors are a specialty metals distribution company.  According to the first day declaration, the filing appears to be attributable to the debtors being over-leveraged.  The petition for Keystone Tube Company, LLC indicates $100-$500 million in both assets and liabilities.  The debtors have filed both a plan and a disclosure statement and a motion seeking a combined hearing on both.  According to the debtors, the proposed plan is supported by 100% in principal amount of the holders of their first lien secured claims,  92% in principal amount of second lien secured claims and 61% in principal amount of third lien claims.  The debtors have also filed a motion to assume a restructuring support agreement and a motion to assume an exit facility commitment letter.  The cases have been assigned to the Honorable Laure Selber Silverstein.  The docket is available through KCC. The companies have issued a press release regarding their restructuring efforts.

 

Contact Norman L. Pernick and Nicholas J. Brannick for more information.