Unilife Corporation (NASDAQ: UNIS), a manufacturer and supplier of wearable injectors and other proprietary drug delivery systems based in York, Pennsylvania, and two of its affiliates have filed petitions for relief under Chapter 11 in the Bankruptcy Court for the District of Delaware (Lead Case No. 17-10805). The Debtors’ last 10-Q, filed on February 9, 2017, reported total liabilities of $201.07 million and total assets of $82.98 million. According to the First Day Declaration, the Debtors’ business has been unable to generate sufficient cash to cover its operating and finance costs. The First Day Declaration also states that one of Unilife’s Australian non-Debtor affiliates, Unitract Syringe Pty Limited, owns substantially all of the Debtors’ Intellectual Property. Rust Consulting/Omni Bankruptcy is the proposed claims and noticing agent. The cases have been assigned to the Honorable Laurie Selber Silverstein.
Upcoming Committee Formation Meeting: Wednesday, April 19, 2017, 10:00 am
Case Name: 17-10772 (BLS)
Location: The Doubletree Hotel 700 King Street Wilmington, DE 19801
Rupari Holding Corp. and Rupari Food Services, Inc., two affiliates of Rupari Foods, a distributor of uncooked and ready-to-eat BBQ meat, have filed voluntary petitions for relief under Chapter 11 in the Bankruptcy Court for the District of Delaware (Case No. 17-10793). A First Day Declaration has not yet been filed, but it was reported yesterday that the Debtors had reached an agreement with Carl Buddig and Company for a sale of substantially all of the Debtors’ assets, to be effectuated through the Debtors’ cases. Rupari Food Services, Inc. has also filed a complaint and begun an adversary proceeding against Roma Dining, LLC And Romacorp., Inc., alleging that the Roma defendants have attempted to unlawfully terminate the licensing agreement that allows Rupari exclusive distribution rights to “Tony Roma” branded-pork products in certain defined territories. The cases have been assigned to the Honorable Kevin J. Carey. Donlin, Recano & Co. is the proposed claims agent.
Colorado-based Ciber, Inc., (NYSE: CBR), a leading global IT consulting services and outsourcing company, and two of its affiliates, has filed for chapter 11 bankruptcy protection in the United States Bankruptcy Court for the District of Delaware (Lead Case No. 17-10772). The petition lists between $50-100 million in both assets and liabilities. The Debtors are entering chapter 11 with Capgemini as the stalking horse. According to the First Day Declaration, in 2016, Ciber began to divest all of its non-core assets to improve and preserve liquidity. The Debtors filed for chapter 11 in an effort to sell its remaining business pursuant to an expedited sale process. Wells Fargo, a prepetition secured lender has agreed to provide DIP Financing. The Debtors have filed a Bidding Procedures Motion seeking approval of Capgemini as the Stalking Horse Bidder and to undertake a post-petition marketing process. Prime Clerk is the proposed claims agent. The Honorable Brendan L. Shannon will preside over these cases.
On March 23, 2017, the U.S. Bankruptcy Court for the Southern District of Florida (the “Court”) issued an opinion in the chapter 15 case of Banco Cruzeiro do Sul, S.A., a Brazilian bank (“BCSUL” or the “Debtor”), holding, among other things, that section 1521(a)(7) of the Bankruptcy Code does not prevent foreign representatives from commencing state law fraudulent conveyance actions. See Laspro Consultores LTDA v. Alinia Corp. (In re Massa Falida Do Banco Cruzeiro Do Sul S.A.), No. 14-22974-BKC-LMI, Adv. Pro. No. 16-01315-LMI, 2017 WL 1102814 (Bankr. S.D. Fla. Mar. 23, 2017) (hereinafter, “Laspro”). The opinion arose in the context of a motion to dismiss the complaint in an adversary proceeding commenced by Laspro Consultores LTDA, Trustee of BCSUL (“Plaintiff” or the “Foreign Representative”) against Alinia Corporation (“Alinia”) and 110 CPS, Inc. (“CPS” and together with Alinia, the “Defendants”). See id., at *1.
The Foreign Proceeding and the Chapter 15 Case
In September 2012 BCSUL was placed into extra judicial liquidation by the Central Bank of Brazil. Laspro, 2017 WL 1102814, at *1. On June 14, 2014, BCSUL filed a petition in the Court for recognition of the Brazilian liquidation proceeding as a foreign main proceeding under sections 1515 and 1517 of the Bankruptcy Code. See id., at *2. On July 14, 2014, the Court entered an order recognizing the Brazilian liquidation proceeding as a “foreign main proceeding.” Id. On August 12, 2015, the Brazilian bankruptcy court decreed BCSUL bankrupt. Id. As of January 21, 2016, Plaintiff was the sole trustee of BCSUL’s estate. Id.
The Adversary Complaint
On July 8, 2016, Plaintiff filed a complaint (as amended, the “Complaint”) in the Court based on allegations that Luis Felippe Indio da Costa (“Felippe”) and Luis Octavio Indio da Costa (“Octavio”), members of the family involved in BCSUL’s management, orchestrated a fraudulent loan scheme in which funds from BCSUCL were diverted to the Defendants. Laspro, 2017 WL 1102814, at *2. Felippe is alleged to be the settlor and sole beneficiary of the trust that owns Alinia. Id. CPS is owned by a Brazlian entity that is alleged to be jointly owned by Felippe and Octavio. Id. The Complaint alleges, among other things, that the diverted funds were used to purchase two apartments in New York City and certain artwork located therein, that allegedly were then transferred to the Defendants. Id. The counts in the Complaint fall into four basic categories: (i) imposition of a constructive trust/equitable lien; (ii) fraudulent conveyance under New York law; (iii) aiding and abetting; and (iv) four separate Brazlian law claims regarding consumer protection, misappropriation, unjust enrichment and fraudulent collusion. Id., at *2*-3; see also Laspro, Docket No. 25.
The Motion to Dismiss
On October 26, 2016, Defendants filed a motion dismiss all counts of the Complaint arguing, among other things, that section 1521(a)(7) of the Bankruptcy Code precludes the Foreign Representative from bringing the state fraudulent conveyance counts because they were akin to “avoidance actions” under the Bankruptcy Code which the Foreign Representative did not have standing to prosecute. Laspro, 2017 WL 1102814, at *3. Section 1521(a)(7) of the Bankruptcy Code states that “[u]pon recognition of a foreign proceeding . . . the court may, at the request of the foreign representative, grant . . . any additional relief that may be available to a trustee, except for relief available under sections 522, 544, 545, 547, 548, 550, and 724(a)” of the Bankruptcy Code. 11 U.S.C. § 1521(a)(7).
The Court’s Holding
The Court relied on the explicit language of sections 1509 and 1521(a)(7) of the Bankruptcy Code to deny the motion to dismiss with respect to the state fraudulent conveyance claims. Laspro, 2017 WL 1102814, at *6. Specifically, although the Court acknowledged that section 1521(a)(7) does preclude a court from granting a foreign representative relief under “certain enumerated sections pursuant to which a bankruptcy trustee may bring avoidance actions,” it found that same section to “not prohibit a foreign representative from bringing avoidance claims that are available to the foreign representative generally under non-bankruptcy law.” Id. Moreover, the Court pointed to section 1509(f) of the Bankruptcy Code, which “makes clear” that “the failure of a foreign representative to commence a case or to obtain recognition under [chapter 15] does not affect any right the foreign representative may have to sue in a court in the United States to collect or recover a claim which is the property of the debtor.” Id.; see also 11 U.S.C. § 1507(f). Accordingly, the Court found that the Foreign Representative’s ability to seek relief under the New York state fraudulent conveyance laws stemmed not from its capacity as a “foreign representative” under chapter 15 of the Bankruptcy Code, but its capacity as the Brazilian bankruptcy judicial administrator “who represents the creditors of the estate under Brazilian law.” Laspro, 2017 WL 1102814, at *6, *9; see also id., at *7 (“There is absolutely nothing in any part of chapter 15 that remotely suggests that a foreign representative may never bring an avoidance claim that the foreign representative has the direct right to bring in his or her capacity as the foreign representative (or as section 1509(f) makes clear — in his or her independent capacity otherwise).”). For these same reasons, the Court also denied the motion to dismiss as to the constructive trust/equitable lien claims. Id., at *9.
In light of the foregoing, it behooves foreign representatives to carefully analyze the nature of each cause of action they might be able to bring in a chapter 15 proceeding.
Traditional DIP Order Carve Outs Do Not Cap the Administrative Claims of Committee Professionals
On January 5, 2017, Judge Sontchi of the Bankruptcy Court for the District of Delaware issued an opinion (the “Opinion”) in the pending Molycorp Chapter 11 case (Case No. 15-11357). In re Molycorp, Inc., 562 B.R. 67 (Bankr. D. Del. 2017). In the Opinion, the Court rejected a challenge by OCM MLYCo. Ltd. (“Oaktree”), one of Molycorp’s pre-petition secured lenders, Molycorp’s DIP Lender and, in combination with Molycorp’s other set of secured lenders, purchaser of Molycorp’s more profitable operating subsidiaries, to the fees & expenses of Paul Hastings LLP, lead counsel to the Official Committee of Unsecured Creditors (the “Committee”).
Molycorp’s Chapter 11 has been extremely contentious and detailing its history would take many pages. The facts relevant to the Opinion are quite simple. The DIP Financing Order entered by the Court provided for a carve-out of $250,000 for the Committee to investigate pre-petition claims against Oaktree (the “Investigation Budget”). D.I. 278, ¶ 4(b). The Committee began investigating potential claims against Oaktree almost immediately and, on January 14, 2016, the Court entered an order granting the Committee standing to bring litigation on the estate’s behalf against Oaktree. D.I. 1086. After mediation with all major parties in the case before the Honorable Robert D. Drain (SDNY), the Debtors filed a notice of the execution of a global settlement agreement on February 22, 2016, including a settlement of the claims brought by the Committee (the “Settlement Agreement”). D.I. 1302, Settlement Agreement at Ex. A. In the Court’s own words, “[t]he Settlement Agreement paved the way for a consensual reorganization plan for certain of the Debtors.” Molycorp, 562 B.R. at 72. On April 8, 2016, the Court entered an Order confirming a plan of reorganization premised on the Settlement Agreement. D.I. 1580.
After the Settlement Agreement was approved, Paul Hastings filed a Second Interim Fee Application, covering the period from September 1, 2015 to March 31, 2016, requesting Court approval of $8,491,064.75 in fees and $226,179.06 in expenses (the “Fee Application”). Oaktree objected to Paul Hastings’ Fee Application on four grounds. First, Oaktree argued that the DIP Financing Order established a dispositive cap of $250,000.00 (the “Cap”) on the fees and expenses of the Committee counsel in relation to the investigation of claims against Oaktree. Id. at 73. Second, Oaktree argued that the DIP Financing Order only authorized the compensation of the Committee’s professionals for the investigation of claims, not for the initiation and prosecution of such claims. Id. Third, Oaktree argued that even if the Cap was not dispositive, “any portion of Paul Hastings’ fees that exceeds the cap set by the DIP Financing Order is presumptively unreasonable.” Id. at 73-74. Finally, Oaktree argued that the descriptions of the work performed by Paul Hastings’ attorneys were excessively vague and should be disallowed. Id. at 74.
The Court’s opinion was decisive but comprehensive. As the Court explained, before confirmation of a plan, “absent equity in the [secured party’s] collateral, administrative claimants cannot look to encumbered property to provide a source of payment for their claims.” Molycorp, 562 B.R. at 75. Thus, there was no doubt that as the secured party, Oaktree’s consent was necessary for the payment of administrative expenses and Oaktree was within its rights to “impose a limit on the amount of its collateral which may be used to pay the attorneys employed by the Committee.” Id. at 77.
11 U.S.C. § 1129(a)(9)(A), however, mandates that for a plan to be confirmed, each holder of an allowed administrative expense claim, unless agreed otherwise, must be paid in cash equal to the allowed amount of such claim on the effective date of the plan. Molycorp, 562 B.R. at 77. Therefore, “if the secured parties desire confirmation, the administration claims must be paid in full in cash even if it means invading their collateral.” Id. at 78 (quoting In re Emons Industries, Inc., 76 B.R. 59, 60 (Bankr. S.D.N.Y. 1987)). Therefore, “in the context of a plan confirmation, a cap on the amount to be paid towards administrative expenses may only be approved after obtaining the administrative claimants’ consent.” Molycorp, 562 B.R. at 78.
The Court then held that the Investigation Budget in the DIP Order unambiguously “[did] not contain any language that can compel automatic disallowance of Paul Hastings’ fees.” Id. at 79. The Court saw nothing in the language of the DIP Order that differed from a standard carve-out provision. Id. The Court also noted the difference between the language in the DIP Order and the language in the Confirmed Plan, which stated that “[a]ny amounts incurred by the Creditors’ Committee’s legal professionals on and after the Committee Settlement Effective Date with respect to the Creditors’ Committee Legal Fee Cap Matters in excess of the Creditors’ Committee Legal Fee Cap shall be disallowed.” Id. at 80 (emphasis in original). The Court noted that the difference in language spoke for itself and made absolutely clear that “the costs incurred by Paul Hastings are not affected by the DIP Financing Order.” Id. Finally, the Court concluded by allowing Paul Hastings’ fees and expenses as reasonable compensation for services rendered, noting that the “record demonstrates that the services rendered benefited the Debtor’s estate and advantaged the Committee’s constituents.” Id. at 82.
The Unanswered Question—Can a DIP Order Ever Be Used to Cap The Committee’s Professionals’ Administrative Claims?
The Court declined to answer whether it would ever uphold a provision in a DIP Order capping the allowable administrative claims of the Committee’s professionals. Id. at p. 80, n. 62. Both the parties and the Court noted that other courts had approved such provisions in a DIP Order, most notably In re Granite Broadcasting Corp. (ALG) (Bankr. S.D.N.Y. Jan. 5, 2007). The Court did, however, note that there was an ongoing debate “with regard to the term ‘agreed’ [in § 1129(a)(9)(A)]: whether this requires a creditor expressly or affirmatively consent to a different treatment, or whether consent may be implied from the creditor’s conduct.” Molycorp, 562 B.R. at 78, n. 54.
The Court’s acknowledgement of this debate was not mere happenstance. If consent to lesser treatment may be implied from a creditor’s conduct, a court could find that by accepting employment from the Committee after such a DIP Order has been entered, a Committee professional has impliedly consented to the hard cap in the DIP Order. If, however, implied consent is insufficient, it seems unlikely that a Court could ever find a hard cap in a DIP Order binding.
The Court did, however, signal its position on this debate in a footnote. In explaining the debate over the type of consent necessary under § 1129(a)(9)(A), the Court cited to In re Teligent, Inc., in which administrative creditors who had not returned a ballot were deemed to have agreed to lesser treatment (the case was administratively insolvent). The Court viewed the holding in Telligent as a “questionable fiction.” Molycorp, 562 B.R. at 78, n. 54. It therefore appears questionable that Judge Sontchi will be well disposed to arguments that an administrative claimant has impliedly consented to lesser treatment and, by implication, to DIP Orders which attempt to place a hard cap on the administrative claims of Committee professionals.
Upcoming Committee Formation Meeting: Friday, April 7, 2017, 10:00 a.m.
Case Name: 17-10635 (KG)
Location: Delaware State Bar Association 405 King Street, 2nd Floor Wilmington, DE 19801
Aerospace Holdings, d/b/a GroupAero, along with four of its affiliates, has filed a petition for relief under Chapter 11 in the Bankruptcy Court for the District of Delaware (Lead Case No. 17-10635). The Debtors’ petition reports $10-50 million in assets and $50-100 million in liabilities. Through its operating subsidiaries, Aerospace Holdings provides engineering, design and manufacturing services to the space, commercial aerospace and defense markets. According to the First Day Declaration of Matthew D. Sedigh, the Debtors’ CRO, the Debtors intend to sell substantially all of their assets. The stalking horse bidder is Harlow Aerostructures LLC. BMCGroup is the proposed claims agent. The case has been assigned to the Honorable Kevin Gross.
Upcoming Committee Formation Meeting: Thursday, March 23, 2017, 10:00 a.m.
Case Name: 17-10570 (BLS)
Location: Delaware State Bar Association 405 King Street, 2nd Floor Wilmington, DE 19801-2529
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 proposed claims agent for further information.
Upcoming Committee Formation Meeting: Wednes., March 22, 2017, 10:00 a.m.
Case Name: 17-10567 (LSS)
Location: The Doubletree Hotel 700 King Street Wilmington, DE 19801