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ONE Aviation Corporation, along with eleven subsidiaries and affiliates, has filed a petition for relief under chapter 11 of the Bankruptcy Code in the Bankruptcy Court for the District of Delaware (Lead Case No. 18-12309).  ONE Aviation, based in Albuquerque, New Mexico, is an aircraft manufacturer that was formed by the 2015 merger between Eclipse Aerospace and Kestrel Aircraft.  ONE Aviation has filed with a prepackaged plan of reorganization, which is supported by ONE Aviation’s senior pre-petition lender, Citiking International US LLC.  One Aviation is seeking to hold a combined hearing on November 19, 2018 to approve its Disclosure Statement and confirm the prepackaged plan.  According to the First Day Declaration, the prepackaged plan contemplates a debt for equity swap, with Citiking receiving 100% of the Class A common stock in the reorganized ONE Aviation.  Epiq is the proposed claims and noticing agent.  The cases have been assigned to the Honorable Christopher S. Sontchi.

Contact Norman L. Pernick, G. David Dean or Myles R. MacDonald for more information regarding this matter.

Upcoming Committee Formation Meeting: Thursday, October 18, 2018 10:00 AM

Case Name: 18-12221 (KJC)

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 petition for relief.

Contact Norman L. Pernick, G. David Dean or Myles R. MacDonald for more information regarding this matter.

Mattress Firm, Inc., along with forty (40) affiliates and subsidiaries, has filed a petition for relief under chapter 11 of the Bankruptcy Code in the Bankruptcy Court for the District of Delaware (Lead Case No. 18-12241).  Mattress Firm’s petition estimates its assets and liabilities to both be between $1–$10 billion.  First Day Pleadings are still being filed.  According to a press release, the Debtors enter chapter 11 having negotiated a prepackaged plan of reorganization with their major stakeholders, pursuant to which the Debtors will close up to 700 stores nationwide.  A business plan posted publicly on the claims agent’s website provides additional details regarding the Debtors’ reorganization plan.  Epiq Bankruptcy Solutions is the proposed claims and noticing agent.  The cases have been assigned to the Honorable Brendan Linehan Shannon.

Contact Norman L. Pernick, G. David Dean or Myles R. MacDonald for more information regarding this matter.

In a recent decision, Heritage Home Group LLC, et al., Case No. 18-11736-KG, 2018 WL 4684802 (Bankr. D. Del. Sept. 27, 2018), Judge Kevin Gross, U.S. Bankruptcy Judge for the District of Delaware, held that a consultant tasked with liquidating the debtors’ assets under a store closing and asset disposition agreement (“Disposition Agreement”) is not a professional, and consequently, not required to be retained under Section 327(a) of the Bankruptcy Code.

The Debtors, Heritage Home Group LLC, et al. (“Debtors”), sought to retain SB360 Capital Partners, LLC (“SB360” or “Consultant”), pursuant to the Disposition Agreement, as their consultant to sell the Debtors’ “Non-Luxury Group” assets.  Heritage Home Group, 2018 WL 4684802 at *1.  In exchange, Debtors agreed to pay SB360 commissions from the sales of assets and furniture, fixtures and equipment.  Id. at *2.  Bankruptcy court approval of the retention was sought under Sections 105(a) and 363 of the Bankruptcy Code, pursuant to a motion for authority to, inter alia, enter into the Disposition Agreement and conduct store closing or similar themed sales.  Id. at *1; see also Case No. 18-11736-KG, Docket No. 219.

The U.S. (“Trustee”) objected to SB360’s retention on the bases that the engagement was subject to Section 327(a) of the Bankruptcy Code, not Section 363.  More specifically, the Trustee argued that the Consultant was a “professional like an auctioneer” and should be required to file a declaration of disinterestedness and have its fees reviewed under applicable professional compensation standards, in compliance with Section 327(a) of the Bankruptcy Code and Federal Rule of Bankruptcy Procedure 2014.  Id. at *2; see also Case No. 18-11736-KG, Docket No. 265.

The Debtors disputed that the engagement required approval under Section 327(a), arguing that Section 363 was the proper standard and the engagement was a valid exercise of the Debtors’ business judgment.  See Case No. 18-11736-KG, Docket No. 305 at 2-3.  SB360 argued it was not a “professional” as defined in Section 327(a), and the services provided under the Disposition Agreement did not require Section 327 retention because the services did not assist the Debtors in administering the chapter 11 cases.  See Case No. 18-11736-KG, Docket No. 300 at 2.

Following an evidentiary hearing and argument, the Delaware Bankruptcy Court rejected the notion that SB360 was an auctioneer.  Heritage Home Group, 2018 WL 4684802 at *3.  Noting the term “auctioneer” is not defined in case law or the Bankruptcy Code; the Court reviewed the Black’s Law Dictionary definition of an auctioneer and determined that SB360 was not an auctioneer because it was not in charge of selling at an auction and there was no public auction.  Id.

The Court, citing In re First Merchants Acceptance Corp., 1997 WL 873551 (D. Del. Dec. 15, 1997), observed that “a ‘professional’ is limited to those occupations which control, purchase or sell assets that are important to reorganization, is negotiating the terms of a plan of reorganization, has discretion to exercise his or her own personal judgment, and whether he or she contributes ‘some degree of special knowledge or skill.’”  Id. at *3.  The Court noted that SB360 was not at the center of Debtors’ reorganization and the terms of the Disposition Agreement nullified SB360’s control.  Id.

The Court then looked to the bankruptcy court decisions in In re Nine West Holdings, Inc., 2018 WL 3238695 (Bankr. S.D.N.Y. July 2, 2018), and In re hhgregg, Inc., Case No. 17-01302-RLM-1 (Bankr. S.D. Ind. May 8, 2017).  Id. at *4.  In Nine West Holdings, the Bankruptcy Court for the Southern District of New York rejected the argument that Alvarez and Marsal and its employee serving as Nine West’s CEO should be retained under Section 327(a), as opposed to Section 363(b).  That court reiterated that “a ‘professional’ for purposes of Section 327(a) is intimately involved in the reorganization process.”  Id.  Judge Gross noted that SB360 was not so involved.  Id.  Similarly, in hhgregg, the Bankruptcy Court for the Southern District of Indiana did not require Section 327(a) retention because the consultant at issue “(1) carried out debtor’s judgment, (2) did not play a central role in the reorganization, (3) did not have broad discretion and (4) had no control over sale prices.”  Id.

Considering the language of the Disposition Agreement which required SB360 to, among other things, “‘recommend appropriate discounting,’ ‘provide qualified supervision,’ ‘maintain focused and constant communication,’ …,” the Court concluded that the Consultants’ responsibilities were “clearly advisory” and did not “constitute an intimate role in the Debtors’ plans.”  Id.

In overruling the Trustee’s objection, the Court observed that the Bankruptcy Code provides clearly that certain professionals must be retained formally pursuant to Section 327(a) but that retention of the Consultant did not require such treatment.  Id.

The ruling in Heritage Home Group provides certainty to practitioners, as well as consultants seeking to be retained by a debtor to liquidate assets, that such consultants are not “professionals” requiring retention under Section 327(a) in the Delaware bankruptcy court.


Subsequent to Judge Gross’ decision in Heritage Home Corp., Judge Brendan Linehan Shannon, U.S. Bankruptcy Judge for the District of Delaware, held, in Brookstone Holdings Corp., Case No. 18-11780-BLS, 2018 WL 4801890 (Bankr. D. Del. Oct. 1, 2018), that Gordon Brothers Retail Partners, LLC and Hilco Merchant Resources, LLC (collectively, “Hilco”), performing services related to debtor’s going-out-of-business (“GOB”) sales (and acting in a role similar to SB360 in Heritage Home Corp.), was not a “professional” within the meaning of Section 327(a).  Judge Shannon looked to the common usage of the term “auctioneer” and concluded that the sale process was not an auction and Hilco was not hired to conduct an auction.  As such, Hilco was not engaged as an “auctioneer” for purposes of Section 327(a). Brookstone Holdings Corp., 2018 WL 4801890 at *6.  The Court also considered whether Hilco was an “other professional” as the term is used in Section 327(a) and decided it was not.  Id. at *10.  The Court reviewed the factors developed in First Merchants for determining whether an employee is a “professional” within the meaning of Section 327(a), and concluded Hilco’s services were “not sufficiently central to the development and implementation of the Debtor’s reorganization.”  Id. at *1.  Based on the record, the debtor remained in “complete control of all aspects of the GOB sales” and Hilco did not control or manage the sale process, was not involved in negotiating the terms of a plan, did not exercise discretion “in the administration of the debtor’s estate” and it’s role in store closures did not “constitute meaningful participation in the ‘administration of debtors’ estate.’”  Id. at *7-9.

ATD Corporation, along with nine affiliates and subsidiaries, has filed a petition for relief under chapter 11 of the Bankruptcy Code in the Bankruptcy Court for the District of Delaware (Lead Case No. 18-12221).  ATD, headquartered in Huntersville, North Carolina, is the largest replacement tire distributor in North America, with 122 distribution centers across the United States and another 24 in Canada.  According to the First Day Declaration, ATD’s filing was precipitated by the recent decisions of Goodyear Tire & Rubber Company and Bridgestone Americas, Inc. to cease using ATD as a distributor of their products and instead form a joint venture competing against ATD.  According to ATD’s press release, ATD enters chapter 11 having reached a restructuring support agreement with its bondholders, who have agreed to exchange over $1 billion in outstanding bonds for 95% of the equity in the reorganized ATD.  ATD is also seeking authority for a DIP facility from ATD’s prepetition ABL Lenders, which will provide up to $200 million in new money financing.  Kurtzman Carson Consultants is the proposed claims and noticing agent.  The cases have been assigned to the Honorable Kevin J. Carey.

Contact Norman L. Pernick, G. David Dean or Myles R. MacDonald for more information regarding this matter.

Kraus Carpet Inc., along with five subsidiaries and affiliates, has filed a petition for recognition of a foreign proceeding under chapter 15 of the Bankruptcy Code in the Bankruptcy Court for the District of Delaware (Lead Case No. 18-12057).  According to the accompanying Declaration, Kraus, based in Waterloo, Ontario, Canada, operates a carpet and flooring distribution network throughout the United States and Canada.  Kraus is seeking recognition of its foreign proceeding under the Companies’ Creditors Arrangement Act, which is pending before the Ontario Superior Court of Justice (File No. CV-18-604759), as a foreign main proceeding.  Kraus is also seeking to sell its distribution business, pursuant to section 363 of the Bankruptcy Code and an order to be entered by the Canadian Court, to Roberts Company Canada Ltd.  The cases have been assigned to the Honorable Kevin Gross.

Contact Norman L. Pernick, G. David Dean or Myles R. MacDonald for more information regarding this matter.

Bankruptcy remote structures have become common in recent years to attempt to prevent a borrower from filing for Chapter 11.  One such structure is commonly referred to as a “golden share.”  The “golden share” typically refers to a noneconomic membership interest provided to a lender whose vote would be necessary for the borrower to file Chapter 11.

The Fifth Circuit in In re FranchiseServs. of N. Am., Inc., 891 F.3d 198, 209

(5th Cir. 2018), as revised (June 14, 2018), recently considered the enforceability of blocking “golden share” provisions and whether a creditor or shareholder could use such a provision to prevent a company from filing for bankruptcy.

In re Franchise Services

Prior to the petition date, the debtor obtained a $15 million investment from an investor, Boketo, LLC (“Boketo”), to finance an acquisition.  Id. at 203.  Boketo was a fully-owned subsidiary of Macquarie Capital Inc. (“Macquarie”), which created Boketo to finance the transaction.  Id.  The debtor agreed to pay Macquarie a $3 million fee for arranging the financing.  Id.  Boketo was given 100% of preferred stock in the form of a convertible preferred equity instrument.  Id.  Boketo was the largest single investor in the debtor and its stake in the debtor  amounted to a 49.76% equity interest if converted.  Id.  As a condition of the investment, the debtor reincorporated in Delaware and adopted a new certificate of incorporation that provided, in part, the majority of all equity classes, voting separately, must approve a bankruptcy filing.  Id.

The debtor filed a chapter 11 petition without requesting or securing the consent of  Boketo and the common shareholders.  Id. at 204.  Boketo and Macquarie moved to dismiss the bankruptcy case claiming the debtor failed to seek shareholder authorization.   Id.  In response, the debtor argued that the consent provision was an invalid restriction on its right to file a bankruptcy petition.  Id.

Following an evidentiary hearing, the bankruptcy court granted the motion to dismiss finding that, because Boketo was an owner, rather than a creditor, conditioning the debtor’s right to file a voluntary petition on the investor’s consent was not contrary to federal bankruptcy policy.  Id.

Thereafter, the bankruptcy court certified three questions for direct appeal to the Fifth Circuit:

(i)  Is a provision, typically called a blocking provision or a golden share, which gives a party (whether a creditor or an equity holder) the ability to prevent a corporation from filing bankruptcy valid and enforceable or is the provision contrary to federal public policy?

(ii)  If a party is both a creditor and an equity holder of the debtor and holds a blocking provision or a golden share, is the blocking provision or golden share valid and enforceable or is the provision contrary to federal public policy?

(iii)  Under Delaware law, may a certificate of incorporation contain a blocking provision/golden share? If the answer to that question is yes, does Delaware law impose on the holder of the provision a fiduciary duty to exercise such provision in the best interests of the corporation?  Id.

The Fifth Circuit observed as an initial matter that a “blocking provision” and “golden share” are not synonymous.  Id.  The term “‘blocking provision’ is a catch-all to refer to various contractual provisions through which a creditor reserves a right to provide debtor from filing for bankruptcy.”  Id.  A “golden share” is a “share that controls more than half of the corporation voting rights and given the shareholder veto power over changes to the company’s charter.”  Id.  The facts at issue did not fit into either definition and would narrow the certified questions.  Specifically, the bankruptcy court requested the Fifth Circuit opine on the legality of “blocking provisions” and “golden shares”, but to do so would result in an advisory opinion.  Id.  Instead, the Fifth Circuit confined its analysis to whether federal and Delaware law permit parties to “amend a corporate charter to allow a non-fiduciary shareholder fully controlled by an unsecured creditor to prevent a voluntary bankruptcy petition.”  Id. at 206.

On appeal, the debtor argued that federal law precluded enforcement of the corporate charter because it violated a “federal public policy against waiving the protections of the Bankruptcy Code.”  Id. at 207.  The debtor also asserted that the case involved “a creditor masquerading as a bona fide equity owner.”  Id. at 207.  The Fifth Circuit, however, found no evidence that the arrangement was merely a ruse to ensure that the investor would pay the affiliate’s bill.  Id. at 207.  Based on the facts presented, the Fifth Circuit held that “federal bankruptcy law does not prevent a bona fide equity holder from exercising its voting right to prevent the corporation from filing a voluntary bankruptcy petition just because it also holds a debt owed by the corporation and owes no fiduciary duty to the corporation or its fellow shareholders.”  Id. at 209.

The Fifth Circuit next addressed, in two parts, whether Delaware law allows the investor to exercise the block right: (i) “whether Delaware law allows parties to provide in the certificate of incorporation that the consent of both classes of shareholders is required to file a voluntary petition” and (ii) “whether Delaware law would impose a fiduciary duty on a minority shareholder with the ability to prevent a voluntary bankruptcy petition.”  Id.

As to the first inquiry, the Fifth Circuit noted the debtor had waived such argument on appeal, and, having found no Delaware cases on point, the Fifth Circuit assumed that Delaware law would tolerate a provision in a certification of incorporation conditioning a corporation’s right to file a petition on shareholder consent.  Id. at 210-211.  As to the second question involving consent, the Fifth Circuit noted that an investor could only owe a fiduciary duty if it qualifies as a controlling minority shareholder.  Id.  The Fifth Circuit stated the standard for minority control is high and “potential control is not enough.”  Id. at 212Rather, the debtor must prove “Boketo actually dominated the [debtor’s] corporate conduct.  Id. 213 (emphasis included).  The board’s willingness to act without Boketo’s consent undercut the case for control according to the Fifth Circuit.  Id.  Accordingly, the Fifth Circuit found that the record before it did not establish that Boketo was a controlling shareholder.  The Court also observed a fundamental defect in the debtor’s argument.  Id. at 214.  Assuming Boketo was a controlling shareholder and breached its fiduciary duty, the proper remedy was not to “deny an otherwise meritorious motion to dismiss the bankruptcy petition.”   Id.  The debtor must seek “its remedy under state law.”  Id.

The Franchise Services decision touches on difficult questions regarding whether a creditor or shareholder can block a bankruptcy filing pursuant to a corporate charter’s “golden share” or other blocking provisions.  The decision may be viewed as somewhat favorable to creditor’s ability to block a bankruptcy; however, the Fifth Circuit’s decision is limited to the unique set of facts involved in the case.



Upcoming Committee Formation Meeting: Friday, September 14, 2018 10:00 AM

Case Name: 18-12012 (KJC)

Location: The Doubletree Hotel, 700 King Street, Wilmington, DE 19801

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

Contact Norman L. Pernick, G. David Dean or Myles R. MacDonald for more information regarding this matter.

Creditors often think that an involuntary bankruptcy petition is a great bargaining chip when faced with a recalcitrant debtor. However, the actual filing of an involuntary bankruptcy petition (when that petition is filed in “bad faith”) confers a considerable risk to the petitioning creditors.  Recently, the United States Court of Appeals for the Third Circuit issued an opinion that re-emphasizes just how risky bad faith involuntary petitions can be for creditors.

In that non-precedential opinion authored by Circuit Judge Rendell, the Third Circuit weighed in on whether a creditor can set off damages imposed against it due to a bad faith involuntary bankruptcy petition against its claims against the debtor.  U.S. Bank, N.A. v. Maury Rosenberg, No. 18-1249, 2018 WL 3640987 (3d Cir. July 31, 2018).

Although this case has extensive procedural history the basic facts and procedural history are as follows: Maury Rosenberg established and owned a group of companies and partnerships operating as National Medical Imaging (“NMI”). NMI entered into equipment leases with U.S. Bank’s predecessors-in-interest. After NMI defaulted, U.S. Bank sued NMI and Rosenberg, which eventually settled (resulting in modified lease agreements under which NMI would continue to lease the equipment). As part of the settlement, Rosenberg would be personally liable if NMI again defaulted, which NMI did after twenty-one months.

After the default, entities related to U.S. Bank filed an involuntary bankruptcy petition against Rosenberg in the Eastern District of Pennsylvania, which was transferred to the Southern District of Florida (where Rosenberg lived).  The involuntary bankruptcy petition was subsequently dismissed.  After the dismissal, Rosenberg filed an adversary proceeding against U.S. Bank under 11 U.S.C. § 303(i) seeking the recovery of costs, attorney’s fees, and damages resulting from a bad faith filing of an involuntary bankruptcy petition.  That adversary proceeding was removed to the District Court, and tried before a jury. The jury awarded Rosenberg over $6 million, including $5 million in punitive damages, which are only warranted when the evidence shows that a defendant acted “with intentional malice” or that its conduct was “particularly egregious”.  After an appeal to the Eleventh Circuit (which reinstated the jury’s punitive damage award that had been vacated by the District Court in Florida), a final judgment of $6,120,000 (including the $5 million punitive damage award) was entered against U.S. Bank and its related entities for filing a bad faith involuntary petition against Rosenberg (the “Florida Judgment”).

At the same time, U.S. Bank proceeded with an action in the Eastern District of Pennsylvania for breach of contract against Rosenberg.  The District Court found in favor of U.S. Bank and awarded U.S. Bank approximately $6.5 million in damages, fees, and costs (the “Pennsylvania Judgment”).

Thereafter, U.S. Bank filed a motion with the Eastern District of Pennsylvania requesting that the District Court offset the Florida Judgment against the Pennsylvania Judgment. If such motion were granted, U.S. Bank would owe Rosenberg nothing and, importantly, would not have been required to come out of pocket for the Florida Judgment.  Reasoning that (i) the judgments lacked mutuality (because, among other things, the parties involved were not identical) and (ii) “equitable principles embodied in § 303 of the United States Bankruptcy Code preclude setoff”, the District Court, exercising its discretion consistent with Pennsylvania state law, denied the motion.  U.S. Bank appealed.

Determining that it need not reach the question of whether there was a lack of mutuality, the Third Circuit determined that the District Court did not abuse its discretion in denying U.S. Bank’s motion for mutual judgment satisfaction based on equitable principles.  Rosenberg, 2018 WL 3640987 at *2.  Accordingly, the Third Circuit affirmed the District Court.  In so doing, the Third Circuit cited with approval several other courts that have concluded that § 303(i)’s equitable purpose would be frustrated if bad faith filers were allowed to offset a § 303(i) judgment.  Citing In re Macke Int’l Trade, Inc., 370 B.R. 236, 255 (B.A.P. 9th Cir. 2007); In re Diloreto, 442 B.R. 373, 377 (E.D. Pa. 2010); In re Forever Green Athletic Fields, Inc., Bankr. No. 12-13888-MDC, 2017 WL 1753104, at *7 (Bankr. E.D. Pa. May 4, 2017); In re K.P. Enter., 135 B.R. 174, 185-86 (Bankr. D. Me. 1992); In re Schiliro, 72 B.R. 147, 149 (Bankr. E.D. Pa. 1987).

Setoff rights are an important remedy for creditors especially when a debtor becomes insolvent or files for bankruptcy. Frequently, it may be the only way a creditor can collect on such debt. However, under Pennsylvania law, “[s]etoff is an equitable right to be permitted solely within the sound discretion of the court.” Foster v. Mut. Fire, Marine & Inland Ins. Co., 531 Pa. 598, 614 A.2d 1086, 1095 (Pa. 1992). Therefore, courts may weigh whether setoff is equitable or if other equitable concerns are tantamount. Sanctions under § 303(i) seek to deter the improper filing of involuntary petitions. These sanctions play “a key role in deterring bad faith filing and remedying the negative effects of improperly-filed petitions.” Rosenberg, 2018 WL 3640987 at *2. The Third Circuit’s decision recognizes that permitting U.S. Bank to set off the § 303(i) award would severely undermine § 303(i)’s equitable purpose. Thus, it held that in light of U.S. Bank’s conduct and the equitable principles underlying § 303(i), the District Court did not abuse its discretion in denying U.S. Bank the equitable remedy of setoff.

This case is but another warning to creditors considering the use of an involuntary petition for a bad faith purpose.  In this case, U.S. Bank’s decision to commence an involuntary petition exposed it to a substantial award that made a bad situation worse – it must now write a large check and only hope that it can collect against a judgment debtor that may be judgment proof.   This is the quintessential lose/lose situation for any creditor.