Orchard Acquisition Company, LLC, along with four of its affiliates and subsidiaries (including the J.G. Wentworth Company, LLC), has filed a petition for relief under Chapter 11 in the Bankruptcy Court for the District of Delaware (Lead Case No. 17-12914).  The Petition estimates the Debtors’ assets and liabilities to both be between $100 – $500 million.  According to the First Day Declaration, the Debtors enter Chapter 11 having reached a restructuring support agreement with holders of over 87% in outstanding principal amount of its term loan claims and over 99% of the ownership interests of the J.G. Wentworth Company, LLC.  The Debtors have filed a prepackaged Plan of Reorganization and Disclosure Statement, and will seek to have both approved at a (tentative) combined hearing on January 17, 2018 at 10:00 a.m. ESTPrime Clerk, LLC is the proposed claims and noticing agent.  The cases have been assigned to the Honorable Kevin Gross.

Contact Norman L. Pernick or Nicholas J. Brannick for more information regarding this matter.  Please note, however, that Cole Schotz P.C. does not represent the debtors in these cases and cannot respond to questions directed toward the debtors.

Dextera Surgical Inc. (NASDAQ: DXTR), a designer and manufacturer of surgical devices based in Redwood City, CA, has filed a petition for relief under Chapter 11 in the Bankruptcy Court for the District of Delaware (Case No. 17-12913).  The Petition estimates that Dextera has $10 – $50 million in both assets and liabilities.  According to the First Day Declaration, Dextera enters Chapter 11 having carried out a prepetition marketing process and will pursue a 363 sale, with Aesculap, Inc. as the Stalking Horse Purchaser.  Dextera also seeks approval to borrow up to $1.5 million in DIP Financing from Aesculap, Inc.  Rust/Omni is the proposed claims and noticing agent.  The case has been assigned to the Honorable Kevin J. Carey.

Contact Norman L. Pernick or Nicholas J. Brannick for more information regarding this matter.  Please note, however, that Cole Schotz P.C. does not represent the debtors in these cases and cannot respond to questions directed toward the debtors.

Charming Charlie Holdings, Inc., a fashion accessories retailer based in Houston, Texas, has, along with six of its affiliates and subsidiaries, filed a petition for relief under Chapter 11 in the Bankruptcy Court for the District of Delaware (Lead Case No. 17-12906).  According to the Petition, Charming Charlie has an estimated $50 – $100 million in assets and $100 – $500 million in liabilities.  According to the First Day Declaration, Charming Charlie enters Chapter 11 having entered into a restructuring support agreement with 80% of its prepetition secured term loan lenders, and will pursue a comprehensive restructuring involving the closing of approximately 100 underperforming stores.  Charming Charlie has also filed a motion to approve up to $35 million in DIP Financing from a consortium of lenders with Bank of America, N.A., as administrative agent.  Rust/Omni is the proposed claims and noticing agent.  The cases have been assigned to the Honorable Christopher S. Sontchi.

Contact Norman L. Pernick or Nicholas J. Brannick for more information regarding this matter.  Please note, however, that Cole Schotz P.C. does not represent the debtors in these cases and cannot respond to questions directed toward the debtors.

PhaseRx, Inc. (NASDAQ: PZRX), a Seattle-based biopharmaceutical company developing mRNA treatments for life-threatening inherited liver diseases in children, has filed a chapter 11 petition before the United States Bankruptcy Court for the District of Delaware (Case No. 17-12890).  The case has been assigned to the Honorable Christopher S. Sontchi.  The petition indicates assets of $4.1 million and liabilities of $5.6 million.  Donlin Recano will serve as the claims agent.  The company has issued a press release regarding its reorganization.

 

Contact Norman L. Pernick or Nicholas J. Brannick for more information regarding this matter.  Please note, however, that Cole Schotz P.C. does not represent the debtors in these cases and cannot respond to questions directed toward the debtors.

Boston Herald, Inc., along with three affiliates and subsidiaries, has filed a petition for relief under Chapter 11 in the Bankruptcy Court for the District of Delaware (Lead Case No. 17-12883).  The Herald’s Petition estimates both its assets and liabilities to be between $10 – $50 million.  Although First Day Motions have not yet been filed, the publisher of the Boston Herald, Patrick J. Purcell, announced earlier today that the Herald will be sold via the Chapter 11 process to Gatehouse Media, LLC.  No claims and noticing agent has been proposed yet.  The cases have been assigned to the Honorable Laurie Selber Silverstein.

 

Contact Norman L. Pernick or Nicholas J. Brannick for more information regarding this matter.  Please note, however, that Cole Schotz P.C. does not represent the debtors in these cases and cannot respond to questions directed toward the debtors.

On November 28, 2017, Tidewater Inc. and its affiliated debtors (collectively, the “Tidewater Debtors”) withdrew their motion objecting to final allowance of rejection damage claims of Fifth Third Equipment Finance Company (“Fifth Third”).  The notice of withdrawal indicated that Fifth Third, the sole remaining non-settling vessel lessor, resolved its dispute with the Tidewater Debtors pursuant to which Fifth Third’s “Sale Leaseback Claim” was allowed in the amount of $67,500,000.

The Tidewater Debtors (and their non-debtor affiliates) own and operate Offshore Support Vessels (OSVs) that support offshore energy exploration and production activities worldwide.  The Tidewater Debtors commenced Chapter 11 proceedings on May 17, 2017 to implement a fully negotiated and consensual restructuring under a prepackaged plan of reorganization filed on the same day.

Before the bankruptcy filings, the Tidewater Debtors and Fifth Third (as well as the other vessel lessors, the “Lessors”) entered into sale-leaseback transactions pursuant to which some of the Tidewater Debtors (collectively, the “Charterers”) sold vessels to the Lessors, which then leased the vessels back to the Charterers under bareboat charter agreements (the “Bareboat Charter Agreements”).  The Bareboat Charter Agreements each provided that upon an Event of Default (as defined therein, but including the Tidewater Debtors’ insolvency and bankruptcy filings, confirmation of a plan and rejection), Lessors were entitled to recover a stipulated loss value (“SLV”) as liquidated damages.  Tidewater Inc. absolutely and unconditionally guaranteed the payment and performance of the Charterers’ obligations under the Bareboat Charter Agreements.

A bareboat charter agreement is one type of charter agreement that governs the terms and conditions for the lease of a vessel. A bareboat charter is an executory contract that can be assumed or rejected under Section 365(a) of the Bankruptcy Code.  Rejection allows a debtor to disavow contracts that are burdensome or no longer advantageous to its ongoing business operations.

On the petition date, the Tidewater Debtors filed a motion to reject the Bareboat Charter Agreements.  They asserted that rejecting the Bareboat Charter Agreements would save them approximately $171 million over the next seven years.  In the motion, the Tidewater Debtors preemptively also sought to disallow the Lessors’ rejection damage claims in the amount of the SLV stated in the respective Bareboat Charter Agreements as an “unreasonable and unenforceable liquidated damages provision.”  The Tidewater Debtors argued the claims should be limited to “the reasonable expectation damages incurred by the Lessors.”  They proposed the final damages claims to equal the total maximum amount owing under each Bareboat Charter Agreement discounted to present value.  With respect to Fifth Third, the difference in the parties’ positions was astronomical.  Fifth Third argued for an SLV claim of approximately $94 million, while the Debtors posited it should be $34 million.

Relying on two Third Circuit decisions (In re Transworld Airlines, Inc., 145 F.3d 123 (3d Cir. 1998) and In re Montgomery Ward Holding Corp., 326 F.3d 383 (3d. Cir. 2003)), on August 31, 2017, Judge Brendan Shannon of the U.S. Bankruptcy Court for the District of Delaware ruled that the SLV provision was an unenforceable penalty.  He scheduled an evidentiary hearing in late September to determine Fifth Third’s “actual and appropriate damages” from rejection of the Bareboat Charter Agreement.

As parties oftentimes do in bankruptcy proceedings, the Tidewater Debtors and Fifth Third sagaciously resolved their dispute.  Given the settlement of Fifth Third’s claim, Judge Shannon did not have to rule on Fifth Third’s argument that even if the SLV is an unenforceable penalty against the direct contract counterparty, under New York law, it is entitled to the SLV amount pursuant to Tidewater Inc.’s guaranty.  That was an argument with respect to which he reserved opinion at the August hearing. It is clear, however, that vessel lessors may not be able to enforce their contractual SLV provisions if the actual damages they incur from rejection of the charter agreement is less than the SLV.

Upcoming Committee Formation Meeting:  Tuesday, November 28, 2017 10:00 AM

Case Name: 17-12560 (KJC)

Location: The Double Tree 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 and Nicholas J. Brannick for more information.

The Woodbridge Group of Companies, LLC, a real estate finance and development company based in Sherman Oaks, CA, has filed a petition for relief under Chapter 11 in the Bankruptcy Court for the District of Delaware, along with two hundred and seventy five subsidiaries and affiliates (Lead Case No. 17-12560).  Woodbridge’s Petition reports $500 million to $1 billion in both assets and liabilities.  According the First Day Declaration, the Debtors’ principal business is buying, improving, and selling high-end luxury homes.  The Debtors have filed Chapter 11  to implement a balance sheet restructuring and have secured $100 million in DIP Financing from Hankey Capital, LLC.  The DIP Motion has not yet been filed.  The Garden City Group, Inc. is the proposed claims and noticing agent.  The cases have been assigned to the Honorable Kevin J. Carey.

Contact Norman L. Pernick or Nicholas J. Brannick for more information regarding this matter.  Please note, however, that Cole Schotz P.C. does not represent the debtors in these cases and cannot respond to questions directed toward the debtors.

It’s no secret that Delaware, New York (Southern District), and Texas (at least since the oil and gas crisis) have become known as the “hotspots” for filing large chapter 11 bankruptcy cases.  Whether due to desirable precedent, well qualified judges, the responsiveness of the Courts to the need for prompt scheduling of hearings, or a sense of uniformity, most large companies have historically chosen to file in these venues. However, these popular venues appear to have a rival.  Recently, some large chapter 11 debtors— Gymboree and Toys “R” Us— have filed in the commonwealth that generally prides itself as being a place “for lovers.”  So, let’s explore why recent chapter 11 debtors have chosen to file in Virginia.

Venue in a bankruptcy case is governed by 28 U.S.C. § 1408, which provides that a debtor may file its bankruptcy case in any district where the debtor’s domicile, residence, principal place of business, or principal assets are located.  For the purposes of the statute, “domicile” indicates a corporation’s state of incorporation.  However, the debtor is not restricted to these locations.  Bankruptcy venue is also proper in a district where the debtor’s affiliate, general partner, or partnership already has a bankruptcy case pending, often times opening the door to a variety of venues.  In many cases, more than one venue will satisfy the statutory requirements, allowing the debtor to make a choice.

What is so appealing about the United States Bankruptcy Court, Eastern District of Virginia (Richmond Division)?  First, the two judges sitting in this district are well respected. Michael A. Condyles, a lawyer in the firm representing Gymboree as local counsel, was quoted in a recent article published in The Virginia Lawyers Weekly as saying, “I do think there is a definite trend.  I think it is a testament to the quality of the judges.”  “The attraction is the ‘quality and sophistication’ of the judges,” Condyles continued.  Judges Kevin R. Huennekens and Keith L. Phillips, who serve in Rich­mond, have a combined 15 years of experience on the bankruptcy bench.

However, this alone cannot answer the question of “why Virginia” in a particular case. Attorneys who have appeared before the bankruptcy courts in Delaware, New York, and Texas, are well aware of the proficiency of excellence and sophistication of the judges who sit there.  The judges’ experience and competency are driving factors that regularly motivate sophisticated attorneys to fly in from all over the country to present their cases in the sought after venues. Clearly, the skill-level of the judges cannot be the only draw to the recent filings in Virginia.

According to a recent article published in the New York Times, the Richmond bankruptcy court is also known to move cases along quickly. While this may be true, that is understandable due to the fact that Virginia courts are required to juggle only a small fraction of the large chapter 11 cases that some of the other venues regularly encounter. The overburdened dockets which many courts frequently face, especially those of the Southern District of New York and Delaware, are managed with ease. These judges commonly schedule multiple hearings in one day, and many of the hearings involve sophisticated, complex issues. Nonetheless, the overburdened dockets are defied by these Courts’ ability to handle the caseload in an efficient manner. Therefore, there still must be more behind this new trend.

The recent large-case filings in Virginia may also be due to another feature attractive to debtors’ counsel— the court is known for approving high professional fees. Nationally, professional fees for bankruptcies have been increasing about 9.5 percent a year, about four times the rate of inflation, according to Lynn LoPucki, a bankruptcy professor at the University of California, Los Angeles who was quoted in the New York Times. In 2014, The National Law Journal posted the results of an hourly billing survey from law firms. It showed the average hourly rate for partners was $604, and associates charged $307. Now, partners in the largest 50 firms charge a median hourly billing rate of $625 per hour, versus those in a second largest group who charge almost $180 less for every hour, coming in at $447. As law firm size increases, so does the median billing rate. Public company debtors typically are represented by the large firms with high billing rates.

Kirkland and Ellis, counsel to Toys “R” Us, disclosed to the bankruptcy judge in the Eastern District of Virginia that its lawyers were charging as much as $1,745 an hour in the case. According to an analysis by The New York Times, that is 25 percent more than the average highest rate in 10 of the largest bankruptcies this year. So far, the Richmond judges seem to accept that with the complexities of large chapter 11 cases, come high attorney rates.

This begs the question, now that the allure of filing in Virginia is known, will we see this trend continue to grow? Only time will tell.

 

 

In order to secure a real property owner’s payment obligation, contractors, mechanics, materialmen, and other workmen are often granted a lien referred to by a variety of names including, materialmen’s liens, workmen’s liens, and mechanic’s liens.  While the parlance varies by jurisdiction, they are generally referred to as mechanic’s liens in Texas—even in the context of real property.  Because a mechanic’s lien secures the real property owner’s obligation to the underlying real property, making sure that their mechanic’s lien is properly perfected should be in the forefront of all contractors’ minds.  The protection afforded by a mechanic’s lien becomes increasingly important for contractors if they encounter issues obtaining payment from the real property owner or if the real property owner files bankruptcy.

Texas has two types of mechanic’s liens for real property: constitutional and statutory.  Article XVI section 37 of the Texas Constitution expressly provides for a variety of mechanic’s liens, and states:

Mechanics, artisans and material men, of every class, shall have a lien upon the buildings and articles made or repaired by them for the value of their labor done thereon, or material furnished therefor; and the Legislature shall prove by law for the speedy and efficient enforcement of said liens.

Courts interpret this section of the Texas Constitution as providing for “self-executing” liens as between the lien claimant and the property owner; that is, these constitutional liens do not generally require a contractor to take any additional steps beyond furnishing materials or labor directly to the property owner in order to perfect their interest.  The ease with which protection is afforded is generally great news for contractors because they receive increased rights just by virtue of their labor.  There is also a second, and arguably superior, way to obtain a mechanic’s lien on real property.

The second way to create a mechanic’s lien on real property in Texas is by following the statutory procedures.  More particularly described in chapter 53 of the Texas Property Code, the statute generally requires the completion of an affidavit containing certain statutorily specified information including, among other information, the amount of the claim, the contact information of the claimant, and a description of the encumbered property.  The statute also requires recording the affidavit with the county clerk for the county in which the property is located within a statutory period, and then providing a copy of the notice to the property owner.

But why would anybody want to jump through all those additional hoops for a statutory lien when obtaining a constitutional lien is so easy?  The answer is simple: the statutory lien is more powerful, and in certain situations, including if the real property owner files bankruptcy, may mean the difference between getting paid in full and getting pennies on the dollar.  In the context of bankruptcy, the crucial difference between these statutory and constitutional liens is the type of notice each provides.

In Texas, a mechanic’s lien claimant must provide actual or constructive notice to third parties to be protected against the rights of those third parties.  Because they are not recorded, constitutional liens rely on actual notice and constructive notice via the third party’s knowledge.  On the other hand, properly perfected statutory liens provide constructive notice because they are recorded in the county’s real property records.

Section 544 of the Bankruptcy Code provides the so-called “strong arm powers” of the bankruptcy trustee, which may be used to avoid certain liens and interests in property of the bankruptcy estate.  More particularly, Bankruptcy Code section 544(a) provides that

The trustee shall have as of the commencement of the case, and without regard to any knowledge of the trustee or of any creditors, the rights and powers of, or may avoid any transfer of property of the debtor or any obligation incurred by the debtor that is voidable by . . .

(3) a bona fide purchaser of real property, other than fixtures, from the debtor, against whom applicable law permits such transfer to be perfected, that obtains the status of a bona fide purchaser and has perfected such transfer at the time of the commencement of the case, whether or not such a purchaser exists.

Section 544 causes major problems for the contractors that only have a constitutional lien because it makes actual knowledge or notice irrelevant.  Constitutional mechanic’s liens are not recorded and rely on actual notice or knowledge to be effective.  Without actual notice and knowledge, constitutional liens are ineffective and can be avoided by the trustee’s strong arm powers.  Absent another defense, section 544 leaves a contractor relying a constitutional mechanic’s lien no better off than another unsecured creditor.

The simple solution to the problems associated with constitutional liens in bankruptcy is for contractors to fulfill the requirements to obtain a statutory mechanic’s lien.  The constructive notice provided by recording a statutory mechanic’s lien with the county clerk’s office is not rendered ineffective by section 544.  As a result, contractors with properly perfected statutory mechanic’s liens generally cannot have their interest avoided by section 544.  While constitutional mechanic’s liens are of value in some contexts, a properly perfected statutory mechanic’s lien provides greater protection in the event the real property owner files bankruptcy.