Michael provides counsel to debtors, creditors’ committees, individual creditors, liquidating trustees, and other interested parties with respect to corporate bankruptcy and creditors’ rights matters, including bankruptcy-related litigation.
Reliable and efficient, Michael is appreciated for his innate ability to effectively apply and communicate his understanding of the law and general business principles with respect to complex issues, both while providing advice to clients and while aggressively advocating on their behalf. Michael works tirelessly to understand clients’ needs and provide practical solutions that are reasonable, balanced, and favorable to the clients he serves.
Michael takes pride in his commitment to the community and provides pro bono representation to individuals and a nonprofit organization regarding bankruptcy and foreclosure-related matters.
Prior to joining the firm, Michael held multiple clerkships in the U.S. Bankruptcy Court; he clerked for the Hon. Jerrold N. Poslusny, Jr. (District of New Jersey), the Hon. Ashely M. Chan (Eastern District of Pennsylvania), and the Hon. Gloria M. Burns (Chief Judge, District of New Jersey). Michael applies the valuable insights learned from working closely and directly with these members of the judiciary to his everyday practice.
Bankruptcy, Financial Reorganization & Creditors' Rights | Bankruptcy, Financial Reorganization & Creditors’ Rights
In light of the numerous recent major bankruptcy filings, particularly in retail, the speakers will provide valuable information on what to expect, and how credit professionals can protect themselves against the onslaught of bankruptcy filings expected in the wake of COVID-19.
Timing: 1-2 p.m. EDT
A recent decision by the Third Circuit Court of Appeals (the “Third Circuit” or the “Court”) may have a lasting impact on financially distressed companies selling themselves in bankruptcy and the rights of their employees. In the In re AE Liquidation, Inc.decision, the Court ruled that the Debtor did not violate the Worker Adjustment and Retraining Notification (“WARN”) Act—which generally requires employers to provide 60-days’ notice of a mass layoff—when it waited until the day on which its proposed going concern sale fell through to notify employees that the company would shut down immediately. In so ruling, the Court established that the test to determine whether notice is required under the WARN Act is if the mass layoff is probable, or, “more likely than not” to occur, rather than merely possible.
Given that the Third Circuit’s decisions are binding on the country’s most active district for large chapter 11 filings (the District of Delaware), this decision is important for all companies. However, as the standard is both vague and flexible, it raises questions as to how exactly it will affect distressed companies in the future. Does the AE Liquidation decision blur the line as to when an insolvent company needs to provide notice, such that any company whose bankruptcy sale falls through need not give notice to its employees of a potential closure? Or, is the AE Liquidation decision merely the result of an exceptionally unique set of facts such that, as a practical matter, it will have little impact on many cases going forward?
It is no secret that distressed companies can leverage the Bankruptcy Code to sell their assets free and clear of liens, claims, encumbrances, judgments or other obligations. After all, it is widely accepted that one of the purposes of bankruptcy law is to give a debtor a “fresh start.”
The U.S. Bankruptcy Court for the Southern District of New York’s recent decision in Advanced Contracting Solutions, LLC illustrates how a debtor adjudicated to be an alter ego of another company prior to bankruptcy may use a bankruptcy filing, appointment of a chief restructuring officer (CRO), and section 363 sale to obtain a determination that it is no longer an alter ego.
Advanced Contracting Solutions (ACS) filed for bankruptcy shortly after a Sept. 20, 2017, decision by the U.S. District Court for the Southern District of New York that determined ACS was an alter ego of another entity, Navillus Tile, Inc. The court reached this conclusion by considering whether ACS and Navillus maintained similar or identical ownership, management, supervision, business purpose, customers, operations and equipment (i.e., the alter ego factors).
The court determined that, on balance, these factors weighed in favor of finding ACS was an alter ego of Navillus and, in turn, deemed ACS a party to certain collective bargaining agreements (CBAs) to which Navillus was a signatory.
On Nov. 6, 2017 (the petition date), ACS filed for bankruptcy because it was unable to satisfy an approximately $73.4 million judgment associated with the district court’s decision that was entered in favor of certain unions and related benefits funds.
During its bankruptcy case, ACS filed a section 363 sale motion to sell its business free and clear of all liens, claims and encumbrances (including the judgment and successor liability claims).
ACS also filed two related pleadings in the bankruptcy court. One sought a determination that ACS was no longer an alter ego of Navillus as of the petition date; the other sought a determination that, even if ACS was still an alter ego, it could reject Navillus’ CBAs pursuant to section 1113 of the Bankruptcy Code.
The Bankruptcy Court held that ACS had sufficiently “disentangled” itself from Navillus as of the petition date, and therefore ACS was no longer the alter ego of Navillus. Significantly, this allowed ACS to sell substantially all of its assets free and clear of successor liability claims related to the judgment and any possibility that ACS would be deemed an alter ego at any point prior to the sale closing, both of which were conditions to closing in the underlying asset purchase agreement.
Because the Bankruptcy Court determined that ACS was no longer an alter ego, it did not reach the issue of whether ACS could reject Navillus’ CBAs.
Only a few courts have previously considered whether an alter ego determination can be unwound, and those courts only discussed the issue at a very high level. Therefore, no specific test or burden for proving disentanglement had been established prior to the decision involving ACS. The Bankruptcy Court concluded that evaluating disentanglement claims required a “fresh application” of the alter ego factors.
Bankruptcy Creates Change of Circumstances
Bankruptcy Court observed that ACS’s business had changed since the District Court’s decision.
The owners/principals of Navillus who held options to purchase ACS during the time period relevant to the District Court’s decision no longer possessed such options.
ACS operated in a different office space from Navillus.
ACS no longer received financial assistance from Navillus or its principals.
ACS maintained its own insurance policies.
Critically, however, the Bankruptcy Court recognized that ACS’s bankruptcy filing fundamentally changed the nature of the business and its operations. In this regard, the Bankruptcy Court noted that the District Court’s alter ego ruling was primarily based on facts from 2013 and 2014—well before the petition date. Prior to the bankruptcy filing, ACS and Navillus were predominantly managed, owned and supervised by the same owner and key employees, but after the petition date ACS appointed a chief revenue officer (CRO) to make critical business decisions.
The CRO ran the section 363 sale process, reviewed the company’s books and records and managed its financial affairs. Moreover, the business decisions of chapter 11 debtors and their managers are also subject to oversight by the U.S. Trustee’s office, investigation by statutory committees, and numerous reporting and other transparency requirements. Therefore, while the Bankruptcy Court noted the unions were correct that ACS and Navillus still largely shared the same management, business purpose, equipment and customers after the petition date, these commonalities became “less significant under the facts and circumstances of [ACS’s bankruptcy] case.”
The Bankruptcy Court’s heavy reliance on the change of circumstances caused by the bankruptcy filing, the CRO’s related testimony, and how many of the alter ego factors still cut in favor of the unions’ and union funds’ position begs the question: Are a bankruptcy filing and appointment of a CRO sufficient to disentangle alter egos? If so, similarly situated entities obtaining an alter ego judgment against a company could face significant difficulty collecting such judgments.
It would be premature to draw sweeping conclusions from one case and one set of facts. That said, this budding issue is intriguing, and labor lawyers, bankruptcy attorneys and their respective clients should monitor how this legal landscape develops. Some clarity may arise on these issues in the near future, as the Bankruptcy Court’s decision is currently on appeal directly to the 2nd Circuit Court of Appeals.
Reposted from Construction Executive, June 2018, a publication of Associated Builders and Contractors. © Copyright 2018. All rights reserved.
If there is one pill tougher for a creditor to swallow than being owed significant indebtedness by a financially distressed customer that has filed a bankruptcy case, it is collecting outstanding invoices from its customer only to later find out those payments are subject to turnover as a preference after its customer’s bankruptcy filing. Preference claims continue to plague trade creditors who received payments from a customer within 90 days of the customer’s bankruptcy filing because the Bankruptcy Code provides that these payments are subject to disgorgement.
Creditors can reduce their exposure by asserting an array of preference defenses. However, the recent decision of the United States Court of Appeals for the Third Circuit (the “Third Circuit”), in Burtch v. Prudential Real Estate & Relocation Services, Inc., et al. (“Prudential”), illustrates how a trade creditor’s prudent collection efforts ultimately precluded the creditor from proving one of these preference defenses, the ordinary course of business defense, that would have mitigated its preference liability.
The courts have reached conflicting holdings over the validity of nonconsensual releases of claims against non-debtors in Chapter 11 bankruptcy cases. However, the courts have been more inclined to approve nonconsensual releases of claims against non-debtors in Chapter 15 bankruptcy cases. This most recently occurred in the Chapter 15 case of In re Avanti Communications Group PLC (Avanti), pending in the United States Bankruptcy Court for the Southern District of New York (the Bankruptcy Court). The Avanti decision illustrates the willingness of United States courts to approve nonconsensual releases of claims against non-debtors in Chapter 15 cases that these same U.S. courts would not necessarily approve if those same releases were sought in Chapter 11 cases. However, even in Chapter 15 cases, there are limits to a court’s willingness to grant such nonconsensual non-debtor releases.
Prudent trade creditors may rightly be wary of continuing to sell goods or provide services on credit to distressed customers that are headed toward bankruptcy. The risk of nonpayment is worrisome enough, but the added risk of having to return payments, received after painstaking collection efforts, as a preference is simply unpalatable.
Luckily, trade creditors can take comfort from a recent decision by the United States Court of Appeals for the Eleventh Circuit (the “Eleventh Circuit”), In re BFW Liquidation, LLC (“BFW”), that allowed paid as well as unpaid new value as a defense to a preference claim. The Eleventh Circuit’s holding will likely significantly reduce preference risk in many cases and is a solid win for the trade!
As the commercial world continues moving business processes and transactions to mobile devices and the web, the legal world continues working—and often struggling— to adapt traditional contract principles to an ever-evolving electronic paradigm. The recent ruling of the United States District Court for the Northern District of California, in Rushing v. Viacom, where the court grappled with the enforceability of an arbitration clause of a website user agreement, should serve as a warning for companies considering entering into online agreements with their customers. The Rushing v. Viacom decision illustrates that a party seeking to create an enforceable electronic contract with its customers must provide clear and explicit, notice of the contract’s terms and conditions, and a mechanism for confirming its customers’ acceptance of such terms and conditions, or face the risk that a court will not enforce the electronic contract.
A trade creditor can mitigate the risk of dealing with a financially distressed customer by entering into a consignment agreement with its customer. A creditor that “dots its i’s and crosses its t’s” and satisfies all of the requirements for consignment contained in Article 9 of the Uniform Commercial Code (“UCC”) obtains a first and prior interest in its consigned goods. On the other hand, a creditor that fails to satisfy the UCC’s requirements for consignment risks losing its superior interest in its consigned goods and being relegated to holding a low priority general unsecured claim.
That said, certain creditors that fail to follow UCC Article 9’s consignment requirements can invoke a recent decision of the United States Bankruptcy Court in Delaware in the Sports Authority Chapter 11 case, TSA Stores, Inc. v. Performance Apparel Corp. (In re TSAWD Holdings, Inc.), as support for enforcing their consignment rights. The bankruptcy court held that a creditor who had allowed its UCC financing statement to lapse still retained a superior interest in its consigned goods that prevailed over the blanket security interest of Sports Authority’s secured lenders. The court relied on the secured lenders’ actual knowledge of the consignment arrangement when the lenders had made their loans to Sports Authority.
Trade and other unsecured creditors concerned about a debtor’s nonpayment of their claims may consider joining an involuntary bankruptcy petition against that debtor. However, a petitioning creditor’s eligibility to join in an involuntary bankruptcy is conditioned on its claim not being subject to a bona fide dispute.
The meaning of “bona fide dispute” has long been the subject of controversy. One of the more recently litigated issues over the meaning of bona fide dispute is whether a creditor’s partially disputed claim is subject to a bona fide dispute that would disqualify the creditor from joining an involuntary petition.
A financially distressed customer’s request for trade credit is a tough ask for a creditor to accept in light of the significant risk of nonpayment. That ask is made even tougher as the customer is approaching bankruptcy where a creditor is facing—in addition to the risk of nonpayment—an increased risk that, even if the customer does make payments to the creditor, the payments prior to bankruptcy may later be clawed back as a preference.
The Bankruptcy Code prescribes several defenses to mitigate preference risk. Notably, the “subsequent new value” defense grants a creditor a dollar-for-dollar reduction in preference exposure where the creditor had provided new value in the form of goods sold and/or services provided on credit terms to the debtor after receiving an alleged preference payment.
Trade creditors enter into consignment agreements with their customers for various reasons. Some do so as a matter of standard practice in industries where a consignment arrangement will help the customer avoid burdensome working capital needs due to the high costs associate with the relevant product (such as petroleum). Others use consignment arrangements as a means of protecting themselves when supplying goods to financially distressed customers. In any event, a consignment seller (known as a consignor) provides goods to its customer (known as a consignee) with the expectation that the consignor retains an ownership interest— and, therefore, will maintain a priority interest—in the consigned goods.
A consignor should “dot its i’s and cross its t’s” by satisfying all of the requirements contained in Article 9 of the Uniform Commercial Code (“UCC”) governing consignments as a matter of best practice. This will ensure that the consignor will enjoy prior rights to its consigned goods over the rights of a secured lender with a blanket security interest in the consignee’s goods and the rights of a bankruptcy trustee as a judgment lien creditor under the Bankruptcy Code. However, a consignor that fails to satisfy the UCC’s perfection requirements risks being treated as a general unsecured creditor in the event the consignee files for bankruptcy.
A trade creditor seeking to mitigate the risk of nonpayment of its claim may opt to enter into a consignment arrangement with a distressed customer. A creditor that satisfies all of the requirements for consignment contained in Article 9 of the Uniform Commercial Code (“UCC”) obtains a first and prior interest in its consigned goods. A creditor that fails to satisfy the UCC’s consignment requirements risks forfeiting any prior rights to its consigned goods and being relegated to asserting a low priority general unsecured claim against its customer.
The Chapter 11 bankruptcy cases of The Sports Authority Holdings, Inc. and its affiliated debtors (collectively, “Sports Authority”) have provided numerous examples of how consignment-related disputes ultimately play out when litigated before a bankruptcy court. Recently, on April 12, 2019, the United States Bankruptcy Court for the District of Delaware, in TSA Stores, Inc. et al. v. Sports Dimension Inc. a/k/a Body Glove (“Sports Dimension”), ruled against one of Sports Authority’s trade vendors that had failed to timely perfect its consignment interest. The court’s decision illustrates the many hurdles and pitfalls facing a non-compliant consignor that fails to “dot its i’s and cross its t’s” when selling goods on consignment.
A trade creditor can obtain a security interest in its customer’s property to increase the likelihood of payment of the creditor’s claim. A creditor seeking a valid and perfected security interest in its customer’s personal property, with priority over future security interests in the same property, must properly identify its collateral in both (i) the security agreement executed by its customer, and, just as importantly, (ii) the financing statement that was publicly filed pursuant to the Uniform Commercial Code (the “UCC”).
Trade and other unsecured creditors concerned about a debtor’s nonpayment of their claims may consider joining in the filing of an involuntary bankruptcy petition against that debtor. A petitioning creditor whose claim is not subject to a “bona fide dispute as to liability or amount” has standing to file an involuntary bankruptcy petition pursuant to Section 303(b) of the Bankruptcy Code.
Conflicting interpretations of the “bona fide dispute” limitation on a petitioning creditor’s standing to join an involuntary petition have been the subject of much litigation, as the courts have recently been grappling with how the “bona fide dispute” limitation applies to creditors holding partially disputed claims. A growing number of courts have held that a petitioning creditor’s partially disputed claim is subject to a “bona fide dispute as to liability or amount, ” which disqualifies the creditor from joining an involuntary petition. Other courts have held that the undisputed portion of a creditor’s partially disputed claim is not subject to a “bona fide dispute” and that, therefore, a creditor holding a partially disputed claim is not barred from being a petitioning creditor.
Trade creditors are constantly seeking to mitigate risk in the event that a financially distressed customer files for bankruptcy. One way a creditor can do so is by setting off its claim against the customer, dollar-for-dollar, against any indebtedness owed by the creditor to the customer.
State and bankruptcy law each condition a creditor’s exercise of “setoff” rights upon the existence of mutual obligations owing between the creditor and debtor. Creditors have sought to satisfy this mutuality requirement by negotiating “triangular” setoff arrangements where their contracts permit affiliated entities to setoff the claims of one of the affiliates against indebtedness owed by another affiliate to the debtor.
Nothing is more frustrating to a trade creditor saddled with a large unpaid balance owed by a debtor in bankruptcy than being subject to the risk of having to remit back to the debtor’s estate “preference” payments received from the debtor prior to the commencement of the bankruptcy case. Pursuant to section 547(b) of the Bankruptcy Code, a debtor in possession or trustee can seek the recovery of alleged preference payments made within 90 days of the bankruptcy filing date.
This is the harsh reality faced by the approximately 750 trade creditors (and counting) who have recently been sued in the Sears Chapter 11 case for the recovery of payments they had received within 90 days of Sears’ bankruptcy filing date. The policy behind the preference statute is to treat creditors equitably and level the playing field by requiring preferred creditors to share their recovery with all other creditors. Unfortunately, the reality is that preference recoveries are used to pay higher priority claims, such as the unpaid Chapter 11 administrative expense claims owing by Sears that must be paid as part of Sears’ Chapter 11 plan. And creditors defending preference lawsuits would more likely characterize the complaints for recovery of “preference” payments as punishment for continuing to do business with a financially distressed customer.
So, what should a creditor do when it first receives a preference demand letter and is then subsequently sued? What defenses can a creditor assert to rebut a preference claim? How should a creditor go about responding to, defending and/ or settling a preference claim? This article answers these questions by providing a step-by-step checklist of the actions a creditor should take starting from the date that a customer files for bankruptcy (the “Petition Date”) through the resolution of a preference litigation. A creditor is far better off spending the time compiling and presenting proof of its potential defenses to a preference demand than simply paying the amount demanded.
Trade creditors of financially distressed customers that filed for bankruptcy relief can assert reclamation rights as part of their recovery toolkit. However, the Bankruptcy Code restricts reclamation rights by explicitly subjecting them to the prior rights of a secured creditor with a blanket security interest in the debtor’s inventory (which includes goods subject to reclamation).
Courts have issued conflicting opinions as to whether a lender providing Chapter 11 financing with a blanket lien in the debtor’s inventory has priority over a reclamation creditor where the post-petition loan is used to pay off a prepetition loan secured by a blanket security interest in the debtor’s inventory. In the Chapter 11 cases of In re hhgregg, Inc., the United States Court of Appeals for the Seventh Circuit (the “Seventh Circuit”) recently concurred with other courts in ruling in favor of the post-petition lenders where the debtors had obtained the bankruptcy court’s approval of Chapter 11 financing granting the post-petition lenders a prior security interest in all of the debtors’ inventory. The Seventh Circuit concluded the post-petition secured lenders had retained a prior interest in the goods subject to reclamation rights because the “lien chain” between the prepetition and post-petition secured lenders had not been broken.
It is common practice for a company that files for bankruptcy protection to immediately seek, in its “first day” motions, authority to pay the prepetition claims of certain vendors that the debtor deems to be critical to the success of its bankruptcy case. A debtor seeks this authority on the premise that its business would be irreparably disrupted and its efforts to maximize value for its estate and creditors would be severely impaired if these “critical vendors” refuse to provide goods and services post-petition.
The claims trading market provides a useful avenue for creditors who seek to quickly monetize their prepetition claims in bankruptcy cases. Rather than waiting out the bankruptcy process with the hope of obtaining a recovery from the bankruptcy estate, creditors may obtain an immediate recovery by selling their claims at a discount. Claims buyers are willing to purchase claims for less than the claims’ face value for a number of reasons. They may expect that the bankruptcy estate’s eventual distribution on account of the purchased claims will exceed the price they paid for the claims. Alternatively, they may believe there is an opportunity to receive equity in the reorganized debtor, or they may seek to influence a debtor’s reorganization by obtaining a significant portion of the debtor’s capital structure.
While a claims buyer purchases the right to receive whatever distribution is made on the purchased claim, the claims buyer also bears the risk that it will receive less than anticipated with respect to the purchased claim or that the purchased claim will be disallowed entirely. This risk has been exacerbated by a recent decision of the United States Bankruptcy Court for the Southern District of New York—a very active jurisdiction for claims trading—in the Chapter 11 cases of In re Firestar Diamond, Inc. In Firestar, the bankruptcy court rejected a prior decision by the United States District Court for the Southern District of New York and joined the growing majority of courts that have held that a purchased claim may be disallowed under Bankruptcy Code Section 502(d) where the claim seller had received, and had not returned, an avoidable transfer (such as a preference or fraudulent transfer).
© Lowenstein Sandler LLP, 2020