Avoidance and Recovery
|The South Bay Law Firm Law Blog highlights developing trends in bankruptcy law and practice. Our aim is to provide general commentary on this evolving practice specialty.|
Posts Tagged ‘United States District Court for the Southern District of New York’
Avoidance and Recovery
Asset sales through bankruptcy are all the rage – they’re presumably [relatively] quick. And just as importantly, they’re perceived as clean – that is, they permit assets to be sold “free and clear” of an “interest” in the property.
The term “interest” has been construed broadly, and has been interpreted to extend to successor liability claims – including often prohibitively expensive environmental liabilities. Indeed, one recent post on this blog (here) notes the potentially broad reach of bankruptcy court orders authorizing asset sales – and suggests the relief available in some circumstances may even be broader than the Chapter 11 discharge.
But not all courts agree with this conclusion . . . at least not entirely.
Late last month, the Southern District of New York (the same jurisdiction which authorized the “Section 363″ sale of General Motors free and clear of environmental liabilities) reached a different result in the case of In re Grumman Olson Industries, Inc.
Grumman Olson, an auto-body manufacturer whose primary customers were Ford and General Motors, commenced Chapter 11 proceedings nearly nine years ago and completed a “363 sale” of its assets to Morgan Olson, LLC about 6 months after filing. The sale order contained provisions which purported to release both Morgan Olson and the sold assets themselves from any successor liability claims which might arise.
Ms. Frederico, a FedEx employee, sustained serious injuries on October 15, 2008 when the FedEx truck she was driving hit a telephone pole. In a New Jersey lawsuit filed after the accident, the Fredericos claimed that the FedEx truck involved in the accident was manufactured, designed and/or sold by Grumman in 1994, and was defective for several reasons. The Fredericos claimed that Morgan Olson continued Grumman‘s product line, and was, therefore, liable to the Fredericos as a successor to Grumman under New Jersey law. In response, Morgan Olson requested that Bankruptcy Judge Stuart Bernstein re-open the [now closed] Grumman Olson case, then filed an adversary proceeding to determine that the Federico’s claim was barred by the prior sale order.
Both sides sought Judge Bernstein’s summary judgment regarding the Morgan Olson suit. In a 21-page decision, Judge Bernstein ruled (following a brief discussion addressing his continuing jurisdiction to interpret the prior sale order) that Morgan Olson was, indeed, a successor for purposes of the Fredericos’ suit. This was because the Fredericos’ claimed injuries arose not from the assets sold through bankruptcy, or from personal claims against Grumman Olson that arose prior to Grumman’s Chapter 11, but from Morgan Olson’s post-confirmation conduct:
A good portion of Judge Bernstein’s decision is devoted to a discussion of what constitutes a “claim” for bankruptcy purposes – and the circumstances under which an anticipated “future tort claim” (i.e., claim based on a defective product manufactured by the debtor which hasn’t yet caused an injury, but which will at some point in the future) may be addressed through a “Section 363″ sale.
In permitting the Fredericos to proceed with their New Jersey law suit against Morgan Olson, Judge Bernstein’s analysis focused on three areas:
– the Fredericos’ lack of any meaningful “contact” with Grumman prior to the commencement of Grumman’s case or confirmation of Grumman’s Chapter 11 plan;
– the absence of any notice by the Fredericos of the Grumman/Morgan sale; and (though less important than the lack of contact and lack of notice)
– the absence of any provision for such anticipated “future claims” in Grumman’s Chapter 11 plan.
In the end, he observed that “every case. . . addressing this issue has concluded for reasons of practicality or due process, or both, that a person injured after the sale (or confirmation) by a defective product manufactured and sold prior to the bankruptcy does not hold a ‘claim’ in the bankruptcy case and is not affected by either the § 363(f) sale order or the discharge under 11 U.S.C. § 1141(d).”
Judge Bernstein’s Grumman Olson decision serves as an important reminder that “section 363 sales” – though undoubtedly a very powerful tool for disposing of distressed assets quickly and cleanly – do not provide “bullet-proof” protection for any type of liability which might be associated with the debtor’s assets, or with its general product line.
Many readers of this blog will be well aware that “venue shopping” – usually to a known, “debtor-friendly” jurisdiction such as Delaware or the Southern District of New York – is a common feature of Chapter 11 practice. For those who may not be, the primary idea is that the debtor’s management, looking to increase the likelihood of a successful reorganization, often identifies a “debtor-friendly” jurisdiction and seeks to fit within the venue provisions for commencing a reorganization case there.
But though the federal venue provisions (at least as interpreted by these courts) generally make it easy to obtain access to file a Chapter 11 case, not every such case filed in New York or Delaware stays there without a fight from one or more creditors who disagree with the debtor’s choice of forum.
Last week, another example of creditors disagreeing with the debtor’s choice of forum – in the strongest possible terms – presented itself in the recently-filed Chapter 11 bankruptcies of Rock & Republic Enterprises, Inc. and Triple R, Inc.
The purveyors of high-end jeans sought Chapter 11 protection on April 1 in Manhattan. Though the bulk of their management and facilities – and their creditors – are located in the Los Angeles metropolitan area, the companies opted for an East Coast venue, each citing a single office – and a showroom – as the basis for their request to reorganize in New York’s Southern District.
The companies’ primary secured creditor, RKF, LLC, wasn’t pleased. It immediately filed an “Emergency Motion to Transfer Venue” to the Central District of California, alleging:
– The companies’ status as California corporations;
– The companies’ management offices, books and records, and address for service of process are in the Los Angeles area;
– All but 2 of 10 of the companies’ leased premises are in the Los Angeles area;
– 16 of the companies’ top 25 creditors are based in Los Angeles (only 2 are in New York); and
– 9 of 14 litigation matters involving the companies are being heard in California.
On Friday, RKF was joined by Zabin Industries, Inc. Zabin is one of the companies’ self-described “larger unsecured creditors” and is also based in Southern California.
No word yet on a date for the hearing on RKF’s “Emergency Motion” – as of this writing, presiding Judge Arthur Gonzales hadn’t set one. Meanwhile, the Judge has set an accelerated hearing date on the companies’ request to reject an exclusive distribution agreement with Richard I Koral, Inc. (dba “Jessica’s”), the companies’ present off-price distributor.
JSC BTA Bank – A recent post appearing here discussed JSC BTA Bank (BTA)’s petition for recognition in the Southern District of New York’s U.S. Bankruptcy Court. BTA, reportedly Khazakstan’s second-largest bank, sought recognition of its state-sponsored restructuring in Khazakstan as a “foreign main proceeding.” On March 2, Judge James Peck in Manhattan granted the bank’s request. A copy of Judge Peck’s ruling is available here.
White Birch Paper Co. – The second-largest newsprint company in North America – Greenwich, Conn.’s White Birch Paper – followed the largest (Montreal’s AbitibiBowater Inc.), into bankruptcy in both Canada and the US on February 24.
White Birch and 10 affiliates, which together operate paper mills in Gatineau, Quebec; Riviere-du-Loup, Quebec; and Quebec City filed their request for protection under the Canadian Companies’ Creditors Arrangement Act in Montreal, and a concurrent request for recognition of 6 of those proceedings in Virginia’s Eastern District before Chief Bankruptcy Judge Douglas O. Tice, Jr. They were joined by US affiliate Bear Island Paper Co. of Ashland, which sought protection under Chapter 11.
Pleadings filed in White Birch’s cases claim that the companies controlled approximately 12% of the North American newsprint market as of last December. The filings were triggered by the continued shift from print to digital media and the attendant decline in revenues. In addition, the widening spread between the Canadian and US currencies also hurt operations, as payables are frequently accepted in US dollars, while expenses are paid in Canadian dollars. Finally, the companies’ operational woes were compounded by the burden of a January 2008 purchase of SP Newsprint Co. for approximately $350 million.
Cost-cutting efforts commenced in late 2009 were not sufficient to prevent White Birch’s default on first- and second-lien credit facilities. Attempts to restructure the debt out of court were likewise unsuccessful. Judge Tice’s Order granting recognition and entering a preliminary injunction was entered yesterday.
JSC Alliance Bank – Khazakstan’s sixth-largest bank followed BTA’s lead, seeking similar recognition in Manhattan’s Southern District less than 2 weeks after the larger Kazakh institution did so.
Like BTA, Alliance sought relief from creditors and litigation in the US while it restructures itself out of debt defaults and liquidity problems arising, in part, from its need to foreclose on bad loans and its subsequent difficulty selling foreclosed assets. In its papers, Alliance claims that last December, it obtained approval for a restructuring plan from creditors holding more than 94 percent of its claims.
Mega Brands Inc. – Toymaker Mega Brands has sought recognition in Delaware before Bankruptcy Judge Christopher Sontchi for its Canadian restructuring, commenced in mid-February before the Superior Court of Quebec in Montreal.
The global supplier of construction toys, stationery and other children’s toys and activity instruments plans to implement a global restructuring, which is reportedly supported by more than 70% of the company’s secured debt holders and all of its debenture holders – and on which lenders and shareholders will vote on March 16. In pleadings submitted with the petition, the company blames its need to restructure on the downturn in global demand, resulting stagnation in the North American toy industry, and fluctuations in raw materials prices.
Japan Airlines – On January 19, Japan Airlines (JAL), Asia’s largest airline, sought Chapter 15 protection in New York in furtherance of its reorganization in the Tokyo District Court under Japan’s Corporate Reorganization Act. Bankruptcy Judge James Peck – the same judge presiding over BTA Bank’s Chapter 15 proceeding (see above) – recognized the Japanese proceeding in mid-February. According to JAL’s Court pleadings, US assets protected by the Chapter 15 recognition order include aircraft and real estate interests in New York and Los Angeles. Judge Peck’s Order granting JAL’s recognition is here.