Bankruptcy Preference Statute of Limitations Trustee Appointment Extension
The HomeBanc Mortgage Corporation bankruptcy was filed on August 9, 2007, well over 2 years and 5 months ago. This week 386 bankruptcy preference adversary proceeding complaints were filed by the HomeBanc Mortgage Chapter 7 trustee. For those who have been lulled into ignorant bliss by the often quoted 2 year statute of limitations for bankruptcy preference actions, the case illustrates that the conversion of a Chapter 11 bankruptcy to Chapter 7 can result in up to a 1 year extension of the statute of limitations – i.e. up to a theoretical maximum of 3 years. »»» Read rest of article . . .
Can Pre-Petition Deliveries Provide a Bankruptcy Preference “New Value” Defense and Section 503(b)(9) Administrative Expense?
Does a supplier have to choose between asserting a subsequent new value bankruptcy preference defense and making a Section 503(b)(9) administrative expense request? Judge Marian F. Harrison of the Bankruptcy Court for the Middle District of Tennessee held on January 7, 2010 that a supplier does not have to choose. In the memorandum decision In re Commissary Operations, Inc. — B.R. —-, 2010 WL 99036 (Bkrtcy.M.D.Tenn.), Judge Harrison ruled that deliveries entitled to Section 503(b)(9) claim status are not disqualified from constituting new value for purposes of the subsequent new value defense to a bankruptcy preference claim.
The Commissary Operations decision provides ground breaking precedent in the continuing challenge of bankruptcy courts to reconcile the post-petition administrative expense granted for goods received by a debtor in the 20 day pre-petition period with the ability of a debtor to recover avoidable payments made in the 90 days prior to bankruptcy. The decision also provides a clear statement of and support for the Congressional intent in enacting Section 503(b)(9), which will be helpful to 503(b)(9) claimants in fighting off punitive bankruptcy preference attacks by debtors. »»» Read rest of article . . .
Debtors’ Bankruptcy Preference vs Administrative Expense Ploy – A Tactic that Needs to be Stopped
In adding Section 503(b)(9) in the 2005 amendments to the Bankruptcy Code, did Congress intend that the supplier beneficiaries of the new section would wear a sign saying “BANKRUPTCY PREFERENCE TARGET – HIT ME”? This article challenges the growing use of bankruptcy preference actions under Section 547 to defeat and delay the allowance of Section 503(b)(9) administrative expense requests. As discussed below, the ploy subverts Congressional intent in adopting Section 503(b)(9). More fundamentally, the ploy ignores a basic tenet of the Bankruptcy Code that also is embodied in the prima facie requirements for bringing a bankruptcy preference action – “First Determine Priority.” »»» Read rest of article . . .
Best, Worst Examples of Using 503(b)(9) Claims to Settle Bankruptcy Preference Claims
Increasing instances of administrative insolvency, especially in the automotive sector, have caused many suppliers to question the value of 503(b)(9) claims. Even when administrative expense claims are impaired, however, 503(b)(9) claims can be worth substantially more than their face amounts in settlements of bankruptcy preference claims. Seldom do you see in one case, much less in one settlement order, the absolute worst and among the best examples of using this strategy. A recent settlement order in the Cadence Innovation bankruptcy provides this rare opportunity. »»» Read rest of article . . .
Debtor Onslaught to Disallow Supplier 503(b)(9) Administrative Expenses
Bankrupt retailer and manufacturer attacks on allowance of administrative expenses under Section 503(b)(9) of the Bankruptcy Code are increasing in frequency, breadth and ingenuity. One recent case in which pervasive attacks have been launched on supplier 503(b)(9) requests is the Grede Foundries bankruptcy where the debtor has sought to disallow more than 99% of suppliers’ $5,100,000 in 503(b)(9) expense requests. The following table summarizes the 8 objections made to 503(b)(9) requests in the Grede Foundries bankruptcy.
In this table, we have color coded the objections according to the level of concern these objections could pose to suppliers, not only in the Grede Foundries bankruptcy, but in bankruptcies to come.
| Grede Foundries’ Description of Objections and Text of Grede Foundries’ Objections to Suppliers’ Filed Administrative Expenses under Bankruptcy Code Section 503(b)(9) | Objection Data | |
| Times Made | Objection Amount | |
| % of Requests | % Request Amounts | |
| “Filed After the 20 Day Bar Date” – The claim was filed after September 25, 2009, the 20 Day Claims Bar Date …,” | 5 | $16,238 |
| 3.62% | 0.32% | |
| “Goods Delivered to a Third Party” – The claim is for goods that were not delivered to Debtor, but were instead delivered to a third party … | 24 | $711,465 |
| 17.39% | 13.99% | |
| “Goods Not Received Within 20 Day Period” – The claim is for the value of goods that were not received by the Debtor within the 20 day period before the Petition date … . | 83 | $3,451,652 |
| 60.14% | 67.87% | |
| “Insufficient Documentation” – The claim is not supported with adequate documentation for Debtor or the Court to determine the validity of the Claim … | 43 | $2,115,231 |
| 31.16% | 41.59% | |
| “Services and/or Altered Good” – The claim is for the value of services, rather than goods … . | 69 | $2,748,152 |
| 50.00% | 54.04% | |
| “Pre-Paid Goods” – The value of goods received by the Debtor during the 20 days prior to the Petition date does not qualify as an administrative expense under §503(b)(9) because the Debtor prepaid (or made contemporaneous payments) for the goods. | 44 | $3,786,684 |
| 31.88% | 74.46% | |
| “§502(d) Offset or Stay Due to Pending Preference Action” – Even if the claim is determined to be an allowable administrative expense under §503(b)(9) of the Code, … the claimant is not entitled to receive payment for the claim until the claimant returns to the Debtor the voidable preferential payments it has received. | 93 | $4,852,953 |
| 67.39% | 95.43% | |
| “Goods Received Not in the Ordinary Course of Business” – The goods received by Debtor were not received in the ordinary course of business … . | 42 | $3,772,082 |
| 30.43% | 74.17% | |
This post addresses the first 3 of the above objections. »»» Read rest of article . . .
27 Automotive Suppliers File Chapter 11 Bankruptcies in 2009; End of Year Status Summary; Likelihood of Bankruptcy Preference Recovery
Pressures in the global automotive industry forced 27 FN1 automotive parts and component manufacturers and 2 automakers t
o seek Chapter 11 bankruptcy protection in 2009. The number of filings is only the headline of the story. While estimated trade creditor distributions on prepetition claims swung the spectrum of 100% to 0%, estimated recoveries of less than 2 percent predominate. And more trade creditor pain looms in several bankruptcies, as bankruptcy preference action recoveries are either included in liquidation budgets, are necessary to avoid administrative insolvency or are likely to be sought by plan administrators and liquidation trustees.
This article provides a comprehensive list of the 27 automotive supplier Chapter 11 bankruptcies in 2009, together with status at the end of 2009, estimated trade creditor recoveries and the potential for avoidance actions. »»» Read rest of article . . .
Fluid Routing Solution Bankruptcy to Convert to 7, Preference Claims Coming
The other shoe in the Fluid Routing Solutions (now know as Carolina Fluid Handling Intermediate Holding Corp.) bankruptcy has finally dropped. On September 14, 2009, slightly more than 5 months from the 363 sale of most it operations, the Debtors filed a motion for an order converting the Debtors’ chapter 11 cases to cases under chapter 7 of the Bankruptcy Code. The motion was granted on September 28, 2009 and the trustee was appointed on October 2, 2008. We have provided a DocSheet for the period after the conversion of the Fluid Routing Chapter 11 to Chapter 7.
For suppliers, this is not the worst of the bad news. The really bad news for suppliers – the only hope of the Debtors’ trustee to avoid administrative insolvency is recovery of $2.5 million in preference claims. »»» Read rest of article . . .
Documentation Makes Contemporaneous Exchange Preference Defense a Winner
The contemporaneous exchange defense is one of the most often disputed defenses. It should not be that way. The focus of the defense is very narrow. The focus is on the time when the potential preference payment was received. The payment must be made at or about the same time as the delivery of goods or services for which payment is made. So the “information zone” is very short.
The reason the contemporaneous exchange defense is often litigated is because the supplier has failed to get the proper documentation in place to establish the defense. »»» Read rest of article . . .
Bankruptcy Preference Subsequent New Value Defense
The subsequent new value defense is perhaps the most frequently-used defense. It is, from a books and records perspective, the easiest defense to prove. The focus is on the period after the potentially preferential payment.
We have posted a brief video in which we review the “subsequent new value” defense.
- The “Zone of Information” that applies to this defense
- The basic elements of the defense
- A simple example of the application of the defense
Click this link to see the video Bankruptcy Preferences – Subsequent New Value Defense. »»» Read rest of article . . .
Multiple Payments – Multiple Bankruptcy Preference Defenses – Mixing and Matching
One of the most critical but often overlooked opportunities to defend bankruptcy preference claims regards the ability to apply multiple defenses when there have been multiple payments. This ability to mix and match defenses means that the supplier’s exposure to bankruptcy preference claims can be reduced. »»» Read rest of article . . .
Section 365 Bankruptcy Preference Defense – Overlooked, Underutilized
Feb. 19, 2009 – In an article entitled Section 365 Executory Contract Assumption Defense to a Bankruptcy Preference Claim, we discuss the absolute defense to a preference claim created when a bankrupt company or its trustee “assumes” an “executory contract”. That defense was firmly established in a 2003 decision by the Third Circuit Court of Appeals in the bankruptcy case of In re Kiwi International Air Lines Inc., so the defense is sometimes called the Kiwi defense.
The Kiwi defense is a defense that we believe may be underutilized. As we explain elsewhere on this web site, the facts needed to establish the 3 most common defenses are “fixed” at the time of the bankruptcy filing. As to establishing the subsequent new value, ordinary course of business and contemporaneous exchange defenses, there is nothing that the supplier can do but pull together books and records. »»» Read rest of article . . .
Ordinary Course of Business Bankruptcy Preference Defense
The ordinary course of business defense requires that either (1) the payment have been made in the ordinary course of business of both the supplier and the customer; OR (2) the payment was made under “ordinary business terms.” Please note this is an either/or test. Prior to 2006 the test was an “AND” test and both elements had to be proven. This was very difficult to do. »»» Read rest of article . . .
Bashas Lesson – PACA Trust Beneficiaries Require Bankruptcy Advocacy
The Perishable Agricultural Commodities Act (“PACA”) provides federal statutory protection to vendors of fresh fruits and vegetables as the commodities pass through the “foodservice chain” from growers, to distributors and to retailers. PACA packs a real punch, and protects unpaid suppliers of produce by treating them as beneficiaries of a trust. Unpaid PACA vendors who “follow the rules” to maintain their status as trust beneficiaries, are given a first-priority, preemptive, floating trust interest in the commodities themselves, as well as the proceeds and receivables in the hands of those who have sold or disposed of them (“PACA Trust Benefits”). »»» Read rest of article . . .
Cooper-Standard Automotive Combo 503(b)(9) Claims, Essential Supplier and Foreign Vendor Motion
Cooper-Standard Holdings Inc. and its affiliated debtors (“Cooper-Standard Automotive” or the “Debtors”) have combined into one motion a request to allow payment of 503(b)(9) administrative expense claims, a request to allow payment of critical vendors a/k/a essential suppliers, and a request to allow for payment of foreign vendors. The dollar amount of pre-petition claims Cooper-Standard Automotive is seeking to pay seems to vary between the motion and the interim and final orders. However, the relief requested in the interim order is for authority “to pay, in their sole discretion, as and when they come due, Essential [including 503(b)(9)] and Foreign Suppliers Claims in an amount that shall not exceed $19.5 million.” »»» Read rest of article . . .
How Did Lear Decide Which Suppliers are its Critical Vendors
Lear Corporation and co-debtor subsidiaries (“Lear”) have estimated that they collectively have 1,600 vendors with outstanding prepetition claims. Lear has identified 214 of these vendors as “critical vendors”. As part of its first day motions, Lear has requested an order from the Bankruptcy Court authorizing Lear to pay up to an aggregate of $50,100,000 ($25,050,000 pursuant to an interim order and up to an additional $25,050,000 pursuant to a final order) of prepetition claims held by these 214 “critical vendors.” In the Lear bankruptcies and in other bankruptcies where similar motions have been filed, suppliers (and their lenders and stakeholders) repeatedly are asking: “What is a ‘critical vendor’ and what are the chances of my company being one?” »»» Read rest of article . . .
Sample Motion for Allowance of Administrative Expense Claim Pursuant to 11 U.S.C. Section 503(b)(9)
We have included a simple sample of Motion for Allowance of Administrative Expense Claim Pursuant to 11 U.S.C. Section 503(b)(9). You can access this sample by clicking the preceding link.
We stress that this is a sample and a simple one at that. There are several ancillary provisions that could be included depending upon the circumstances of a particular case.
We provide an extensive discussion Section 503(b)(9) administrative expense request process in the article: Bankruptcy Creditor 503(b)(9) Administrative Expense
Critical Vendor Motion in Arclin Bankruptcy Raises Questions for 503(b)(9) Claimants
The first day motion of Arclin US Holdings Inc. and its 6 co-debtor affiliates (“Arclin”) to pay “critical vendors” illustrates how dramatically the “critical vendor” concept can vary from industry to industry. The motion also illustrates how a “critical vendor” motion can be used by a debtor to extract post petition concessions from suppliers holding administrative expense claims under Section 503(b)(9). Finally, the case presents an interesting situation where a debtor argues in favor of inclusion of freight costs in 503(b)(9) claims. »»» Read rest of article . . .
GM Bankruptcy – Cure Costs Procedures Catastrophic Failures
Automotive suppliers can only hope that GM will make better cars than they do cure cost procedures. Based on the cure cost objections (“Cure Cost Objections”) filed, the procedures approved by the Bankruptcy Court either were flawed from the beginning or improperly executed. The net result is to cast a shadow on the entire contract assignment and assumption process pursuant to the proposed 363 sale to New GM. In the following post we discuss the problems experienced by suppliers. In a later post, we summarize the substantive objections that were filed and give a sampling of the differences between the GM cure costs and the Supplier cure amounts. »»» Read rest of article . . .
GM Bankruptcy – Selective Cure List and Substantive Objections
There were approximately 479 objections filed by the June 15, 2009 deadline by suppliers and other trade creditors to GM’s proposed cure costs (click link to see list). An additional 75 objections were filed after the deadline and on or before June 20, 2009. As in the case of Chrysler, the majority of the objections were to cure cost amounts. However, as noted in our prior post, the cure cost procedures also provided a frequent basis for objection. As a final irony, Chrysler’s objection was among the most vehement (as well as apparently a day late). In the following post, we discuss the substantive objections and provide a sampling of the differences between GM’s cure costs and cure costs computed by suppliers. »»» Read rest of article . . .
GM Bankruptcy – For Suppliers Chrysler Bankruptcy Lesson 1
(Update: Since the original post date we have added two additional posts on the GM Cure Cost Procedure and the Supplier Objections that were filed to GM Cure Costs. Please Click the preceding link to see those posts.)
The Chrysler bankruptcy taught suppliers several lessons. Lesson 1 - SUPPLIERS, BE READY TO CONFIRM THE CURE AMOUNT FOR THE ASSIGNMENT OF GM SUPPLY CONTRACTS. Consider the years that your company has worked with GM. If your company got a cure cost notice from GM today, would it be ready to say “If GM pays my company this amount, my company has no further claims against GM, and if it does have additional claims, we give them up?” A lot of suppliers in the Chrysler bankruptcy found out the hard way that they were not ready to respond; the pain just has not hit yet. »»» Read rest of article . . .
