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Pittsburgh Riverhounds Stumble as They Declare Chapter 11 Bankruptcy

By:  Justin A. Saporito

The  Riverhounds Event Center, L.P. and Riverhounds Acquisition Group, L.P., the limited partnerships that own and operate Highmark Stadium and the Pittsburgh Riverhounds Professional Soccer Club respectively,  jointly declared voluntary Chapter 11 bankruptcy on March 26, 2014.  Debtors filed in the United States Bankruptcy Court for the Western District of Pennsylvania, assigned case numbers 2:14-bk-21180 and 2:14-bk-21181 respectively.  Both cases have been assigned to the Honorable Jeffery A. Deller.

The Riverhounds Event Center, L.P. owns and operates the newly constructed Highmark Stadium located in the South Side area of Pittsburgh and claims assets ranging from $1 million to $10 million with liabilities between $10 million and $50 million.  Of those liabilities, $7.2 million is mortgage debt and $1.5 million in bank loans.  riverhounds_logo

The Riverhounds Acquisition Group, L.P. is the limited partnership that owns the Pittsburgh Riverhounds minor league soccer team and claims assets ranging from $500,000 to $1 million with liabilities between $1 million and $10 million.  The Pittsburgh Riverhounds  was founded in 1999 and currently plays in the United Soccer Leagues.  Much of the debt leading up to the bankruptcy was incurred in 2012-2013 during the construction of Highmark Stadium.  The bankruptcy is not expected to affect the 2014 season.

Debtors share some creditors such as Shallenberger Construction, Inc.,  First National Bank of Pennsylvania, and Urban Redevelopment Association of Pittsburgh.  Both debtors are represented by John M. Steiner of Leech Tishman Fuscaldo & Lampl, LLC.

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Stonefront Witch Way Inn Files for Chapter 11

BY: Katie Imler, Law Clerk

On July 26, 2013 , TAM of Allegheny LLC d/b/a Stonefront Witch Way Inn filed a voluntary petition for relief under Chapter 11 of the Bankruptcy Code in the Western District of Pennsylvania (assigned No. 13-23143-GLT). The Stone Front Witch Way Inn, located at 2827 California Avenue, Pittsburgh, PA 15212, was a local café and bar that was padlocked by police on June 28, 2013 for not paying the Allegheny County drink taxes totaling more than $22,390. The Allegheny County Treasurer, John Weinstein, has been cracking down on businesses that are not paying the alcoholic beverage tax.

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The case has been assigned to the Honorable Judge Gregory L. Taddonio. Norma Hildenbrand has filed an Notice of Appearance and Request for Notice on behalf of the United States Trustee. A summary of the docket can be found here.

The Debtor listed $50,000-$100,000 in Assets and $0-$50,000 in Liabilities, which are primarily business debts. Although there are less than 50 creditors, the top creditors holding unsecured claims include: Allegheny County ($21,864), BMI ($658.07), Chase Bank ($2,723.39), Dietz Electronics, Inc. ($438.98), IRS ($8,058.44), Joseph J. Brunner, Inc. ($407.80), and Trudy L. Schmitt, President of TAM of Allegheny LLC. All Schedules and Attorney Disclosures are due on August 9, 2013. The Chapter 11 Plan and Disclosure Statements are due November 25, 2013. However, the Government Proof of Claims Bar Date is set for January 22, 2014.

The Debtor is represented by J. Michael Baggett of McCann Garland Ridall & Burke, 11 Stanwix Street, Suite 1030, Pittsburgh PA, 15222. Jodi L. Hause filed a Notice of Appearance on July 29, 2013 to represent Creditor Duquesne Light Company. A Status Conference will be held on October 20, 2013 at 10:00am.

Does Motive Matter in a Preference Lawsuit?

This is the second in a series of blog posts I am writing here about preference lawsuits (I have a 50 page research treatise that I wrote, from which I am pulling to create these posts!).  I will try to make the subject matter as interesting as possible.    

Does the motive of a debtor a creditor matter in a preference law suit?

MOTIVE

MOTIVE

Scenario One: I know our business is not going to make it another 30 days.  I have one $10,000 receivable that we can expect to receive.  We owe our trade creditors about $100,000 and we owe my Aunt Molly $50,000 that she lent to us on an unsecured basis.  We have been making monthly payments in the amount of $500 to her for the past three years.   I want to take the $10,000 once we get it and pay her all of it because she is my favorite Aunt, I feel bad we are going to stiff her, and she use to buy me pink marshmallow peeps for every Easter.

       Scenario Two: My critical supplier knows that we  have been in distress.  He knows that we lost our biggest customer and we are barely making ends meet.  He just recently shortened my payment terms from net 30 to net 7, he has told me he doesn’t care if I cannot pay my electric bill or payroll and that he wants me to pay his aged account receivable now!  He sends me threatening letters, emails, and nasty voicemail messages.  I don’t even answer my phone anymore. 

As set forth in my prior blog post, there are the five basic elements of a preference; basically, a transfer must be made (1) to or for the benefit of a creditor, (2) on account of an antecedent debt, (3) while the debtor is insolvent, (4) within ninety days before bankruptcy (for non-insiders) or 1 year (for insiders); and (5) the transfer must enable the creditor to receive a greater amount had the transfer not occurred and had the creditor received payment in a hypothetical Chapter 7 liquidation.

What is absent from that list is mental state of mind, motive, or intent.   Under the predecessor statute to Bankruptcy Code § 547 (§60 of the Bankruptcy Act of 1898), a plaintiff had to establish that the creditor had “reasonable cause to believe” that a debtor was insolvent before a preferential transfer could be avoided.  But, importantly, a creditor’s state of mind is no longer an element to the preference cause of action.  See Barash v. Public Finance Corp., 658 F.2d 504, 510 (7th Cir. (Ill.) 1981).  In the Barash case, the Seventh Circuit Court of Appeals held that voluntary payments by a debtor to creditor on an installment contract were preferential transfers, and the fact that the creditor had no way of knowing that the debtor was having financial difficulties was irrelevant.   The Barash Court quoted the legislative notes regarding Bankruptcy Code § 547:  “A creditor’s state of mind has nothing whatsoever to do with the policy of equality of distribution ….”.  H.R.Rep.No.95-595, supra, at 178, 5 U.S. Code Cong. & Admin. News at 6139.

Collier on Bankruptcy, the most authoritative secondary authority on bankruptcy law, acknowledges this change as well.  “Intent or motive is not a material factor in the consideration of an alleged preference under §547.  Generally speaking, it is the effect of a transaction, rather than the debtor’s or creditor’s intent, that is controlling.” See 4 COLLIER ON BANKRUPTCY, ¶547.01 at 547.12.

Some courts, however, have attached a significance to the intent, motive or state of mind of either the debtor or a creditor, even though intent is not a “material” or a basic element of a preference,.  In the Eleventh Circuit, for example, see In re Craig Oil Co., 785 F.2d 1563 (11th Cir. (Ga.) 1986)).   The Craig Oil Court held that a pre-Petition payment was a preference, attaching significance to fact that debtor’s motive for making a payment to a creditor was to forestall an involuntary petition and to prevent personal liability on guaranteed debt, but observing that state of mind of the debtor alone, would not establish unusual or extraordinary actions by the debtor, but merely would go to explain unusual payment actions by debtor.  Also, in the  First Software Corp. v. Micro Educ. Corp. of Amer., 103 B.R. 359 (D. Mass. 1988), the United States District Court for Massachusetts held that payments made by a debtor under an agreement with a creditor were not preferences.   The debtor agreed to make larger weekly payments to a creditor until the balance on the account was reduced to zero.  The Court held that the transfers were within the ordinary course of business (and not preferences), where there was no evidence that indicated that the creditor knew that the debtor was on the verge of bankruptcy when the payments at issue were agreed upon and made.

I have had cases in which my creditor clients were guilty of making dunning phone calls to the debtor prior to company’s slide into bankruptcy.  I have also had cases in which my client was a critical supplier and it wanted to keep servicing the debtor during the time of distress.  Often, at moments like that, new deals are struck in order to keep the debtor afloat and the supplier still dealing with the debtor.   Perhaps, the supplier is owed a substantial amount of money from the debtor and the supplier is willing to do anything to keep the debtor as a going concern; otherwise, the supplier faces the threat of its own bankruptcy.

Although the intent, mens rea, state of mind, motive of either the debtor or the creditor is no longer a prima facie element to a preference action, when I conduct diligence surrounding an alleged preferential transfer I always ask the necessary questions to get a better understanding of what was really going on in the business relationship as the debtor became unable to pay its debts as they came due.   Asking these questions is important in order to paint an accurate picture of the course of dealing between the parties and how such dealing may have changed prior to the filing of the case.

I often advise the credit risk groups of all of my clients always to have a pulse on the financial condition of their clients, especially if a client generates revenue from only a handful of customers.  I even advise my clients to put “google alerts” on each such client so that they can catch wind of any distressed circumstances.

Without a doubt, a business should be strategic when dealing with a distressed client, especially if there is a significant amount owed, and especially if you are striking a new deal with the debtor with changed terms.   Even if you are paid in the year or 90 days prior to your customer’s bankruptcy filing, you always run the risk that the payment will be clawed back post-Petition.  You should be prepared for what defenses you will mount in the event that happens.

MAZURKRAEMER represents debtors and creditors in bankruptcy courts all over the country. The information, comments and links posted on this blog do not constitute legal advice. No attorney-client relationship has been or will be formed by any communication(s) to, from or with the blog and/or the blogger. For legal advice, contact an attorney at MAZURKRAEMER or an attorney actively practicing in your jurisdiction.

Inside the Trenches of a Chapter 11 Bankruptcy Case-Preparing the Initial Filing

       In the world of business law, many seem to be mystified by the chapter 11 bankruptcy process.   When I tell my friends and colleagues what I do, they still don’t seem to understand me.  I get that glazed, deer-in-headlights look.   I just recently filed a Chapter 11 case and I decided to write a series of blog posts as we are going through the process.

        The chapter 11 process is expensive but can be a worthwhile option and a financially prudent decision for certain businesses wishing to reorganize, restructure their debts, reject undesirable contracts, and/or orderly liquidate certain assets under the jurisdiction and protection of the bankruptcy court.

Triggering Event.  Usually an event triggers the filing (a pending auction of assets, an inability to payroll, the threat of a shut-off notice for utilities, a impending freezing of bank accounts, a filed lawsuit, etc.).  A debtor can file an emergency petition in such an instance.

Emergency Petition.  To file an emergency petition, at the very minimum a debtor needs to submit the 2-page petition, its list of 20 largest unsecured creditors, and a creditor matrix (listing all of the creditors the debtor believes it currently has).    This sounds like a simple initial filing; but, it might not be.   The preparation of the debtor’s bankruptcy petition and related schedules can be very time-consuming depending upon the nature of the debtor’s business, how orderly its books and records are, and how many divisions or locations, it has etc.

Automatic Stay.  Once the minimal skeletal documents are filed, an “automatic stay” goes into immediate effect; the automatic stay is basically an injunction against any and all actions against the debtor and is property.    If a creditor violates the stay, it is a serious infringement and the bankruptcy court can award sanctions  against the creditor.

After the initial bankruptcy petition is filed, a Ch. 11 debtor has another 14 days within which to file its complete schedules and statement of financial affairs.   This timeframe can be extended for cause.

“Debtor In Possession” Bank and Insurance Information.  Also once the petition is filed, generally within 10 days, the debtor and its counsel have to submit certain bank account and insurance information to the United States Trustee (part of the Department of Justice).    Importantly, a business must close its books as of its bankruptcy “Petition Date” and open up  a new set of financial books and records.  New “Debtor-in-Possession” (“DIP”) Bank accounts must be opened at certain approved banks;  the United States Trustee’s Office has the “approved” list of banks.  The debtor and its counsel also may have an initial debtor interview with the agent for the United States Trustee (depending  upon the district in which you file), at which the debtor discusses its business operations and assets and liabilities.

The Bankruptcy Court Is Watching.  Once a bankruptcy petition is filed, a business will then have to seek bankruptcy court approval prior to taking many actions (paying its lawyers and accountants, paying pre-petition wages, utilizing cash (“cash collateral”) to pay expenses, selling anything outside the ordinary course).   A business debtor post-petition generally CANNOT pay any pre-petition obligations, otherwise serious consequences may ensure, including “avoidance” lawsuits. 

Drama.  The initial filing process can be intense for everyone involved.  Lots of information gathering, document review, fact checking.   Many phone calls may be made to and from creditors about the impact of the filing of the case.

Often, a distressed situation, not surprisingly, involves drama.  In some instances I have had to file the case right before the auction on the courthouse steps, right before the repossession crew found the vehicle, or right after the doors to a business were locked and the business suddenly went dark.  After the petition is filed and is made known to the public, media outlets may starting calling to find out more about the future of the business.

STAY TUNED FOR MORE DETAILS REGARDING INSIDE THE TRENCHES OF A CHAPTER 11 BANKRUPTCY CASE

MAZURKRAEMER represents debtors and creditors in bankruptcy courts all over the country.   The information, comments and links posted on this blog do not constitute legal advice. No attorney-client relationship has been or will be formed by any communication(s) to, from or with the blog and/or the blogger. For legal advice, contact an attorney at MAZURKRAEMER or an attorney actively practicing in your jurisdiction.