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Movie Financier Hedge Fund Files for Chapter 11 Over Increasing Litigation Costs

by Justin A. Saporito, Law Clerk

Aramid Entertainment Fund, Limited filed for Chapter 11 protection in the Bankruptcy Court for the Southern District of New York on June 13, 2014.  Debtor has declared assets of $237.3 million and consolidated debt of $11.5 million.  Debtor was assigned case number 1:14-bk-11802, a judge has yet to be assigned.  Approximately 96 creditors were listed in the petition; among them are several other Aramid entities including Aramid Liquidating Trust, Ltd. and Aramid Entertainment, Inc. which jointly filed with the Debtor and were assigned consecutive case numbers.

aramid-logo-618x400                    Aramid Entertainment Fund, Limited is part of Aramid Capital Partners, LLP, a London based hedge fund that specializes in financing movies.  According to their website, Aramid Capital has provided financing for thirty-two (32) movies including Paranormal Activity, W., and How to Lose Friends & Alienate People.  Please click here for a list of their productions.

                   Debtor filed for Chapter 11 protection due to the cost of ongoing litigation against several of its borrowers who failed to repay loans or violated film-financing agreements.  One such suit began in February 2012 and is over an alleged $44 million in losses.  Debtor invested $22 million in a financing deal between Relativity Media, LLC and Sony Pictures.  Debtor alleges that executives from Fortress Investment Group, LLC used Aramid’s confidential information, which was allegedly obtained during a 2010 portfolio review as part of a proposed purchase of Debtor’s assets, to make a deal with Sony that destroyed Debtor’s investments.

                     Debtor and its affiliates are represented by James C. McCarroll, a partner at Reed Smith, LLP who specializes in Financial Industry, Commercial Restructuring, and Bankruptcy.

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The Company You Own Files Bankruptcy: Can Creditors Still Come After You?

automatic-stayAs is almost always the case, principals of a distressed business have personally guaranteed the debt on a credit line or property or equipment lease. When a business files bankruptcy, an automatic stay is imposed against any adverse actions taken against the business entity, the Debtor. But what about the owners of the business? Often, I find myself seeking to extend the automatic stay injunction to those principals. This issue came up in a recent case we had pending in the Fourth Circuit. We were compelled to find case law regarding the standard for relief.

A factual example would be as follows: A distressed business ABC Recylcing owns a building, and the building has a mortgage on it in favor of Meanie Bank, N.A.  The business falls behind on payments. Meanie Bank initiates a foreclosure action to set an auction to sell the building. Jake, the owner of the business had to sign a guaranty in order for ABC Recycling to get the loan with Meanie Bank. ABC Recycling still operates with the faint hopes of reorganizing through a Chapter 11 bankruptcy. Once the Chapter 11 is filed, the foreclosure action is stayed as to ABC Recycling, but now the Meanie Bank is going after Jake. Help, my clients say.

ISSUE: Pursuant 11 U.S.C. §105 and §362 of the Bankruptcy Code, is a court likely to grant an injunction to protect the principal of a bankrupt business?

CONCLUSION: Where the principal Jack is a primary guarantor of the mortgage and Meanie Bank now intends to secure a judgment against the principal, the principal will only be able to obtain an injunction by demonstrating a mutuality of identity with the Debtor such that allowing Meanie Bank to proceed against Jake will substantially deprive the Debtor of a primary asset (its owner’s time and attention).  In Plain English, how important is the principal Jake to the Debtor’s operations?  A four-part test is employed to make that determination.

While automatic stay proceedings are usually only available to the Debtor, under unusual circumstances, the Fourth Circuit has held that the Bankruptcy Court can enjoin proceedings against third parties.  In re F.T.L. Inc., 152 B.R. 61 (Bankr. E.D. Va. 1993).  However, where no compelling or unusual circumstances exist, then under §362 the Debtor’s guarantors must file their own bankruptcy petition in order to be protected by the Bankruptcy laws.  Id. at 63. (this also happens often).

A court is only likely to grant an injunction to a third party non-debtor principal in the unusual circumstance that it is evident that the identity of the debtor and the non-debtor third party is so interconnected that it is clear that the creditor is proceeding against the debtor.   Under such circumstances, the court may apply a four-part test and equitably grant an injunction where the court finds that:

  • the plaintiff principal has a greater likelihood of succeeding on the merits;
  • plaintiff principal has shown that lack of relief will result in irreparable injury;
  • an injunction will not substantially harm other interested parties, and;
  • preserving the status quo until the merits of the controversy is decided will serve public interests. Id.

In re F.T.L., the primary secured creditor to a car wash company debtor, secured a judgment lien against the debtor’s guarantors, the plaintiffs. Plaintiffs are the primary owners and guarantors of the car wash and the creditor perfected its lien against plaintiffs’ personal residence.  Id. at 62.  Noting that the collection activities against the owners arose from the car wash’s debt to the creditor, the court applied the four-part test and found that the debtor was likely to succeed on the merits by proposing a confirmable chapter 11 plan; the debtor’s chapter 11 plan would be impossible if the owners were forced to file their own chapter 11 petition; very little harm was likely to come to the creditor if it was enjoined from collection activities against the owner, and; lastly the creditors as a whole were best served if the debtor were allowed to propose a plan for reorganization. Id.  The Court extended the injunction to the owners.

If you own a business and are wondering the same questions,  you should review the facts and circumstances of your workout with your attorney.  I think, by and large, the automatic stay is difficult to extend in Bankruptcy Court.  You have to make a really compelling argument that the principal will be so consumed with his or her own bankruptcy that the Chapter 11 reorganization will suffer.

What the Heck Is a Preference Action: Paying Off Favorite Creditors as a Business Tanks

       Preferential Treatment.  My two older siblings Nathan and Nicole and I often teased my folks about being the favorite kid, each of us jockeying for the favorite position (not really).  I will be writing a series of posts on paying a favorite creditor and the consequences of a debtor doing so as his or her business slides into bankruptcy.  This is the first post.  (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.

Favorite Child      I have been prosecuting and defending the recovery of alleged preferential transfers since my first few weeks as a bankruptcy associate at a large firm in Philadelphia and Wilmington, DE.   I have developed a massive library of research regarding this special type of litigation that arises only  in a bankruptcy case.   So let’s start with the basics; what is a preference action?

As business owners and management see the tell-tale signs that they are going to close their doors or reorganize, the issue always comes up—who can I pay now and in what order?  Often, we see significant outstanding tax liability, much of which consists of trust fund taxes (i.e., payroll, sales taxes, etc.) for which the owners of the company are personally liable.  We also see mom and dads or related companies (aka insiders) lend an ailing business sizable chunks of money on an unsecured basis.   We also see business owners who feel terrible stiffing their long-term business buddy suppliers because they know if that last payment is not made, then the suppliers’ business will become troubled too.   In their darkest hour of distress, as the lights are about to go out, the owners scurry to pay “preferred” creditors.

But, the Bankruptcy Code provides a recourse to protect those creditors who are not on the preferred list.   Specifically, pursuant to 11 U.S.C.§ 547 (aka Bankruptcy Code §547(b)), a preference action is a statutory right unique to bankruptcy that allows a debtor-in-possession or trustee to recover transfers made to a creditor within 90 days of a bankruptcy filing or within 1 year if to an insider, where such transfers were made to pay pre-existing debt.   By initiating preference lawsuits inside of a bankruptcy proceeding, a bankruptcy trust or debtor is able to sue the creditors that it once “preferred” (either voluntarily or involuntarily) in order to claw back those monies into a debtor’s estate for fair distribution to all unsecured creditors.

The five basic elements of a preference are as follows:

  • The 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 within one 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.

All of these elements of a preference under Section 547(b) of the Bankruptcy Code must be present.  If the plaintiff trustee/debtor-in-possession cannot prove a transfer’s avoidability by a “preponderance of the evidence” (generally the ability to prove as “more likely than not” that the five preference elements exist) then a defendant creditor will prevail.  Note that, neither the debtor nor the creditor’s intent regarding the transfer is a material factor in the consideration of an alleged preference (more on this later).

I have been on both the prosecuting and defending side of numerous preference cases.  When a debtor initiates preference actions, often a debtor is directed to pull its check register to identify payments and persons that the debtor has paid over the last year.  Sometimes, those names, addresses and payments are placed into an excel spreadsheet that is then merged with a form complaint.  The preference lawsuits are then filed in “batches.”   I have seen hundreds of preference actions filed in a batch.   Truth be told then — often, not a whole lot of diligence is put into determining whether a debtor’s actually preferred a certain creditor defendant (i.e., whether the debtor or trustee can satisfy each of the statutory elements of a preferential transfer  and/or whether a defendant will have any valid defenses to the action that will either limit or eliminate liability).    So the lawsuit is set in motion and now each creditor defendant to hire a bankruptcy lawyer and defend the lawsuit by either asserting that the plaintiff has not satisfied each of the prima facie elements set forth in the statute and/or asserting an affirmative defense.

Preference laws were designed to facilitate a fundamental bankruptcy policy of equality of distribution among creditors of the debtor.  Nonetheless, in practice, preference actions are often viewed by creditors as extremely punitive, inasmuch as their effect is to cause creditors to disgorge funds that they have received for legitimate, undisputed bills.   Fortunately, as referred to above, the bankruptcy statute also provides numerous defenses to a preference claim that can often substantially reduce or eliminate liability that would otherwise arise if the defenses are not timely asserted.   I will discuss defenses in another post!  Stay tuned.

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.