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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.

Affairs Afloat, Inc. Takes On Water With Chapter 11 Filing

By:  Justin A. Saporito, MAZURKRAEMER Legal Clerk

Affairs Afloat, Inc. voluntarily filed for Chapter 11 bankruptcy relief on October 15th, 2013.  The petition was filed in the Bankruptcy Court for the Southern District of New York.  The case has been assigned to the Honorable Judge Burton R. Lifland, under case number 1:13-bk-13356. (Click case number for docket summary.)

queen of hearts

The debtor is a river cruise operator that operates in New York City out of Pier 78 on West 38th Street.   Affairs Afloat, Inc. was established in 1988 and provides services through its two river cruise ships, The Queen of Hearts (pictured right) and The Star of Palm Beach.  The Queen of Hearts is a three level ship that is Coast Guard certified for 450 guests plus staff and crew.  The Star of Palm Beach is a two level ship and is Coast Guard certified for 380 guests plus staff and crew.

Affairs Afloat hosts various cruises on specified dates in addition to its weekly cruises such as its Shadow Nightclub on Tuesday nights, Cruise Brasil on Wednesday nights, Candela Cruise on Thursday nights.  Debtor also holds a Kiddie Cruise on Sunday afternoons.  Debtor offers group packages for many of its events and its services are also available for private events.  For more information about debtor’s programs and services please visit their website here.

Debtor claimed assets and liabilities of between $1 and $10 million with HSBC Bank, the Internal Revenue Service, the Security Exchange Commission.  It appears that the Chapter 11 filing has not affected debtor’s operations as it is accepting reservations for cruises for Halloween and New Year’s Eve.  Affairs Afloat, Inc. is represented by Jonathan S. Pasternak of DelBello Donnellan Weingarten Wise & Wiederkehr, LLP.

Rhinoceros Visual FX and Design Firm Files for Chapter 11 Bankruptcy in New York

By:  Justin A. Saporito, MAZURKRAEMER Law Clerk

On September 17th, 2013 Rhinoceros Visual Effects and Design LLC filed a VictoriaSecretsvoluntary petition for bankruptcy relief under Chapter 11 of the U.S. Bankruptcy Code.  The filing was made in the U.S. Bankruptcy Court in the Southern District of New York and assigned case number 1:13-bk-13016. (A summary of the docket can be found here. )  The case has been assigned to the Honorable Judge Stuart M. Bernstein under case number 1:13-bk-13016.

The Debtor is a Multi-Video Group/Gravity Company.  The Multi Video Group, Ltd. owns and/or is associated with various companies that are in the business of graphic and audio design and editing.  Internationally, The Multi Video Goup, Ltd. is associated with companies such as Gravity Post Production in Tel Aviv, Israel and Digital Renaissance in Oberhausen, Germany.  Rhinoceros Visual Effects and Design LLC is, as the name implies, a visual effects and design firm located at 315 Madison Avenue, 3rd Floor New York, NY 10017.  Debtor’s clientèle has included Victoria’s Secret Stores, LLC, a subsidiary of Limited Brands, Inc., and Six Flags Theme Parks, Inc. (sources: VS, Six Flags)

The Debtor claims assets between $100,001 and $500,000 and liabilities between $1 and $10 million.  It has listed 62 creditors including various individuals and companies such as Bell Technologies and Verizon.  For a complete list of creditors please click here.  Debtor is represented by Paul H. Aloe of Kudman Trachten Aloe LLP.  A Scheduling Order was signed on September 17th, 2013 scheduling the Initial Conference Hearing to be held on September 31st, 2013 at 10:00 AM.

Bankruptcy Docket Beat: Cooper-Booth Manufacturing Company, Inc. files for Chapter 11

By: Katie Imler, Law Clerk

On May 21, 2013, Cooper-Booth Management Company, Inc. a full-line, full-service wholesale distributor for retailers and convenience stores, filed for a voluntary Chapter 11 bankruptcy in the Eastern District of Pennsylvania (Case No. 2:13-bk-14522). The company began in 1865 as Booth Tobacco Company in Lancaster, Pennsylvania. Being family owned and operated for three generations, Cooper-Booth has been recognized as one of the Top 20 leading convenience store wholesales in the country. Murton Margolis is Emeritus and Barry Margolis is President.

Cooper-Booth, located at 200 Lincoln West Drive, Mountville, PA 17554 listed assets of $500,000-$1 million and liabilities of $10-$50 million, enumerating over 200 creditors . See summary of the docket here. Schedules are due June 4, 2013. The Debtor is represented by Aris J. Karalis and Robert W. Seitzer of Maschmeyer Karalis P.C., 1900 Spruce Street, Philadelphia, PA 19103. Cooper-Booth’s largest creditors include Maryland Comptroller of the Treasury-Alcohol & Tobacco Tax ($7,438,500.00), PA Department of Revenue ($3,330,768.00), New York State Department of Tax & Finance Division of Treasury ($3,140,324.74), Delaware Division of Revenue ($1,563,285.93).

CooperBooth Product Offering       The federal government has frozen the Debtor’s bank accounts while an investigation is pending to determine if one of the Debtor’s customers has been illegally smuggling untaxed cigarettes into New York. Basel Ramadan and his brother, Samer Ramadan, bought cigarettes from the Debtor Cooper Booth Wholesale Inc. using business fronts in Virginia allowing them to pay the $0.30/pack Virginia cigarette tax instead of the $4.35/pack cigarette tax in New York.

The two moved 20,000 cigarettes a week to the New York City area without paying the New York taxes, which cost the state approximately $80 million in taxes. See more on the story here.

The Debtor’s case was initially assigned to the Honorable Judge Eric L. Frank, but was reassigned to the Honorable Judge Magdeline D. Coleman. On May 22, 2013 Judge Coleman issued an order demanding timely filing of all Schedules. Judge Coleman also entered an order directing the joint administration of Debtors’ Chapter 11 Cases 13-14522 and 13-14521 pursuant to Bankruptcy Code § 1015(b), determining 13-14519 as the lead case. The Debtor’s second voluntary Chapter 11 bankruptcy was for Cooper-Booth Transportation Company, LP (Case No. 2:13-bk-14521), which listed $1-$10 million in both assets and liabilities. Most of the liabilities are for state and federal taxes.

 

Ch. 7 or Ch. 11: Which Bankruptcy Option Is Best For My Business?

CO-AUTHORS: Katie Imler and Salene Kraemer

Let’s face it, all businesses face challenges. Especially when the economy is not a booming bull, financial challenges are in abundance. You are not alone. So what do you do when your company has financial troubles staring you down? What do you do when going to work every day puts you and your family deeper in debt instead of adding money to your bank account? At some point, the best business decision you can make may be the decision to no longer do business.

Image

What do you do?  Well, there are a few options:  1) Sell the business to a competitor, strategic business, or key employee; 2) File for Chapter 7 bankruptcy; 3) Wind-down the company yourself. We want to talk about the latter two options. Before taking action, both avenues have advantages and disadvantages that must be weighed.

Avenue 7. Filing for Chapter 7 Bankruptcy means that a Bankruptcy Trustee employed by Office of the United States Trustee of the Department of Justice, steps into the shoes of the company and has the burden of winding-down the business.  In doing so, the Trustee is in control of distributing the business assets according to the Bankruptcy Code.

Perks of Chapter 7:

  • Upon filing a petition for Chapter 7, an automatic stay is imposed preventing lawsuits and writs of execution against business assets –think of it as MC Hammer’s “Can’t Touch This.” This preserves the vital business assets and provides peace of mind that the business will not have to defend against future legal actions arising from pre-petition debts
  • The Bankruptcy Court assumes the burden of notifying all creditors of the bankruptcy (sending the “funeral notice”, if you will).  Having this objective third party serve as a buffer between the business owner and the unpaid creditor provides a sense of relief to the business owner
  • Debtor benefits from expertise of an experienced Bankruptcy Trustee
  • Debt forgiveness is not taxable

Downsides of Chapter 7:

  • Business management has no control in the winding-down
  • Trustee will scrutinize the pre-petition financial and operational affairs of the Debtor
  • Instead of finding a strategic buyer who may pay more for business assets, a trustee may liquidate business assets for pennies on the dollar, called a “fire sale”
  • Trustee may abandon certain assets letting creditors with an interest in them duke it out
  • Since the Trustee assumes the place of the debtor, he or she also assumes all of the debtor’s legal claims. The debtor, therefore, may be without standing to pursue a future lawsuit arising out of pre-petition transactions, unless otherwise agreed
  • Furthermore, filing for bankruptcy creates a public record and may pick up media attention, depending upon your business
  • Time and monetary costs are also associated with Chapter 7.  In addition to attorney’s fees, the filing fee alone is $306 and the Debtor will have to pay Trustee’s fees if there are assets for the Trustee to liquidate. Plus, the Trustee’s fees come off the top of liquidation proceeds before any distributions to creditors are made.

The Wind-Down Alternative.  If you are a do-it-yourself personality, then the Wind-down approach may be the approach for you. In this scenario, you control the winding-down process of the company and pay off the debts. However, this do-it-yourself project may require a thick skin and much cooperation from your creditors and lessors.Image

Perks of Non-Bankruptcy Wind-down:

  • Winding-Down the business yourself avoids the legal and bankruptcy fees
  • Business owner retains control and does not expose dirty laundry to the public
  • Business avoids scrutiny by the Trustee
  • Higher likelihood that you, the business owner with the industry know-how, will find a better buyer in the market who is willing to pay more for business assets

Downsides of Non-Bankruptcy Wind-down:

  • Creditors may initiate an involuntary Chapter 7 bankruptcy petition against your business
  • Business must comply with state laws for dissolving which are usually more demanding than the Bankruptcy Code and take longer to execute. If liquidation is done incorrectly, the business can be exposed to lawsuits for dishonoring creditors’ legal rights
  • Business owner personally deals with all of the creditors and is responsible for all issues that arise.
  • Debt forgiveness is taxable outside of bankruptcy

Now, do you file for Chapter 7 or Wind-down? In some cases, a hybrid approach may be best. Go as far as feasible in the liquidation process on your own, and then turn it over to a Trustee or a bankruptcy  lawyer to finish the job.  Weigh which option suits your needs the most, reflecting upon your unique business, the nature and amount of the debt that your business still owes, and your personal capabilities.  And, as always, it is best to first consult with your attorney.

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.

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.