A preferential payment is one made in the 90 days prior to the bankruptcy filing, that gives the creditor which received the payment preferential treatment to other similarly situated creditors.

The Bankruptcy Code permits a trustee (or a debtor in possession) to recover from creditors payments made shortly before the bankruptcy filing where the payment gave the creditor more than other, similarly situated, creditors would get through the bankruptcy process. The preference statutes are simply an attempt to achieve equity between creditors. Creditors are almost always better off attempting to get payment of their claims from their debtors and dealing with any efforts to recover the money when, and if, such attempts are made in bankruptcy.

Bankruptcy Code §547 defines a preference as

1. Payment on an antecedent (as opposed to current) debt;
2. Made while the debtor was insolvent;
3. To a non insider creditor, within 90 days of the filing of the bankruptcy;
4. That allows the creditor to receive more on its claim than it would have, had the payment not been made and the claim paid through the bankruptcy proceeding.

Defenses to the recovery of a preference are found in 11 U.S.C. 547(c).  They include:

1. contemporaneous exchanges;
2. amounts of subsequent credit extended and unpaid;
3. payments made in the ordinary course of the business of the debtor and the creditor on ordinary business terms;  and
4. security interests that secure debts that bring new value to the debtor.

These defenses need to be raised in an answer to a preference complaint. The burden of proof lies with the creditor to establish that despite the elements of a preference; the transfer is protected by one or more of these defenses.

The law firm of Ronald Page, PLC has extensive experience defending creditors in preference actions before the Bankruptcy Court.  Responses must be made to the S&K Famous Brands Liquidating Trust’s above referenced Omnibus Objections by 4 p.m. on July 15, 2010.  Please contact Ronald Page, a Richmond Virginia Bankruptcy Attorney, if you need assistance responding to the S&K Famous Brands, Inc. Liquidating Trust’s attempts to disallow your claim.

The Garden City Group, Inc.
Attn.: Bear Island Claims Processing
P.O. Box 9550
Dublin, Ohio 43017-4850

The claims agent’s website is: http://www.gardencitygroup.com/cases/bip/index.php3

Those who wish to protect their claims against Bear Island should file a proof of claim prior to the claims bar date.  While a deceivingly simple form on its face, drafting a proof of claim can involve complicated legal issues.  Those with claims against Bear Island may want to consult with an attorney to assist in drafting their proof of claim so as to ensure that they receive all to which they are entitled.  Ronald Page has extensive experience representing creditors in large bankruptcy cases.

Secured debts differ from unsecured debts in that the obligation of the debtor to pay the secured debt is “secured” by a right given to the lender in certain property of the debtor. Two common examples are (1) a deed of trust which gives a lender the right to foreclose on a property if the debtor fails to pay their mortgage and (2) a lien placed on an automobile’s title which gives a lender the right to repossess the automobile. Unlike an unsecured debt, if a debtor fails to pay, the secured lender may have recourse to the pledged property to satisfy the debt. In practice, if the debtor fails to pay their secured debt, the secured lender sells the pledged property and applies the proceeds to the debt. A secured lender is in a better position than that of an unsecured lender as the secured lender has both a right to proceed against the debtor based on the debt and also a claim against the pledged property if the debtor fails to pay the debt.

While the secured lender has an interest in the pledged property, this interest does not amount to the lender having title to the property or having a present possessory interest. Instead, the lender has a charge against the pledged property. So, the lender does not acquire ownership of the property once they are granted a security interest. The ownership remains with the debtor, but that ownership is now encumbered by the lender’s interest. Only upon the debtor’s default can the lender become entitled to take action to terminate the debtor’s ownership and to sell the property or take transfer of it.

Secured debts arise either by contract or by operation of law. Cited above, a deed of trust is an example of a secured debt that comes about as the result of a contract. The secured lender gives the debtor the funds to purchase a house in exchange for the debtor’s promise to repay the funds and the debtor’s granting the lender a security interest in the house. An example of a security interest arising by operation of law is when a judgment attaches to real property. If a judgment is granted against a debtor and that debtor owns real property, even though the judgment is unrelated to the real property, the judgment can attach to the debtor’s property interest. By attaching, the judgment becomes a lien on the property. In Virginia, in order for the judgment to attach it must be properly docketed with the Circuit Court Clerk’s Office in the jurisdiction where the debtor owns real property. In this way, an unsecured debt that is reduced to judgment may become a secured debt if the debtor owns real property and the judgment is properly docketed.

Movie Gallery, the second-largest movie-rental chain by outlets behind Blockbuster Inc., failed to rebound after it emerged from bankruptcy in spring 2008 owned by private-investment firms Sopris Capital Advisors and Aspen Advisors.

Consumers are now viewing movies streamed online or through on-demand cable services. Netflix Inc. has cut into revenues of Movie Gallery and Blockbuster through its mail-order service and online offerings. In addition, movie-watchers have turned to alternatives such as Redbox, a unit of Coinstar Inc. that operates movie-vending machines in grocery stores, among other places. 

Movie Gallery’s downward prospects were even commented on by Judge Douglas O. Tice, Jr. while presiding over the first day bankruptcy hearings during the retailer’s first bankrutpcy in 2008.  In response to a statement by Movie Gallery’s counsel that the retailer had a plan to restructure and emerge from bankrutpcy competitive in the market, Judge Tice said, “Really?”

Movie Gallery’s financial woes trace back to debt it took on acquiring Hollywood Entertainment Corp. in 2005. It filed for bankruptcy in February under the weight of roughly $600 million in debt.

The law firm of Ronald Page, PLC has extensive experience representing creditors in retail bankrutpcies.  Please contact our office to speak with Ronald Page, a Richmond, Virginia bankruptcy attorney.

Kurtzman Carson Consultants
c/o Movie Gallery (2010) Claims Processing
2335 Alaska Avenue
El Segundo, CA 90245
T: (310) 823-9000

The claims agent’s website is: http://www.kccllc.net/moviegallery

Those who wish to protect their claims against Movie Gallery should file a proof of claim prior to the claims bar date.  While a deceivingly simple form on its face, drafting a proof of claim can involve complicated legal issues.  Those with claims against Movie Gallery may want to consult with an attorney to assist in drafting their proof of claim so as to ensure that they receive all to which they are entitled.  Ronald Page has extensive experience representing creditors in large retail bankruptcy cases.

Circuit City Stores, Inc. v. Active Media Services, Inc., Case No. 09-03232
Circuit City Stores, Inc. v. Apex Digital, Inc. et al., Case No. 10-03069
Circuit City Stores, Inc. v. Creative Labs, Inc., Case No. 09-03225
Circuit City Stores, Inc. v. Mitsubishi Electronics America, Inc. et al, Case No. 10-03068
Circuit City Stores, Inc. v. Onkyo USA Corp. et al., Case No. 10-03071
Circuit City Stores, Inc. v. PNY Technologies Inc., Case No. 10-03056
Circuit City Stores, Inc. v. Sharp Electronics Corporation, Case No. 09-03224 
Circuit City Stores, Inc. v. United States Debt Recovery and Signature Home Furnishings Co. Inc., Case No. 10-03055

The Bankruptcy Code permits a debtor in possession to recover from a creditor payments made in the 90 days before the bankruptcy filing where the payments gave the creditor more than other, similarly situated, creditors would get through the bankruptcy process.  The preference statutes are an attempt to achieve equity between creditors. Nonetheless, creditors are almost always better off attempting to get payment of their claims from their debtors and dealing with any efforts to recover the money when, and if, such attempts are made in bankruptcy.

Bankruptcy Code §547 defines a preference as

1. Payment on an antecedent (as opposed to current) debt;
2. Made while the debtor was insolvent;
3. To a non insider creditor, within 90 days of the filing of the bankruptcy;
4. That allows the creditor to receive more on its claim than it would have, had the payment not been made and the claim paid through the bankruptcy proceeding.

Defenses to the recovery of a preference are found in 11 U.S.C. 547(c).  They include:

1. contemporaneous exchanges;
2. amounts of subsequent credit extended and unpaid;
3. payments made in the ordinary course of the business of the debtor and the creditor on ordinary business terms;  and
4. security interests that secure debts that bring new value to the debtor.

These defenses need to be raised in an answer to a preference complaint. The burden of proof lies with the creditor to establish that despite the elements of a preference; the transfer is protected by one or more of these defenses.

The law firm of Ronald Page, PLC has extensive experience defending creditors in preference actions before the Bankruptcy Court.  Please contact our office to contact Ronald Page, a Richmond Virginia Bankruptcy Attorney.

When a company files for protection under the Bankruptcy Code, its trade creditors and vendors are left scrambling to understand how the bankruptcy will affect them.  As explained below, time is of the essence and so vendors must act quickly to take full advantage of their rights under the Bankruptcy Code.  Instead of having the uncertainty of when and how much they are going to be paid, many vendors simply want their goods returned.  In the bankruptcy context, this is referred to as reclamation.  While not an ideal solution, it avoids having to file a proof of claim and waiting for payment from the debtor for these goods. 

Reclamation under the Bankruptcy Code

Under the 2005 amendments to the Bankruptcy Code, known as the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (“BAPCPA”), the ability of vendors to reclaim their goods was expanded.  These provisions apply in both Chapter 11 reorganization cases and Chapter 7 liquidation cases. 11 U.S.C. 546(c) details the ability of a vendor to reclaim their goods as follows:

• The vendor has the right to reclaim goods received by the debtor within 45 days of the date of the commencement of the bankruptcy case;
• The reclamation demand must be in writing and made within 45 days of the receipt of the goods by the debtor;
• If the 45-day period expires after the commencement of the bankruptcy case, the vendor must make their reclamation demand not later than 20 days after the date of commencement of the case; and
• The vendor must have sold the goods to the debtor in the “ordinary course” of the vendor’s business and the goods must have been received by the debtor while the debtor was “insolvent”.

Issues That May Prevent Reclamation

The right of a vendor to reclaim their goods is not absolute.  Detailed below is a non-exclusive list of issues that may prevent a successful reclamation:

• A vendor will not be able to reclaim its good if its fails to make a timely, written demand.  This demand may also need to be filed with the bankruptcy court;
• The goods cannot be reclaimed if the debtor has sold them.  This is a danger where the debtor has rapid inventory turnover;
• The goods have to have been received by the debtor.  Drop shipments or other shipments that are delivered to the debtor’s customers will not be able to be reclaimed; and
• If the goods become subject to a secured creditor’s lien, the goods will not be able to be reclaimed.  This comes about in cases where the debtor has granted a bank or other lender a security interest in the goods.  As amended in 2005, 11 U.S.C. 546(c) now expressly makes reclamation rights subject to the prior rights of a secured creditor with a security interest in the goods or their proceeds.

Contents of the Reclamation Demand

The reclamation demand should identify the goods to be reclaimed, include a general statement reclaiming all goods shipped during the 45-day period, and demand that the goods be segregated so as to guarantee their swift return.  However, demand may not be enough to protect a vendor’s goods.  Absent an agreement with the debtor or a court ordered reclamation program, a vendor may be forced to seek and obtain a court order preventing sale of the goods to be reclaimed.

Failure of Reclamation

If a vendor fails to reclaim its goods, it still has recourse in the form of an administrative priority claim.  11 U.S.C. 503(b)(9) gives vendors an administrative priority claim for the value of goods received by the debtor within 20 days of its bankruptcy filing.  The administrative priority claim covers a shorter period of time, but is a recourse if reclamation efforts fail.

Legal Advice

As detailed above, reclamations can be complicated, involving a number of issues, and are time sensitive.  Vendors who have a reclamation claim should contact an attorney for advice immediately upon learning of the bankruptcy or insolvency of a customer.  Ronald Page has experience representing trade creditors and vendors in bankruptcy and insolvency matters.

The Ashland, Virginia-based company listed assets of $100 million to $500 million and debt of $500 million to $1 billion in its Chapter 11 petition filed with the Bankruptcy Court for the Eastern District of Virginia, Richmond Division.

The Bear Island paper mill north of Ashland employs about 200 people and produces about 235,000 tons of newsprint. It is owned by White Birch Paper Holding Co. of Nova Scotia.

Bear Island has hired Garden City Group, Inc. as its claims and notice agent.  The case is listed as In re Bear Island Paper Company LLC, 10-31202. 

Ronald Page, PLC has extensive experience representing creditors in large bankruptcy cases.   Please contact my offices directly to discuss any claims your entity may have against Bear Island.

A creditor in a chapter 7 case who has a lien on the debtor’s property should consult an attorney for advice. Ronald Page, PLC has experience representing consumer debtors in chapter 7 liquidations.