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Lowenstein Sandler LLP

Eric Chafetz

Eric Chafetz

Partner

Expertise

  • Bankruptcy, Financial Reorganization & Creditors’ Rights
  • Bankruptcy, Financial Reorganization & Creditors' Rights

WSG Practice Industries

Activity

WSG Leadership

WSG Coronavirus Task Force Group
Member

Lowenstein Sandler LLP
New York, U.S.A.

Profile

Creditors' committees, trade creditors, and plan/liquidating trustees involved in complex bankruptcies regularly turn to Eric for strategic counsel on creditors' rights. He also represents secured creditors in connection with their use of cash collateral and related adequate protection issues, and he advises debtors on various phases of their reorganization efforts.

Eric frequently negotiates:

  • Cash collateral and debtor-in-possession (DIP) financing orders
  • Bid procedures, bid procedures orders, sale orders, and the underlying corporate transaction documents
  • Plans of reorganization, liquidation trust agreements, plan supplements, plan support agreements, and rights offering procedures

Additionally, Eric advises clients on their rights associated with the assumption and assignment of executory contracts and the cure amounts associated therewith.

Eric is well-versed in all aspects of the claims resolution and reconciliation process. Clients benefit from his extremely successful track record in investigating and prosecuting actions against officers, directors, and lenders, as well as in prosecuting and defending hundreds of preference actions.

A leader in his field, Eric participated in the American Bankruptcy Institute (ABI) Commission's Avoidance Power Subcommittee's study of the aspects of the Bankruptcy Code involving preferences, creditors' reclamation rights, and creditors' rights under Section 503(b)(9). Eric is also a prolific author and has published numerous articles addressing various cutting-edge issues in journals geared toward trade creditors. He is a frequent speaker on current bankruptcy and creditors’ rights topics, including serving as a guest lecturer at the Columbia University School of Professional Studies and Cornell Tech’s Master of Laws program, where he has presented topics on the intersection of bankruptcy and such fields as real estate and intellectual property.

Active in the firm's pro bono efforts, Eric has represented several individuals who filed for Chapter 7 bankruptcy protection, as well as veterans before the Department of Veterans Affairs.

Bar Admissions

    New York
    New Jersey

Education

Brooklyn Law School (J.D. 2004), cum laude
University of Michigan (B.A. 2000)
Areas of Practice

Bankruptcy, Financial Reorganization & Creditors' Rights | Bankruptcy, Financial Reorganization & Creditors’ Rights

Professional Career

Significant Accomplishments

Represented unsecured creditors’ committees in bankruptcies for:

Draw Another Circle, LLC

Malibu Lighting Corp.

Verso Corp.

Cenveo, Inc.

Filmed Entertainment

SportCo Holdings

Herb Phillipsons’s Army

Advanced Contracting

Wynit Distribution

Auburn Aramature, Inc.

Bumble Bee Parent, Inc.

Golden County Foods

Exide Technologies

Qualteq Inc., d/b/a VCT of New Jersey Inc. (100% plus interest distribution to general unsecured creditors)

Borders Group Inc.

SP Newsprint Holdings LLC

Manistique Papers Inc.

Chef Solutions Holdings LLC

Represented the debtors in the following bankruptcy case:

Frank Entertainment Group LLC

Represented the following individual creditors in one or more bankruptcy cases:

International Paper

LG Electronics U.S.A., Inc. / LG Alabama

Valvoline LLC

Dusa Corp.

Central National Gottesman, Inc.

Hilldun Corporation

Represented a class of customers in the following bankruptcy case:

Gallant Capital



Professional Associations


  • American Bankruptcy Institute
  • Turnaround Management Association

    • NYC Membership Committee

Professional Activities and Experience

Accolades
  • Super Lawyers (2013–2017) - Eric Chafetz
  • National Conference of Bankruptcy Judges 2014 Annual Meeting - Eric Chafetz

Articles

When Financial Stress Turns to Distress–Restructuring Tools to Avoid Disaster Parts 1 and 2: Chapter 11 Checklist and What Else Is in the Toolbox
Lowenstein Sandler LLP, April 2020

When Financial Stress Turns to Distress–Restructuring Tools to Avoid Disaster Parts 1 and 2: Chapter 11 Checklist and What Else Is in the Toolbox In this Client Alert series, Lowenstein’s Bankruptcy, Financial Reorganization & Creditors’ Rights Department will introduce the various restructuring tools available to help businesses avoid financial catastrophe in the current environment...

Remain on Guard: Lessons for Trade Creditors in a post-Toys "R" Us World
Lowenstein Sandler LLP, June 2018

In today’s retail bankruptcy environment, obtaining “critical vendor status” is not enough. Many predict that 2018 will continue being an active year in retail bankruptcies, especially for highly leveraged retailers. Since our last article, numerous well-known retailers have filed for protection under the Bankruptcy Code, including: Bon-Ton, Claire’s, Nine West, and Toys “R” Us...

Additional Articles

On its face, Section 503(b)(9) of the Bankruptcy Code looks deceptively easy to apply. It grants a goods seller an administrative priority claim for the value of goods sold to the debtor in the ordinary course of its business that the debtor had received within 20 days of its bankruptcy filing. However, there has been extensive litigation over various aspects of Section 503(b)(9), particularly over the meaning of the term “received.” Success or failure in these litigations has greatly impacted trade creditor recoveries because creditors have a greater likelihood of obtaining full payment of their Section 503(b) (9) priority claims in comparison to their far less valuable general unsecured claims, in which recovery prospects are oftentimes dim to nonexistent.


The United States Court of Appeals for the Third Circuit, in In re World Imports Ltd., recently became the first United States Court of Appeals to address the meaning of “received” in the context of Section 503(b) (9) administrative priority claims. The Third Circuit, which includes Delaware (the venue where many large Chapter 11 cases are filed), New Jersey and Pennsylvania, held that a debtor receives goods when the debtor or its agent takes physical possession of them, instead of when title or risk of loss passes to the debtor, which might occur earlier. This decision could lead to an increase in allowed Section 503(b)(9) priority claims, particularly for creditors manufacturing and then delivering goods from outside the United States.


Then, just a few days later, the United States Bankruptcy Court for the District of Delaware, in SRC Liquidation LLC, formerly known as Standard Register Company (“Standard Register”), relied on the World Imports decision to resolve another issue: whether a creditor’s claim for goods “drop-shipped” directly to a debtor’s customer is eligible for administrative priority status under Section 503(b)(9). The SRC Liquidation court denied Section 503(b)(9) administrative priority status to the claim of a goods seller that drop-shipped goods to the debtor’s customer based on the court’s determination that neither the debtor nor its agent took physical possession of the goods. This ruling could have devastating consequences to trade creditors that sell on drop-ship terms.


You win some and you lose some!

The United States Court of Appeals for the 3rd Circuit, in In re World Imports Ltd., recently held that a debtor, World Imports, had received goods when the debtor or its agent physically received the goods, not when the goods were delivered to a common carrier for shipment. This decision was made in conjunction with determining the allowed amount of trade creditors’ Section 503(b)(9) administrative priority claims for goods purportedly received by World Imports within 20 days of its bankruptcy filing.

Article 2 of the Uniform Commercial Code (“UCC”) grants unpaid goods sellers the right to stop delivery of goods or reclaim goods sold to a financially distressed customer, depending on whether the customer had received the goods. However, reclamation rights have been eviscerated as a result of the enactment of the 2005 amendments to the Bankruptcy Code and prior and subsequent court decisions that have subordinated reclamation rights to a secured lender’s floating inventory lien.


A seller’s stoppage of delivery rights can be far more potent than the more problematic reclamation rights. A recent decision by the United States Bankruptcy Court for the District of Delaware, in O2Cool, LLC v. TSA Stores, Inc., et al., continues to tip the scales in favor of an unpaid seller’s stoppage of delivery rights. The court held that a goods seller’s proper exercise of its stoppage of delivery rights may trump a secured lender’s floating lien on inventory because stoppage of delivery rights—unlike reclamation rights—are not subordinate to a floating lien on a debtor’s inventory.

A recent decision by the Third Circuit Court of Appeals (the “Third Circuit” or the “Court”) may have a lasting impact on financially distressed companies selling themselves in bankruptcy and the rights of their employees. In the In re AE Liquidation, Inc.decision, the Court ruled that the Debtor did not violate the Worker Adjustment and Retraining Notification (“WARN”) Act—which generally requires employers to provide 60-days’ notice of a mass layoff—when it waited until the day on which its proposed going concern sale fell through to notify employees that the company would shut down immediately. In so ruling, the Court established that the test to determine whether notice is required under the WARN Act is if the mass layoff is probable, or, “more likely than not” to occur, rather than merely possible.


Given that the Third Circuit’s decisions are binding on the country’s most active district for large chapter 11 filings (the District of Delaware), this decision is important for all companies. However, as the standard is both vague and flexible, it raises questions as to how exactly it will affect distressed companies in the future. Does the AE Liquidation decision blur the line as to when an insolvent company needs to provide notice, such that any company whose bankruptcy sale falls through need not give notice to its employees of a potential closure? Or, is the AE Liquidation decision merely the result of an exceptionally unique set of facts such that, as a practical matter, it will have little impact on many cases going forward?

Most states have enacted statutes that allow creditors providing goods and/or services to a contractor on a construction job to file a "mechanics' lien" or "construction lien" directly against a third-party owned construction project in which (a) the creditor provided goods and/or services to the contractor, (b) the contractor used the goods and/or services on the construction project, and (c) the contractor had not paid for the materials or services. Under certain circumstances, the creditor might also be able to benefit from its lien rights by stepping into the contractor's shoes and directly collecting the project owner's indebtedness to the contractor.

In its March 2017 decision in Czyzewski v. Jevic Holding Corp., the Supreme Court of the United States (the "Supreme Court") held that case-ending structured dismissals which circumvent the absolute priority rule and do not have a significant Bankruptcy Code related justification are impermissible. Because creditors' committees rely heavily on structured dismissals and related gifting provisions to obtain a recovery for holders of general unsecured claims ("GUCs") where a recovery would not otherwise be possible, practitioners and commentators have expressed concern over the long term implications of the Jevic decision.

Preference claims continue to be a thorn in the side of trade creditors' efforts to minimize their losses from a customer's bankruptcy filing. Creditors mitigate their losses by frequently relying on the subsequent new value defense.

Trade creditors oftentimes have great difficulty collecting their general unsecured claims against financially distressed customers. Creditors should, therefore, take advantage of any rights that can enhance their recoveries.

As a general rule, the automatic stay in a debtor’s bankruptcy case bars creditors from taking action to collect their claims against the debtor. However, in very limited circumstances, courts have extended the stay to enjoin non-debtor third-party collection efforts, such as lawsuits against guarantors of a debtor’s obligations. In a recent decision, the United States Bankruptcy Court for the Northern District of Iowa (the “Bankruptcy Court”), in In re Bailey Ridge Partners, LLC, took the unusual step of staying two litigations against non-debtors, one to enforce claims against guarantors of a debtor’s obligations and the other to enforce a claim against a nondebtor co-obligor. The Bankruptcy Court concluded that: (a) the debtor was likely to successfully reorganize and emerge from bankruptcy; (b) the guarantors and co-obligor were critical to the success of the reorganization based on the financial and other support they had provided and committed to provide to the debtor; and (c) the creditor suing the non-debtor guarantors was fully secured by the debtor’s assets.

It is no secret that distressed companies can leverage the Bankruptcy Code to sell their assets free and clear of liens, claims, encumbrances, judgments or other obligations. After all, it is widely accepted that one of the purposes of bankruptcy law is to give a debtor a “fresh start.” 


The U.S. Bankruptcy Court for the Southern District of New York’s recent decision in Advanced Contracting Solutions, LLC illustrates how a debtor adjudicated to be an alter ego of another company prior to bankruptcy may use a bankruptcy filing, appointment of a chief restructuring officer (CRO), and section 363 sale to obtain a determination that it is no longer an alter ego.


Advanced Contracting Solutions (ACS) filed for bankruptcy shortly after a Sept. 20, 2017, decision by the U.S. District Court for the Southern District of New York that determined ACS was an alter ego of another entity, Navillus Tile, Inc. The court reached this conclusion by considering whether ACS and Navillus maintained similar or identical ownership, management, supervision, business purpose, customers, operations and equipment (i.e., the alter ego factors). 


The court determined that, on balance, these factors weighed in favor of finding ACS was an alter ego of Navillus and, in turn, deemed ACS a party to certain collective bargaining agreements (CBAs) to which Navillus was a signatory.


On Nov. 6, 2017 (the petition date), ACS filed for bankruptcy because it was unable to satisfy an approximately $73.4 million judgment associated with the district court’s decision that was entered in favor of certain unions and related benefits funds.


During its bankruptcy case, ACS filed a section 363 sale motion to sell its business free and clear of all liens, claims and encumbrances (including the judgment and successor liability claims). 


ACS also filed two related pleadings in the bankruptcy court. One sought a determination that ACS was no longer an alter ego of Navillus as of the petition date; the other sought a determination that, even if ACS was still an alter ego, it could reject Navillus’ CBAs pursuant to section 1113 of the Bankruptcy Code.


The Bankruptcy Court held that ACS had sufficiently “disentangled” itself from Navillus as of the petition date, and therefore ACS was no longer the alter ego of Navillus. Significantly, this allowed ACS to sell substantially all of its assets free and clear of successor liability claims related to the judgment and any possibility that ACS would be deemed an alter ego at any point prior to the sale closing, both of which were conditions to closing in the underlying asset purchase agreement.


Because the Bankruptcy Court determined that ACS was no longer an alter ego, it did not reach the issue of whether ACS could reject Navillus’ CBAs.


Only a few courts have previously considered whether an alter ego determination can be unwound, and those courts only discussed the issue at a very high level. Therefore, no specific test or burden for proving disentanglement had been established prior to the decision involving ACS. The Bankruptcy Court concluded that evaluating disentanglement claims required a “fresh application” of the alter ego factors.


Bankruptcy Creates Change of Circumstances


Bankruptcy Court observed that ACS’s business had changed since the District Court’s decision.


The owners/principals of Navillus who held options to purchase ACS during the time period relevant to the District Court’s decision no longer possessed such options.


ACS operated in a different office space from Navillus.


ACS no longer received financial assistance from Navillus or its principals.


ACS maintained its own insurance policies.


Critically, however, the Bankruptcy Court recognized that ACS’s bankruptcy filing fundamentally changed the nature of the business and its operations. In this regard, the Bankruptcy Court noted that the District Court’s alter ego ruling was primarily based on facts from 2013 and 2014—well before the petition date. Prior to the bankruptcy filing, ACS and Navillus were predominantly managed, owned and supervised by the same owner and key employees, but after the petition date ACS appointed a chief revenue officer (CRO) to make critical business decisions.


The CRO ran the section 363 sale process, reviewed the company’s books and records and managed its financial affairs. Moreover, the business decisions of chapter 11 debtors and their managers are also subject to oversight by the U.S. Trustee’s office, investigation by statutory committees, and numerous reporting and other transparency requirements. Therefore, while the Bankruptcy Court noted the unions were correct that ACS and Navillus still largely shared the same management, business purpose, equipment and customers after the petition date, these commonalities became “less significant under the facts and circumstances of [ACS’s bankruptcy] case.”


The Bankruptcy Court’s heavy reliance on the change of circumstances caused by the bankruptcy filing, the CRO’s related testimony, and how many of the alter ego factors still cut in favor of the unions’ and union funds’ position begs the question: Are a bankruptcy filing and appointment of a CRO sufficient to disentangle alter egos? If so, similarly situated entities obtaining an alter ego judgment against a company could face significant difficulty collecting such judgments.


It would be premature to draw sweeping conclusions from one case and one set of facts. That said, this budding issue is intriguing, and labor lawyers, bankruptcy attorneys and their respective clients should monitor how this legal landscape develops. Some clarity may arise on these issues in the near future, as the Bankruptcy Court’s decision is currently on appeal directly to the 2nd Circuit Court of Appeals.


Reposted from Construction Executive, June 2018, a publication of Associated Builders and Contractors. © Copyright 2018. All rights reserved.

Trade creditors should take notice when any United States Court of Appeals rules on the applicability of a preference defense. Well, the United States Court of Appeals for the Third Circuit is no exception, particularly because the United States Bankruptcy Court in Delaware, where many large commercial Chapter 11 cases are filed, is in the Third Circuit.


The Third Circuit’s recent ruling, in Burtch v. Prudential Real Estate & Relocation Services, Inc., et al., provides important guidance to trade creditors, seeking to mitigate their preference risk, on the applicability of the ordinary course of business (“OCB”) and subsequent new value (“SNV”) defenses. Bottom line: while a creditor’s efforts to collect its past due claim, such as by changing terms, imposing a credit hold, and/or applying other collection pressure, might increase the likelihood of collection, these actions might also have the unintended consequence of frustrating the creditor’s ability to prove the OCB defense (and increasing the creditor’s preference liability) for payments that might have otherwise been regarded as ordinary course transactions.

Trade and other unsecured creditors may consider joining an involuntary bankruptcy petition as a means to obtain payment of their claims. However, they should carefully weigh their decision and consider section 303(b)(1) of the Bankruptcy Code, which conditions a creditor’s eligibility to join an involuntary petition on its claim not being subject to a bona fide dispute as to liability or amount. 


A recent decision by the United States District Court for the District of Nevada, in State of Montana Department of Revenue v. Blixseth (the “Blixseth Court”), has fleshed out the meaning of a bona fide dispute as to the amount of a petitioning creditor’s claim and serves as a stark warning to creditors contemplating joining an involuntary bankruptcy petition. The Blixseth Court upheld the dismissal of an involuntary petition based on the disqualification of two petitioning creditors whose claims were found to be subject to a bona fide dispute as to amount because they were partially disputed. Bottom line, this decision raises the bar for creditors filing an involuntary bankruptcy petition. Creditors should make sure their claims are wholly undisputed or risk dismissal of the petition that can expose them to sanctions.

Trade creditors dealing with financially troubled customers often have difficulty collecting their claims. Unpaid sellers and service providers must refrain from collection efforts against a buyer that files for bankruptcy unless specifically authorized to take action by the bankruptcy court or the Bankruptcy Code. Instead, they frequently have a general unsecured claim against the buyer in bankruptcy with the right to file a proof of claim with the bankruptcy court. Trade creditors usually obtain little or no recovery on their unsecured claims because the value of the debtor’s assets is frequently significantly reduced when they are liquidated in bankruptcy. In addition, the Bankruptcy Code’s priority rules require the full payment of more senior secured and administrative priority claims before any distribution can be made to holders of general unsecured claims. Further, due to the inherent delays in administering a typical bankruptcy case, any dividend will likely only be received long after a bankruptcy case is filed.

Material and service providers dealing with a financially distressed subcontractor on a construction project frequently use a joint check agreement as a risk mitigation tool. The holding of the United States District Court for the Eastern District of Virginia (the “Court”), in Myers Controlled Power, LLC v. H. Jason Gold, in his capacity as trustee for The Truland Group, Inc., et al. (In re The Truland Group, Inc., et al.) (the “Truland Case”), is a cautionary tale about the utility of a joint check arrangement that was entered into during the 90-day preference period.


Truland Walker Seal Transportation Inc. (“TWST”), a subcontractor on a largescale construction project, chose Myers Controlled Power, LLC (“Myers”) to supply certain electrical equipment and switches. The Court held that a joint check, issued by the general contractor on the project and payable to Myers and TWST pursuant to a joint check agreement, that Myers had received shortly before TWST had filed its bankruptcy case, was recoverable as a preference. The Court relied on TWST’s entry into the joint check agreement during the 90-day preference period, which subjected Bottom line, while Myers thought it was mitigating its risk by entering into a joint check agreement and collecting the proceeds of a joint check, Myers instead found itself embroiled in, and then losing, a very expensive and time-consuming preference litigation. And, this unfortunate result was avoidable (no pun intended)!

The fastest prepacks (i.e., a prepackaged Chapter 11 plan of reorganization for which votes were solicited by the debtor prior to the filing of the debtor’s Chapter 11 petition) are getting faster—a lot faster. Three years ago, Roust Corporation set a blistering record in the Southern District of New York when it filed for Chapter 11 relief on Sunday, Dec. 30, 2016, and confirmed its prepack only seven days later. See In re Roust Corp., Case No. 16-23786 (RDD) (Bankr. S.D.N.Y.). Roust’s time-to-confirmation record in the Southern District held up for only two years. FullBeauty Brands filed for Chapter 11 relief earlier this year on Sunday, Feb. 3, 2019, confirmed its plan the next day, and exited Chapter 11 only three days after that (on February 7). See In re FullBeauty Brands Holdings Corp., Case No. 19-22185 (RDD) (Bankr. S.D.N.Y.). Barely three months later, on May 1, 2019, Sungard Availability Services filed for Chapter 11 relief—then confirmed its plan and exited Chapter 11 the very next day. See In re Sungard Availability Servs. Cap., Case No. 19-22915 (RDD) (Bankr. S.D.N.Y.).


WSG's members are independent firms and are not affiliated in the joint practice of professional services. Each member exercises its own individual judgments on all client matters.

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