On February 16, 2012, J.H. Cohn, LLP, as Unsecured Creditor Agent in the Orleans Homebuilders, Inc. Bankruptcy, commenced mass Chapter 5 preferential transfer recovery litigation in the District of Delaware. The proceedings add insult to injury. Each defendant now knows that the Debtors chose not to invoke the reorganization plan’s “Litigation Protocol” to stop the the avoidance action against it.
The Unsecured Creditor Agent was granted the right to bring avoidance claims, “subject to” the Debtors’ right to “purchase” and thereby stop certain of such claims. The process depended upon three lists, all described in the disclosure schedule. The fist list was prepared by the Creditors Committee and consisted of a preference analysis of potential avoidance actions. The second and third lists were both prepared by the Debtors and consisted of the names of vendors that the Debtors considered to be “Critical Vendors” or whom the Debtors wished to classify as “Additional Vendors”. All three lists were kept confidential. The reasons for the confidentiality of the lists was summarized in the Disclosure Statement as follows:
The schedule of Critical Vendors contains a list of approximately 52 parties and the schedule of Additional Vendors contains a list of approximately 76 parties. The Debtors, the Reorganized Debtors, the Sponsors, the Creditors Committee, and the Unsecured Creditor Agent will keep the respective schedules of the Additional Vendors and the Critical Vendors confidential (although the Debtors will provide copies of these schedules to the Bankruptcy Court and to the United States Trustee for their review) because they have determined that a failure to do so may prejudice the Debtors and/or the Unsecured Creditor Agent (as applicable) in a variety of ways. Initially, the schedules contain the Creditors Committee’s analysis of the potential preference exposure of each of the various Critical Vendors or Additional Vendors, information that should not become public because it would reveal to potential defendants how the Creditors Committee has valued the applicable Avoidance Claim and/or the merits of any defenses thereto. Also, if a vendor were to discover that it has been deemed a Critical Vendor or an Additional Vendor, this could adversely impact the Debtors’ or the Unsecured Creditor Agent’s (as applicable) ability to successfully negotiate a settlement of the applicable Avoidance Claim because it might signal that the plaintiff would be willing to settle such claim at only 40% or 60% (as applicable). Finally, the Debtors are concerned that any vendor that discovers the Debtors did not seek to have it deemed a Critical Vendor or Additional Vendor would consider this as a sign that the Debtors do not sufficiently value their business relationship with the applicable vendor, which could impair the Debtors’ or the Reorganized Debtors’ future activities with such vendor.
The Bankruptcy Code, in 11 U.S.C. § 1123(b)(3)(B), allows a chapter 11 confirmation plan to provide for “retention and enforcement by the debtor, by the trustee, or by a representative of the estate appointed for such purpose, of any claim or interest.” In some jurisdictions, this provision is interpreted require that the language retaining claims be “specific and unequivocal”. Unfortunately, Delaware is not among these jurisdictions.
The Delaware bankruptcy courts have held that a general reservation indicating the type of claims to be preserved provides creditors with any required notice under 11 U.S.C. § 1123(b)(3)(B). However, the type of “conditional reservation” scheme described in the Orleans Homebuilders plan tests the boundaries of even the most liberal interpretations of the requirement of notice of “retention and enforcement” of claims.
Debtor and Bankruptcy Case Overview
Lead Bankruptcy Case Name (Case Number): Orleans Homebuilders, Inc. (10-10684)
Bankruptcy Court District (Division): District of Delaware
Petition Date: On March 1, 2010, the Debtors filed voluntary petitions for relief under chapter 11 of the Bankruptcy Code.
Associated Debtors: Brookshire Estates, L.P., Community Management Services Group, Inc., Greenwood Financial Inc., Masterpiece Homes, LLC, OHB Homes, Inc., OHI Financing, Inc., OHI PA GP, LLC, OPCNC, LLC, Orleans Arizona Realty, LLC, Orleans Arizona, Inc., Orleans at Bordentown, LLC, Orleans at Cooks Bridge, LLC, Orleans at Covington Manor, LLC, Orleans at Crofton Chase, LLC, Orleans at East Greenwich, LLC, Orleans at Elk Township, LLC, Orleans at Evesham, LLC, Orleans at Falls, LP, Orleans at Hamilton, LLC, Orleans at Harrison, LLC, Orleans at Hidden Creek, LLC, Orleans at Jennings Mill, LLC, Orleans at Lambertville, LLC, Orleans at Limerick, LP, Orleans at Lower Salford, LP, Orleans at Lyons Gate, LLC, Orleans at Mansfield LLC, Orleans at Maple Glen LLC, Orleans at Meadow Glen, LLC, Orleans at Millstone River Preserve, LLC, Orleans at Millstone, LLC, Orleans at Moorestown, LLC, Orleans at Tabernacle, LLC, Orleans at Thornbury, L.P., Orleans at Upper Freehold, LLC, Orleans at Upper Saucon, L.P., Orleans at Upper Uwchlan, LP, Orleans at Wallkill, LLC, Orleans at West Bradford, LP, Orleans at West Vincent, LP, Orleans at Westampton Woods, LLC, Orleans at Windsor Square, LP, Orleans at Woolwich, LLC, Orleans at Wrightstown, LP, Orleans Construction Corp., Orleans Corporation, Orleans Corporation of New Jersey, Orleans DK, LLC, Orleans RHIL, LP, Parker & Lancaster Corporation, Parker & Orleans Homebuilders, Inc., Parker Lancaster, Tidewater, L.L.C., Realen Homes, L.P., RHGP LLC, Sharp Road Farms Inc., Stock Grange, LP and Wheatley Meadows Associates
Debtors' Industry Group: Operative Builders (SIC: 1531)
Debtors' Business: Debtors built, developed, marketed, and sold single-family homes, townhouses, and condominiums to various segments of the homebuyer market. The Debtors also regularly purchased land and finished lots for development, improved land for home construction, obtained land entitlements, and invested in joint venture projects with other homebuilders.
Primary Industry Groupings of Defendants: residential building contractors; building material suppliers; other residential construction service providers
Adversary Proceedings Overview
Plaintiff: J.H. Cohn, LLP, as Unsecured Creditor Agent
Number of Proceedings: 257
When Filed: from February 16, 2012 to February 29, 2012
Adversary Proceeding Judge: U.S. Bankruptcy Judge Peter J. Walsh
Plaintiff's Counsel: Duane Morris LLP (Wilmington, DE), lead attorney Lawrence J. Kotler
Avoidance Period: The complaint identifies the preference period as the period "the ninety-day period prior to the filing of the Debtors' bankruptcy cases".