In re Deval Corp.

601 B.R. 725
CourtDistrict Court, E.D. Pennsylvania
DecidedMay 17, 2019
DocketCIVIL ACTION NO. 18-5135
StatusPublished
Cited by2 cases

This text of 601 B.R. 725 (In re Deval Corp.) is published on Counsel Stack Legal Research, covering District Court, E.D. Pennsylvania primary law. Counsel Stack provides free access to over 12 million legal documents including statutes, case law, regulations, and constitutions.

Bluebook
In re Deval Corp., 601 B.R. 725 (E.D. Pa. 2019).

Opinion

KEARNEY, J.

A business debtor working through its Chapter 11 bankruptcy reorganization may act-or fail to act-in ways harmful to the interests of its creditors, and perhaps even itself. Its creditors or other interested parties may respond by acting to protect the debtor's estate and their interests in it. But legal action after already at risk for losing money as a creditor can be costly. To encourage improved distributions possibly resulting from creditors taking an assertive role in a debtor's reorganization, Congress permits creditors to recover administrative expenses incurred in substantially benefitting the debtor's Chapter 11 estate. Creditors, however, may not seek a windfall solely for protecting their own interests. Creditors may recover administrative expenses only for steps transcending their narrow interests.

Properly applying these principles, the Bankruptcy Court found the Chapter 11 debtor failed for months to make efforts to *727secure the necessary sale of its business. Facing the debtor's inertia, one secured creditor eventually filed various motions which, the Bankruptcy Court found, jolted the debtor from slumber to action, eventually resulting in the long-awaited and necessary sale of the debtor and successful reorganization. After evaluating witness credibility and adduced exhibits, the Bankruptcy Court found the secured creditor's conduct transcended its narrow interest and warranted a partial award of administrative expenses and legal fees-but only for the steps providing the substantial benefits to the estate. The Bankruptcy Court declined to award costs for certain expenses it found protected only the creditor's interests.

We find no clear error in the Bankruptcy Court's detailed fact findings based on the Bankruptcy Judge's credibility evaluations of extensive testimony and first-hand supervision of the various actors' conduct in this multi-year case. We affirm the Bankruptcy Court's reasoned award of administrative expenses.

I. Background1

DeVal Corporation "is a high-tech manufacturer of aircraft and weapon support equipment for the United States military."2 As early as 2008 or 2009, Irwin Haber, principal of PDI/DeVal Acquisition, LLC ("PDI"), first became interested in purchasing DeVal.3 In November 2010, DeVal and PDI "entered into an Asset Purchase Agreement" under which PDI would "acquire substantially all the assets of Deval."4 But PDI could not "obtain the necessary financing" for the deal, so "[t]he parties never closed on that Agreement."5 In February 2011, "PDI and Deval entered into a Management Agreement ... which provided for PDI to manage Deval's business pending a closing on the Asset Purchase Agreement."6

"PDI advanced $ 2,011,861.12 to DeVal for operating expenses" during the term of the Management Agreement.7 DeVal repaid $ 1,391,500 of the $ 2,011,861.12 advance, "[l]eaving a balance of approximately $ 620,000."8 PDI obtained a judgment against DeVal for $ 982,933.96, plus continuing interest at 18% per annum.9 PDI domesticated the judgment in Pennsylvania, aware this action may force DeVal to seek bankruptcy protection.10 PDI executed on the judgment "in the early fall of 2016,"11 resulting in BB&T Bank, DeVal's senior secured creditor, "freezing Deval's borrowings, sweeping Deval's cash, and failing to honor Deval's payroll checks."12

PDI forwarded to DeVal in early September 2016 "a two page term sheet proposing that PDI acquire all of Deval's personal *728property through a sale conducted pursuant to Bankruptcy Code section 363, for a purchase price of $ 750,000, subject to higher bids."13 It is not disputed PDI understood closing of the proposed transaction would result in no payment being made to DeVal's general unsecured creditors.14

DeVal's initial steps in bankruptcy court.

Rather than close on a transaction with PDI, DeVal filed a voluntary petition for protection under Chapter 11 of the Bankruptcy Code on November 11, 2016.15 PDI then delivered to DeVal a revised term sheet "in January 2017 propos[ing] that PDI acquire Deval's personal property in consideration of a payment of $ 675,000 to BB&T Bank, $ 25,000 in cash to Deval, and forgiveness of the PDI debt, subject to higher bids."16 This proposed deal would have allowed Deval to retain the equity in its real estate; DeVal's unsecured creditors could have potentially recovered on pending claims in litigation.17 But DeVal "failed to take any action to finalize the deal with PDI for two months."18

On March 9, 2017, DeVal moved for a 60-day "exten[sion] [of] the exclusive periods during which it may file and solicit acceptances to a plan of reorganization."19 DeVal then reported it "had been negotiating the terms and conditions of a sale of substantially all of its assets to an interested party," believing a sale to be "imminent."20 The interested party, however, "grew anxious with the Chapter 11 sale process," requiring DeVal "expand[ ] its sale and marketing efforts identifying other prospective purchases (sic) of its business assets and/or real estate."21 DeVal reported it "plans to reorganize around the anticipated sale transaction and/or the proceeds of such sale and, accordingly, requires additional time within which to facilitate its sale and reorganization efforts."22

PDI's efforts in the bankruptcy.

PDI objected to DeVal's request for an extension of the exclusivity period and alternatively requested appointment of a Chapter 11 trustee.23 PDI argued DeVal "is administratively insolvent and its business is on the verge of collapse."24 DeVal's "cash flow is so tight that the Shareholders have recently deferred one or more paychecks and taken a slight compensation cut along with the rest of the Debtor's workforce of about 29 people."25 PDI argued although DeVal "has two large, and presumably somewhat profitable, long term contracts with the Navy," the company "has no cash with which to purchase the inventory necessary to commence production," despite the contracts "account[ing] for 50% of [DeVal's] normalized sales volume."26 DeVal "delivered minimal, if any, production units to date and the contracts remain stalled and are classified by the *729Navy in a 'delinquency status.' "27 PDI argued the contracts faced "imminent danger of cancellation."28

On April 4, 2017, Judge Chan extended "[t]he period during which [DeVal] has the exclusive right to file a plan of reorganization," to April 24, 2017 and extended "the period during which [DeVal] has the exclusive right to solicit acceptances of such plan" to June 23, 2017.29

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Cite This Page — Counsel Stack

Bluebook (online)
601 B.R. 725, Counsel Stack Legal Research, https://law.counselstack.com/opinion/in-re-deval-corp-paed-2019.