Restructuring

Contributed by Elisa Lemmer
The date on which a debtor files its bankruptcy petition, often called a “petition date” or a “commencement date,” is one of the most integral dates in the debtor’s bankruptcy existence.  It is the debtor’s bankruptcy birthday of sorts and the date from which many deadlines in the Bankruptcy Code are triggered.  Deadlines to bring certain causes of action, to file a plan of reorganization, and to assume or reject certain leases, to name only a few, are based on a debtor’s petition date.  In light of this, can a petition date be modified? Can a bankruptcy judge, with the stroke of the pen, deem a petition date to have occurred earlier than it actually did? Taking it a step further, are petition dates ever automatically made retroactive?
The United States Bankruptcy Court for the District of Delaware in Sunset Aviation, Inc. recently considered this issue when the chapter 7 trustee for various debtors whose cases had previously been substantively consolidated filed a complaint under section 547 of the Bankruptcy Code against a creditor, seeking to avoid as a preference a transfer the creditor received during what the trustee alleged was the debtors’ “preference period.”  Section 547 provides for the avoidance of a prepetition transfer made to a creditor, on or within 90 days before the petition date (known as the “preference period”), on account of an antecedent debt, if the debtor was insolvent and the transfer enabled the creditor to receive more than it would have in a hypothetical chapter 7 liquidation.
The creditor, Shorenstein Company LLC, sought to dismiss the trustee’s complaint, arguing that the trustee had calculated the 90-day preference period incorrectly when he assumed that the applicable petition date under section 547 was that of the first filed of the substantively consolidated debtors.  Instead, Shorenstein stated that the proper petition date from which to calculate the preference period was that of the specific debtor-transferor.  Because the transfer at issue was outside of the debtor-transferor’s 90-day preference period, Shorenstein argued that preference claims against it should be dismissed.  The court’s prior substantive consolidation order, Shorenstein reasoned, did not require a different result because it had not been entered nunc pro tunc (literally, “now for then” in Latin).  In other words, it did not expressly provide that the order was retroactive to the earliest filed debtor’s petition date or that the other debtors’ cases would be deemed to have been filed on the earliest petition date.
Undeterred by the lack of express language in the substantive consolidation order modifying the debtor-transferor’s petition date, the chapter 7 trustee urged the court to find that its order was applicable retroactively anyway.  He contended that substantive consolidation orders are “by nature” retroactive.  The chapter 7 trustee cited to several decisions from courts in the Sixth Circuit holding that substantive consolidation establishes the earliest petition date as the operative date for the purposes of calculating a preference period.  Although the District of Delaware had previously rejected this position, because the United States Court of Appeals for the Third Circuit had not yet ruled on the issue, the chapter 7 trustee urged the bankruptcy court to adopt the Sixth Circuit’s rule.
The bankruptcy court was not persuaded.  First, the court found no basis to stray from the District of Delaware’s previous decisions holding that substantive consolidation is not automatically retroactive to the earliest filed debtor’s petition date.  Second, the court observed that the substantive consolidation order in Sunset Aviation actually contained prospective requirements.  The forward-looking language convinced the bankruptcy court that, if anything, the order was meant to apply prospectively, rather than retroactively. Third, the court distinguished the Sixth Circuit cases cited by the chapter 7 trustee by noting that, in those cases, creditors had regarded the substantive consolidated debtors as “one entity.”  Even though, in Sunset Aviation, the trustee’s substantive consolidation motion contained similar representations, the trustee had not alleged specific facts supporting his assertion.  Having failed to show that Shorenstein had “conflated” the debtors, the bankruptcy court found the Sixth Circuit cases factually inapposite.  Finally, the court observed that the trustee had not requested nunc pro tunc relief in his motion for substantive consolidation.  As such, creditors had not been put on notice and could not be expected to know that substantive consolidation would be applied retroactively or that the petition dates might be altered.  Accordingly, the bankruptcy court dismissed the chapter 7 trustee’s preference claim because the transfer at issue did not fall within the transferring debtor’s preference period.
What if, however, the facts were different and the issue first arose when the chapter 7 trustee moved for substantive consolidation – an extraordinary remedy in and of itself?  Would the court have granted the relief? Should a court grant such relief?  Judge Walsh, in Sunset Aviation, hinted at what his decision might have been by noting, “I do not think it is appropriate to use a nunc pro tunc order to rewrite § 547, which is what the Trustee seeking to do here by extending the preference period beyond 90 days.”  In fact, retroactively modifying a petition date could have a cascading effect throughout the Bankruptcy Code.  For example, claims that were previously “prepetition claims” against a debtor might later be considered administrative expenses.  Similarly, the two-year look back for fraudulent transfer claims under section 548 of the Bankruptcy Code might be broader than some creditors anticipated.  These consequences appear to be a bit draconian.  Yet, remembering the context in which they arise – substantive consolidation – is important.  If debtors’ assets and liabilities are so entangled that unscrambling them would be a practical impossibility or if the debtors’ creditors regarded the debtors as a single entity (each of which are factors courts consider in deciding whether to order substantive consolidation), wouldn’t using different petition dates for substantively consolidated debtors be somewhat arbitrary anyway?  In that context, a “deemed” single petition date for all substantively consolidated debtors does not appear to be as harsh as it might originally seem.
To date, courts have not reached a uniform view as to the effects of substantive consolidation on petition dates.  In the Third Circuit, however, whether substantive consolidation means a “one-size-fits-all” petition date is still a case-by-case analysis.