Two weeks ago,  preference actions were commenced against a long list of defendants in the New Century Mortgage (“New Century”) and Tweeter Home Entertainment (“Tweeter”) bankruptcies.  The plaintiff in the New Century preference actions is Alan M. Jacobs, the liquidating trustee authorized under New Century’s Second Amended Plan of Liquidation to commence and prosecute preference actions.  The preference actions in the Tweeter bankruptcy, on the other hand, were brought by the debtor instead of a liquidating trustee.

Summary of the New Century Bankruptcy

New Century filed for bankruptcy in Delaware on April 2, 2007.   According to New Century’s Declaration in Support of Chapter 11 Petitions (the “Declaration”),  New Century, through its subsidiaries, originated, purchased and sold mortgage loans nationwide.  New Century also serviced some of the loans they originated and sold.

New Century operated both wholesale and retail mortgage divisions. The wholesale division purchased loans through mortgage brokers and lenders. In the months prior to filing for bankruptcy, New Century’s wholesale division operated in 34 locations in 20 states. At the same time, New Century’s retail division, which originated loans directly with consumers, was operating out of 262 branch offices employing over 1,700 retail loan officers.

As stated in its Declaration, 86% of New Century’s loan origination were subprime loans in the year prior to filing for bankruptcy. Once housing prices begin to decline, New Century’s borrowers began to default in greater numbers.

Summary of the Tweeter Bankruptcy

Tweeter’s slide into bankruptcy was more gradual than New Century.  According to Tweeter’s Declaration in Support of Bankruptcy Petitions,  the company began experiencing operational losses for six years prior to filing for bankruptcy.  Tweeter contends that one of the largest factors to hurt is profitability was the increase in competition from “format stores” such as Walmart and Best Buy. As Tweeter’s competitors expanded their footprint in the video products market, competition grew and profit margins declined.  Tweeter’s problems worsened when Best Buy and Circuit City both expanded their in-home design and installation programs.

The Preference Actions

With a petition date of April 2, 2007, New Century filed its preference complaints on the eve of the statute of limitations.  Tweeter, on the other hand, has until June 11 before it runs up against the statute of limitations for preference actions (Tweeter filed for bankruptcy on June 11, 2007).  Tweeter, therefore, may file more preference actions in the months ahead.  The New Century preference actions are before the Honorable Kevin J. Carey, Chief Judge of the United States Bankruptcy Court for the District of Delaware.  The Tweeter preference actions are before the Honorable Peter J. Walsh, former Chief Judge of the Delaware Bankruptcy Court.

In prior posts, I have addressed issues relevant to preference litigation.  These posts address topics such as whether new value must remain unpaid to constitute a defense in a preference action.  To read prior posts on this blog regarding preference litigation click here.