On August 23, 2017, Judge Shannon of the Delaware Bankruptcy Court issued an order that is a reminder that this is a court of equity – and that at the end of the day, he will act equitably.  A copy of Judge Shannon’s opinion (the “Opinion”) is available here.  Mr. Welsh filed the complaint that led to this Opinion, seeking damages for emotional distress, and punitive damages, for alleged violations of the automatic stay.

Brian Welsh is a debtor in bankruptcy case no. 14-11503 in the Bankruptcy Court for the District of Delaware.  On April 13, 2012, despite his mortgage being in default, Bank of America (“BofA”) mistakenly recorded a satisfaction of mortgage.   On February 7, 2014, BofA
filed a complaint in the Superior Court in the State of Delaware to set aside the Satisfaction.  On June 18, 2014, prior to any disposition in the Superior Court litigation, Mr. Welsh filed his Chapter 13 petition. On November 3, 2014, in order to protect its interest, BofA filed a proof of claim on account of the mortgage.  In response to an adversary proceeding seeking to avoid BofA’s claim, the Court issued a decision on October 1, 2015, in which it held that a bona fide purchaser would not have been on notice of the Superior Court litigation as of the Petition Date, and the lien was therefore avoided pursuant to Section 544(a)(3).  At that time, Judge Shannon said that Mr. Welsh “will benefit mightily due to [Defendant’s] honest mistake”, in essence obtaining “a house for free”.

As the facts are provided by Judge Shannon in the Opinion, it appears that he would be inclined to rule that BofA did violate the automatic stay.  This is reinforced by his denial of the defendants’ motion to dismiss the complaint.  He does, however, issue a parting word of guidance to the parties that makes exceptionally clear that the Debtor should not expect to receive any amount of damages due to BofA’s violation of the automatic stay.  “Candor requires that the Court advise the parties that it is highly unlikely that, at trial, this Court would award damages to the Plaintiff beyond the free house he has already obtained.”

When I was in law school, I heard numerous times that “pigs get fat and hogs get slaughtered”.  Mr. Welsh got a rich reward due to his handling of his bankruptcy petition – a free home.  Anything more than a free home, which had a mortgage of $205,000, may be more than a judge in a court of equity could in good conscience award.

John Bird practices with the law firm Fox Rothschild LLP in Wilmington, Delaware. You can reach John at 302-622-4263, or jbird@foxrothschild.com.

In the recent decision of Klauder v. Echo/RT Holdings LLC (In re Raytrans Holding, Inc.), Adv. No. 15-50273 (CSS) (Del. Bankr. Aug. 10, 2017), Judge Sontchi granted Defendants’ Motion to Dismiss the Trustee’s Second Amended Complaint, dismissing the Trustee’s claims in their entirety either under collateral estoppel or the doctrine of res judicata.

Procedural Background

Prior to the Raytrans bankruptcy proceeding, creditor Spring Capital Real Estate, LLC (“Spring Capital”) commenced a lawsuit in the Court of Chancery against Defendants Echo/RT Holdings LLC and Echo Global Logistics, Inc. (“Echo Defendants”) and RayTrans Distribution on October 31, 2012, seeking to void as fraudulent conveyances the transfers made to defendants by Holdings and RayTrans Distribution.

The Trustee joined the fraudulent transfer action commenced by Spring Capital in the Court of Chancery. On November 3, 2014, the Trustee asserted crossclaims against the defendants, pursuant to Del. Ch. R. 13(g), “seeking to assert the estate’s interest in, and to void as fraudulent conveyances, the transfers made to defendants by Holdings under Delaware and Illinois state law that were being challenged by Spring Capital. As recoverable by a creditor holding an unsecured claim.”

On December 31, 2013, the Court of Chancery dismissed Spring Capital’s claims with prejudice.  The Trustee then filed Amended Cross-Claims against the Echo Defendants, asserting slightly modified fraudulent transfer claims brought by Spring Capital, under both Delaware and Illinois law, that had also been dismissed by the Court of Chancery.  The Echo Defendants moved to dismiss the Trustee’s claims, which was granted on February 18, 2016, and the Court of Chancery both dismissed the Trustee’s entire Amended Cross-Claim with prejudice and denied the Trustee’s request for leave to amend (the “Dismissal Order”).  On December 12, 2016, the Delaware Supreme Court rejected the appeals filed by the Trustee and Spring Capital and affirmed the Dismissal Order.

Before the Court of Chancery granted the Motion to Dismiss, the Trustee filed the instant adversary proceeding against the Echo Defendants on April 24, 2015, asserting (i) three counts for avoidance of fraudulent transfers pursuant to 11 U.S.C. §§ 548 and 550, (ii) a count for avoidance of preferential transfer pursuant to 11 U.S.C. § 547, (iii) one count for recovery of an avoided transfer pursuant to 11 U.S.C. § 550, and (iv) disallowance of all claims pursuant to 11 U.S.C. § 502(d) and (j)

On November 7, 2016, the Trustee sought leave to amend his complaint. On December 28, 2016, the Court granted the Motion to Amend and the Trustee filed his Second Amended Complaint, now asserting two counts for avoidance of fraudulent transfers under Sections 544, 548, and 550 and added a new breach of contract claim (Count V) and a claim for attorneys’ fees (Count VIII). The original breach of contract claim (Count VI) and accounting claim (Count VII) remain in the Second Amended Complaint.

Analysis

The Court found that Counts I and II (for fraudulent transfer under Sections 544 and 548) were barred under the doctrine of collateral estoppel.  The Court of Chancery previously found that the APA was supported by reasonably equivalent value, and that the APA did not amount to a fraudulent transfer.

The Court likewise dismissed Counts III and IV, seeking the avoidance and recovery of preferential transfers under Sections 547 and 550 of the Bankruptcy Code.  Per the Opinion, the Trustee merely stated that Defendants were “insiders” of the Debtor, but offered no factual support for such a conclusion in the Second Amended Complaint.

Finally, the Court dismissed Counts V (breach of contract and judicial estoppel), VI (breach of contract), VII (accounting) and VIII (breach of guaranty and attorneys’ fees) under the doctrine of res judicata.  The Court noted that for the past three years, the Trustee and the defendants have been litigating before the Court of Chancery and then on appeal to the Delaware Supreme Court, and that the “basis of the entire adversary proceeding, and the prior Court of Chancery litigation, was the APA.”  Accordingly, the Court dismissed the Trustee’s Second Amended Complaint in its entirety.

Carl D. Neff is a partner with the law firm of Fox Rothschild LLP.  You can reach Carl at (302) 622-4272 or at cneff@foxrothschild.com.

In a decision signed July 26, 2017 in the Nephrogenex bankruptcy (case 16-11074), Judge Gross of the Delaware Bankruptcy Court approved of the application of the Debtor’s investment banker for a success fee over the objection of, among others, the Debtor and the purchaser of all the reorganized debtor’s equity. Judge Gross’s opinion is available here (the “Opinion”).

In this case, the Debtor hired an investment banker (“CS”), which was duly approved by the Court.  Part of CS’s compensation included a “Sale Transaction” fee which would be earned in the event of a Sale Transaction.  The term Sale Transaction was broadly defined, Opinion at *4, and included:

“any transaction or series of transactions involving (a) an acquisition, merger, consolidation, or other business combination pursuant to which all or substantially all of the business assets, subsidiaries, divisions, business segments, operations, securities, or equity interests of the Company are, directly or indirectly, combined with another company; (b) the acquisition, directly or indirectly, by a buyer or buyers. . . of equity interests or options, or any combination thereof constituting a majority of the then outstanding economic interests in the Company. . .”  Opinion at *4.

As part of the Plan of liquidation, the equity of the reorganized debtor would be transferred to one of its creditors as satisfaction of that creditor’s claim.  After the transfer of equity, CS filed its fee application alleging that the release of the claim, with a post-distribution value of approximately $2 million (the claim was for $4,312,698.51 and the estimated distribution was 49.5%, Opinion at *2-3), was a Sale Transaction, triggering its success fee.

After reviewing all the relevant documents and hearing the testimony of the principle of CS, Mr. Cassel, Judge Gross agreed with CS, holding that the equity transfer satisfied the definition in CS’s engagement documents.  The one wrinkle that the objecting parties tried to use to oppose the the payment, is that CS’s retention agreement provided that the success fee would be paid out of the proceeds of the Sale Transaction, and there were no proceeds from this transaction.  Judge Gross determined that this was not a necessary requirement of compensation on the basis of two parts of the engagement agreement.  First, “the Engagement Agreement does not provide that the Sales Transaction Fee can only be paid if the Sales Transaction generates cash.”  Second, “the Engagement Agreement defines ‘Sale Consideration’ to include ‘(y) the principal amount of all indebtedness for borrowed money or other liabilities of the [Debtor] or [Debtor] related entity as applicable, as set forth on the most recent balance sheet, or in the case of a sale of assets, all indebtedness for borrowed money or other liabilities assumed, cancelled, exchanged, or forgiven by a third party. . . .'”  Opinion at *8.

Because people constantly try to find ways to get around definitions to maximize their profit, attorneys, like those representing CS, often draft language as broad (or narrow) as possible to best protect their client.  In this case, was the recipient of the reorganized debtor truly intending to buy the company?  Probably not.  However, CS’s attorney’s careful drafting of their retention agreement helped ensure that even if the acquiring company was trying to avoid the success fee, CS still received it.  The takeaway in this Opinion is, if you represent the retained professional, to make sure there is no language disallowing a fee for some reason, like a lack of cash in the consideration received.

John Bird practices with the law firm Fox Rothschild LLP and is resident in Portland, Oregon. You can reach John at 302-622-4263, or jbird@foxrothschild.com.

In a decision signed July 17, 2017 in the Our Alchemy, LLC bankruptcy (case 16-11596), Judge Gross of the Delaware Bankruptcy Court granted a trustee’s partial motion to dismiss a complaint, holding that a creditor cannot assert general claims against a Chapter 7 Trustee in his official capacity (essentially a derivative action meant to enrich the creditor body) . Judge Gross’s opinion is available here (the “Opinion”).  In the adversary proceeding in which this Opinion was issued, Nu Image, Inc (“NI”) sought to recover from the chapter 7 trustee, George L. Miller (the “Trustee”), alleging that he breached his fiduciary duty by “(i) failing to exploit the Agreements, (ii) delaying the request for permission to sell the estate’s interests and assets, (iii) letting the time to assume or reject the Agreements lapse, and (iv) establishing an utter indifference to the effect of his actions on the estate’s creditors, particularly Nu Image.”  Opinion at *6.

The Debtor’s business model involved distributing, or “exploiting”, movies for filmmakers.  The Debtor entered into agreements to distribute 163 films owned by NI.  Opinion at *2.  In its agreement with NI, as with other film owners, the Debtor contracted to share the profits of film distribution.  The first claim of the Complaint  asserts that the Trustee failed to take action for the benefit of all the Debtor’s creditors. Opinion at *9

Unfortunately for NI, suing a trustee in its professional capacity is, by definition, a general claim that would be paid out of the estate’s corpus.  “In the Third Circuit individual creditors may not assert general claims because they belong to all creditors.”    Opinion at *7 (quoting PHP Liquidating, LLC v. Robbins (In re PHP Healthcare Corp.), 128 Fed. Appx. 839, 844-45 (3d Cir. 2005)).  Further, in the Third Circuit, a creditor does not have standing to assert claims for damages alleged to have been caused to the creditor body at large without prior permission of the bankruptcy court.  Opinion at *9.  In the instant case, NI had not requested court approval to assert a claim against the Trustee for breach of his duty, and accordingly had no standing to assert the first cause of action contained in its complaint.

With no further ado, the Court granted the motion to dismiss the fiduciary duties claim of the complaint.  Judge Gross then extended the Trustee’s deadline to respond to the other counts in the complaint and to assert any compulsory counterclaims.

John Bird practices with the law firm Fox Rothschild LLP in Wilmington, Delaware. You can reach John at 302-622-4263, or jbird@foxrothschild.com.

We have previously posted about a couple major milestones for Green Field Energy – here Green Field Energy Files for Bankruptcy Protection in Delaware and here: Green Field Energy Services – Preference Actions Filed.  In this Opinion, published June 23, 2017, the Court denied the defendants Motion to Abate (or stay the action).  A copy of the Opinion is available here.

Alan Halperin, the Trustee of the GFES Liquidation Trust (the “Trustee”), filed a complaint alleging that the defendant, Moreno, received a fraudulent transfer, and that its subsidiary breached two contracts requiring the purchase of preferred stock to fund GFES.  The Court denied a motion to dismiss and “considerable” discovery has taken place. A trial on the Trustee’s motion for partial summary judgment is scheduled to begin on December 11, 2017.

One year after the Trustee commenced the adversary proceeding, defendants sought leave to file a third-party complaint against GE, alleging that it was liable for contribution. The Court denied the Third Party Motion, holding that it did not have subject matter jurisdiction. On July 25, 2016, defendants filed with the District Court an appeal motion and notice of interlocutory appeal to enable them to take an interlocutory appeal from the Court’s denial of the Third-Party Motion. The Appeal Motion has been fully briefed and remains pending.  On November 22, 2016, defendants filed the Withdrawal Motion so they can add GE as a party and avoid the Court’s jurisdiction limitation. The Withdrawal Motion is pending in the District Court.  Now, the defendants have moved for the Bankruptcy Court to “Abate”, or stay, the adversary proceeding pending the District Court’s decisions.

Judge Gross cited Am. Classic Voyages Co. v. Westaff (In re Am. Classic Voyages Co.), 337 B.R. 509, 511 (D. Del. 2006), in holding that courts must consider four other factors on a motion to withdraw the reference, which the Court is weighing on the issue of the likelihood of success. They are (1) promoting uniformity of bankruptcy administration, (2) reducing forum shopping and confusion, (3) fostering economical use of debtor-creditor resources and (4) expediting the bankruptcy process.

While Judge Gross examines each factor in turn, holding that defendants failed to carry their burden for each, it appears that the greatest weight arises from the significant time that defendants allowed to pass prior to moving to join GE and the ability to sue for contribution outside of the Bankruptcy Court.

John Bird is a bankruptcy attorney with the law firm of Fox Rothschild LLP.  John is admitted in Delaware and regularly practices before the United States Bankruptcy Court for the District of Delaware. You can reach John at (302) 622-4263 or at jbird@foxrothschild.com.

On June 13, 2017, Judge Kevin Gross of the Delaware Bankruptcy Court issued an opinion granting in part and denying in part BMW’s motion to dismiss a complaint filed by Emerald Capital Advisors Corp., in its capacity as trustee for FAH Liquidating Trust – established in the Fisker bankruptcy proceedings.  A copy of the Opinion is available here.

Judge Gross addresses a large number of issues in the Opinion, including extraterritorial transfers, the findings necessary to support a motion to dismiss, and the relevant statute of limitations.  The primary holding in the Opinion, was that for the majority of the causes of action alleged by the plaintiff, the statute of limitations has expired – resulting in granting the motion to dismiss as to $31,786,216.13 and denied to the remaining $793,761.87.  The one major caveat and the most interesting aspect of the decision involves the plaintiff’s claim for unjust enrichment.

Judge Gross spent less than two pages of the 26-page Opinion in denying the motion to dismiss as to the count of unjust enrichment in the complaint.  Judge Gross cited to Halperin v. Moreno, (In re Green Field Energy Svcs., Inc.), 2015 WL 5146161 at *10 (Bankr. D. Del. Aug. 31, 2015) in holding that a claim for unjust enrichment can survive a motion to dismiss where it is plausible that the plaintiff’s other claims may fail and leave the plaintiff without a remedy at law.

It is clear however, that at the pleading stage it is entirely acceptable to pursue alternative theories.  Lass v. Bank of Am., N.A., 695 F. 3d 129, 140 (1st Cir. 2012).  It is also well established that a plaintiff may plead alternative claims for relief even where the pleading contains claims for breach of contract and unjust enrichment.  Pedrick v. Roten, 70 F. Supp. 3d 638, 653 (D. Del. 2014) (citing Corbin on Contracts § 66.10 (2014) for the proposition that “[e]xpectancy damages and restitution will not ordinarily be given as concurrent remedies for the same injury, although they may be pleaded as alternatives”).   The unjust enrichment claim in Count V is significant because it keeps alive the claim for the entire amount which the Trustee has placed at issue, namely, $32,579,798.87.

Opinion at *25.  Clearly, the fact that the Bankruptcy Court is a court of equity is clearly on display in allowing the unjust enrichment count survive, specifically for the purpose of ensuring that a plaintiff has a remedy at law in the failure of its other claims.  In this case, claims totaling $31 million that would otherwise have been dismissed survive to be disputed another day.  I have little doubt that trustees who had not been including unjust enrichment counts in their preference complaints will quickly make an adjustment.

John Bird is a bankruptcy attorney with the law firm of Fox Rothschild LLP.  John is admitted in Delaware and regularly practices before the United States Bankruptcy Court for the District of Delaware. You can reach John at (302) 622-4263 or at jbird@foxrothschild.com.

On May 8, 2017, Judge Gross ruled on a Motion to Compel Production of Documents in the Haggen bankruptcy.  Judge Gross’ opinion (the “Opinion”) addresses the conflict when a party is acting on another’s behalf and that entity claims “the oldest of the common law privileges”.  Opinion at *5.  A copy of the Opinion is available here.

In the Haggen bankruptcy, the Committee, the Debtors and the Defendants entered into stipulations granting the Committee derivative standing to bring an adversary proceeding against Defendants.  The Committee served discovery on the Debtors and the Debtors withheld nearly 1,000 documents on the basis of attorney-client privilege and attorney work-product doctrine.  The issue is as stated by Judge Gross: “[T]he Committee is acting on behalf of the Debtors. Yet it does not have access to all of Debtors’ documents which are or may be relevant to the matters it raises in the Complaint.”  Opinion at *5.

In the Opinion, Judge Gross analyzed three key precedents related to the issue of whether the Committee, acting in place of the conflicted Debtors, could obtain discovery from the Debtors:  Teleglobe Communications v. BCE, Inc. (In re Teleglobe Communications Corp.), 493 F. 3d 345 (3d Cir. 2007); Garner v. Wolfinbarger, 403 F. 2d 1093 (5th Cir. 1970) (“Garner”); and Commodity Futures Trading Comm’n v. Weintraub, 471 U.S. 343 (1985) (“Weintraub”).

Judge Gross’s analysis under Weintraub begins on page 6.  He concludes that “the Committee, suing on behalf of the Debtors, does not have access to privileged documents. The foregoing is true even though the Debtors are not operating and the Committee’s recovery, if any, may be on behalf of the estate as a whole. Weintraub therefore applies to chapter 7 trustees but not to Committees.”  Opinion at *8-9.

The discussion of Garner begins on page 9.  Judge Gross determined that if the Committee could show “cause” as to why the attorney-client privilege should be breached.  However, the finding of Garner was limited by Teleglobe.  The Teleglobe discussion begins on page 10.  In Teleglobe, the Third Circuit “added to the joint representation issue this: were the debtors insolvent or in the zone of insolvency when the privileged communication occurred?”  Opinion at *11.  Judge Gross ends his discussion of piercing the attorney-client privilege by denying the relief sought and stating that “If Debtors were insolvent at the time of the communications, the Committee must prove that they were. Perhaps the Committee will be able to prove insolvency at a later date but for now the Committee raises only conjecture and no proof.”  Opinion at *12.

To summarize, Judge Gross concludes that “Weintraub does not apply to the Committee but only to chapter 7 trustees; that Garner affords relief but only on a finding of insolvency; and that it is Teleglobe which requires insolvency without which there is no fiduciary duty owed to creditors.”  Opinion at *13

Judge Gross very quickly reviewed the arguments on the work-product doctrine, finding that as described by the Debtors and Defendants, documents withheld on the basis of the work product doctrine shall be produced, subject to the Debtors proving that they prepared the withheld documents in anticipation of litigation.  Opinion at *13.

John Bird is a bankruptcy attorney with the law firm of Fox Rothschild LLP.  John is admitted in Delaware and regularly practices before the United States Bankruptcy Court for the District of Delaware. You can reach John at (302) 622-4263 or at jbird@foxrothschild.com.

On September 3, 2014, Brent Williams, the Plan Trustee (“Trustee”) for Touch America Holdings, Inc., filed a complaint initiating an adversary proceeding against, among others, AT&T Corp. (AT&T”).  In a 36 page decision dated April 25, 2017, Judge Carey of the Delaware Bankruptcy Court granted AT&T’s motion for summary judgment, bringing the litigation to an end.  Judge Carey’s opinion is available here (the “Opinion”).  The dispute hinged on a number of contracts entered into in Touch America’s bankruptcy, all of which had been approved by the Court.

Judge Carey’s Opinion

Judge Carey’s Opinion begins with a 20 page recitation of undisputed facts.  He then provides an overview of the standard for summary judgment before addressing the decisive contract language.  He begins with the primary factor that can prevent a summary judgment ruling in a contract interpretation case – ambiguity.  “In a dispute over the meaning of a contract, the threshold question is whether the contract is ambiguous.”  Opinion at *26 (quoting Lockhead Martin Corp. v. Retail Holdings, N.V., 639 F.3d 63, 69 (2d Cir. 2011)).  “If a contract is unambiguous, the court should assign the plain and ordinary meaning to each term and interpret the contract without the aid of extrinsic evidence.”  Id. (quoting Alexander & Alexander Servs. v. These Certain Underwriters at Lloyd’s, 136 F.3d 82, 86 (2d Cir. 1998)).

Despite the Trustee’s argument that there was ambiguity in one of the contracts at issue (which seems to undercut the Trustee’s argument for summary judgment), Judge Carey held that “the fact that something is not stated explicitly does not mean that the language of the contract is ambiguous. I do not find the pertinent language to be ambiguous, and will assign the plain and ordinary meaning to each term and interpret the contracts without the aid of extrinsic evidence.”  Opinion at *28.

After summarizing the extrinsic evidence provided by the parties, Judge Carey held that “the terms of the SPC Settlement Agreement, as well as the other agreements at issue, [are] unambiguous. Accordingly, I will not consider the extrinsic evidence introduced by any of the parties.”  Opinion at *35.  In one paragraph, he cited to each of the controlling contract provisions to resolve this conflict, holding that the explicit, unambiguous language of the contracts and agreements at issue warranted a ruling on summary judgment in favor of AT&T.

One of the key issues, is language included in one of the agreements pursuant to which assets were transferred to AT&T.   New York and other courts consistently maintain that the term “’related to’ … is clear and unambiguous.”  Opinion at *27 (quoting Coregis Ins. Co. v. American Health Found., 241 F.3d 123, 129 (2d Cir. 2001).).  One court has stated that such a provision “constitutes the broadest language the parties could reasonably use.”  Opinion at *28 (quoting Fleet Tire Serv. v. Oliver Rubber Co., 118 F.3d 619, 621 (8th Cir. 1997)).  While the Trustee suggested other possible meanings of the language, Judge Carey held that those arguments were insufficient to create an ambiguity, as the alternative interpretations are simply not reasonable.  Id.

If a contract calls for the broadest language that parties could reasonably use, it is likely that the party for whose benefit that language was used will win the day.  No matter how effective a litigator you employ, the attorneys drafting a contract have more impact on the outcome of future litigation.  It can seem expensive to have a comprehensive contracted created.  Yet, one has but to consider how much more this litigation would have cost if AT&T lost on its motion for summary judgment, to realize that the time of the drafters of these agreements was a worthwhile expense.

John Bird practices with the law firm Fox Rothschild LLP. You can reach John at 302-622-4263, or jbird@foxrothschild.com.

In a 24 page decision released April 13, 2017, Judge Walrath of the Delaware Bankruptcy Court denied a motion for summary judgment in a preference action brought by Charles Stanziale as the chapter 7 Trustee of Powerwave Technologies against Superior Technical Resources – Adversary Proceeding Case No. 15-50085.  Judge Walrath’s opinion is available here (the “Opinion”).  Judge Walrath held that “genuine factual disputes precluding summary judgment”.  Opinion at *6.  While we have summarized a large number of opinions on preference actions, this is one of the most informative opinions released by the Delaware Bankruptcy Court in recent memory.

The Opinion provides an in depth analysis of the most common defense to preference actions – the Ordinary Course of Business defense.  Judge Walrath discusses the Subjective test in detail and a quick overview of the Objective test, quickly passing over the New Value defense as “the Court must deny the Defendant’s Motion for Summary Judgment as to the new value defense until the ordinary course of business defense is determined.”  Opinion at *23.

Judge Walrath analyzes how a number of different factors contribute to a determination of whether a transaction was made in the ordinary course of business under the Subjective Test.  As she says, “[W]hether a given transaction was within the subjective ordinary course of business that had developed between the parties is a broad, fact-based inquiry requiring historic examination of the parties’ pre-preference period relations.”  Opinion at *10 (quoting Moltech Power Sys., Inc. v. Tooh Dineh Indus., Inc. (In re Moltech Power Sys., Inc.), 327 B.R. 675, 680 (Bankr. N.D. Fla. 2005)).  The factors she considers are:

  1. The Historical Period: “It is well-established that the historical period should encompass ‘the time period when the debtor was financially healthy.’” Opinion st *9 (citing Davis v. R.A. Brooks Trucking Co. (In re Quebecor World (USA), Inc.), 491 B.R. 379, 387 (Bankr. S.D.N.Y. 2013)).
  2. Ordinariness of the Transfers  “Payments made during the preference period do not have to ‘possess a rigid similarity to each past transaction’; however, there must be ‘some consistency.’” Opinion at *10-11 (quoting Menotte v. Oxyde Chem., Inc. (JLS Chem. Corp.), 424 B.R. 573, 581 (Bankr. S.D. Fla. 2010)).  Judge Walrath addresses five different methods for comparing transacitons within the preference period against those made prior to the preference period.
    1. Range Method: Judge Walrath opined that “there is a material issue of fact as to the proper baseline and the range method’s applicability.”  Opinion at *12.  Judge Walrath compared a number of different cases in which the Range Method was discussed.  In some, it was applied (see, e.g., Am. Home Mortg., 476 B.R. 124, 138 (Bankr. D. Del. 2012)), in others, it was determined to be too broad (see, e.g. Quebecor, 491 B.R. at 387).  Judge Walrath held that “there are genuine disputes of material fact regarding the range method’s appropriateness, which preclude summary judgment in this case.”  Opinion at *14.
    2. Batch Method: When multiple invoices are paid with each payment, a party can calculate the average age of invoices paid in each batch and, from these, derive a standard deviation range, which can then be compared to the payments made in the preference period.
    3. Days Sales Outstanding Method: The DSO Method involves multiplying the total amount of an invoice by the number of days that it took to be paid. That number is then divided by the total amount of the invoices in that batch.
    4. Inter-quartile Range Method: This method involves calculating the range and excluding the fastest and slowest paid quartiles (25%), and considering only the range that includes 50% of pre-preference payments.  There is no precedent in Delaware for the use of this methodology.
    5. Standard Deviation Method: This method involves calculating the average days between invoice and payment, and calculating the standard deviation of the average days to payment.  The argument is that all payments made within one standard deviation of the average are ordinary, and the remainder are not.
  3. Unusual collection activity: “Subsection 547(c)(2) protects those payments that do not result from unusual or extraordinary debt collection practices.” Opinion at *17 (citing McCarthy v. Navistar Fin. Corp. (In re Vogel Van & Storage, Inc.), 210 B.R. 27, 36 (N.D.N.Y. 1997)).  This includes a change in credit terms and defendant’s collection activities.

With all of these issues involving disputes of material fact, Judge Walrath opined that she was unable to issue summary judgment as to whether the subjective test protects any of the allegedly preferential payments from recovery.

Judge Walrath quickly moves through the objective test, holding that (1) a sufficiently detailed basis is needed to establish the relevant industry, (2) expert testimony is not required, and (3) there should be sufficient statistical data or supporting basis for the evidence related to the objective standard.  As the parties disagreed about the relevant industry or NAICS classification, summary judgment could not be entered on this issue either.

While this Opinion doesn’t create precedent that can be used to obtain a final resolution for defendants, it does define the issues that the Court will consider in ruling on a motion for summary judgment.  If you are a bankruptcy practitioner, or the defendant of a preference action, this Opinion should be considered required reading.

John Bird practices with the law firm Fox Rothschild LLP in Wilmington, Delaware. You can reach John at 302-622-4263, or jbird@foxrothschild.com.

Not uncommonly, a preference complaint fails to adequately allege that the transfers sought to be recovered by the trustee were made “for or on account of an antecedent debt owed by the debtor before such transfer was made”, as required under Section 547(b) of the Bankruptcy Code. Thus, when faced with a complaint to recover alleged preferential transfers, a defendant can proceed in one of two ways: (i) file an answer and raise affirmative defenses, or (ii) move to dismiss under Rule 12(b)(6).

Generally, if a motion to dismiss is filed on this basis, the Court will grant plaintiff leave to amend the complaint to adequately assert that such transfers are recoverable under Section 547(b) of the Bankruptcy Code.  But does the analysis change if the trustee files an amended complaint which continues to fail to meet pleading standards, and defendant once again moves to dismiss?

This question was addressed in the recent Delaware Bankruptcy Court decision of Solmonese v. Shyamsundar, et al. (In re AmCad Holdings, LLC, et al.), Adv. No. 15-51979 (Del. Bankr. Apr. 7, 2017).  There, the Liquidating Trustee commenced a lawsuit against defendants, which included former directors and officers of AmCad Holdings, LLC, et al. (“Debtors” or “AmCad”), for breach of fiduciary duty, preferential transfers, and claim disallowance.  The Court previously dismissed the original complaint because it lacked “related-to” jurisdiction over the fiduciary duty claims, and because the preference claims were not adequately pled.  The Liquidating Trustee was permitted to file an amended complaint to address the deficiencies as it related to the preference claims.

The Liquidating Trustee filed the Amended Complaint seeking to avoid and recover $651,496.50 of alleged preferential transfers made to Visagar M. Shyamsundar (“Defendant”) within one year of the petition date pursuant to sections 547 and 550 of the Bankruptcy Code.  Defendant again moved to dismiss, asserting that the Amended Complaint continued to fail to adequately allege that the transfers were made for or on account of an antecedent debt.

The Court granted dismissal as to five of the alleged transfers to Defendant for “car payments,” “payroll,” and “records storage”, totaling approximately $100,000. The Court held that the allegations did not support a claim that they were made in satisfaction of an antecedent debt owed to the Defendant.

In addition, the Court separately dismissed these transfers from the Amended Complaint because the Liquidating Trustee failed to satisfy his burden of demonstrating insolvency.  While insolvency is presumed within the 90 day period prior to the bankruptcy filing, the burden rests with a trustee to adequately allege insolvency for claims arising before such 90 day period.

Finally, the Court denied the Liquidating Trustee’s request to further amend as to the aforementioned transfers.  The Court noted that the Liquidating Trustee was put on notice of his deficiencies when the Court previously granted dismissal of the original Complaint, and did little to correct the deficiencies.  See Krantz v. Prudential Invs., 305 F.3d 140, 144 (3d Cir. 2002) (denying leave to amend previously amended complaint where motion to dismiss original complaint put plaintiff on notice of deficiencies, yet plaintiff failed to rectify them in his first amended complaint).  Accordingly, dismissal was granted with prejudice as to the five aforementioned transfers.

Carl D. Neff is a partner with the law firm of Fox Rothschild LLP.  You can reach Carl at (302) 622-4272 or at cneff@foxrothschild.com.