On August 29, 2017, The Wet Seal, LLC filed preference actions against 67 defendants.  The lead Wet Seal bankruptcy case is Case No. 17-10229 in the Bankruptcy Court for the District of Delaware.  Wet Seal is represented by A.M. Saccullo Legal, LLC and ASK, LLC.

According to the complaints, the Debtors were a national multichannel specialty retailer selling fashion apparel and accessory items designed for female customers aged 18 to 24 years old. The Debtors were comprised of two primary business units; the retail store business and an e-commerce business. Through their retail store business, the Debtors operated approximately 142 retail locations in 37 states, principally in leased-based mall locations. Through their e-commerce business, the Debtors operated an e-commerce site at  and had over 2 million followers on their Facebook page.  As retailers, they had a significant supply chain, comprised of a significant number of suppliers.  The defendants in these preference actions were entities who were alleged to have received payments within the 90-day period immediately preceding Wet Seal’s February 2, 2017 bankruptcy filing.

 

Preference actions are a form of litigation specifically provided for by the Bankruptcy Code which are intended to recover payments made by the Debtor within the 90 days prior to declaring bankruptcy.  The presumption is that the Debtor knew it was going to file bankruptcy, so any payments it made during this 90-day window went to friends and people it wanted to keep happy, and stiffed those the Debtor’s management didn’t like.   Recognizing that these payments aren’t always made for inappropriate reasons, the Bankruptcy Code provides creditors with many defenses to preference actions. Included among these are the “ordinary course of business defense” and the “new value defense.” For reader’s looking for more information concerning claims and defenses in preference litigation, attached is a booklet I prepared on the subject: “A Preference Reference: Common Issues that Arise in Delaware Preference Litigation.”

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.

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.

On July 19-21, 2017, David W. Carickhoff, in his capacity as Chapter 7 Trustee of the Estates of Univita Holdings, et al., filed approximately 46 complaints seeking the avoidance and recovery of allegedly preferential and/or fraudulent transfers under Sections 547 and 550 of the Bankruptcy Code.

Univita Health, Inc. and its affiliated debtors filed voluntary petitions for bankruptcy in the U.S. Bankruptcy Court for the District of Delaware on August 28, 2015 under Chapter 7 of the Bankruptcy Code.  The cases are jointly administered pursuant to Rule 1015(b) of the Bankruptcy Rules.

The various avoidance actions are pending before the Honorable Mary F. Walrath.  The Pretrial Conference has been set for 10/4/2017 at 02:00 PM ET.

For readers looking for more information concerning claims and defenses in preference litigation, attached is a booklet prepared by this firm on the subject: “A Preference Reference: Common Issues that Arise in Delaware Preference Litigation.”

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.

On July 6-7, 2017, Craig Jalbert, in his capacity as Trustee for F2 Liquidating Trust, filed approximately 187 complaints seeking the avoidance and recovery of allegedly preferential and/or fraudulent transfers under Sections 547, 548 and 550 of the Bankruptcy Code (depending on the nature of the claims).  In certain instances, the Trustee also seeks to disallow claims of such defendants under Sections 502(d) and (j) of the Bankruptcy Code.

F-Squared Investment Management and its affiliated debtors filed voluntary petitions for bankruptcy in the U.S. Bankruptcy Court for the District of Delaware on July 8, 2015 under Chapter 11 of the Bankruptcy Code.   The Court confirmed the Debtors’ Joint Plan of Liquidation.  The Liquidating Trust was established in accordance with the Plan and Confirmation Order.

The various avoidance actions are pending before the Honorable Laurie Selber Silverstein.  As of the date of this post, the pretrial conference has not yet been scheduled.

For readers looking for more information concerning claims and defenses in preference litigation, attached is a booklet prepared by this firm on the subject: “A Preference Reference: Common Issues that Arise in Delaware Preference Litigation.”

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.

On June 15, 2017, Curtis R. Smith, as Liquidating Trustee of the Hastings Creditors’ Liquidating Trust, filed approximately 69 complaints seeking the avoidance and recovery of allegedly preferential and/or fraudulent transfers under Sections 547, 548 and 550 of the Bankruptcy Code.  The Liquidating Trustee also seeks to disallow claims of such defendants under Sections 502(d) and (j) of the Bankruptcy Code.

Draw Another Circle, LLC and its affiliated debtors filed voluntary petitions for bankruptcy in the U.S. Bankruptcy Court for the District of Delaware on June 13, 2015 under Chapter 11 of the Bankruptcy Code.   On February 14, 2017, the Court confirmed the Debtors’ Plan.  The Trust was established in accordance with the Plan and Confirmation Order.

The various avoidance actions are pending before the Honorable Kevin J. Carey.  As of the date of this post, the pretrial conference has not yet been scheduled.

For readers looking for more information concerning claims and defenses in preference litigation, attached is a booklet prepared by this firm on the subject: “A Preference Reference: Common Issues that Arise in Delaware Preference Litigation.”

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.

On May 23, 2017, Don A. Beskrone, the chapter 7 trustee for the estate of PennySaver USA Publishing, LLC filed preference actions against 46 defendants.  PennySaver was an iconic company that specialized in the production, printing, and dissemination of a free weekly publication, offering coupons and classified ads to targeted audiences.

By 2013, the Debtors’ print circulation locally targeted 780 zones or regions and reached approximately 9.1 million California households every week. The Debtors’ website, PennySaverUSA.com, received 1 million unique visitors each month.  By 2015, the Debtors encountered financial difficulties, which arose from a number of causes including, among other things: (i) a decline in print advertising market that corresponded with a rise in electronic media and changing consumer habits, and (ii) a related inability of the Debtors to pay their debts as they came due.  Finally, on May 29, 2015 (the “Petition Date”), the Debtors filed for bankruptcy.  Accordingly, the Trustee had until May 29, 2017 to file preference actions in this case pursuant to the statute of limitations contained in the Bankruptcy Code.

These cases have been filed in the Bankruptcy Court for the District of Delaware.  The Trustee is represented by Ashby & Geddes, P.A.

Preference actions are a form of litigation specifically provided for by the Bankruptcy Code which are intended to recover payments made by the Debtor within the 90 days prior to declaring bankruptcy.  The presumption is that the Debtor knew it was going to file bankruptcy, so any payments it made during this 90-day window went to friends and people it wanted to keep happy, and stiffed those the Debtor’s management didn’t like.   Recognizing that these payments aren’t always made for inappropriate reasons, the Bankruptcy Code provides creditors with many defenses to preference actions. Included among these are the “ordinary course of business defense” and the “new value defense.” For reader’s looking for more information concerning claims and defenses in preference litigation, attached is a booklet I prepared on the subject: “A Preference Reference: Common Issues that Arise in Delaware Preference Litigation.”

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.

Starting on April 28, 2017, Craig R. Jalbert, as Distribution Trustee of the Corinthian Distribution Trust, filed approximately 122 complaints seeking the avoidance and recovery of allegedly preferential and/or fraudulent transfers under Sections 547, 548, 549 and and 550 of the Bankruptcy Code (depending upon the nature of the underlying transactions).  The Distribution Trustee also seeks to disallow claims of such defendants under Sections 502(d) and (j) of the Bankruptcy Code.

Corinthian Colleges and its affiliated debtors filed voluntary petitions for bankruptcy in the U.S. Bankruptcy Court for the District of Delaware on May 4, 2015 under Chapter 11 of the Bankruptcy Code.   On August 28, 2016, the Court confirmed the Debtors’ Third Amended and Modified Combined Disclosure Statement and Chapter 11 Plan of Liquidation.  The Corinthian Distribution Trust was established in accordance with the Plan and Confirmation Order.

The various avoidance actions are pending before the Honorable Kevin J. Carey.  As of the date of this post, the pretrial conference has not yet been scheduled.

For preference defendants looking for an analysis of defenses that can be asserted in response to a preference complaint, below are several articles on this topic:

Preference Payments: Brief Analysis of Preference Actions and Common Defenses

Minimizing Preference Exposure: Require Prepayment for Goods or Services

Minimizing Preference Exposure (Part II) – Contemporaneous Exchanges

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.

On March 2, 2017, Cal Dive Offshore Contractors, Inc. (“Cal Dive” or “Debtor”) filed approximately 136 complaints seeking the avoidance and recovery of allegedly preferential and/or fraudulent transfers under Sections 547, 548 and 550 of the Bankruptcy Code.

Cal Dive and its affiliated debtors filed voluntary petitions for bankruptcy in the U.S. Bankruptcy Court for the District of Delaware on March 3, 2015 under Chapter 11 of the Bankruptcy Code.  According to each complaint, Cal Dive “constituted a global marine contractor that provided highly specialized manned diving, pipelay and pipe burial, platform installation and salvage, and well-intervention services to a diverse customer base in the offshore oil and gas industry.”

The various avoidance actions are pending before the Honorable Christopher S. Sontchi.  The pretrial conference has not yet been scheduled.

For preference defendants looking for an analysis of defenses that can be asserted in response to a preference complaint, below are several articles on this topic:

Preference Payments: Brief Analysis of Preference Actions and Common Defenses

Minimizing Preference Exposure: Require Prepayment for Goods or Services

Minimizing Preference Exposure (Part II) – Contemporaneous Exchanges

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 the recent decision of Spizz v. Goldfarb Seligman & Co. (In re Ampal-American Israel Corp.), 2017 WL 75750 (Bankr. S.D.N.Y. Jan. 9, 2017), the United States Bankruptcy Court for the Southern District of New York dismissed a preference complaint filed by a trustee of chapter 7 debtor headquartered in Israel, where the payment was made from the debtor’s Israeli bank to an Israeli supplier.  The Court held that Section 547 of the Bankruptcy Code does not have extraterritorial effect and the transfer did not originate in the U.S.

Within 90 days before bankruptcy, the debtor wired money from the debtor’s Israeli bank account to the supplier’s Israeli bank account, on account of an antecedent debt.  The chapter 7 trustee sued the supplier to avoid and recover the alleged preferential payment.  The supplier asserted that Section 547 could not be applied extraterritorially.

Judge Bernstein observed that the “presumption against extraterritoriality” is a “longstanding principle of American law that legislation of Congress, unless a contrary intent appears, is meant to apply only within the territorial jurisdiction of the United States.”  In Morrison v. Nat’l Australia Bank Ltd., 561 U.S. 247 (2010), the United States Supreme Court outlined a two-step approach to determine whether the presumption forecloses a claim.

First, the court asks “whether the statute gives a clear, affirmative indication that it applies extraterritorially.”  If not, the court must turn to the second step to determine if the litigation involves an extraterritorial application of the statute.  Second, the court determines “whether the case involves a domestic application of the statute, . . . by looking to the statute’s ‘focus.’ . . . [I]f the conduct relevant to the focus occurred in a foreign country, then the case involves an impermissible extraterritorial application regardless of any other conduct that occurred in U.S. territory.”

In applying this analysis, the S.D.N.Y. bankruptcy court first held that the avoidance provisions of the Bankruptcy Code (including Section 547) do not apply extraterritorially.  In so holding, the Court disagreed with the Fourth Circuit’s decision in French v. Liebmann (In re French), 440 F.3d 145 (4th Cir. 2006), which held that Congress intended international application of U.S. fraudulent transfer law.

Next, the S.D.N.Y. Bankruptcy Court ruled that the determination of whether the case involves a domestic or extraterritorial application of section 547 depends on whether the initial transfer came from the United States.  Because the transfer here occurred between a U.S. transferor headquartered in Israel and an Israeli transferee through Israeli bank accounts, the transfer occurred in Israel, and was not domestic.

Therefore, the court concluded that it could not be avoided, and dismissed the trustee’s preference complaint.

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.

From December 15-21, 2016, the Seal123, Inc. Liquidation Trust filed approximately 68 complaints seeking the avoidance and recovery of allegedly preferential and/or fraudulent transfers under Sections 544 and/or 547, 548 and 550 of the Bankruptcy Code (depending upon the nature of the underlying transactions).  The Liquidation Trust also seek to disallow claims of such defendants under Sections 502(d) and (j) of the Bankruptcy Code.

The Seal123, Inc., and its affiliated debtors, filed voluntary petitions for bankruptcy in the U.S. Bankruptcy Court for the District of Delaware on January 15, 2015 under Chapter 11 of the Bankruptcy Code.   On October 30, 2016, the Court confirmed the Debtors’ First Amended Joint Plan of Liquidation.

The various avoidance actions are pending before the Honorable Christopher S. Sontchi.  The pretrial conference has been scheduled for February 28, 2017  at 10:00 AM at US Bankruptcy Court, 824 Market St., 5th Fl., Courtroom #6, Wilmington, Delaware.

For preference defendants looking for an analysis of defenses that can be asserted in response to a preference complaint, below are several articles on this topic:

Preference Payments: Brief Analysis of Preference Actions and Common Defenses

Minimizing Preference Exposure: Require Prepayment for Goods or Services

Minimizing Preference Exposure (Part II) – Contemporaneous Exchanges

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.