Adversary Proceeding Publication
The bankruptcy debtors of Sportco Holdings Inc began filing adversary proceedings against certain creditors in the Bankruptcy Court for the District of Delaware on June 8, 2021.
According to our review of the Bankruptcy Case Docket, between June 8th and June 9th, 2021, there were approximately 68 complaints filed.
The 68 complaints filed seek to avoid and recover allegedly preferential or fraudulent transfers made by the debtors.
The claims against the defendant in this matter include a preference claim and a fraudulent transfer claim.
The defendant (a person, corporation, or entity against whom Sportco Holdings Inc has filed a complaint) is required by the Bankruptcy Code to file an answer or response within 30 days of the Summons issue date. Failure to respond may result in a default judgment in the amount of the lawsuit against the defendant.
A default judgment requires the defendant to refund the entire amount of the claim, and any claims the defendant may have against Sportco Holdings Inc may be disallowed by the court, preventing you from pursuing them.
If your rights are in jeopardy and you have not yet retained counsel, you should do so immediately. Click here to contact us today for support.
Preferential Transfer Claim
Under section 547 of the Bankruptcy Code, preferential payments, also known as preferences, are payments made to creditors (a person or company to whom money is owing) before filing a bankruptcy case that result in the creditor receiving more than they would in the bankruptcy case.
In this case, the payments received by businesses from Sportco Holdings Inc for a period of up to 90 days before filing for bankruptcy may be considered preference payments. This bankruptcy provision allows Sportco Holdings Inc to "clawback" those payments in an attempt to acquire the funds needed to distribute payments equally among the creditors.
Fraudulent Transfer Claim
A Fraudulent Transfer, or otherwise known as Fraudulent Conveyance, is when a business transfers money to another person or company to prevent a creditor from collecting on the debt.
A fraudulent conveyance can be either with the intent to defraud, otherwise known as an actual fraudulent conveyance or without the intent to defraud, although the details of the transaction render it constructively fraudulent. A Fraudulent Transfer claim is often lodged in the alternative to a Preferential Transfer claim to take another stab at the same transactions under a different theory.
As some creditors were paid in full while other creditors received no payment, Sportco Holdings Inc seeks to claw back these payments from its paid creditors as either Preferential Transfers or Fraudulent Transfers to redistribute the money equally among all of its creditors.
There are some defenses that are typically applicable that could be utilized.
For defense against preferential transfer.
Under section 547, there are five elements of preference. If there is a lack of any of the following, we can use this in defense. The five elements are:
To or for the creditor's benefit
There was an antecedent debt (a legally enforceable duty to repay someone with money or property that existed before the moment in question) payable to the creditor.
The complaint was made while the debtor is insolvent.
If the creditor was an insider (someone who has a position in a business), made within 90 days after the petition, or between 90 days and one year. Or if the creditor was an outsider (family members, business partners, etc.)
More than the creditor would have received if the debtor's case was filed in chapter 7 (liquidation).
Ordinary Course of Business – A determination of "ordinary course" entails examining the debtor's and creditor's business activities to demonstrate a consistency of transactions between the preference period and the alleged base period. The ordinariness of the transactions is determined by various factors, the most important of which is the timing of the payments.
New Value – Generally, if the defendant provided goods or services to the debtor after the first alleged preference payment (based on the precise date of the alleged payment) but before the petition date, any such new value may be protected from avoidance.
Contemporaneous Exchange for New Value – This affirmative defense requires that the alleged payment and the value delivered to the debtor were not only intended to be contemporaneous (happening at the same time or very close together) but also were. If the defendant had any security interests or claims on the debtor's property, this defense might also apply.
Ordinary Business Terms – This defense is applied when the alleged payments were within the industry standard of lateness/timing of payments.
For defense against fraudulent transfer.
While the intent to defraud is required for actual fraudulent conveyance, it is not required for constructive fraudulent conveyance.
It is difficult to discard invoices and payments if the agreements cover them. Here are two potential strategies for defending against preferential transfer.
Reasonably Equivalent Value – This affirmative defense element is generally evidenced by showing that the defendant's invoices and payments were made per the agreement/s.
Received in Good faith (honesty in a person's conduct during the agreement) – This element may be satisfied with arrangements entered into at arm's length and made payments as per the agreement/s (parties negotiating a contract independent of each other, unrelated, and operating with their self-interest).
Our Proposed Strategy
Typically, once we are retained as counsel, we first prepare an answer or response to the complaint, such as a motion to dismiss (requesting the complaint to be dismissed as it lacks legal sufficiency to go to trial) to file with the court before the filing deadline.
Because settlement in the early stages of litigation is generally encouraged to mitigate litigation costs, we prepare and draft a Position Statement for settlement negotiations. This Position Statement may be used for not only negotiation purposes but also, if required, it may also be converted into a formal pleading.
The Law Office of Magdalena Zalewski is experienced in Bankruptcy litigation and can help you defend yourself against Sportco Holdings Incorporated.