On December 14, 2021, Alan D. Halperin, as Liquidating Trustee of the High Ridge Brands Liquidating Trust began filing adversary proceedings against certain creditors in the Bankruptcy Court for the District of Delaware.
According to our review of the Bankruptcy Case Docket, there were approximately 84 complaints filed between the 14th and 16th of December 2021.
These complaints seek to avoid and recover transfers made by the debtors as alleged preferential transfers or fraudulent transfers.
The claims against the defendant in this matter include a preference claim and a fraudulent transfer claim.
The Bankruptcy Code requires the defendant (a person, corporation, or entity against whom the Trustee has lodged a complaint) to file an answer or response within 30 days of the Summons issue date. Failure to file a response may result in a default judgment against the defendant in the lawsuit amount.
A default judgment requires the defendant to refund the entire amount of the claim, and any claims the defendant may have against HRB Winddown, Inc. (f/k/a High Ridge Brands Co.) and its affiliates 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.
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 HRB Winddown, Inc. (f/k/a High Ridge Brands Co.) and its affiliates for a period of up to 90 days before filing for bankruptcy may be considered preference payments. This bankruptcy provision allows the Trustee to "claw back" those payments in an attempt to acquire the funds needed to distribute payments equally among the creditors.
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 transaction(s) under a different theory.
As some creditors were paid in full while other creditors received no payment, the Trustee 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 and could be utilized to protect the payments from being clawed back.
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:
- Payment made 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 payment was made while the debtor was insolvent.
- If the creditor was an outsider (unrelated to the debtor in any way), than a payment made within 90 days before the petition, or if the creditor was an insider (someone who has a position in a business, family members, business partners, etc.), than payments made one year before the petition.
- 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 90 day preference period and the 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, in fact, contemporaneous. 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.
To defend against a fraudulent transfer claim.
While the intent to defraud is required for actual fraudulent conveyance, it is not required for constructive fraudulent conveyance.
Plaintiffs generally have difficulty avoiding such payments under this theory if invoices and payments are issued and paid according to the agreements between the parties. Here are two potential strategies for defending against a fraudulent transfer claim.
- 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 agreements entered into at arm's length and with payments that were made 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 the Trustee's allegations.