Are Customer Funds Held by Debtor Logistics Company Property of the Debtor’s Estate? Chief Judge Ferguson (D.N.J.) Addresses Multiple Avoidance Issues in TransVantage Solutions

By Evan T. Miller, Esq.

Bankruptcies involving logistics management companies inherently involve unique issues with respect to avoidance actions, be it the tripartite nature of the transactions (customer/debtor/carrier), the contentious dispute over what constitutes property of the estate, and so on.  Chief Judge Ferguson (Bankr. D.N.J.) recently tackled some of these issues at the motion to dismiss stage in her opinion for Giuliano v. Delta Air Lines, Inc. (In re TransVantage Solutions, Inc.), Adv. No. 15-1882, 2016 WL 5854197 (Bankr. D.N.J. Oct. 6, 2016).  In denying the motion to dismiss (hereafter, the “Motion”), the Court provides a detailed analysis of the 547(b) preference elements that may prove influential as these cases arise in the future, notwithstanding the non-binding nature of the opinion.

Background

The TransVantage cases were initiated under Chapter 7 of the Bankruptcy Code on May 3, 2013 (“Petition Date”), following which Alfred Giuliano was appointed Chapter 7 Trustee (“Trustee”).  In April 2015, the Trustee filed hundreds of preference and fraudulent transfer complaints against various defendants.  Per one of the complaints (which may differ from defendant to defendant), the Debtors were

in the business of providing freight audit and payment services on behalf of its customers (the “Customers”) to help ensure that the auditing and payment of freight invoices were done accurately and timely. TransVantage Solutions would receive freight invoices from the Customers’ common carriers/shippers . . . and then audit and determine whether those invoices were accurate and in compliance with the Customers’ agreements with the carriers/shippers, tariffs and/or regulations.  TransVantage Solutions would then remit the funds received from the Customers to the applicable carriers/shippers. The transfers that are the subject of this Complaint are the transfers described in the preceding sentence that were received by the [Carrier].

Many defendants in the case settled, but ten did not (those ten hereafter referred to as the “Defendants”) and sought to go forward with the Motion.

The Preference Counts

The Defendants based their Motion upon, inter alia, an assertion that the Trustee failed to sufficiently plead the predicate elements of section 547(b) of the Bankruptcy Code.  These points are summarized as follows:

  1. “Interest of the debtor in property”

The Defendants first contended that because the Trustee referred to the funds advanced to the Debtors by the Customers as being held in trust, there could be no property of the estate involved.  The Court, however, would not dismiss the Complaint solely because of the Trustee’s use of the word “trust”; to contrary, the Court found the usage to be conclusory at best, as “[d]etermining whether something is a true trust for bankruptcy purposes is a legal determination for the court to make, it should not be done on a motion to dismiss.” The Court found this especially true considering the early stage of the proceedings, which warrants freely permitting amendment to cure pleading deficiencies.

Having dismissed the Defendants’ “trust” language argument, the Court found that the Debtors at least had a possessory interest in the funds in its own account, which account received the transferred funds from its Customers.

  1. “To or for the benefit of a creditor”

The Court next determined that payments made to the Carriers were for the benefit of the Customers who owed the freight bills.  Customers, in the Court’s view, met the definition of “creditors” under the Bankruptcy Code, as they would have had a claim against the Debtors by virtue of the Customers advancing funds to the Debtors for payment to the Carriers.

  1. “For or on account of an antecedent debt owed by the debtor”

One of the Defendants argued that the Trustee’s failure to allege an antecedent debt owed by the Debtors to the Defendant was dispositive because its business relationship was with the Debtors’ Customers, not the Debtors.  Nevertheless, the Court found that section 547(b)(2) “does not state that the antecedent debt must be owed by the debtor to the defendant, it merely states that it must be ‘owed by the debtor’”; as such, a payment to the Defendant would have been for the benefit of a Customer (a creditor).

  1. “Made while the debtor was insolvent”

The Court found this element met by virtue of the presumption of insolvency under section 547(f) as well as the allegation of a $40 million shortfall as of the Petition Date.

  1. “Made on or within 90 days before the date of the filing of the petition”

The Court found the Complaint clearly pled that pertinent transfers were made within 90 days of the Petition Date.

  1. “Transfer enabled the creditor to receive more than it would have in a Chapter 7 but for the transfer”

The Trustee argued that the Debtors’ liabilities exceeded their assets such that all of the Debtors’ unsecured creditors would not receive full payment – i.e., the Customers whose freight carriers received either full or partial payment made out much better than those Customers whose Carriers received no payment.  The Court appeared to find this allegation sufficient.

In light of the foregoing, the Court concluded the predicate preference elements were sufficiently pled to survive dismissal.  Interestingly, one of the Defendants also raised an ordinary course of business defense under section 547(c)(2), which the Court questioned both on procedural and substantive grounds.  To the latter, “[t]aking the factual allegations in the complaint as true . . . the payments were neither made in the ordinary course of business nor made according to ordinary business terms.”  Further, “the method of payment deviated from the ordinary course of business which was supposed to have been that the funds paid by the Customers were held specifically to pay the freight bills of that Customer and only that Customer.”

The Fraudulent Transfer Counts Under State and Federal Law

The Complaint also contains fraudulent transfer allegations under sections 544 (using New Jersey law) and 548.  The Defendants attacked these counts on multiple fronts, arguing that the Trustee failed to identify “an actual creditor holding an allowed unsecured claim who could avoid the challenged transfers.”  Nevertheless, the Court found that “[w]hen analyzing the sufficiency of a complaint for purposes of Rule 12(b)(6), courts do not generally require a trustee to plead the existence of an unsecured creditor by name, although the trustee must ultimately prove such a creditor exists.”

The Court next rejected the Defendants’ argument that the Complaint is deficient with respect to Federal Rule of Civil Procedure 9(b); the Defendants asserted that the Debtors’ intent to hinder, delay or defraud creditors did not meet the rule’s heightened pleading standards. The Court, however, found that Rule 9(b) permits fraudulent intent to be alleged generally.  As such, the Court found sufficient the Complaint’s allegations that the Debtors’ insiders “were not segregating the funds in the Freight Payment Plan Account, but instead using them to pay personal and business expenses, the complaint adequately pleads actual intent to hinder, delay or defraud.”

The Defendants also argued that the Complaint fails to allege a cause of action for constructive fraud under section 548(a)(1)(B) and N.J.S.A. 25:2-27 because the Debtors received reasonably equivalent value in exchange for each alleged transfer.  In other words, each transfer “was a ‘wash’ because each payment made to the Carriers reduced a corresponding liability owed to them by [the Debtors] (on behalf of the Customers) on a dollar for dollar basis.”  While not rejecting this contention, the Court found that it was inappropriate to find as much at the motion to dismiss stage, noting how highly fact-sensitive such a determination would be.

The Court likewise found that, despite the Defendants’ assertions to the contrary, the Complaint did sufficiently allege insolvency based upon statements that the Debtors’ debts were greater than their assets and that they could operate only in reliance upon new Customer funds.

Is the Bankruptcy Code Preempted by the Federal Aviation Administration Authorization Act?

The Defendants’ last argument relied upon the Federal Aviation Administration Authorization Act, which they averred should limit any remaining fraudulent transfer claims to 18 months prior to the bankruptcy filing.  The FAAAA is designed to preempt any law “related to a price, route or service of any motor carrier, … broker, or freight forwarder with respect to the transportation of property.”  Nevertheless, the Court rejected this argument for multiple reasons: (1) the Defendants cite no supporting case law in which the Bankruptcy Code or New Jersey’s fraudulent transfer statutes were preempted by the FAAAA; (2) the state law claims are derivative of the Trustee’s federal powers in any event, making it not a purely state law issue; and (3) two federal statutes should be harmonized instead of preempting one in favor of another.  To the last point, the Court found that the statutes could be so harmonized, as “the Bankruptcy Code’s goal of equality of distribution through allowing avoidance actions in no meaningful way interferes with the goal of increased competition in interstate transportation.”  Even if it did, however, the Court found that the FAAAA should yield to Bankruptcy Code, citing to a 1994 bankruptcy decision from the Northern District of California (In re Medicar Ambulance Co.).

Conclusion

It bears repeating that the Court has designated the instant opinion as “Not for Publication”.  Nevertheless, given the relative dearth of opinions in the logistics debtors space, parties representing any party in the affected trifecta (customer, debtor/trustee, carrier) should take note of this opinion.  The issues and questions in such cases are invariably quite similar – chief among them being the determination of the trifecta’s rights as to any alleged asset of the estate.

Moreover, it obviously remains to be seen what the final outcome will be in these cases once the parties have had an opportunity to flesh their arguments out with discovery.  Until then, this will be a docket to keep an eye on, barring settlement.

A copy of the Opinion can be found here.

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