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History of the Case
On July 11, 2019 (the “Petition Date”), Charming Charlie Holdings, Inc. and its 6 affiliated debtors (collectively, the “Debtors”) each filed voluntary petitions for bankruptcy relief under Chapter 11 of the Bankruptcy Code in the District of Delaware (“the “Court”). The Debtors continue to manage their estates as debtors in possession of their assets.
Bankruptcy Judge Christopher S. Sontchi was assigned as a judge in the bankruptcy case.
On July 11, 2019, the Debtors filed a motion for joint administration of their individual bankruptcy cases. On July 12, 2019, the Court granted the motion allowing joint administration of the Debtors’ cases for procedural purposes only. The lead bankruptcy case is Charming Charlie Holdings, Inc., Bankruptcy Number 19-11534 (CSS),
Debtor Charming Charlie USA, Inc. (the “Plaintiff”) is pursuing avoidance actions in the bankruptcy case.
On April 27, 2021, the Plaintiff filed adversary proceedings against 62 defendants seeking the avoidance and/or recovery of transfers as alleged preferential transfers and fraudulent transfers among other claims. The amounts at stake in these adversary cases range from $26,000 to $1,737,000.
Archer & Greiner, P.C, is representing as the special counsel to the Debtors with respect to these adversary cases. On March 24, 2020, the Debtors filed a Motion to retain the firm as their special counsel. On April 15, 2020, the Court authorized the retention and employment of the firm to serve as the Debtors’ special counsel.
Allegations in the Complaints
The Plaintiff alleges that the Defendants have received transfers that are allegedly avoidable and/or recoverable as preferential transfers under §547(b) and as a constructively fraudulent transfer under §548 and §550 of the Bankruptcy Code.
As to the preference transfer claim in the complaints, the Plaintiff specifically alleges that the alleged transfers were made for the benefit of the defendants, for or on account of an antecedent debt owed by the Debtors, the Debtors were insolvent at the time of the transfers, the transfers were made within 90 days before the Petition Date (the “Preference Period”) and that the defendants received more than they would have received if the defendants were paid in a hypothetical Chapter 7 liquidation. These allegations constitute the basic elements of a preferential claim pursuant to §547(b) of the Bankruptcy Code. As a result of the transfers, the Plaintiff is alleging that the defendants were preferred over other similarly situated creditors of the Debtors.
As to the constructive fraudulent transfer claim in the complaints, the Plaintiff is alleging that the transfers were made to the defendants for less than their worth at a time when the Debtors were insolvent or were rendered insolvent as a result of the transfers. Fraudulent intent is not required for a constructive fraudulent transfer claim. All transfers made to the defendants within two years before the Debtors’ bankruptcy fall within the purview of avoidance.
Possible Defenses to a Plaintiff’s Allegations
The defenses available to a defendant are two-fold. First, the defendant may challenge the plaintiff’s allegations as described above. For example, by challenging that the transfers were not the property of the debtor or by challenging the insolvency status of the debtor. Alternatively, a defendant may assert the following “affirmative defenses”, among other defenses:
- Contemporaneous Exchange for New Value Defense pursuant to §547(c)(1) of the Bankruptcy Code – For this defense to apply to a preference claim, the payment must be made substantially contemporaneous in exchange for the alleged transfers and there must have been an intent to make the contemporaneous exchange. Typically, this occurs when a vendor does not render an invoice and the understanding of the parties is that the payment will be made immediately upon delivery of the product or services to the debtor.
- Ordinary Course of Business Defense pursuant to §547(c)(2)(A) of the Bankruptcy Code – For this defense to apply to a preference claim, the payments during the historical period which typically occurs during the 2 years before the preference period, and during the preference period must be shown as consistent. The consistency in the pattern and timing of payments determines that the transfers were made in the ordinary course of business of the parties and as such, no preferential treatment was given to the defendant over other creditors of the debtor.
- Industry Standard Defense pursuant to §547(c)(2)(B) of the Bankruptcy Code – This defense typically protects the payments that are ordinary for a particular industry. For this defense to apply to a preference claim, a defendant may be required to establish standard terms concerning the pattern and timing of payment in its industry.
- New Value Defense pursuant to §547(c)(4) of the Bankruptcy Code – For this defense to apply to a preference claim, a defendant must have provided new value in the form of products or services to the debtor after an alleged preferential transfer and the new value should not be secured by a security interest which the plaintiff cannot avoid. The new value may or may not have remained unpaid depending on the applicable law in the applicable Circuit.
- Provided Value” Defense pursuant to §548(a)(1)(B)(i) and §548(c) of the Bankruptcy Code – For this defense to apply to a constructive fraud claim, a defendant has to prove that the debtor received reasonably equivalent value in exchange of the alleged transfer. This defense is required to be established along with the “good faith” defense as described below.
- “Good Faith” Defense pursuant to §548(c) of the Bankruptcy Code – For this defense to apply in addition to the “reasonably equivalent value” defense to a constructive fraud claim, a defendant has to prove that the transfer was a result of an arm’s length dealing with the debtor and that the defendant was a good faith transferee.
- Safe Harbor Defense pursuant to §546(e) of the Bankruptcy Code – This defense, also known as the “financial institution safe harbor” defense, may apply to certain transactions which may qualify as transactions “by or to” financial institutions pursuant to §546(e) of the Bankruptcy Code.