Delaware Bankruptcy Court Grants Defendants’ Motion to Dismiss As Claims Were Time-Barred Under DUFTA
August 20, 2021, District of Delaware – Plaintiff Trustee George L. Miller, for the jointly administered bankruptcy estates of the Debtors J&M Sales, Inc. filed an adversary alleging that the Debtors’ owners (‘Fallas’) operated and controlled a vast enterprise of entities that functioned as the alter-egos of the Debtors, and used the Debtors to sustain the enterprise and enrich the Fallas family at the Debtors’ expense.
Debtors operated retail stores offering clothing, shoes, toys, household items, and other discount merchandise. Over the years, Debtors expanded their business operations through multiple acquisitions of other retail chains. Fallas had ownership and control of the Debtors. In addition to the Debtor Entities, the Fallas controlled, both directly and through family trusts for which they were trustees, a large group of special purpose entities.
Somewhere in 2014, Debtors acquired Conway Stores, Inc. (“Conway”), a retail chain that was on the verge of bankruptcy, with the stated intent of expanding their retail footprint. However, the Conway Acquisition did not prove fruitful and Debtors’ financial condition rapidly deteriorated. Eventually, the Debtors filed for bankruptcy. The Trustee commenced a lawsuit to avoid the Debtors’ assumption of nearly $46 million in liabilities resulting from the Debtors’ acquisition of Conway and avoid and recover payments made by Debtors to Conway’s creditors; avoid as fraudulent transfers nearly $67 million in rent payments made by Debtors to Fallas special purpose entities; avoid other alleged fraudulent transfers made to Fallas, his family, and trusts under their control; and recover damages for alleged breaches of fiduciary duty by the Fallas.
Defendant Michael Fallas and others filed motions to dismiss the complaints. The Court ruled in Defendants’ favor concerning the claims that occurred more than four years before the petition date because such claims were time-barred under Del. Code Ann. tit. 6, § 1309. Next, the Court dismissed the claims for transfers against certain defendants for failure to state a claim because the Court found that the Trustee did not adequately allege lack of reasonably equivalent value. However, some of the constructive fraud claims survived since the Trustee had sufficiently pleaded lack of reasonably equivalent value and Debtors’ insolvency.