Reasonable Financial Controls At Arms’ Length Do Not Transform a Lender Into An Insider

October 5, 2021, District of Delaware – Four Defendant entities – Salem Investment Partners III, LP, along with SIP III Holdings, Inc., Plexus Fund III, LP, and Plexus Fund QP III, LP, filed motions to dismiss Trustee Jeoffrey Burtch’s amended complaint in the bankruptcy case of Parker School Uniforms, LLC for its alleged failure to state a claim. The Trustee argues that all claims have been sufficiently pled and requests the Court to either permit discovery to obtain the additional information needed to support the claims at issue or allow an opportunity to amend the complaint.

The Court found that the Trustee failed to state a preference claim under 11 USCS. § 547 because he did not plead facts to support the contention that Defendant was a statutory or a non-statutory insider. The Court found that there was no showing of a high level of control by Defendant.

The Court also dismissed the fraudulent transfer claim under 11 USCS § 548 because the complaint did not show that the transactions at issue lacked fair market value or there was no arms’ length relationship between the Debtor and Defendant. Finally, the Court dismissed the Trustee’s claim for recharacterization, but without prejudice to permit the Trustee to amend should additional facts come to light suggesting that the Defendants disguised their equity investment as a loan.

Burtch v. Salem Inv. Partners, III, LP (In re Parker Sch. Unifs., LLC), 2021 Bankr. LEXIS 2759, 2021 WL 4553016

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