Comm. Unsecured Creditors of Gregg Appliances v. Curtis Int'l Ltd. (In re Hhgregg, Inc.)
| Decision Date | 03 February 2022 |
| Docket Number | Case No. 17-01302-JJG-11 (Jointly Administered),Adv. Pro. No. 17-50281 |
| Citation | 636 B.R. 545 |
| Parties | IN RE: HHGREGG, INC., et al., Debtors. Official Committee of Unsecured Creditors of Gregg Appliances, Inc., Plaintiff, v. Curtis International Ltd., Defendant. |
| Court | U.S. Bankruptcy Court — Southern District of Indiana |
Richard James Reding, Ask LLP, Eagan, MN, Joseph L. Steinfeld, Jr., Ask LLP, St. Paul, MN, for Plaintiff.
Scott H. Bernstein, Skolnick Legal Group, P.C., Roseland, NJ, Scott Emery Blakeley, David Michael Mannion, Sean Lowe, Blakeley LLP, Irvine, CA, Joseph L. Steinfeld, Jr., Ask LLP, St. Paul, MN, for Defendant.
Jeffrey J. Graham, United States Bankruptcy Judge This matter comes before the Court on Plaintiff the Official Committee of Unsecured Creditors of Gregg Appliances, Inc.’s (the "Committee") Complaint to Avoid and Recover Transfers Pursuant to 11 U.S.C. §§ 547, 548, 549 and 550 and to Disallow Claim Pursuant to 11 U.S.C. § 502 (the "Complaint") against Defendant Curtis International Ltd. ("Curtis"). Having considered the evidence and testimony presented at trial on September 29, 2021, and incorporating relevant parts of the Order on Cross-Motions for Summary Judgment entered on April 23, 2021 (the "SJ Order"), the Court hereby enters the following Findings of Fact and Conclusions of Law .
1. On March 6, 2017 (the "), hhgregg, Inc., Gregg Appliances, Inc., and HHG Distributing LLC (together, "Debtors") each filed a voluntary Chapter 11 petition under the United States Bankruptcy Code.
2. On March 10, 2017, the United States Trustee appointed the Committee.
3. On May 2, 2017, the Court entered a Final Order (I) Authorizing Debtors in Possession to Obtain Post-Petition Financing Pursuant to 11 U.S.C. §§ 105, 362, 363, and 364, (II) Granting Liens and Superpriority Claims to Post-Petition Lenders Pursuant to 11 U.S.C. §§ 364 and 507 ; and (III) Authorizing the Use of Cash Collateral and Providing Adequate Protection to Prepetition Secured Parties and Modifying the Automatic Stay Pursuant to 11 U.S.C. §§ 361, 362, 363, and 364 (the "Final DIP Order"). Pursuant to the Final DIP Order, the Committee has "the exclusive right, authority, standing and discretion to determine and initiate, file, prosecute, enforce, abandon, settle, compromise, monetize, assign, transfer, release, withdraw, or litigate to judgment" certain causes of action under chapter 5 of the Bankruptcy Code, including the instant avoidance action.
4. Debtors were a multi-region retailer that sold a selection of appliances, consumer electronics, home products, and computer tables in 220 brick-and-mortar stores in 19 states and online. Debtors also sold third-party service plans, in-home service, repair, delivery and maintenance.
5. Curtis is a Canadian company that distributes consumer electronics.
6. Curtis primarily sold Debtors entry-level televisions. Curtis and Debtors did business together for approximately ten years prior to the Petition Date.
7. From December 6, 2016, to March 6, 2017 (the "Preference Period"), Debtors made two transfers to Curtis in the aggregate amount of $750,656.83 (the "Transfers"). The Transfers consisted of two payments, the first in the amount of $500,547.29 on January 26, 2017, and the second in the amount of $250,111.54 on February 6. 2017. The Transfers paid 17 separate invoices (the "Invoices").
8. There is no evidence before the Court to suggest that the form of payment different from payments made by Debtors to Curtis prior to the Preference Period.
9. The quarter ending June 30, 2013, marked the last time that Debtors enjoyed positive "same store" sales.
10. In January of 2016, Debtors released sales figures and financial reports for the fiscal quarter ending in December 31, 2015 (the "Q4 Financials"). The Q4 Financials revealed that Debtors’ holiday sales were significantly below analysists’ expectations. Following the release of this information, several key vendors reduced or eliminated Debtors’ credit limit, the value of Debtors’ shares declined by approximately one-third. Debtors also replaced their then-CEO.
11. Reductions in Debtors’ credit limits with certain key vendors created a "liquidity crisis" in that Debtors were unable to purchases sufficient inventory which, in turn, reduced Debtors’ borrowing base.
12. Following this liquidity crisis, Debtors found it increasingly challenging to pay trade creditors on time. During the Preference Period, Kevin Kovacs—Debtors’ CFO—worked closely with Debtors’ accounts payable department and department heads for appliances, electronics and furniture to determine which vendors to prioritize on any given week.
13. As these conversations related to Curtis, Kovacs interacted with Matt Phillips, the head of Debtors’ electronics department.
14. Kovacs was in charge of authorizing all payments made to trade creditors during the Preference Period.
15. As of the Preference Period, Debtors owed a significant amount to Curtis, and Kovacs was aware of this fact.
16. As of the Preference Period, Debtors had decided not to purchase any further product from Curtis, as Debtors shifted away from entry-level televisions.
17. In early 2016, Curtis began to communicate with Debtors, primarily through email, in an effort to collect on outstanding and overdue invoices. Curtis had not previously engaged in such activity.
18. The frequency of these communications increased during the Preference Period and the tone in at least some of the emails was arguably more insistent.
19. Most of the emails during the Preference Period were sent to Debtors’ accounts payable department but several were sent or copied to Matt Phillips. Similarly, most of the emails during the Preference Period were from Curtis’ accounts receivable department but several were sent by, or copied to, Aaron Herzog, Curtis’ President.
20. Arguably the most insistent of the emails—sent by Curtis’ accounts payable department to Philips and copied to Herzog on January 20, 2017—states that Curtis’ bank "is all over us" because of its exposure to Debtors. The email also indicated that Debtors owed over $4 million to Curtis for past due invoices.
21. Kovacs believed that Phillips felt pressure to pay Curtis because of these emails. Kovacs himself testified that he authorized the Transfers because of the pressure that Phillips, in turn, exerted on him.
22. While some of the emails were insistent, they did not indicate that Curtis intended or threatened to escalate its collection efforts. Curtis did not alter or threaten to alter its credit or payment terms, reduce or threaten to reduce Debtors’ credit limit, withhold or threaten to withhold product, refer or threaten to refer Debtors’ indebtedness to a collection agency, or initiate or threaten legal proceedings.
23. On November 17, 2017, the Committee filed the Complaint.
24. On April 23, 2020, the Court issued the SJ Order, wherein the Court held that the Committee had established a prima facie case with respect to the Transfers under § 547(b). The Court further concluded that Curtis had established that the timing of the Transfers was, with the exception of one invoice in the amount of $29,224.65 (the "Outlier Invoice"), not outside the parties’ ordinary course of business for purposes of § 547(c)(2)(A). The Court, however, reserved for trial whether Curtis had engaged in any unusual collection activity that rendered all or part of the remaining Transfers extraordinary.2
The Court has jurisdiction over this matter pursuant to 28 U.S.C. § 1334(b). This is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(F). The parties have consented to the Court's entry of a final judgment.
Under § 547(b), pre-bankruptcy preferential transfers of debtor's property or payments by debtor made while insolvent may be recovered. To recover a payment as a preference, it must be proved that the payment was: (1) to or for the benefit of a creditor; (2) for or on account of an antecedent debt; (3) made while debtor was insolvent; (4) on or within 90 days before debtor filed its bankruptcy petition; and (5) enabled the creditor to receive more than it would have received had debtor not made the payment. Id .; In re Energy Co-op., Inc. , 832 F.2d 997, 999–1000 (7th Cir. 1987). As previously indicated, the Committee successfully established these elements on summary judgment and the Court incorporates that conclusion and the factual findings, as set out in the SJ Order, that support it into these Findings of Fact and Conclusions of Law .
The sole issue reserved for trial relates to whether Curtis is entitled to the safe harbor provided by § 547(c)(2)(A) ’s "subjective" ordinary course of business defense. Section 547(c)(2) provides:
The ordinary course defense was designed to "leave undisturbed normal commercial and financial relationships and protect recurring, customary credit transactions which are incurred and paid in the ordinary course of business of both the debtor and the debtor's transferee." See Kleven v. Household Bank, F.S.B. , 334 F.3d 638, 642 (7th Cir. 2003) (citations omitted). These transactions are not considered "preferential," although they would otherwise fit comfortably within the statutory definition.
The creditor has the burden of proving that the debtor's payment to it qualifies for this protection by a preponderance of the evidence. See 11 U.S.C. § 547(g) ; Matter of Midway Airlines, Inc. , 69...
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