FBI Wind Down Inc. v. Innovative Delivery Sys., Inc. (In re FBI Wind Down, Inc.)

• Decision Date: 16 February 2018
• Docket Number: Adv. Pro. No. 15–51077 (CSS),Case No. 13–12329 (CSS) Jointly Administered
• Citation: 581 B.R. 387
• Parties: IN RE: FBI WIND DOWN, INC. (f/k/a Furniture Brands Int'l, Inc. ), et al. Debtors. FBI Wind Down Inc. Liquidating Trust, by and through Alan D. Halperin, as Liquidating Trustee, Plaintiff, v. Innovative Delivery Systems, Inc., Defendant.
• Court: U.S. Bankruptcy Court — District of Delaware

581 B.R. 387

IN RE: FBI WIND DOWN, INC. (f/k/a Furniture Brands Int'l, Inc. ), et al. Debtors.

FBI Wind Down Inc. Liquidating Trust, by and through Alan D. Halperin, as Liquidating Trustee, Plaintiff,

v.Innovative Delivery Systems, Inc., Defendant.

Case No. 13–12329 (CSS) Jointly Administered

Adv. Pro. No. 15–51077 (CSS)

United States Bankruptcy Court, D. Delaware.

Signed February 16, 2018

BLANK ROME LLP, Victoria A. Guilfoyle, 1201 Market Street, Suite 800, Wilmington, DE 19801, -and- HAHN & HESSEN LLP, Jeffrey Zawadzki, 488 Madison Avenue, New York, NY 10022, Co–Counsel for Plaintiff

SULLIVAN, HAZELTINE & ALLINSON LLC, Elihu E. Allinson III, 901 North Market Street, Suite 1300, Wilmington, DE 19801, Counsel for Defendant

OPINION

Sontchi, J.

INTRODUCTION ¹

Before the Court is a motion for summary judgment, filed by the Plaintiff,² seeking a determination whether thirty-two³ transfers (collectively, the "Transfers") qualify as avoidable preferences outside any 11 U.S.C. § 547(c) defenses, whether such Transfers can be disallowed under § 502 and the Plan, and whether the Transfers are per se for less than reasonably equivalent value if not preferential.

For the reasons set forth below, the Court will grant summary judgment, in part, on certain § 547(b) elements and the lack of any § 547(c)(1) contemporaneous exchange of new value defense, and deny the remainder of the Motion. Specifically, the Court finds:

a. The Transfers meet the § 547(b) preference elements, with the exception that there is a dispute of material fact regarding whether the Transfers were (1) an interest of TRI in property, (2) to or for the benefit of TFI a creditor, and (3) on account of an antecedent debt of TFI.

b. A dispute of material fact remains over whether the § 547(c) ordinary course of business and subsequent new value defenses apply, but summary judgment is granted for the lack of contemporaneous exchange of new value.c. A determination of disallowance, objection, or setoff is inappropriate at summary judgment when preference status is in dispute.

d. A dispute of material fact remains as to whether the Transfers were given for less than reasonably equivalent value in satisfaction of § 548(a)(1)(B)(i).

e. Discovery is reopened for ninety days after entry of the order to procure additional evidence on the fraudulent conveyance count.

JURISDICTION

This Court has subject matter jurisdiction pursuant to 28 U.S.C. §§ 157 and 1334. This is a core proceeding pursuant to 11 U.S.C. § 157(b)(2)(A) and (O). Venue is proper before the United States Bankruptcy Court for the District of Delaware under 28 U.S.C. §§ 1408 and 1409. The Court has the judicial authority to enter a final order.

STATEMENT OF FACT

A. Procedural Background

On September 9, 2013 (the "Petition Date"), FBI Wind Down, Inc. (f/k/a Furniture Brands International, Inc.) and eighteen affiliated companies, (together, the "Debtors") filed a voluntary petition for Chapter 11 relief.⁴ On October 2, 2013, the Debtors filed their schedule of general unsecured claims; Defendant was identified as having three claims (the "Claims").⁵ On July 14, 2014, the Court entered an order confirming the Second Amended Joint Plan of Liquidation of FBI Wind Down, Inc. and Its Subsidiaries Under Chapter 11 of the Bankruptcy Code (the "Plan"). The Plan partially consolidated the Debtors into groups based on prepetition business and operations.⁶

Under Section 7.3 of the Plan, the Liquidating Trustee has rights to pursue any existing or potential Causes of Action (as defined in the Plan) including those under 11 U.S.C. §§ 547 – 50.⁷ Alan D. Halperin was appointed as Liquidating Trustee ("Liquidating Trustee" or "Plaintiff") for FBI Wind Down, Inc. Liquidating Trust and continues to serve in that capacity.⁸ On August 19, 2015 the Liquidating Trustee brought this present action against Innovative Delivery Systems, Inc. ("IDS" or "Defendant") seeking (a) avoidance of preferential transfers under §§ 547 and 550, or (b) the avoidance of constructively fraudulent transfers if "the Transferring Debtor was not the Debtor who incurred the debt," and (c) objecting to any claims filed or scheduled on behalf of IDS, including the Claims.⁹ Defendant answered with six affirmative defenses, including defenses for contemporaneous exchange of new value, ordinary course of business, and new value.¹⁰ Following the Court's procedures, both parties participated in mediation but were unsuccessful in reaching an accord.¹¹ Written discovery and depositions, including that of Howard Dell, were subsequently conducted according to a scheduling order, with fact discovery closing on April 3, 2017 and expert discovery closing on July 7, 2017.¹²

On July 31, 2017, the Plaintiff filed this motion for summary judgment (the "Motion") seeking avoidance of certain preferential or fraudulent transfers under §§ 547, 548, 550, and 551, as well as the disallowance of IDS's claims pursuant to § 502 and the Plan.¹³ The Motion has been fully briefed and this matter is ripe for decision.

B. Factual Background

1. Thomasville Debtor Group

The substantively consolidated group at issue in the present Motion is the "Thomasville Debtor Group" or "Thomasville Group," which consists of TFI Wind Down, Inc., f/k/a Thomasville Furniture Industries, Inc. ("TFI"); THF Wind Down, Inc. f/k/a Thomasville Home Furnishings, Inc.; and TR Wind Down, Inc. f/k/a Thomasville Retail, Inc. f/k/a Classic Design Furnishings, Inc. ('TRI").¹⁴ The entire Thomasville Debtor Group operated to produce and sell furniture under the brand name "Thomasville."¹⁵

TFI owned the manufacturing facilities, contracted with third-party suppliers to supply the goods necessary to make the furniture, and manufactured Thomasville furniture. TRI was a subsidiary of TFI that operated in tandem. TRI operated all the retail stores, leased the locations, hired its own employees to manage stores, contracted with third parties to provide services, and sold Thomasville furniture. As a result, a customer purchasing Thomasville furniture would pay TRI at their store and have their order relayed to TFI, who would manufacture and arrange shipment of the product.¹⁶

In addition to operating two separate but related business entities, both TFI and TRI had related but independent roles in Thomasville's cash management system. TRI collected payments from consumers who purchased Thomasville furniture. When TRI received a payment, the proceeds would go into zero-balance deposit accounts in the name of TRI, which were swept into the Debtors' operating accounts, and then wired back to brand-specific disbursement accounts.¹⁷ All Thomasville Group payments were channeled through the brand's disbursement account, which was in the legal title of TFI, and controlled through the centralized cash management system of the parent, Furniture Brands International, Inc. ("Furniture Brands"). TFI's disbursement account made all payments for the Thomasville Group, including all payments owed by TRI.¹⁸

2. Thomasville Debtor Group and IDS

IDS was a third-party vendor utilized by the Thomasville Group to provide warehouse and delivery services. Once TFI manufactured a piece of furniture, the piece was sent directly to the IDS warehouse, where it would be warehoused and eventually delivered to the customer's home. In the case of damaged furniture, IDS would report to TFI and allow them to determine whether to have the furniture repaired, replaced, or refunded, and how to dispose of any unfixed pieces. In certain limited cases, such as customer returns, IDS would recollect furniture from the customers.¹⁹

As of April 1, 2010, IDS entered into the Warehouse and Home Delivery Service Agreement with TRI and Debtor HDM Retail, Inc. to provide warehouse services for the Debtors (the "Agreement").²⁰ The Agreement is governed by North Carolina law.²¹ Provisions in the Agreement limit amendments or modifications to those made in writing. A waiver provision also stipulates that failure of any party to require performance shall "not affects its right to enforce the same ... [n]o waiver by either party of the breach of any provision of this Agreement, whether by conduct or otherwise, shall be deemed to be a continued waiver thereof."²²

Provisions in the Agreement also limits use of the inventory. IDS does not have a right to offset or make a claim against the Debtors' inventory. Furthermore, "[n]othing in this Agreement shall be deemed to have transferred to I.D.S. the right of property or title on the [TRI] inventory. Until delivered to the customer, title to the [TRI] inventory shall remain with [TRI] and I.D.S. shall not pledge, grant a security in or lien, loan, or part with the possession of the inventory other than in accordance with this Agreement."²³ The Agreement was amended in March 2013 to account for certain rate changes.²⁴

On November 2, 2012, IDS President Howard Dell signed an additional letter agreement²⁵ on behalf of IDS that acknowledged, among other things, that the Debtors' inventory was "not covered by a document, as defined in the Uniform Commercial Code." IDS also "disclaim[ed] any and all ownership rights and interests in the [Debtors' inventory]," including holding the inventory "for the benefit of any party other than the [Debtors]."²⁶

As part of services under the Agreement, payments to IDS came from or through either TFI or Furniture Brands via ACH.²⁷ The Agreement stipulated net 30 payment terms.²⁸ Deliveries of goods were typically "billed the following Monday" after delivery, and payment followed "as early as five days, fifteen days, sometimes never" after billing.²⁹ The payment and invoicing practice continued in this manner for 3¹/_/2years and covered over 200 payments and 3,500 invoices, until the last payment before the ninety days prior to the Petition Date (the "Preference Period").³⁰

IDS sent invoices and documents to the name of "Thomasville Home Furnishings," as opposed to TFI or TRI.³¹ Dell noted that whether or not the...