In re KB Toys, Inc.

• Decision Date: 04 May 2012
• Docket Number: No. 04–10120 (KJC).,04–10120 (KJC).
• Parties: In re KB TOYS, INC, et al., Debtors.
• Court: U.S. Bankruptcy Court — District of Delaware

470 B.R. 331

56 Bankr.Ct.Dec. 149

In re KB TOYS, INC, et al.,¹ Debtors.

No. 04–10120 (KJC).

United States Bankruptcy Court, D. Delaware.

May 4, 2012.

Alfred Villoch, III, Buchanan Ingersoll, PC, Wilmington, DE, James S. Yoder, White and Williams, LLP, Wilmington, DE, Jennifer R. Noel, Joel A. Waite, Joseph A. Malfitano, M. Blake Cleary, Matthew Barry Lunn, Young, Conaway, Stargatt and Taylor, LLP, Wilmington, DE, John H. Knight, Kimberly D. Newmarch, Mark A. Kurtz, Richards, Layton & Finger, Wilmington, DE, Susan Balaschak, Akerman Senterfitt, LLP, New York City, William E. Chipman, Jr., Landis Rath & Cobb, LLC, Wilmington, DE, for Debtors.

MEMORANDUM²

KEVIN J. CAREY, Bankruptcy Judge.

KB Toys, Inc. and related entities (the “Debtors”) filed voluntary petitions under chapter 11 of the United States Bankruptcy Code on January 14, 2004 (the “Petition Date”). Before the Court is the Residual Trustee's (the “Trustee”) Tenth Omnibus Substantive Objection to Claims Pursuant to Sections 365(d), 502(b) and 502(d) of the Bankruptcy Code (D.I.6012) (the “Claim Objection”), in which, among other objections, the Trustee seeks disallowance of certain trade claims. Prior to the Claim Objection, the Trustee brought preference actions pursuant to Bankruptcy Code § 547 (the “Preference Actions”) and obtained default judgments or summary judgments against certain original holders of some trade claims (the “Original Holders”).³ However, some of the Original Holders sold their trade claims (the “Sold Claims”) post-petition to ASM Capital, L.P. and ASM Capital II, LLP (together referred to as “ASM”). The Trustee seeks to disallow these Sold Claims pursuant to Bankruptcy Code § 502(d), although the Preference Action judgments are against the Original Holders and the Sold Claims are now owned by ASM. For the reasons set forth below, the Trustee's Claim Objection to the Sold Claims will be sustained.

Undisputed Facts

On the Petition Date, the Debtors filed voluntary petitions for relief under chapter 11 of the Bankruptcy Code, then liquidated substantially all of their assets. On August 18, 2005, this Court entered an order (the “Confirmation Order”) (D.I. 2981) confirming the Debtors' First Amended Joint Plan of Reorganization Proposed by the Debtors and the Official Committee of Unsecured Creditors Under Chapter 11 of the Bankruptcy Code (the “Plan”) (D.I. 2554). ⁴ The Plan, which became effective on August 29, 2005, established the KBTI Trust, in accordance with the Residual Trust Agreement, and the Trustee was appointed by the Residual Trust Advisory Board. ( See Confirmation Order at ¶ L). The KBTI Trust was authorized to liquidate, collect and maximize the value of certain assets, as well as investigate and pursue avoidance actions and other claims for the benefit of creditors. ( See Plan, Article V).

On March 15, 2004, the debtors each filed a Statement of Financial Affairs (“SOFA”) ( See D.I. 473–501) pursuant to Code § 521(a)(1)(B)(iii). Question 3 of the SOFA asks the debtor to identify all payments made within 90 days immediately proceeding the commencement of the case (the “Preference Section”). The Preference Section in the SOFA for most of the related debtor entities states:

All disbursements made to creditors for 90 days prior to the commencement of the Chapter 11 case were processed through the Debtors' consolidated and centrally maintained cash management system maintained by KB Toys of Massachusetts, Inc. Therefore, these payments have been described and presented on the Statement of Financial Affairs of KB Toys of Massachusetts, Inc. (Case # 04–10138 (JBR)).

( See, e.g., D.I. 473). Exhibit 3A attached to the SOFA for KB Toy of Massachusetts, Inc., also filed on March 15, 2004, contains a list of creditors who received potentially avoidable transfers during the preference period. ( See D.I. 481). All nine Original Holders of the Sold Claims are listed on Exhibit 3A.⁵

ASM purchased the Sold Claims from the Original Holders between April 7, 2004 and May 18, 2007.⁶ Pursuant to Rule 3001(e) of the Federal Rules of Bankruptcy Procedure, ASM filed notices of assignment for eight of the Sold Claims. Four of the assignment agreements dated after May 3, 2004 contain indemnification clauses; five of the assignment agreements dated on or before May 3, 2004 do not.⁷

Between February 23, 2006 and May 16, 2008, the Trustee commenced adversary proceedings against the Original Holders. Between June 2, 2006 and June 1, 2009, the Trustee obtained default judgments or summary judgments against the Original Holders based on their failure to answer or, having answered, failure to otherwise defend against the proceedings. ASM acquired eight of the Sold Claims before the Trustee commenced adversary proceedings. ASM acquired one of the Sold Claims (Liquidxs.com) after the Trustee had obtained a default judgment against Liquidxs.com. The transactions are illustrated in the chart that follows:

+------------------------------------------------------------------------------+
                ¦Original    ¦Claim    ¦Date     ¦BR 3001  ¦Summons  ¦Judgment ¦Indemnification¦
                ¦Holder      ¦Amount   ¦Bought   ¦Notices  ¦Date     ¦Date     ¦Clause         ¦
                +------------------------------------------------------------------------------+
                

+------------------------------------------------------------------------------+
                ¦SPL           ¦$ 73,030.00¦4/7/2004 ¦4/7/2004 ¦2/23/2006¦6/16/2006¦No         ¦
                ¦Merchandising ¦           ¦         ¦         ¦         ¦         ¦           ¦
                +--------------+-----------+---------+---------+---------+---------+-----------¦
                ¦Shaw Creations¦$ 14,005.68¦4/9/2004 ¦         ¦5/16/2008¦6/23/2008¦No         ¦
                +--------------+-----------+---------+---------+---------+---------+-----------¦
                ¦Haschel–Caribe¦           ¦         ¦         ¦         ¦         ¦           ¦
                ¦Marketing &   ¦$128,817.85¦4/26/2004¦4/26/2004¦6/22/2007¦6/1/2009 ¦No         ¦
                ¦Distribution  ¦           ¦         ¦         ¦         ¦         ¦           ¦
                +--------------+-----------+---------+---------+---------+---------+-----------¦
                ¦HAS Sales &   ¦$118,813.48¦4/29/2004¦4/29/2004¦2/23/2006¦6/9/2006 ¦No         ¦
                ¦Marketing     ¦           ¦         ¦         ¦         ¦         ¦           ¦
                +--------------+-----------+---------+---------+---------+---------+-----------¦
                ¦Hubbard       ¦$ 2,340.50 ¦5/3/2004 ¦5/3/2004 ¦6/14/2006¦9/22/2006¦No         ¦
                ¦Security      ¦           ¦         ¦         ¦         ¦         ¦           ¦
                +--------------+-----------+---------+---------+---------+---------+-----------¦
                ¦Natural       ¦           ¦11/17/   ¦11/17/   ¦         ¦         ¦           ¦
                ¦Science       ¦$ 77,676.38¦2004     ¦2004     ¦2/23/2006¦6/6/2006 ¦Yes        ¦
                ¦Industries    ¦           ¦         ¦         ¦         ¦         ¦           ¦
                +--------------+-----------+---------+---------+---------+---------+-----------¦
                ¦Accessory Time¦$ 64,440.00¦8/4/2005 ¦8/4/2005 ¦3/8/2006 ¦6/2/2006 ¦Yes        ¦
                ¦Inc           ¦           ¦         ¦         ¦         ¦         ¦           ¦
                +--------------+-----------+---------+---------+---------+---------+-----------¦
                ¦Liquidxs.com  ¦$163,092.60¦1/16/2007¦1/16/2007¦2/23/2006¦6/6/2006 ¦Yes        ¦
                +--------------+-----------+---------+---------+---------+---------+-----------¦
                ¦Lee Middleton ¦$ 30,151.85¦5/18/2007¦5/22/2007¦2/20/2008¦6/30/2008¦Yes        ¦
                ¦Dolls         ¦           ¦         ¦         ¦         ¦         ¦           ¦
                +------------------------------------------------------------------------------+
                

On July 31, 2009, the Trustee filed the Claim Objection seeking disallowance of, among other claims, the Sold Claims pursuant to Bankruptcy Code § 502(d). The face amount of the Sold Claims exceeds $650,000. ASM filed a response on August 28, 2009, arguing that the Sold Claims are not subject to disallowance under Section 502(d) (D.I.6023). The Trustee replied to ASM's Response on November 16, 2009, and ASM filed a Supplemental Response on November 24, 2009. On December 10, 2009, this Court held a hearing on the Claim Objection. On February 8, 2010, ASM filed an additional Memorandum of Law in support of its position.

Discussion

The issue before the Court is whether the purchaser of a trade claim holds the purchased claim subject to the same rights and disabilities, and is subject to Bankruptcy Code § 502(d) challenge, as is the original holder of the claim.

1. Section 502(d)

When interpreting a section of the Bankruptcy Code, the rules of statutory construction require that “we begin by analyzing the statutory language, ‘assuming that the ordinary meaning of that language accurately expresses the legislative purpose.’ We must enforce plain and unambiguous statutory language according to its terms.” Hardt v. Reliance Standard Life Ins. Co., ––– U.S. ––––, 130 S.Ct. 2149, 2156, 176 L.Ed.2d 998 (2010) (quoting Gross v. FBL Fin. Serv., Inc., 557 U.S. 167, 129 S.Ct. 2343, 2350, 174 L.Ed.2d 119 (2009)); Patel v. Attorney General of U.S., 599 F.3d 295, 298 (3d Cir.2010).⁸ “[W]here the statutory language provides a clear answer, [the analysis] ends there as well.” Hughes Aircraft Co. v. Jacobson, 525 U.S. 432, 438, 119 S.Ct. 755, 760, 142 L.Ed.2d 881 (1999); Daniel S. v. Scranton School Dist., 230 F.3d 90, 97 (3d Cir.2000)(same). We only look to the “legislative history if the statutory language is unclear.” Blum v. Stenson, 465 U.S. 886, 896, 104 S.Ct. 1541, 1548, 79 L.Ed.2d 891 (1984).

Bankruptcy Code § 502(d) provides in relevant part:

Notwithstanding subsections (a) and (b) of this section, the court shall disallow any claim of any entity ... that is a transferee of a transfer avoidable under section ... 547 ... of this title, unless such entity or transferee has paid the amount, or turned over any such property, for which such entity or transferee is liable under section 522(i), 542, 543, 550, or 11 U.S.C. § 553 of this title.

11 U.S.C. § 502(d) (emphasis added). At issue is the meaning of the...