Pereira v. Urthbox, Inc. (In re Try World, Inc.)

• Decision Date: 09 August 2021
• Docket Number: Ad. 20-01013-jlg,18-11764-JLG
• Parties: In re: TRY THE WORLD, INC, Debtor. JOHN S. PEREIRA, as Chapter 7 Trustee for the Estate of Try the World, Inc., Plaintiff, v. URTHBOX, INC., KATERINA VOROTOVA, DAVID EMMANUEL, and JOHN DOES 1, 2, 3, Defendants.
• Court: U.S. Bankruptcy Court — Southern District of New York

In re: TRY THE WORLD, INC, Debtor.

JOHN S. PEREIRA, as Chapter 7 Trustee for the Estate of Try the World, Inc., Plaintiff, v. URTHBOX, INC., KATERINA VOROTOVA, DAVID EMMANUEL, and JOHN DOES 1, 2, 3, Defendants.

No. 18-11764-JLG

Ad. No. 20-01013-jlg

United States Bankruptcy Court, S.D. New York

August 9, 2021

Chapter 7

LAW OFFICE OF RACHEL S. BLUMENFELD PLLC Counsel for UrthBox, Inc. By: Rachel S. Blumenfeld, Esq.

MEDINA LAW FIRM LLC Counsel for John S. Pereira, Esq. as Chapter 7 Trustee for Debtor's Estate By: Eric S. Medina, Esq.

MEMORANDUM DECISION AND ORDER RESOLVING MOTION BY URTHBOX TO DISMISS COMPLAINT OR COMPEL ARBITRATION AND STAY THE COMPLAINT IN LIEU OF AN ANSWER.

Honorable James L. Garrity, Jr. United States Bankruptcy Judge

Introduction^[1]

Try The World, Inc. (the "Debtor") is a chapter 7 debtor herein. Less than one year prior to the Petition Date, and pursuant to that certain Asset Purchase Agreement dated September 30, 2017 (the "APA"), Katerina Vorotova and David Emmanuel Foult, the Debtor's principals (collectively, the "Principals"), caused the Debtor to sell substantially all of its assets to Urthbox LLC ("Urthbox") (the "Asset Sale"). John S Pereira is the chapter 7 trustee (the "Trustee") of the Debtor's estate. In this adversary proceeding, he is suing Urthbox, the Principals, and certain unknown individuals and entities (the "John Doe Defendants" and collectively with the Principals and Urthbox, the "Defendants").

The Trustee named Urthbox as a defendant in ten of the eleven Claims for Relief/Counts alleged in the Amended Complaint.^[2] In broad strokes, in the complaint the Trustee seeks alternative forms of relief from Urthbox. Principally, he seeks to avoid and preserve the transfers under the APA (the "Transfers") as fraudulent transfers under state law and the Bankruptcy Code, and to recover the Acquired Assets or their value from Urthbox. Alternatively, he seeks to recover damages occasioned by Urthbox's alleged breach of the APA; and to recover damages based on Urthbox's alleged unjust enrichment through its use of the Acquired Assets after the APA closed. The APA includes an Arbitration Clause pursuant to which the parties agreed that "all disputes, controversies, or claims arising out of or relating to this Agreement or a breach thereof shall be submitted to and finally resolved by arbitration under the rules of the American Arbitration Association . . . then in effect." APA § 18. The matter before the Court is Urthbox's motion to dismiss all or select Counts of the Amended Complaint pursuant to the Federal Arbitration Act, 9 U.S.C. §1, et seq. (the "FAA"), or Rule 12(b)(6) of the Federal Rules of Civil Procedure ("Rule 12(b)(6)"), ^[3] or in the alternative, to stay prosecution of the Amended Complaint pending arbitration of the arbitrable Counts in the Amended Complaint (the "Motion").^[4] The Trustee opposes the Motion (the "Opposition"), ^[5] and Urthbox filed a reply to the Opposition and in further support of the Motion (the "Reply").^[6]

For the reasons discussed below, the Court resolves the Motion, as follows:

Denies the Motion to the extent it seeks to dismiss the Amended Complaint in its entirety pursuant to the FAA and/or Rule 12(b)(6).

Grants the Motion to the extent it seeks to enforce the Arbitration Clause and compel the arbitration of Counts 8 and 9 of the Amended Complaint and stays the prosecution of those claims in the adversary proceeding pending resolution of the arbitration but denies the Motion to arbitrate the Fraudulent Transfer Claims and Counts 5 and 11 of the Amended Complaint.

Denies the Motion to the extent that it seeks to stay prosecution of the non-arbitrable Claims for Relief in the adversary proceeding pending resolution of the arbitration of Counts 8 and 9, and, pursuant to section 105 of the Bankruptcy Code, stays the arbitration of Counts 8 and 9 pending the Court's disposition of the Fraudulent Transfer Claims.

Denies the Motion to the extent it seeks to dismiss the Fraudulent Transfer Claims pursuant to Rule 12(b)(6).

Jurisdiction

The Court has jurisdiction over this matter pursuant to 28 U.S.C. §§ 1334 and 157(a) and (b)(1) and the Amended Standing Order of Reference dated January 31, 2012 (Preska, C.J.). This is a core proceeding pursuant to 28 U.S.C. § 157(b)(2).

Facts^[7]

Background

On or about April 10, 2013, the Principals, acting as equal members, formed the Debtor as a Delaware Limited Liability Company. See Am. Complt. ¶ 12. Beginning in or about 2013, the Debtor operated a subscription-based, as well as a "one-time purchase," snack food box delivery service. See id. ¶ 13. To that end, it solicited subscribers and customers to purchase boxes of food and snacks sourced from a variety of different countries "around the world," and then sent them on a monthly or one-time basis to its subscribers or customers to "Try the World." See id. The Trustee maintains that the Debtor "operated a successful business" and as support points to the following:

(i) In 2016 the Debtor had gross revenue of over $14, 023, 294.00.

(ii) By 2017 the Debtor had over 35, 000 customers, a vast social media following, valuable intellectual property assets, including good will, and assets of $2, 791, 745 and liabilities of $2, 627, 771, including over $1.2 million of deferred revenue in the form of advance customer payments for the Debtor's products.

(iii) In June 2017, the Debtor solicited and obtained new equity investments of an additional $865, 707.95.

(iv) By September 7, 2017, the Debtor had collected $6, 231, 706 in revenue and was projected to hit $10, 000, 000 in sales with a 46% gross margin on units.

See id. ¶¶ 15-20.

Urthbox is "another snack subscription company." Id. ¶ 21. On or about September 30, 2017, the Debtor entered into the APA transaction with Urthbox. See id. Under the APA, the Debtor assigned substantially all its tangible and intangible assets (including good will) (the "Acquired Assets") to Urthbox in consideration for:

(i) Urthbox's agreement to assume the full obligations to deliver the approximately 35, 000 pre-paid customer boxes being transferred by the Debtor to Urthbox.

(ii) An earn-out percentage of the revenue and cash receipts deposited into the Urthbox bank accounts resulting from the continuation and operation of, or from customers subscribing to, the Debtor's business after the closing date, net of miscellaneous monthly fees, customer chargebacks and customer credits, in an amount not to exceed $772, 000.

(iii) The issuance of a convertible note valued at $500, 000 (the "Convertible Note") to the Debtor's then current investors (including the Principals) based on their ownership of so-called Series Seed Preferred Equity, subject to the passing of thirty (30) calendar days from the closing date under the APA and the payment of at least $200, 000 in earn-out payments to the Debtor.

See APA, Schedule 1 (Acquired Assets), Schedule 2 (Purchase Price).^[8] The APA contains a "Choice of Law and Arbitration" clause in which the parties designated California law as governing the APA, and agreed that disputes under the APA will be resolved by arbitration. The clause states, as follows:

This Agreement shall be governed by and construed in accordance with the domestic laws of the State of California. Except for actions to protect Proprietary Rights and to enforce an arbitrator's decision hereunder, all disputes, controversies, or claims arising out of or relating to this Agreement or a breach thereof shall be submitted to and finally resolved by arbitration under the rules of the American Arbitration Association ("AAA") then in effect. There shall be one arbitrator, and such arbitrator shall be chosen by mutual agreement of the parties in accordance with the AAA rules. The arbitration shall take place in the state of California. The arbitrator shall apply the laws of the State of California, to all issues in dispute. The findings of the arbitrator shall be final and binding on the parties, and may be entered in any court of competent jurisdiction for enforcement. Any party may make service on the others by sending or delivering a copy of the process by internationally recognized express mail carrier to the others at the respective addresses set forth in this Agreement.

APA ¶ 18 (highlighted language to be referred to as the "Arbitration Clause").

On June 9, 2018 (the "Petition Date"), less than one year after the parties closed the Asset Sale transaction, the Debtor filed a voluntary petition for relief under chapter 7 of the Bankruptcy Code in this Court.^[9] On June 11, 2018, the Trustee was appointed as chapter 7 trustee of the Debtor's estate and continues to serve in that capacity. The bar date for filing claims herein is January 18, 2019. Urthbox has not filed a claim herein.

The Adversary Proceeding

On or about February 11, 2020, the Trustee commenced this action against the Defendants by filing his Complaint.^[10] On September 2, 2020, the Trustee filed his Amended Complaint. In support of his claims against Urthbox, the Trustee asserts that the APA was structured to defraud the Debtor's creditors in "multiple ways," because: the Debtor already owned all of the Acquired Assets purchased by Urthbox, the Debtor had collected at least $1, 200, 000 in prepaid subscriptions from its customers, and the Convertible Note was issued to the Debtor's equity holders in violation of the rights of the Debtor's creditors. See Am. Complt ¶¶ 24-25. He says that the Debtor was insolvent on or before September 30, 2017, and that the Principals and the John Doe Defendants knew or reasonably should have known that a transfer pursuant to the APA would render the Debtor insolvent. See id. ¶¶ 26, 32. The Trustee also maintains that the Debtor...