Burtch v. Huston (In re USDigital, Inc.), Case No. 09-10374 (CSS), Adv. Pro. No. 09-50469 (CSS) (January 5, 2011) (J. Sontchi)
On March 26, 2007 (the “Petition Date”), USDigital filed a voluntary Chapter 7 petition, subsequent to which Jeoffrey L. Burtch was appointed as successor interim Chapter 7 Trustee (the “Trustee”). The Trustee filed a complaint on March 18, 2009 seeking to avoid prepetition transfers and alleging breaches of fiduciary duty, aiding and abetting breaches of fiduciary duty, usurping corporate opportunity, corporate waste, unjust enrichment, accounting, disallowance of claims, equitable subordination, and recharacterization against NexGen Telecom, LLC (“NexGen”), Infinidi Media, Inc. (“Infinidi Media”), Stonebridge Marketing, LLC (“Stonebridge”), and directors of USDigital, Inc. (collectively, the “Defendants”).
On November 12, 2009, the Defendants filed a motion to dismiss, to which the Trustee objected on January 14, 2010. The Defendants filed a reply brief on February 12, 2010 and the Court entered its order and issued its opinion on January 5, 2011.
By way of background, USDigital was one of four separate, but interconnected, corporations formed between 2003 and 2006. The corporate quartet consisted of: (1) USDigital; (2) USDigital Television, LLC (“USDTV”); (3) NexGen; and (4) Infinidi Media. Each of these corporations shared the same source of capital, had many of the same directors and officers, and entered into transactions with one another. In relevant part, on June 13, 2006, USDTV executed a promissory note in favor of NexGen in the amount of $104,160.00 secured by set top boxes owned by USDTV, which transaction was documented by a security agreement (the “USDTV Security Agreement”).
Following USDTV’s bankruptcy petition in 2007, USDigital and USDTV entered into an asset purchase agreement (the “APA”) for the sale of substantially all of USDTV’s assets to USDigital, as well as USDigital’s assumption of USDTV’s liabilities to NexGen including the USDTV Security Agreement, which sale was approved on September 12, 2006.
The Court’s ruling and rationale concerning each of the counts of the complaint are set forth below.
Count I: Preferential Transfers to NexGen
Count I of the Complaint alleged that USDigital made two preferential transfers to NexGen: (i) a security interest in the set top boxes, and (ii) a $44,421 payment for expense reimbursement for a payment NexGen made to ESPN on USDTV’s behalf. The issue with respect to both transfers was whether the payment was made “for or on account of an antecedent debt,” as required by 11 U.S.C. § 547(b)(2). The Court determined that neither payment was made on account of an antecedent debt because: (i) the transfer of the security interest occurred on the same day as USDigital incurred the obligation to make such transfer, both of which events either occurred on the date USDigital entered into the APA or on the date the Court approved the asset sale; and (ii) the expense reimbursement payment was made on August 8, 2006, comfortably before the Debtor became obligated to make such payment pursuant to the September 12, 2006 approval of the APA. Accordingly, Count I was dismissed.