Delaware Business Bankruptcy Report : Delaware Business Bankruptcy Report : Morris James LLP Lawyers & Attorneys

The Committee argued that: (1) Bank of America constituted a “transferee” for purposes of § 550; (2) all of the transactions surrounding the sale of property should be collapsed in order to infer constructive fraud by Bank of America; and (3) Bank of America had constructive knowledge of the events surrounding the sale of property and therefore was a party to the constructively fraudulent conveyance.

First, the Court held that Bank of America was not a “transferee” for purposes of § 550 because its status as a trustee rendered it a mere conduit, akin to a courier or an intermediary, and not one with “dominion and control” as required under the applicable case law. Remarking that the term “transferee” is neither defined in the Bankruptcy Code nor discussed in the legislative history of Section 550, the Court adopted the “dominion and control” test set forth in In re Factory 2-U Stores, Inc., 2007 WL 2698207, at *3 (Bankr. D. Del. Sept. 11, 2007), which requires a transferee to have “dominion over the money or other asset [and] the right to put the money to one’s own purposes.” The Court reasoned that having possession over funds does not automatically render one a transferee of funds, especially where the entity in possession receives no benefit from said transfer and is holding the funds for the sole purpose of later making those funds available to a third party. Accordingly, the Court held that Bank of America was not a “transferee.”

Second, the Court concluded that the transactions surrounding the sale of property should not be collapsed because the Complaint was devoid of allegations of actual or constructive fraud as to Bank of America, or any involvement of Bank of America in the questioned transaction.

Third, because the Committee failed to identify the amounts of the transfers at issue or name a proper transferee acting in a non-trustee capacity, the Court held that the Complaint failed to state a valid fraudulent conveyance claim.

Accordingly, for the reasons articulated above, the Motion to Dismiss was granted and the Motion to Amend was denied.

In this case, AVS had sought allowance of an administrative expense claim pursuant to Section 503(b)(9) of the Bankruptcy Code. 11 U.S.C. § 503(b)(9) provides that, after notice and a hearing, there shall be an allowed administrative expense for “the value of any goods received by the debtor within 20 days before the commencement of a case under this title in which the goods have been sold to the debtor in the ordinary course of such debtor’s business.” 11 U.S.C. § 503(b)(9).

AVS was one of the Debtors’ vendors who provided inspection, ticketing and repackaging of apparel that the Debtors purchased from other vendors. In the 20 day period prior to the Debtors’ bankruptcy filings, AVS invoiced the Debtors for $63,000 and sought administrative payment. The Debtors objected to AVS’s claim on the basis that it had been misclassified as a 503(b)(9) claim because AVS had provided “services” and not “goods” as required by the statute.

Examining the statute, the Court noted that to qualify for administrative expense claim treatment under the Bankruptcy Code, AVS had to provide “goods” to the Debtors. As there is no definition of goods contained in the Bankruptcy Code, the Court looked to other sources, noting “where words are employed in a statute which had at the time a well-known meaning at common law or in the law of this country, they are presumed to have been used in that sense.” 

First, the Court looked to the Uniform Commercial Code governing sales of goods. The UCC defines goods as “all things . . . which are movable at the time of identification to the contract for sale . . . .” See generally, UCC 2-107. The Court also looked to the common dictionary definition of goods that also included “movable property.” Examining the Bankruptcy Code, the Court noted that the Code itself is replete with references to both goods and services in the disjunctive: “Since the term ‘goods’ and the term ‘services’ are disjunctively connected throughout the Bankruptcy Code, these terms must be ascribed separate meanings [according to canons of statutory construction]; ‘goods’ cannot include services.”

Considering that AVS’s claim was for inspection of goods, and unpacking and ticketing the goods received from other vendors, the Court concluded that AVS had provided services, and not goods: “Although AVS performed the activities that constitute the basis of the claim on ‘things that are movable,’ the actual activities AVS “sold” are properly characterized as intangible services.”
AVS attempted to argue that it was the value of goods that is recoverable under 503(b)(9). As AVS had provided value in that the goods were not salable without AVS’s work, it contributed to the “value of goods,” and should be entitled to an administrative claim. The Court dispensed with this argument by noting that a similar argument had been rejected by the Michigan bankruptcy court in In re Plastech Engineered Products, Inc., 2008 WL 5233014 (Bankr. E.D. Mich. 2008) (“It is the goods, and not the value that must be received by the debtor to trigger § 503(b)(9).”).

Although the court acknowledged that AVS had undoubtedly provided “value,” the Court held that AVS had not provided “goods,” and was therefore not entitled to an administrative claim under 503(b)(9).