Legal Updates /

Judge Dorsey (Bankr. D. Del.) Holds that an Order Authorizing Payment of Prepetition Customer Obligations Does Not Preclude a Liquidating Trustee from Asserting a Preference Action

Written by Gregory J. Flasser

On June 10, 2019, Insys Therapeutics, Inc. and its affiliated debtors (collectively, the “Debtors”) filed petitions for relief under Chapter 11 of the Bankruptcy Code.  The Debtors were a specialty pharmaceutical company that developed and commercialized certain drugs and drug delivery systems for targeted therapies.  McKesson Corporation d/b/a RXCrossRoads by McKesson, RelayHealth Pharmacy Solutions, and McKesson Specialty Arizona, Inc. (collectively, the “Defendants”) were parties to multiple prepetition agreements with the Debtors pursuant to which they assisted with the development and maintenance of certain programs related to the drugs sold by the Debtors.  The Debtors also purchased pharmaceutical products under certain of the agreements.

As part of their first day motions, the Debtors filed a motion (the “Customer Motion”) requesting authority to maintain and administer certain prepetition customer programs and to pay and honor related prepetition obligations.  The Customer Motion also named the Defendants as “critical customers” and requested authorization to pay all prepetition amounts owed to the Defendants.  The Customer Motion was granted and a final order was entered (the “Customer Order”).  The Customer Order provided that “[t]he Debtors are authorized, but not directed . . . to maintain and administer the Customer Programs.” (emphasis added).

On January 16, 2020, the Court confirmed the Debtors’ plan of liquidation (the “Plan”).  Under the Plan, a Liquidating Trustee was granted authority to initiate, prosecute, defend, and resolve all legal actions and other proceedings related to any asset, liability, or responsibility of the Liquidation Trust.

On February 23, 2021, the Liquidating Trustee filed a complaint seeking, under sections 547 and 548 of the Bankruptcy Code, to avoid and recover allegedly preferential and fraudulent transfers made to the Defendants.  The Defendants moved to dismiss the complaint arguing that (i) the alleged preferential transfers fell within the authorization of the Customer Order and, that if the payments had not been made pre-petition, the Defendants would have nevertheless been paid in full pursuant to the Customer Order, and (ii) that the Liquidating Trustee had not alleged facts sufficient to support the allegation, under Bankruptcy Code section 548, that the transfers were made for less than reasonably equivalent value.

As a threshold matter, Judge Dorsey held, consistent with Judge Walrath’s decision in In re Hayes Lemmerz Int’l,[1] that “the question of whether a creditor received more through a prepetition transfer than it would have in a liquidation scenario is generally a factual one that is not best resolved on a motion to dismiss.”  Therefore, the Liquidating Trustee is entitled to an opportunity to take discovery and gather evidence to prove that the amounts received were more than would have been received in a liquidation scenario.

The existence of the Customer Order does not change this result.  Looking again to the Hayes Lemmerz opinion, Judge Dorsey held that the transfers were not protected by the Customer Order because, among other things, the transfers were made before the Customer Order was entered, the Customer Order was permissive, and it did not provide that previously made payments could not be recovered.  In fact, the Customer Order expressly provided that claims or causes of action were not waived.  As a result, Judge Dorsey held that the facts of this case were readily distinguishable from other cases cited by the Defendants where the “critical vendor defense” has been successful.  In fact, a review of those cases showed that the “critical vendor defense” has only been successful in the Third Circuit where either (1) the debtor is required to pay the prepetition claims, either by order, stipulation, agreement, or statue; or (2) the creditor against whom the preference action is asserted holds a priority claim and would therefore have unquestionably been paid in full in a liquidation scenario.[2]

With respect to the fraudulent transfer count under Bankruptcy Code section 548, the Defendants argued that the Liquidating Trustee failed to allege facts sufficient to support the allegation that the transfers were made for less than reasonably equivalent value.  Judge Dorsey disagreed, holding that the complaint sufficiently pled a lack of reasonably equivalent value.  In so finding, Judge Dorsey relied on the decision in FAH Liquidating Corp. where this Court held that “where a Trustee states a claim for constructive fraud, under the Rule 8(a) pleading requirements, [a]ll that is needed at this stage is an allegation that there was a transfer for less than reasonably equivalent value at a time when the Debtors were insolvent” and “disputes as to the actual value of the transfer or value given in exchange for the transfer do not need to be decided on a motion to dismiss so long as ‘the Trustee has identified the transfer by date and face amount and has alleged that it was for no consideration.’”[3]

 

[1] In re Hayes Lemmerz Int’l, Inc., 313 B.R. 189 (Bankr. D. Del. 2004).

[2] See e.g., In re Kiwi Int’l Air Lines, Inc., 344 F.3d 311 (3d Cir. 2003) (affirming grant of summary judgment where debtors assumed agreements with creditor under section 365(a) and were therefore obligated to pay prepetition claims); In re AFA Inv. Inc., 538 B.R. 237 (Bankr. D. Del. 2015) (denying debtors’ motion for summary judgment where debtors entered into post-petition agreement that required them to pay); In re Primary Health, 275 B.R. 709 (Bankr. D. Del. 2002) (granting motion to dismiss claims against creditors with priority claims that fell within employee wages and benefits order).

[3] In re FAH Liquidating Corp., 572 B.R. 117, 127 (Bankr. D. Del. 2017).

A copy of the opinion can be found here.

Scroll to top