Merrill Lynch Business Financial Services, Inc. v. Kupperman

Summarized by Weston Eguchi , Willkie Farr & Gallagher LLP
14 years 7 months ago

Citation:

No. 10-2912 [Not Precedential]

Tag(s):

3rd Circuit

Ruling:

The Third Circuit ruled that: (1) the creditor (Merrill) of the transferor-chapter 7 debtor (PITTRA) had a security interest in the transferee-non-debtor successor entity's (PGB) collateral that was senior to the security interest of a creditor (Chase) of such non-debtor entity; (2) the creditor of the chapter 7 debtor had standing to bring fraudulent transfer claims against the non-debtor entity where the chapter 7 trustee's stipulation of dismissal of its fraudulent transfer claim against the non-debtor entity clearly excluded the creditor's claims; (3) the non-debtor entity was the chapter 7 debtor's successor, allowing the creditor of the chapter 7 debtor to assert secured claims against such non-debtor entity, where both the debtor and non-debtor were engaged in the same business, located at the same address, operated by the same principals and there was a transfer of assets from the debtor to the non-debtor; (4) "badges of fraud" indicative of an "actual intent to defraud" were present under New Jersey's fraudulent transfer law where there was the same ownership and management between the transferor and the transferee, the transferor retained possession and control of the transferred assets, the transfer and assets were concealed from the transferor's creditor, the transferor ceased operations shortly after the transfer and eventually declared bankruptcy, and the transferee depleted the transferor of resources; and (5) a provision of the security agreement granting a security interest in the transferor's assets "hereafter acquired or arising" also covered accounts receivable of a transferee, not just the specific assets that had been transferred.

Procedural context:

The transferor entity (PITTRA G.B. International, Inc.) filed for chapter 7. PITTRA's chapter 7 trustee commenced an adversary proceeding against a non-debtor entity (PGB International, LLC) to whom PITTRA had transferred a substantial amount of its assets; this suit was eventually settled and dismissed with prejudice. Merrill Lynch Business Financial Services, Inc., a creditor of PITTRA, then filed suit in district court against PGB and others, including JPMorgan Chase Bank, N.A. (a creditor of PGB), asserting first-priority claims arising from secured loans made to PITTRA. The district court granted Merrill's motion for summary judgment and denied Chase's motion for summary judgment.

Facts:

PITTRA, an importer of industrial foods, granted Merrill a security interest in all of its current and future assets, binding on PITTRA's successors and assigns; Merrill perfected its security interest. A year later, PITTRA transferred a substantial amount of its assets to PGB, a newly created entity operating the same type of business from the same address with the same principals and employees, without informing Merrill (and actually submitting false statements to support requests for increased credit lines). Unaware of the transfer, Merrill did not file a new financing statement against PGB. Chase subsequently made loans to PGB, granting a security interest in all current and future assets, which it perfected.

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