Drivetrain, LLC v. X.commerce, Inc.

UNITED STATES BANKRUPTCY COURT

DISTRICT OF DELAWARE

CRAIG T. GOLDBLATT (ge 824 N, MARKET STREET

JUDGE Sy a WILMINGTON, DELAWARE

eae (302) 252-3832

February 7, 2023

VIA CM/ECF

Re: Drivetrain, LLC v. X.Commerce, Inc., Adv. Proc. No. 22-50448

Dear Counsel:

This lawsuit seeks to avoid and recover approximately $840,000 in transfers

that the debtor made to the defendant prior to its bankruptcy. The complaint asserts

that the transfers are voidable on the grounds that they were actual fraudulent

conveyances, constructive fraudulent conveyances, and/or preferences. The

defendant has moved to dismiss the complaint for failure to state a claim under Civil

Rule 12(b)(6) as made applicable hereto by Bankruptcy Rule 7012(b). For the reasons

set forth below, the motion will be denied with respect to the claims for actual and

constructive fraudulent conveyance but granted with respect to the preference claims.

Factual and Procedural Background

The debtor was (or at least purported to be) a cyberfraud prevention company.!

The complaint alleges, however, that the debtor’s business was fundamentally

fraudulent. Specifically, the complaint alleges that the debtor’s founder, Adam

Rogas, provided potential investors with false reports of its customers and revenue

1D.I. 1 913. The debtor in this bankruptcy case, now known as Cyber Litigation, Inc., was previously

known as NS8 Inc. Id. 5-6. The facts set forth herein are taken from the allegations in the

complaint, D.I. 1, which are taken as true for purposes of this motion. See Fowler v. UPMC Shadyside,

578 F.3d 203, 210 (3d Cir. 2009) (on motion to dismiss for failure to state a claim, trial court is to take

well-pleaded facts as true).

Page 2 of 13

in order to raise funds.2 The plaintiff, Drivetrain LLC, is the acting trustee of the

Cyber Litigation Trust created by the debtor’s plan of liquidation.3

Defendant Magento Inc. is a “platform partner” – a company “that sell[s],

market[s], and advertise[s] software and other goods and services on web-based or

app-based platforms.”4 In 2018, Rogas caused the debtor to enter into the first

partnership contract with Magento. Under this contract, the debtor became a “select

partner” of Magento, entitling it to certain marketing and consultant services in

exchange for payments calculated by the debtor’s reported revenue.5 In 2019, the

debtor entered into a second agreement with Magento, the “Premier Agreement.”6 As

a premier-level partner, the debtor received additional marketing and sales services,

but was also required to make higher payments.

The complaint alleges that neither the select nor premier partnership

agreement provided the debtor with any benefit. Rather, “Rogas and his associates

caused Debtor to engage with several platform partners to create a façade that Debtor

was running a successful business.”7 The alleged scheme played out as follows: Rogas

would cause the debtor to enter into various partnership agreements with several

platform partners, including Magento. Magento calculated its fees based on revenue

reports submitted by the debtor detailing how much revenue was earned using

Magento’s services. Rogas would falsify these revenue reports to give the appearance

of a profitable company, even claiming at one point that the debtor earned $26.5

million in revenue from customers obtained through Magento.8 Rogas would then

use those same revenue reports as “proof” that the debtor was a successful business

to attract additional investors. In short, these partnership contracts were “critical

component[s] of Rogas’ fraudulent scheme.”9

In order to perpetuate this scheme, however, the debtor needed to meet its

obligations under the contracts. Under the first partnership agreement, the debtor

2 D.I. 1. ¶¶ 13, 20-29.

3 Id. ¶ 9. Drivetrain LLC is referred to as the “trustee.”

4 Id. ¶ 36. Defendant is currently named X.Commerce, Inc. The caption to the complaint states that

this entity does business as Adobe Commerce and was formerly known as Magento, Inc. Because the

factual allegations of the complaint refer to the defendant as the Magento, the name under which it is

alleged the defendant then conducted business, the defendant is referred to herein as “Magento.”

5 Id. ¶¶ 41-44.

6 Id. ¶ 51.

7 Id. ¶ 37.

8 Id. ¶ 88.

9 Id. ¶ 40.

Page 3 of 13

made two $45,000 payments to Magento between 2018 and 2019.10 Under the second,

premier-level contract, the debtor was required to pay a yearly commission, referred

to as a “revenue share,” equal to 25 percent of all revenue earned on sales made on

Magento’s platform. This commission was calculated on a yearly basis, but the debtor

was obligated to make several interim “prepayments” that would later be offset

against the 25 percent commission as part of a year-end true up.11 Under the

agreements, the debtor was required to pay $500,000 in prepayments the first year

prior to the true up, $1 million the second year, and $1.5 million the third.12 The

complaint alleges that the debtor made quarterly payments of $125,000 in July 2019,

October 2019, January 2020 and April 2020. The complaint further alleges that the

debtor made a quarterly payment of $250,000 in July 2020.13 At no time did Magento

request a true up or even submit an invoice for the 25 percent commission.

The trustee now seeks to recover the $840,000 in transfers made to Magento

under applicable fraudulent conveyance and preference law. First, the trustee alleges

that the debtor’s payments to Magento were made with actual intent to hinder, delay,

or defraud its creditors by allowing the debtor to perpetuate the fraudulent scheme

detailed above. For example, the complaint alleges that the debtor’s chief revenue

officer used the debtor’s “purported growth with [Magento] to back up Debtor’s false

claims of significant revenue growth” and secure capital from investors “who relied

upon these results to make additional multi-million dollar investments in [the]

Debtor.”14

Second, the trustee alleges that these payments are voidable as constructive

fraudulent transfers because the debtor was insolvent at the time of each transfer

and received no value on account of such transfers. According to the complaint, from

“its inception through the Petition Date, Debtor’s expenses exceeded $13 million,” but

the “debtor never generated more than $200,000 of revenue in a year – and in most

years it earned substantially less than that.”15 The debtor’s insolvency, the trustee

contends, is therefore evident, especially since any additional investments were

secured through fraud, thus “transforming these investors into creditors that Debtor

knew it would never have the ability to repay.”16 On account of the debtor’s perpetual

insolvency, it is alleged that the debtor was incapable of receiving any value from the

10 Id. ¶ 46.

11 Id. ¶¶ 65-67.

12 Id. ¶ 68.

13 Id. ¶ 71.

14 Id. ¶¶ 102-103.

15 Id. ¶¶ 17-18.

16 Id. ¶ 106.

Page 4 of 13

partnership contracts. As the complaint notes, these contracts were designed for

“very large companies, who could pay Magento significant amounts for additional

assistance with marketing on Magento’s platform,” not for companies “that had far

less revenue than a million dollar a year.”17 Because the debtor did not fit that profile,

the trustee maintains that “those services had no value to debtor.”18

Third, the trustee seeks to recover the $250,000 paid to Magento in July of

2020 as a preference.19

Defendant moved to dismiss each of the trustee’s counts.20 The Court heard

oral arguments on the matter on January 25, 2023.

Jurisdiction

The district court has jurisdiction over this action under 28 U.S.C. § 1334(b),

as the claims asserted herein “arise under” the Bankruptcy Code. The proceeding

has been referred to this Court under 28 U.S.C. § 157(a) and the district court’s

standing order of reference.21 In view of the Court’s disposition of the motion, the

Court does not believe it is necessary or appropriate to address the question of

whether the underlying claims are “core” or “non-core.”

Analysis

Federal Rule of Civil Procedure 8(a)(2) requires a complaint to contain a “short

and plain statement of the claim showing that the pleader is entitled to relief.”

Meeting this standard, the Supreme Court has held, “demands more than an

unadorned, the-defendant-unlawfully-harmed-me accusation.” It requires a showing

that the claim is “plausible on its face.”22 Plausibility “requires more than a sheer

possibility that a defendant acted unlawfully but is not akin to the probability

17 Id. ¶¶ 53, 57.

18 Id. ¶ 100.

19 Id. ¶¶ 145-153.

20 D.I. 5.

21 Amended Standing Order of Reference from the United States District Court for the District of

Delaware, dated Feb. 29, 2012.

22 Ashcroft v. Iqbal, 556 U.S. 662, 678 (citing Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007))

(internal quotation omitted).

Page 5 of 13

standard. Rather, a plaintiff must allege sufficient facts to nudge the claims across

the line from conceivable to plausible.”23

A complaint that fails to meet this plausibility standard is subject to dismissal

under Federal Rule of Civil Procedure 12(b)(6). The Third Circuit has explained that

a court reviewing the plausibility of a complaint must engage in a three-step analysis:

First, the court must take note of the elements a plaintiff must plead to

state a claim. Second, the court should identify allegations that, because

they are no more than conclusions, are not entitled to the assumption of

truth. Finally, where there are well-pleaded factual allegations, a court

should assume their veracity and then determine whether they

plausibly give rise to an entitlement for relief.24

Additionally, a court should draw all reasonable inferences from the well-

pleaded facts in favor of the non-moving party.25

I. The trustee has adequately pled its count for actual fraudulent

conveyance.

11 U.S.C. § 548(a)(1)(A) authorizes the trustee to avoid any transfer “of an

interest of the debtor in property” if such transfer was made “with actual intent to

hinder, delay, or defraud” a creditor. Proving actual intent, however, is difficult at

times, since those who intend to defraud others rarely make public announcements

of their intentions. Courts therefore commonly rely on circumstantial evidence, or

“badges of fraud,” from which a defendant’s fraudulent intent can be inferred.

Neither the presence nor absence of any particular badge is dispositive. Rather, these

“badges” operate essentially as clues from which a defendant’s intent might be

gleaned.26

Defendant’s principal argument for dismissal is that the complaint “is devoid

of factual allegations that would support the presence of ‘badges of fraud’ from which

actual intent may be inferred.”27 At the January 25 hearing, defendant argued that

of the several badges of fraud recognized by case law, the complaint alleges only two

23 Superior Silica Sands LLC v. Iron Mountain Trap Rock Co., No. 20-51052 (KBO), 2021 Bankr.

LEXIS 2361 at *7 (Bankr. D. Del. Aug. 26, 2021) (internal quotation omitted).

24 Burtch v. Milberg Factors, Inc., 662 F.3d 212, 221 (3d Cir. 2011) (citations omitted).

25 Bohus v. Restaurant.com, Inc., 784 F.3d 918, 921 n.1 (3d Cir. 2015).

26 In re OODC, LLC, 321 B.R. 128, 140 (Bankr D. Del. 2005).

27 D.I. 6 at 7.

Page 6 of 13

– that the debtor was insolvent at the time of the transfers and that the debtor

received less than reasonably equivalent value on account of those transfers.28

This argument, however, confuses the forest for the trees. Badges of fraud

operate as a “substitute for direct evidence.”29 As such, they are essentially beside

the point when the plaintiff makes specific factual allegations, in a non-conclusory

fashion, of a defendant’s actual intent to defraud its creditors. In other words, badges

are helpful when a court is left to draw an inference about the defendant’s intent in

the absence of direct evidence, but they “need not be alleged in a case in which a

complaint adequately alleges facts that would support a direct inference that a

transfer was made with the actual intent to hinder, delay, or defraud creditors.”30

Here, even applying the heightened pleading standard for allegations of

fraud,31 the trustee has sufficiently pled that the Magento payments were made with

the actual intent to defraud creditors. Taking all well-pleaded facts as true, the

complaint fairly alleges that the debtor entered into these contracts as part of an

elaborate head fake. The goal was to trick investors into believing that the company

was both successful enough to afford Magento’s services and was generating

significant revenue from those services. The contracts, therefore, served no other

purpose but “to allow Rogas and his associates to perpetuate fraud on Debtor’s

investors and Board.”32 Those are sufficient allegations of an actual intent to defraud.

The fact that the allegations of the complaint do not contain many of the usual

“badges of fraud” is perhaps unsurprising in this case, in that this case differs from

the paradigmatic fraudulent conveyance action around which those “badges” were

designed. The badges of fraud developed in the caselaw are designed to smoke out

the circumstances in which a transaction that may on its face appear innocuous or

legitimate is in fact an effort by a debtor to put its assets outside the reach of

creditors. In this case, however, the allegation is not that the debtor was moving its

assets into friendly hands where the creditors cannot reach them. It is instead that

the transaction was part of an elaborate ruse that played a critical role in the debtor’s

larger fraudulent scheme. Because of the difference between this action and what

might be viewed as the paradigmatic fraudulent conveyance action, it is not

surprising that the allegations of the complaint to do not involve many of the typical

badges of fraud.

28 Jan. 25, 2023 Hr’g Tr. at 13.

29 In re Millennium Lab Holdings II, LLC, 2019 Bankr. LEXIS 636 at *9 (Bankr. D. Del. 2019).

30 In re MTE Holdings, LLC, No. 19-12269 (CTG), 2022 Bankr. LEXIS 2352 at *8 (Bankr. D. Del. 2022).

31 Fed. R. Civ. P. 9(b).

32 D.I. 1 ¶ 101.

Page 7 of 13

But that hardly means that the allegations of the complaint do not allege the

kind of transaction that is covered by the fraudulent conveyance statute. Section 548

of the Bankruptcy Code allows the avoidance of any transfer if it was done “with

actual intent to hinder, delay, or defraud” a creditor.33 It may be true that the debtor

who transfers funds to their neighbor in an attempt to appear judgment-proof is

guilty of hindering or delaying creditor recovery.34 But it is equally true, as a matter

of ordinary English, that the scheme alleged in the complaint is one in which the

debtor sought to defraud its creditors. And because § 548 is “set out in the disjunctive,

‘a showing of any one of the three requisites state of mind – the intent to hinder, the

intent to delay, or the intent to defraud – is sufficient to establish the intent

element.’”35 The complaint sufficiently alleges actual intent to defraud creditors to

survive a motion to dismiss.36

II. The trustee has adequately pled its count for constructive fraudulent

conveyance.

A transfer may also be avoided under § 548(a)(1)(B), which provides for the

avoidance of “constructive” fraudulent conveyances, if the transfer was made for less

than reasonably equivalent value and the debtor was insolvent at the time of the

transfer. Defendant argues that the complaint fails to allege either.

A. Reasonably equivalent value

The term “reasonably equivalent value” is not defined by the Bankruptcy Code.

The Third Circuit, however, set forth a two-part test in In re R.M.L. to determine

whether a debtor received reasonably equivalent value: First, the court must consider

whether the debtor received any value at all. If so, the question becomes whether the

33 11 U.S.C. § 548(a)(1)(A) (emphasis added).

34 Husky Int. Electronics, Inc. v. Ritz, 136 S.Ct. 1581, 1587 (noting that “[i]n such cases, the fraudulent

conduct. . . is in the acts of concealment and hindrance.”).

35 In re Syntax-Brillian Corp., No. 08-11407 (BLS), 2016 Bankr. LEXIS 988, at *12 (Bankr. D. Del.

2016) (citing In re Stanton, 457 B.R. 80, 93 (Bankr. D. Nev. 2011)).

36 There was, in the briefings and at the January 2023 hearing, some discussion of the applicability of

the Ponzi scheme presumption. Where a Ponzi scheme exists, it is presumed that all transfers done

in furtherance of that scheme are carried out with actual intent to hinder, delay, or defraud creditors.

In re DBSI, No. 08-12687 (PJW), 2011 Bankr. LEXIS 1677, at * 10 (Bankr. D. Del. 2011). The parties

disputed both whether the debtor’s operations could be characterized as a Ponzi scheme and, if so,

whether the payments made under the Magento contracts were made in furtherance of the alleged

Ponzi scheme. Jan. 25, 2023 Hr’g Tr. at 19. Because the Court finds that actual intent exists under §

548(a)(1)(A), it need not address the applicability (or not) of Ponzi scheme presumption.

Page 8 of 13

debtor received roughly the same as what it gave.37 These two inquiries, the Third

Circuit explained, should be kept separate.38

The question of whether a debtor received any value at all is easily answered

when the transferee confers a tangible benefit onto the debtor. For example, “there

is no doubt that [a] debtor is receiving something of ‘value’” when they receive the

proceeds generated from a mortgage foreclosure sale – even if those proceeds are

below fair market value – because the cash received is a tangible, measurable

benefit.39 When the debtor receives intangible benefits, “such as services or the

opportunity to obtain economic value in the future,” the analysis is less

straightforward because these services or opportunities may never materialize into

cognizable value.40 In these cases, courts must analyze each transaction at the

moment they were executed and ask whether, at that time, “the transaction conferred

realizable commercial value” onto the debtor, or the expectation of such value that

was both “legitimate and reasonable.”41

Once a court finds that value was conferred, it may then consider whether such

value was proportional to what the debtor gave up. Here, courts use a totality of the

circumstances approach taking into account, “(1) the ‘fair market value’ of the benefit

received as a result of the transfer, (2) ‘the existence of an arm’s-length relationship

between debtor and the transferee,’ and (3) the transferee’s good faith.”42

Applying these principles, the Court is satisfied that, at least for the purposes

of considering a motion to dismiss, the trustee has sufficiently pled that the debtor

received no value from these partnership agreements. In fairness, the complaint

acknowledges that the debtor ultimately received $6,800 in revenue and acquired

nine new customers from Magento’s services.43 From this, defendant would have the

Court conclude that the debtor received at least some value from the partnership

contracts sufficient to satisfy the first part of the R.M.L. test.44 The Court, however,

37 92 F.3d 139, 149 (3d Cir. 1996).

38 Id.

39 Id. See also BFP v. Resolution Trust Corp., 511 U.S. 531 (1994).

40 In re R.M.L., 92 F.3d at 149.

41 Mellon Bank, N.A. v. Metro Communications, Inc., 945 F.2d 635, 647 (3d Cir. 1991); In re Fruehauf

Trailer Corp., 444 F.3d 203, 212 (3d Cir. 2006) (“A court must consider whether, based on the

circumstances that existed at the time of the transfer, it was legitimate and reasonable to expect some

value accruing to the debtor.”) (citations omitted)).

42 In re Fruehauf Trailer Corp., 444 F.3d at 213.

43 D.I. 1 ¶¶ 87-88.

44 D.I. 6 at 12.

Page 9 of 13

is bound to follow the Third Circuit’s command and limit its analysis to the

“circumstances that existed at the time of the transfer,” not when value eventually

reached the debtor.45

At the time the debtor incurred these obligations, it had never earned more

than $200,000 of revenue in a year,46 while generating close to $13 million in expenses

throughout its existence.47 By contrast, it is alleged that these partnership contracts

were “designed for very large companies, who could pay Magento significant amounts

for additional assistance with marketing on Magento’s platform.”48 Indeed, one of the

defendant’s representatives testified that “he ‘would probably not entertain a

company that had far less revenue than a million dollar a year for [a premier] level

relationship.’”49 The punchline is that the debtor could not have received any

realizable commercial value from these contracts because “it was a service that was

intended solely to allow large companies to grow. . . because the debtor was not a

large company it did not take advantage of any of the services offered to a premier

member, nor could (or did) it benefit from them.”50 Similarly, any expectation of value

would have not been reasonable or legitimate because the debtor, through Rogas,

knew that it was only entering into these agreements to perpetuate its fraudulent

scheme. Accordingly, drawing all reasonable inferences in favor of the non-moving

party (as applicable law requires), the Court is satisfied that the lack of reasonably

equivalent value is adequately alleged.

B. Insolvency

A complaint asserting a claim for constructive fraudulent conveyance must

also allege that the debtor was either insolvent at the time of the transfer or became

insolvent as a result of the transfer.51 The Bankruptcy Code defines an “insolvent”

entity as one for which the sum of its “debts is greater than all of such entity’s

property, at fair valuation.”52 The trustee also invokes Delaware fraudulent

conveyance law (in connection with a claim asserted under the trustee’s strong-arm

powers set forth in § 544(b) of the Bankruptcy Code), under which a debtor is

considered insolvent if it engaged in a transaction whereby the debtor undertook

45 In re Fruehauf Trailer Corp., 444 F.3d at 212 (internal quotation omitted).

46 D.I. 1 ¶ 18.

47 Id. ¶ 17.

48 Id. ¶ 53.

49 Id. ¶ 57.

50 Id. ¶¶ 96, 98.

51 11 U.S.C. § 548(a)(1)(B)(ii)(I).

52 11 U.S.C. § 101(32)(A).

Page 10 of 13

liabilities unreasonably disproportional to the value received, or the debtor knew (or

should have known) that it would be unable to service the debts resulting from such

a transaction.53 The standard set forth in the Bankruptcy Code is commonly referred

to as the “balance sheet test,” and the two state law tests are known as the

“inadequate capital” and “cash flow” tests.54

The complaint pleads facts sufficient to satisfy the balance sheet test and the

inadequate capital test. Paragraphs 17 through 19, for example, allege that while

the debtor generated more than $13 million in expenses from its inception in 2016

through the petition date, it never had more than $200,000 in yearly revenue, and its

“total revenue for its total existence was less than $500,000.”55 The inference, of

course, is that the debtor’s liabilities continually outstripped its assets, leaving it in

a state of perpetual insolvency. As the complaint alleges, “[d]ebtor’s minimal sales

revenue was insufficient to meet its significant operating expenses and liabilities,

including many millions of dollars paid to its employees, rendering Debtor insolvent

for virtually the entirety of its existence.”56

Magento contends that the trustee is excluding an important factor from its

insolvency calculations – investor funds. Even if, Magento argues, the debtor’s

liabilities totaled more than $13 million, the complaint acknowledges that the debtor

obtained investments exceeding $60 million. Indeed, Magento points out, the debtor

had sufficient cash on hand to pay $72 million in June 2020 in connection with a

tender offer.57 According to Magento, if one takes account of the funds that Rogas

was able to secure from outside investors, the debtor clearly had assets in excess of

its operating expenses.

The problem with this argument, however, is that the complaint alleges that

these investments were procured by virtue of the same fraudulent representations

that drove the debtor into bankruptcy. When an investor is fraudulently induced into

making an investment based on a company’s material misrepresentations, the

investor immediately becomes a creditor – holding a tort claim against the company

for having been defrauded into making those investments.58 These claims, even if

53 6 Del. C. § 1304(a)(2).

54 In re Opus East, LLC, 528 B.R. 30, 50-51 (Bankr. D. Del. 2015).

55 D.I. 1 ¶¶ 17-19.

56 Id. ¶ 20.

57 D.I. 6 at 14, see also D.I. 1 ¶¶ 111, 113.

58 See Kach v. Hose, 589 F.3d 626, 634-635 (3d Cir. 2009) (“As a general matter, a cause of action

accrues at the time of the last event necessary to complete the tort, usually at the time the plaintiff

suffers an injury. The cause of action accrues even though the full extent of the injury is not then

Page 11 of 13

contingent or unliquidated, are nevertheless “debt” that is properly considered when

determining insolvency.59

The complaint makes the same point, stating that “[d]ebtor also was insolvent

because it induced investors’ capital contributions through fraud, transforming these

investors into creditors that Debtor knew it would never have the ability to repay.”60

With respect to the tender offer, the complaint alleges that the debtor fraudulently

“convinced outside investors to invest in excess of $60,000,000 in Debtor,” which the

debtor then used to pay off “earlier investors and employees, and that because

Debtor’s revenues and customers were fake, [the debtor knew] that the investors

would almost certainly lose all of their investments.”61 Accordingly, the complaint

sufficiently alleges the debtor’s insolvency for purposes of this motion to dismiss.

III. The trustee has failed to plead a claim for preference because the

alleged preferential transfers were not alleged to have been made on

account of an antecedent debt.

Section 547 authorizes the trustee to recover any preferential payments made

within 90 days before the bankruptcy filing. In this case, the $250,000 payment the

debtor allegedly made to Magento in July 2020 fell within the 90-day preference

period. In order for a transfer to be considered a preference, it must have been made

“on account of an antecedent debt owed by the debtor.”62 For purposes of § 547(b), a

debt is antecedent only if “it was incurred before the debtor made the allegedly

preferential transfer.”63

Defendant moves to dismiss on the ground that the July payment was not

made on account of an antecedent debt. Specifically, defendant contends that all

payments made under the Premier Agreement – which includes the $250,000 transfer

at issue here – were prepayments made in advance of the yearly 25 percent revenue

share obligation.64 The complaint acknowledges that all of the payments the debtor

known or predictable.”) (citations omitted). Nothing herein, however, should be construed to address

the question whether such a claim may be subject to subordination under 11 U.S.C. § 510(b).

59 In re Bayou Group, LLC, 439 B.R. 284, 335 (S.D.N.Y. 2010) (holding that equity holder’s claims for

fraudulent misrepresentation made at the time of the initial investment were properly considered in

an insolvency analysis); In re TWA, 134 F.3d 188, 197-198 (3d Cir. 1998) (holding that contingent

liabilities could be considered in an insolvency analysis).

60 D.I. 1 ¶ 106.

61 Id. ¶¶ 111-112.

62 11 U.S.C. § 547(b)(2).

63 In re Vaso Active Pharms. Inc., 500 B.R. 384, 393 (Bankr. D. Del. 2013).

64 D.I. 6 at 15-16.

Page 12 of 13

made were defined as “prepaid revenue shares” by the agreement and would later be

offset against the final amount owed.65

As Judge Walsh explained, “it is well established that advance payments are

prima facie not preferences because the transfer from the debtor to the creditor is not

for or on account of an antecedent debt.”66 The rationale is that a prepayment is a

payment made before the debtor incurs an obligation to pay – that is, these payments

are made in anticipation of goods being delivered or services being provided. Unless

and until such goods and services are received, no obligation to pay exists.

The trustee responds that the “prepayments” here are not subject to this

principle because the debtor was contractually obligated to make them under the

Premier Agreement. Because the agreement created such a legal obligation, the

trustee argues, the making of the payment satisfied that obligation. Accordingly, the

trustee continues, the payment was made on account of an antecedent debt.67

The district court in In re NewPage Corp., however, squarely rejected this

argument. That court explained that the “entry into an agreement that requires

prepayment does not alone create an antecedent debt or change the result that a

prepayment is by definition not on account of an antecedent debt.”68 The Court thus

finds that the $250,000 payment made to Magento is properly classified as a

prepayment. Under the reasoning of New Page, the debtor’s contractual obligation to

make this prepayment is of no consequence. Because prepayments are (by definition)

not made on account of an antecedent debt, the trustee has failed to allege facts

sufficient to plead a claim for preference. Defendant’s motion to dismiss this claim

will thus be granted without prejudice.

65 D.I. 1 ¶ 66.

66 In re Hechinger Inv. Co. of Del., Inc., No. 99-02261 (PJW), 2004 Bankr. LEXIS 2156, *8-9 (Bankr. D.

Del. 2004).

67 Jan. 25, 2023 Hr’g Tr. at 60.

68 569 B.R. 593, 602-603 (D. Del. 2017).

Drivetrain, LLC v. X. Commerce, Inc., Adv. Proc. No. 22-50448

February 7, 2023

Page 18 of 13

Conclusion

For the reasons set forth above, the defendant’s motion to dismiss the

fraudulent conveyance counts will be denied. Defendant’s motion to dismiss the

preference claim will be granted. The parties are directed to settle an appropriate

order under certification of counsel.

Sincerely,

i

Craig T. Goldblatt

United States Bankruptcy Judge