OFFICIAL COMMITTEE OF UNSECURED CREDITORS v. Vagenas

IN THE UNITED STATES BANKRUPTCY COURT

FOR THE DISTRICT OF DELAWARE

In re: Chapter 11

Pack Liquidating, LLC (f/k/a Packable Case No. 22-10797 (CTG)

Holdings, LLC), et al.,

(Jointly Administered)

Debtors.

Official Committee of Unsecured Adv. Proc. No. 23-50590 (CTG)

Creditors of Pack Liquidating, LLC, et al.,

derivatively, on behalf of the debtors’ Related Docket No. 101

estate,

Plaintiff,

v.

Andrew Vagenas, et al.,

Defendants.

MEMORANDUM OPINION

This action involves claims that have been made against various entities and

individuals associated with Quality King Distributors. The claims arise out of the

defendants’ relationship with Packable and its affiliates, which are the debtors in the

underlying bankruptcy case.1 The debtors’ business involved selling health and

wellness products through various e-commerce platforms. The business grew

1 This Memorandum Opinion is limited to addressing the motion to strike [D.I. 101] and the

motion to dismiss [D.I. 51] filed by one group of defendants who are affiliated with Quality

King. “Quality King” refers to Quality King Distributors, Inc. The defendants who have

brought these motions are Quality King, Glenn Nussdorf, Quality King Fragrances, Inc., Olla

Beauty Supply, LLC, Pro’s Choice Beauty Care, Inc., and Deborah International Beauty Ltd.

“QK Entities” refers to these defendants other than Nussdorf.

substantially in the period from its founding in 2014 until its implosion in 2022. But

despite the growth in revenues, it never achieved profitability. After an effort to raise

capital via a proposed SPAC merger fell through in late 2021, the company ultimately

spiraled into bankruptcy.

In addition to being a supplier of the debtors, Quality King was also an early

investor. As a result of its equity holdings, Quality King’s principal, Glenn Nussdorf,

sat on the debtors’ board of directors. The complaint asserts something of a

hodgepodge of bankruptcy and common law causes of actions in an effort to hold the

defendants responsible for the ultimate demise of the debtors’ business. The Court

concludes that these efforts are generally unsuccessful.

As an initial matter, the Committee (which has obtained standing to assert

estate causes of action) filed a second amended complaint without obtaining consent

or seeking leave of court. While they advance an argument about why Rule 15

permits them to do this, the argument is a weak one. That said, the violation is

ultimately a no-harm/no-foul situation, as their alternative argument for leave to file

the amended complaint ultimately lands us in the same place we would have been

had leave to file been permitted – assessing the question whether the complaint as

amended states a claim for which relief can be granted. So either way, the question

before the Court is whether the second amended complaint states a claim.

The answer is that it mostly does not. The complaint does properly assert

preference claims with respect to certain payments that were made within 90 days of

the bankruptcy filing. And because it states a valid preference claim, the complaint

also states a valid claim to disallow the proofs of claim, under § 502(d), asserted by

those defendants who are alleged to be recipients of transfers within the 90 days. The

rest of the complaint, however, fails to state a claim and will therefore be dismissed.

The actual fraudulent conveyance claims fail because the complaint does not

allege fraud with particularity, as required under Rule 9(b). The constructive

fraudulent conveyance claims relating to transfers alleged to have occurred before

the end of 2021 fail because there is no non-conclusory factual allegation of the

debtors’ insolvency before that time. And the constructive fraudulent conveyance

claims relating to transfers that occurred after that time fail because there is no

allegation that the debtors did not receive reasonably equivalent value in exchange

for the transfers in question.

The various common law causes of action are unsuccessful because, in

connection with loans that Quality King made to the debtors in 2022, the debtors

granted valid releases to the Quality King defendants.

The Committee’s preference claims relating to transfers made more than 90

days before the bankruptcy fail because the complaint does not allege that the

recipients of those transfers are insiders – either on the ground that they exercised

control over the debtors or that they are “non-statutory” insiders on account of non-

arm’s-length transactions between the parties.

The claims for equitable subordination are unsuccessful in the absence of an

otherwise sufficient allegation of wrongdoing; and the effort to recharacterize the

loans as equity also fail. Accordingly, while the claims for preference and § 502(d)

disallowance are sufficient to survive a motion to dismiss, the rest of the complaint is

not.

Factual Background

Pharmapacks was founded in 2010 by Andrew Vagenas, Bradley Tramunti,

and James Mastronardi as an e-commerce venture selling health and wellness

products.2

1. Quality King investment (2014)

In 2014, as part of an effort to raise capital, the founders formed a holding

company, known as Packable Holdings.3 Each of the founders originally held a one-

third interest in the holding company. In August 2014, Jonathan Webb, Adam

Berkowitz, and Quality King collectively paid $500,000 for 50 percent of the equity of

the holding company.4

Quality King is alleged to be a “retail diverter” – a company that purchases

products that are intended for a particular retail channel and sells those products

into an alternative channel.5 At the same time that it acquired equity in the holding

2 D.I. 98 ⁋⁋ 59-60. The description of the facts set forth herein is based on the allegations

made in the second amended complaint, which allegations are taken as true for the purposes

of the present motion.

3 The entity originally known as Entourage Commerce LLC later became Packable Holdings,

LLC. That entity has since been renamed Pack Liquidating LLC. D.I. 98 ¶ 21.

4 D.I. 98 ¶ 67.

5 Id. ⁋ 68 (“Retail Diverters operate at the fringe of the mainstream distribution channels and

‘divert’ the sale of merchandise intended for a particular, premium distribution channel into

another, alternate distribution channel, often at steep discounts.”)

company, Quality King made a revolving loan to the debtors under which it provided

up to $9 million in financing.6

That capital fueled rapid revenue growth – from $17.5 million in 2013, to $31

million in 2014, and $66.6 million in 2015.7 But despite the growth in revenues,

Pharmapacks remained unprofitable, recording net losses of $1.7 million in 2015.8

Over the next several years, the net losses of the debtors persisted and the debt

obligations to Quality King continued to grow, reaching a balance of $33 million by

the end of 2018. At that point, Quality King refused to extend further credit.9

2. Investments by suppliers (2018)

In need of additional capital, Pharmapacks then turned to its existing

suppliers. The company raised $32.5 million in Series A preferred equity in 2018

from Reckitt, McKesson, Sealed Air, and Emerson, a portion of which was used to

reduce the outstanding Quality King Loan by $6 million.10 As a result of the change

in the company’s ownership structure, the Holdings LLC Agreement was amended to

expand the board of managers to nine members – one of whom was Glenn Nussdorf,

the CEO of Quality King. 11

6 Id. ⁋ 71.

7 Id. ⁋ 72.

8 Id.

9 Id. ⁋ 90.

10 D.I. 98 ⁋ 93.

11 Id. ⁋ 94.

3. MGG loan (2019)

In 2019, the company conducted a further refinancing, securing a $75 million

credit facility from an entity known as MGG Investment Group, the proceeds of which

were used to repay the Quality King loan in its entirety.12 Quality King, however,

retained its equity interest and Nussdorf remained on the company’s board.

4. Carlyle transaction and insider redemptions (November 2020)

In November 2020, Carlyle invested approximately $215 million in a Series B

preferred equity offering. The Board approved the use of the proceeds of this equity

offering to redeem the equity interests held by the prior equity holders.13 Quality

King redeemed its equity interest, at a price of $60.25 per unit – the same price at

which the company issued new equity interests to Carlyle. Quality King accordingly

received more than $27 million in proceeds from this equity redemption.14

At the same time, the Board was reconstituted. Carlyle was granted two seats;

Reckitt, McKesson, and Sealed Air each received one; the founders retained three;

Nussdorf also remained on the board.15

5. SPAC efforts and Quality King liens (2021 – March 2022)

In 2021, Pharmapacks pursued a SPAC merger with Highland Transcend

Partners, based on a projected an equity value of the company of $1.9 billion.16 But

12 Id. ⁋ 95.

13 Id. ⁋⁋ 103-108.

14 Id. ⁋⁋ 113-114.

15 Id ⁋ 114.

16 D.I. 98 ⁋⁋ 121, 124.

by late 2021, Deloitte issued “going concern” qualifications, citing negative cash flows

and covenant issues under the company’s debt facilities.17 The company’s balance

sheet showed that as of the end of 2021, the debtors’ liabilities exceeded the value of

their assets.18

By March 2022, the company’s liquidity had essentially collapsed.19

Pharmapacks owed various vendors more than $42 million for goods they had

previously shipped. Some of these unpaid vendors withheld further shipments.20

Quality King refused to ship new product until the receivables due to it were reduced.

Between March 1 and March 15, 2022, Quality King filed three liens against the

debtors’ assets.21 On March 16, 2022, the SPAC merger was terminated, and

Holdings paid a $10 million break-up fee.22

6. Quality King’s role in the April 2022 term loan

On April 14, 2022, Pharmapacks entered into a term loan credit agreement

with a syndicate including Carlyle, Reckitt, McKesson, Sealed Air, Emerson, Castle

Ridge, Webb, and Quality King.23 The initial funding consisted of $77 million of new

money, plus the conversion of $9 million in trade debt to secured term debt.24 As part

17 Id. ⁋ 119.

18 Id. ⁋ 281.

19 Id. ⁋ 138.

20 Id. ⁋⁋ 139-140.

21 Id. ⁋⁋ 143-144.

22 D.I. 98 ⁋⁋ 148, 153.

23 Id. ⁋ 170.

24 Id. ⁋⁋ 171-173.

of the transaction, the debtors executed a broad release in favor of all lenders,

including Quality King, discharging them and their affiliates from any and all claims

relating to their prior conduct, investments, or dealings with the debtors.25

At the same time, Pharmapacks and Quality King entered into a memorandum

of understanding.26 Under that memorandum, Pharmapacks agreed to pay Quality

King, within four weeks, $5 million on account of outstanding receivables.

Pharmapacks further agreed to pay Quality King the rest of the outstanding

receivables balance within 180 days.27 In exchange, Quality King agreed to resume

supplying goods. The debtors made the first $2.5 million payment in May 2022, but

Quality King withheld new shipments thereafter.28 When Mastronardi pleaded with

Nussdorf to release purchase orders, Nussdorf rejected the request, stating the

receivables must be further reduced before any orders would be filled.29

7. Bridge loan and bankruptcy filing (July - August 2022)

By July 2022, the debtors had exhausted the April 2022 term loan proceeds.30

When Carlyle and other lenders refused further participation unless other interested

parties contributed, the term loan syndicate – including Quality King – extended an

25 Id. ⁋ 178.

26 Id. ⁋ 181.

27 Id.

28 D.I. 98 ⁋ 186.

29 Id. ⁋ 186.

30 Id. ⁋ 190.

$8.7 million bridge loan on July 21, 2022.31 Like the term loan, the bridge loan

contained broad general releases.32

On August 28, 2022, Pharmapacks filed for chapter 11.33 In the year leading

up to the filing, lenders including Quality King had received more than $70 million

in payments.34 During the bankruptcy, inventory valued at roughly $70 million was

sold at auction, with Quality King purchasing a substantial portion.35

Procedural Background

In September 2023, the Committee filed its initial complaint in this adversary

proceeding.36 In March 2024, the Committee filed its first amended complaint. That

filing was made as a matter of right under Rule 15(a)(1) of the Federal Rules of Civil

Procedure, as made applicable to this proceeding by Federal Rule of Bankruptcy

Procedure 7015.37 The defendants filed their motion to dismiss the first amended

complaint in June 2024, for failure to state a claim upon which relief may be

granted.38 The Committee did not oppose this motion. Instead, it filed a second

amended complaint. It did so, however, without seeking leave of this Court or with

permission from the defendants.39 The defendants subsequently filed their motion to

31 Id.

32 Id. ⁋ 191.

33 Id. ⁋ 20.

34 D.I. 98 at ⁋ 193.

35 Id. ⁋ 192.

36 D.I. 1.

37 D.I. 8; Fed. R. Civ. P. 15(a)(1).

38 D.I. 51.

39 D.I. 98.

strike the second amended complaint, or in the alternative, renewed their motion to

dismiss.40 The Court heard argument on these matters in May 2025, and now

resolves the motions as set out below.

Jurisdiction

Certain of the claims (those for preference, fraudulent conveyance, and

equitable subordination) arise under the Bankruptcy Code and are thus within the

district court’s “arising under” jurisdiction set out in 11 U.S.C. § 1334(b).41 The

common-law claims are within section 1334(b)’s “related to” jurisdiction because the

resolution of those claims would have a “conceivable effect” on the estate.42 These

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

February 29, 2012 standing order of reference.

Analysis

I. The Court will (reluctantly) deny the motion to strike.

Rule 15(a)(1) provides that “a party may amend its pleading once as a matter

of course within: (A) 21 days after serving it, or (B) if the pleading is one to which a

responsive pleading is required, 21 days after service of a responsive pleading or 21

days after service of a motion under Rule 12(b), (e), or (f), whichever is earlier.”43 Rule

40 D.I. 101.

41 In re Atamian, 368 B.R. 375, 379 (Bankr. D. Del. 2007) (citing Stoe v. Flaherty, 436 F.3d

209, 216 (3d Cir. 2006)).

42 In re Fairchild Corp., 452 B.R. 525, 530 (Bankr. D. Del. 2011).

43 Fed. R. Civ. P. 15(a)(1).

15(a)(2) goes on to explain that in “all other cases, a party may amend its pleading

only with the opposing party’s written consent or the court’s leave.”44

That language is just about as clear as English gets. A party gets one

amendment as of right. Second and subsequent amendments must be with consent

or on leave of the court. The court in Logue put the point simply: “Once means once.”45

The Committee’s textual argument, as far as it goes, is that even after amending its

complaint once under Rule 15(a)(1)(A), it may also amend it once under Rule

15(a)(1)(B).46 The problem with this reading is that this would read the word “or,”

which comes between Rule 15(a)(1)(A) and (a)(1)(B), to mean “and.” But just as “once”

means “once”, “or” means “or”.

The Committee argues that its reading is supported by a decision of the New

Jersey District Court in Getty Petroleum.47 It is true that the court in Getty Petroleum,

on its facts, permitted the filing of a second amended complaint under

Rule 15(a)(1)(B) as a matter of right. But that court’s analysis never engages the

question whether the fact that the plaintiff had previously amended the complaint

under Rule 15(a)(1)(A) ought to affect the analysis. Perhaps that was because the

44 Fed. R. Civ. P. 15(a)(2).

45 Logue v. Patient First Corp., 246 F. Supp.3d 1124, 1127 (D. Md. 2017). See also United

States ex rel. D’Agostino v. EV3, Inc., 802 F.3d 188, 192 (1st Cir. 2015) (“Once a party has

exhausted its one-time right to amend as a matter of course, it may make further

amendments only with the opposing party’s consent or with leave of court.”); Innovative

Water Consulting, LLC v. SA Hosp. Acquisition Group, LLC, No. 22-00500, 2023 WL 130531

(S.D. Ind. Jan. 9, 2023) (same).

46 See D.I. 139 at 54.

47 Route 27, LLC v. Getty Petroleum Marketing, Inc., No. 10-3080, 2011 WL 1256618 (D. N.J.

Mar. 30, 2011).

defendant in that case did not object to leave to amend on Rule 15 grounds.48 In any

event, the decision cannot be squared with the language of the rule. That rule permits

one amendment as a matter of course under Rule 15(a)(1). Second and subsequent

amendments are governed by Rule 15(a)(2).

The Committee argues in the alternative that even if leave was required, the

Court should now grant it leave to amend.49 The problem with that argument is that

it seems to reward the Committee for approaching Rule’s 15’s requirement that a

plaintiff obtain permission for leave to amend as, in effect, affording it the option

either to obtain permission beforehand or to beg for forgiveness afterwards. That is

not what the rule provides, and the Court has given serious consideration to denying

the motion for leave to amend as a form of sanction for the Committee’s flouting of

the rules. In the end, however, the Court concludes that such a “sanction” would be

an overreaction to what is, in fairness, a technical violation of the rules. The Supreme

Court has recently emphasized that “the spirit of the Federal Rules is that

decisions on the merits should not be avoided on the basis of mere technicalities.”50

Following this admonition, the Court concludes that it has little choice but to,

in effect, disregard the Committee’s violation of Rule 15. Instead, it will proceed as

if it had before it a properly filed motion for leave to amend. In such a case, “leave

must be granted in the absence of undue delay, bad faith, dilatory motive, unfair

48 Id., at *3 (“in their briefing, Defendants do not contend that Plaintiffs may not file their

Second Amendment Complaint as of right”).

49 D.I. 139 at 55-56.

50 Parrish v. United States, 145 S. Ct. 1664, 1674 (2025) (cleaned up).

prejudice, or futility of amendment.”51 There is no basis in the record for a finding

that the Committee acted with improper purpose or motive, or for a finding of

prejudice. And the question of futility asks, in substance, whether the second

amended complaint would survive a motion to dismiss.52 The Court accordingly

concludes that it is appropriate to proceed as if, in effect, the complaint has been

amended and simply treat the defendants’ motion to dismiss as being applicable to

the second amended complaint. Even proceeding on this basis, however, the Court

concludes, for the reasons described below, that most (although not all) of the second

amended complaint should be dismissed.

II. Most (but not all) of the second amended complaint should be

dismissed.

The Court’s task when considering a motion to dismiss is to determine whether

the complaint’s factual allegations are plausible and sufficient to state the claims

alleged.53 Under Rule 8(a) of the Federal Rules of Civil Procedure, a complaint must

include a “short and plain statement” showing that the plaintiff is “entitled to

relief.”54 The Supreme Court, in Iqbal and Twombly, made clear that plaintiffs

51 Grayson v. Mayview State Hosp., 293 F.3d 103, 108 (3d Cir. 2002).

52 See Shane v. Fauver, 213 F.3d 113, 115 (3d Cir. 2000) (“‘Futility’ means that the complaint,

as amended, would fail to state a claim upon which relief could be granted. In assessing

‘futility,’ the District Court applies the same standard of legal sufficiency as applies

under Rule 12(b)(6).”) (internal citation omitted).

53 In re DBSI, Inc., 447 B.R. 243, 246 (Bankr. D. Del. 2011); Kost v. Kozakiewicz, 1 F.3d 176,

183 (3d Cir. 1993); Burtch v. Milberg Factors, Inc., 662 F.3d 212, 221 (3d Cir. 2011)

(determining a claim has facial plausibility when the plaintiff pleads factual content that

allows the Court to draw the reasonable inference that the defendant is liable for the

misconduct alleged).

54 Fed. R. Civ. P. 8(a)(2) (made applicable to this proceeding by Rule 7008 of the Federal Rules

of Bankruptcy Procedure).

cannot “merely recite elements of a cause of action.”55 Such allegations should be

disregarded as conclusory. Rather, a complaint must contain actual factual

allegations that support the alleged claim. Accordingly, to survive a motion to

dismiss brought under Rule 12(b)(6), a complaint must “contain plausible facts which

state a claim.”56 In addition, Rule 9(b) requires that plaintiffs plead allegations of

fraud with particularity.57

Although ordinarily affirmative defenses (such as releases and the ordinary

course of business defense) are raised by answer and then considered (with respect to

the adequacy of the defense as pled) in a motion for judgment on the pleadings under

Rule 12(c), they may be decided on a motion to dismiss when facts that give rise to

the affirmative defense are themselves contained in the complaint or documents it

references.58

55 Ashcroft v. Iqbal, 556 U.S. 662 (2009); Bell Atlantic v. Twombly, 550 U.S. 544 (2007); In re

Liquid Holdings Grp., Inc., No. 17-50662 (KG), 2019 WL 3380820, at *1 (Bankr. D. Del. July

25, 2019).

56 Liquid Holdings, 2019 WL 3380820, at *1.

57 See Fed. R. Civ. P. 9(b) (“In alleging fraud or mistake, a party must state with particularity

the circumstances constituting fraud or mistake.”)

58 See Leveto v. Lapina, 258 F.3d 156, 161 (3d Cir. 2001) (“[A] complaint may be subject to

dismissal under Rule 12(b)(6) when an affirmative defense … appears on its face.”); In re

Burlington Coat Factory Sec. Litig., 114 F.3d 1410, 1426 (3d Cir. 1997) (documents “integral

to or explicitly relied upon in the complaint” may be considered on a motion to dismiss).

A. The complaint fails to allege claims for fraudulent conveyance.

1. The claims for actual fraudulent conveyance fail

because the complaint fails to allege fraud with the

particularity required by Rule 9(b).

The Committee alleges that several transfers made by the debtors to the QK

Entities were made with actual intent to hinder, delay, or defraud creditors. To

survive dismissal, the Committee must plead facts sufficient to support a plausible

inference of fraudulent intent. Section 548(a)(1)(A) requires a showing that (i) the

transfers occurred within two years of the petition date, and (ii) the debtors made the

transfers with the requisite fraudulent intent.

Although it is the intent of the transferor that is considered for a § 548(a)(1)(A)

analysis, “[m]ost courts recognize that when a transferee is in a position to dominate

or control the debtor’s disposition of the property, the transferee’s intent to hinder,

delay, or defraud will be imputed to the debtor/transferor.”59 The court in Maxus

concluded that for this exception to apply, the Committee “must prove: (i) [the

defendant] possessed the requisite intent to hinder, delay or defraud [the debtor’s]

creditors, (ii) [the defendant] was in a position to dominate or control [the debtor];

and (iii) this domination and control related to [the debtor’s] disposition of the

property.”60

Because fraudulent intent is at the heart of the claim, it must be pled with

particularity under Rule 9(b). Where direct evidence is absent, courts may look to

59 In re Maxus Energy Corp., 641 B.R. 467, 512-13 (Bankr. D. Del. 2022) (internal citations

omitted).

60 Id.

badges of fraud, but even then, the allegations must contain concrete factual detail,

not mere conclusory statements.61

The Committee’s theory is that the QK Entities, (for the same reason they are

alleged to be insiders) effectively controlled the debtors and thus directed the

challenged transfers. That theory fails for two reasons. First, as discussed in greater

detail below, the complaint has not plausibly alleged that the QK Entities dominated

or controlled the debtors’ disposition of property. While Nussdorf sat on the debtors’

board, there are no factual allegations that he acted as an agent of the QK Entities

or that those entities directed his conduct. Without a showing that the QK Entities

could dominate or control the debtors, there is no basis to impute their intent to the

debtors under the test set out in Maxus.

Second, even as to Nussdorf individually, the imputation theory

fails. Maxus teaches that the intent of a controlling transferee may, in limited

circumstances, be imputed to the debtor. But this Court’s reasoning

in Cyber explains that where the challenged conduct is an action that required

approval of a corporate board, the relevant intent is that of a majority of the board.

The Committee does not allege that a majority of the debtors’ board acted with

fraudulent intent, nor does it allege that Nussdorf’s individual intent drove the

61 In re Fedders North America, Inc., 405 B.R. 527, 545 (Bankr. D. Del. 2009) (In re Hechinger

Inv. Co. of Del., 327 B.R. 537, 551 (D. Del. 2005)). The “badges of fraud” include, but are not

limited to: (1) the relationship between the debtor and the transferee; (2) consideration for

the conveyance; (3) insolvency or indebtedness of the debtors; (4) how much of the debtor’s

estate was transferred; (5) reservation of benefits, control or dominion by the debtor over the

property transferred; and (6) secrecy or concealment of the transaction.

board’s decisions. Accordingly, the Committee’s reliance on Nussdorf’s board

membership to establish fraudulent intent on behalf of the debtors is misplaced.

Finally, even if the Court were to set aside these substantive deficiencies, the

complaint falls short of Rule 9(b). The allegations consist largely of generalized

assertions that the QK Entities “controlled” the debtors or that Nussdorf “caused” the

transfers to occur. But the complaint makes no allegation about any specific

communication, board deliberations, or factual circumstances that would support an

inference of fraudulent intent. Such conclusory allegations do not meet the

heightened pleading requirement that fraud be pled with particularity.

Because the Committee has not plausibly alleged that the debtors acted with

actual intent to hinder, delay, or defraud creditors – and because the complaint fails

to satisfy Rule 9(b) – the claims under § 548(a)(1)(A) must be dismissed.

2. The claims for constructive fraudulent conveyance fail

because, as to the only transfers alleged to occur at a time

when insolvency is sufficiently alleged, there is no

allegation that the debtors did not receive reasonably

equivalent value.

In several counts of the amended complaint, the Committee seeks to avoid

transfers to the defendants as constructive fraudulent conveyances under

§ 548(a)(1)(B) and state-law analogs under § 544(b). All that is needed to plead a

constructive fraudulent conveyance claim adequately is “an allegation that there was

a transfer for less than reasonably equivalent value at a time when the [debtor was]

insolvent.”62 Here, insolvency is sufficiently pled only as to those transactions that

occurred after the end of 2021. And as to those transactions, there is no allegation

that the debtors did not receive reasonably equivalent value in exchange for those

transfers.

a. Insolvency is not sufficiently pled until the end of

2021.

“Insolvency” is an element of a claim for constructive fraudulent conveyance.

For this purpose, that effectively means that the debtor (i) was balance sheet

insolvent at the time of the transfer (or became so as a result thereof); (ii) had

unreasonably small capital; or (iii) was unable to pay its debts as those debts

matured.63 A claim for constructive fraudulent conveyance accordingly requires

factual allegations that would support such a determination. “Mere recitations by a

trustee that a debtor is insolvent are conclusory,” and are therefore insufficient to

survive a motion to dismiss.64

The complaint is replete with conclusory assertions of insolvency. But the

caselaw described above makes clear that such conclusory assertions ought to be

disregarded. As far as concrete factual allegations go, the allegation that the

company was able to raise hundreds of millions of dollars in equity financing in late

2020 counsels strongly against any reading of the complaint that would suggest that

62 In re BMT-NW Acquisition, LLC, 582 B.R. 846, 856 (Bankr. D. Del. 2018) (citing In re

AgFeed USA, LLC, 546 B.R. 318, 336 (Bankr. D. Del. 2016)); citing In re Pillowtex Corp., 427

B.R. 301, 310 (Bankr. D. Del. 2010) (“[C]ourts in this district have held that claims of

constructive fraud (i.e., fraudulent transfers) are evaluated using Rule 8(a)(2).”)).

63 11 U.S.C. § 548(a)(1)(B)(ii).

64 In re Amcad Holdings, LLC, 579 B.R. 33, 38–39 (Bankr. D. Del. 2017).

the company was insolvent at that time. The first factual allegation that supports a

claim of insolvency is the allegation that the company’s October 2021 financials

included a qualification expressing doubt about the company’s ability to fund

operations for the next 12 months and raising questions about the company’s ability

to proceed as a going concern.65

It is less than certain whether such a statement is sufficient to plead

insolvency. But any such ambiguity is resolved by the allegation that the company’s

year-end 2021 audited financials showed that “liabilities exceeded assets by $60

million.”66 That is a text-book allegation of balance-sheet insolvency. Because the

complaint does not allege that there were transfers between the time of the going

concern qualification and the end of calendar year 2021, there is no need to parse the

legal sufficiency of the going concern qualifications standing alone. It is clear that

the complaint does allege insolvency with respect to transactions that occurred after

the end of 2021. It does not, however, sufficiently plead insolvency as to any of the

transfers that it alleges were made before that time.

b. Although insolvency has been pled sufficiently as of

the end of 2021, the complaint fails to allege the

absence of reasonably equivalent value for the

transfers that occurred after that time.

A determination whether the value a debtor received for a transfer was

“reasonably equivalent” is necessarily a factual one, typically requiring comparisons

of the value of the transfer with the consideration received in exchange for the

65 D.I. 98 ¶ 119.

66 Id. ¶ 281.

transfer. That said, a complaint must still sufficiently allege that the value received

in exchange for the transfer was not reasonably equivalent. Here, the two categories

of “transfers” that were alleged to have occurred after the debtors became insolvent

were the payment of invoices to Quality King and the releases granted in connection

with the term loan and the bridge loan. The complaint fails to allege that the

consideration that the debtors received in connection with either of these types of

transfers was not reasonably equivalent to the value of the transfers.

The one-year invoice payments. The Bankruptcy Code and Delaware statute

both define “value” to include satisfaction of an antecedent debt.67 Payments that

satisfy an otherwise valid antecedent debt are accordingly made for reasonably

equivalent value.68 Here, there is no suggestion in the complaint that the payments

did not, in fact, satisfy otherwise valid debts.69 Accordingly, the Committee cannot

claim that the invoice payments were not made for reasonably equivalent value.70

67 11 U.S.C. § 548(d)(2)(A); 6 Del. C. § 1304(a)(2).

68 See In re Opus E., LLC, 528 B.R. 30, 83 (Bankr. D. Del. 2015); Pashaian v. Eccelston Props.,

Ltd., 88 F.3d 77, 85 (2d Cir.1996) (“[T]he general rule is that the satisfaction of a preexisting

debt qualifies as fair consideration...”); In re Champion Enters., Adv. No. 10-50514, 2010 WL

3522132, at *18 (Bankr. D. Del. Sept. 1, 2010) (“The Court agrees with Defendants that

generally under the Fraudulent Conveyance Act, satisfaction of an antecedent debt is ‘fair

consideration’ for a conveyance.”) (citations omitted).

69 D.I. 98 ¶ 277 (“Each of the One Year Transfers was made for, or on account of, an

antecedent debt or debts owed by the Debtors to one of the Preference Defendants before such

One Year Transfers were made.”); see also id. ¶ 276 (“Each of the Preference Defendants was

a vendor and/or supplier to the Debtors . . . by virtue of supplying goods and/or services to or

for the benefit of the Debtors . . . for which the Debtors were obligated to pay.”).

70 See, e.g., In re Capmark, 438 B.R. 471, 518 (Bankr. D. Del. 2010) (“Where a bona fide

antecedent debt exists, a debtor’s payment on account of that creditor’s claim, even if it has

the result of preferring that creditor over others, is not by itself a fraudulent transfer.”)

The constructive fraudulent conveyance claim with respect to these payments thus

fails to state a claim.

The releases granted in connection with the term loan and the bridge loan. The

second amended complaint also alleges that the releases that were given to Quality

King in connection with the two loans that Quality King made to the debtors were

themselves fraudulent conveyances. Specifically, in connection with both the $10.5

million term loan and the $1.4 million bridge loan, the debtors granted releases to

Quality King, its affiliates, and related individuals.

The Committee’s primary argument for a lack of reasonable value rests on the

fact that they contend the releases were over broad and disproportionate to the

lending relationship. The complaint alleges that general releases were granted for

the benefit not only of the Quality King entity that made the loan, but also for the

benefit of affiliates of and individuals associated with Quality King. The defendants

argue that the plaintiffs have not satisfied their burden of demonstrating a lack of

reasonably equivalent value. The Court agrees with the defendants that the

Committee has not plausibly alleged that, in these transactions, the estate did not

receive reasonably equivalent value.

As the Third Circuit has noted, “a party receives reasonably equivalent value

for what it gives up if it gets ‘roughly the value it gave.’”71 In addressing the question

whether a debtor received reasonably equivalent value, a court looks to the totality

71 VFB LLC v. Campbell Soup Co., 482 F.3d 624, 631 (3d Cir. 2007) (internal citations

omitted).

of the circumstances of the transfer, including the following factors: (i) the “fair

market value” of the benefit received as a result of the transfer, (ii) “the existence of

an arm’s-length relationship between the debtor and the transferee,” and (3) the

transferee’s good faith.72

Taking all the facts in the complaint as true and drawing all reasonable

inferences in favor of the Committee, the complaint fails to allege a lack of reasonably

equivalent value. The complaint recognized that at the time that Quality King

elected to extend credit by making the loans in question, the debtors had effectively

exhausted all efforts to obtain a third-party loan. “[T]he Board … acknowledged that

no reasonable investor or commercial lender would invest additional equity or extend

additional debt to Holdings given its precarious financial position.”73

Under these circumstances, the fact that the loan terms included a release for

the lender and related parties is woefully inadequate to suggest that the terms did

not reflect reasonably equivalent value. Counsel for the Committee correctly

recognized, simply as a matter of the market dynamics, that “certainly a release was

going to come with the term loan.”74 In connection with a loan that brought in $80

million of new money to a company then in serious financial distress and that had

exhausted its efforts to obtain needed capital from other sources, it cannot fairly be

72 In re Fruehauf Trailer Corp., 444 F.3d 203, 213 (3d Cir. 2006) (quoting In re R.M.L., 92

F.3d 139, 148-49, 153 (3d Cir. 1996)).

73 D.I. 98 ⁋ 156.

74 May 29, 2025 Hr’g Tr. at 73.

said that the terms of the release as alleged here render the transaction one in which

the debtors did not receive reasonably equivalent value.

The fraudulent conveyance actions against the defendants that seeks to avoid

the releases granted in connection with the term loan and the bridge loan do not

allege claims that are plausible under the standards laid out in Iqbal and Twombly.

Those claims will accordingly be dismissed.

B. Because the defendants are validly released, the common law

claims will be dismissed.

The Committee has pled various common law causes of action against the

defendants, including breach of contract, breach of fiduciary duty, breach of the

covenant of good faith and fair dealing, unjust enrichment, aiding and abetting

breach of fiduciary duty, aiding and abetting breach of contract, and tortious

interference with contract.

Other than their unsuccessful effort to set aside the releases on the grounds

that the releases themselves amounted to fraudulent conveyances, the Committee

does not otherwise take issue with the validity or enforceability of the general

releases. Because the common law claims all fall within the ambit of those releases,

they fail to state a claim for which relief may be granted.

“Delaware courts recognize the validity of general releases.”75 To that end,

“general releases are common,” “their validity is unchallenged,” and “a general

75 Deuley v. DynCorp Int’l, Inc., 8 A.3d 1156, 1163 (Del. 2010).

release that waives all known or unknown claims” is enforceable under Delaware

law.76 The releases here provide that the debtors:

forever waive[], release[] and discharge[] each Released Party from any

and all claims, obligations, rights, suits, damages, causes of action,

remedies and liabilities whatsoever, including any derivative claims,

asserted or assertable on behalf of the Releasing Parties, whether

known or unknown, foreseen or unforeseen, existing or hereinafter

arising, in law, equity or otherwise, that the Releasing Parties would

have been legally entitled to assert in their own right . . . based on or

relating to, or in any manner arising from, in whole or in part, any fact,

act or omission, transaction, agreement, event or other occurrence or

circumstance related to the Company or transactions relating to the

Company existing or taking place on or before such Effective Date,

including, without limitation, the operation, management, financing, or

business affairs of the Company, the purchase, sale, issue or rescission

of the purchase, sale or issue of any security, share, or interest of the

Company . . .77

The common law claims are barred by the plain language of the releases. The

asserted common law claims all arise from conduct alleged to predate the releases,

and each count arises out of transactions and conduct alleged to have occurred in

connection with the debtors. The various common law claims must therefore be

dismissed.

C. Because the complaint fails to allege that the preference

defendants are insiders, the preference claims arising out of

transfers more than 90 days before the petition date will be

dismissed.

Under § 547(b)(4), a transfer that otherwise meets the criteria to be avoided as

a preference may be avoided if it was made to a non-insider within 90 days of the

76 Riverbend Cmty., LLC v. Green Stone Eng’g, LLC, 55 A.3d 330, 336 (Del. 2012).

77 Meloro Decl. Ex. 4, Term Loan Release § 2(a) (emphasis added). The bridge loan release

contains similar language. D.I. 98 ⁋ 191.

petition date, or if it was made to an insider in the period between 90 days and one

year of the petition date. Many of the transfers that the Committee seeks to avoid as

preferential are alleged to have occurred outside the 90-day period, so can only be

avoided if the transferee is an “insider” of the debtor as that term is defined in

§ 101(31) of the Bankruptcy Code.

1. The complaint fails to allege that Quality King is a

statutory insider.

Neither party disputes that Nussdorf is a statutory insider of the debtors by

virtue of his role as a manager and board member.78 The issue turns on whether the

Quality King Entities themselves qualify as insiders under § 101(31).79 The

Committee’s position rests one argument: they contend that the defendants’ ability

to select a member to the debtors’ board effectively makes each of them a statutory

insider within the definition of § 101(31)(B)(iii), by virtue of their “control” over the

debtors.80 Essentially, the argument is that Nussdorf was acting as an agent of the

QK Entities, and that the QK Entities thereby controlled the debtors.

78 D.I. 52 at 26.

79 See 11 U.S.C. § 101(31)(B)(i).

80 D.I. 139 at 31-32 (“As their officer and/or director, Nussdorf was an agent of the Quality

King Entities, representing their interests and acting on their behalf. SAC at ¶¶ 39, 44, 84.

Nussdorf controlled the Quality King Entities with regard to their transactions with the

Debtors. SAC at ¶¶ 81-83. The fact that Nussdorf was the named Manager rather than the

Quality King Entities is a distinction without a difference; the Quality King Entities

participated on the Board through their agent, Nussdorf. Therefore, the Quality King

Entities were de facto managers of the Debtors and qualify as statutory insiders.”) (emphasis

in original).

Courts have consistently held that “actual control (or its close equivalent)” is

required to meet this statutory standard.81 Allegations that an entity monitored a

company’s business and attended board meetings is insufficient to assert a claim that

depends on actual control.82 Rather, there must be a showing that the entity

exercised “day-to-day control” over the company’s business affairs.83 The entity must

have so significant a role in the “the company so as to dictate corporate policy and

disposition of corporate assets without limits.”84

The allegations here fall short of that standard. The Committee points to

transactions such as loans, equity stakes, and redemptions. None of that, however,

approaches the type of day-to-day managerial control required by the case law. There

is no allegation suggesting that the QK Entities directed the debtors’ daily operations

or exercised unfettered authority over corporate decisions. Nussdorf’s alleged

participation in board discussions regarding transactions between the debtors and

81 In re Winstar Commc’ns, Inc., 554 F.3d 382, 396 (3d Cir. 2009).

82 In re Radnor Holdings Corp., 353 B.R. 820, 840-841 (Bankr. D. Del. 2006) (internal

citations omitted) (“TCP was not an insider for purposes of equitable subordination, as it was

not a ‘person in control of the debtor.’ Evidence that TCP monitored the Company’s business

and attended Board Meetings is insufficient; the Committee failed to prove that TCP

exercised ‘day-to-day control’ over Radnor’s business affairs and dictated Radnor’s

business.”).

83 In re U.S. Med., Inc., 531 F.3d 1272 (10th Cir. 2008) (holding that the creditor, despite

having a 10.6% interest in the debtor and having the ability to appoint a member to the

debtors’ board, was not an insider of the debtor because it had not exercised the required

control and undue influence over the debtor); In re QuVIS, Inc., 469 B.R. 353, 368 (D. Kan.),

(“But Moulton’s status as a statutory insider does not extend to Seacoast because the idea

that a corporation can be a ‘de facto director’ under 11 U.S.C. § 101(31) has no basis in statute

or case law.”)

84 In re Zohar III, Corp., 639 B.R. 73, 92 (Bankr. D. Del. 2022) (emphasis in original).

the defendant entities is insufficient to establish that the QK Entities controlled the

debtors.

More particularly, although Nussdorf is an insider, the board members’

participation in the workings of the debtor do not explain how the QK Entities

possessed the necessary day-to-day control over the debtor companies such that they

were in “actual control” over the debtors. The complaint alleges that the QK Entities

conducted transactions by lending money, obtaining equity in the debtor, and

entering transactions under which they redeemed their equity holdings and obtained

releases. But none of these allegations is sufficient to allege the type of day-to-day

managerial control sufficient to satisfy the statutory standard.

The Committee points to In re Papercraft as a case in which a court determined

that a corporation that was entitled to appoint a member of the debtor’s board was

an insider.85 But that case is much different from this one. There, the board

appointee, among other things, used confidential debtor information to advance the

interests of his appointing company. Here, there is no specific factual allegation

(beyond the conclusory assertions) that Nussdorf acted outside the scope of his role

as a director, much less that he misused his position to benefit the QK Entities.

2. The complaint also fails to allege that Quality King is a

non-statutory insider of the debtors.

Section 101(31) sets out what the term insider “includes” rather than what it

“means.” The caselaw accordingly makes clear that the statutory enumeration of

85 D.I. 139 at 31-32 (citing 187 B.R. 486, 494-95 (Bankr. W.D. Pa. 1995)).

entities that qualify as “insiders” is not comprehensive. Rather, courts retain the

flexibility under the statute to treat a party as an “insider” even if the expressly

enumerated statutory criteria are not met. The Committee accordingly argues that

even if the defendants do not fall within the Code’s express definition of “insider,”

they nonetheless qualify as non-statutory insiders.

The Committee grounds this argument in the second amended complaint’s

assertions relating to (1) the proximity of QK Entities to the debtors, (2) the control

and influence exerted by the QK Entities on the debtors, and (3) the asserted non-

arms’-length transactions between the QK Entities and the debtors.86 The defendants

respond by pointing out that these assertions are largely conclusory, and that the

complaint does not contain concrete factual allegations sufficient to establish the kind

of close relationship sufficient to meet the requirements of a non-statutory insider.

The Third Circuit’s decision in Winstar explains that a defendant may be

deemed a non-statutory insider upon a showing (i) of the existence of a close

relationship between the debtor and the alleged insider, and (ii) that the transactions

between the parties were not conducted at arm’s-length.87 Applying that standard

here, the second amended complaint fails to allege facts sufficient to make this

showing.

86 See D.I. 98 ¶¶ 268-283.

87 554 F.3d 396-397 (3d Cir. 2009); see also In re KCMVNO, Inc., No. 08-10600/10-50730

(BLS), 2010 WL 4064832, at *4 (Bankr. D. Del. Oct. 15, 2010) (analyzing In re Winstar 554

F.3d at 382).

The complaint does assert that the QK Entities and the debtors maintained a

longstanding economic relationship. There is no dispute that the debtors viewed

Quality King as a critical vendor, that it was one of the debtors’ largest unsecured

trade creditors, and that the parties had engaged in a number of significant

transactions. The second amended complaint further alleges that Nussdorf served

on the debtors’ board for more than eight years and regularly attended board

meetings. But these allegations, even accepted as true, do not appear to allege the

type of close relationship necessary, under existing law, to confer non-statutory

insider status.88 Rather, they appear to reflect the dynamics of a significant

commercial partnership coupled with a board-level relationship between one

individual and the debtor.

In this respect, the circumstances of this case seems to be similar to those in

KCMVNO. There, the court determined that a non-statutory insider determination

was not appropriate under the standard set forth in Winstar. The court pointed out

that in Winstar the facts established that Lucent used the debtor as a mere

instrumentality to manipulate its own revenue and exerted near-total control over

the debtor’s purchasing decisions.89 In contrast, the facts in KCMVNO established

that the long-standing supplier/purchaser relationship, despite evidence of NDAs,

critical vendor relationships, and use of the debtor’s logos for certain operations, was

88 See id. (holding that the relationship between the supplier and the purchaser, despite

several layers of their relationship, was not probative of a “close relationship” for the purpose

of an insider analysis).

89 In re KCMVNO, Inc., 554 F.3d at 397-400.

not sufficient to establish an insider relationship under the Bankruptcy Code. Based

on the allegations here, this case appears to be more like KCMVNO than like Winstar.

But even if the complaint did satisfy the first prong of the Winstar standard, it

plainly fails the second, as nothing in the complaint alleges the type of non-arm’s

length dealings required by Winstar. Although plaintiffs repeatedly assert (in

conclusory fashion) that the transactions between Quality King and the debtors were

not arm’s length, the complaint does not allege actual facts that would support that

conclusion. Rather, the factual allegations point the other way: the debtors and

Quality King negotiated in their respective commercial roles as supplier and

purchaser. Nothing in the complaint suggests that the debtors were unable to

bargain freely or that Quality King did anything more than exercise whatever

commercial leverage it may have had in those negotiations. Unlike in Winstar, there

is no suggestion that the debtors here were ever simply doing Quality King’s bidding.

The allegations suggest that the debtors and its management team were doing their

best to serve the interests of the debtors. That is the kind of allegation that would be

needed (and was present in Winstar) to cross the line between the exercise of

commercial leverage and the kind of “control” sufficient for one party to be a non-

statutory insider of another.

The allegations accordingly fall short of what is necessary to be a non-statutory

insider under Winstar. They are likely insufficient to allege the kind of close

relationship that would meet the first prong of Winstar. But even if that prong were

satisfied, they fail to allege the kind of non-arm’s length dealings sufficient to meet

the second prong.

Accordingly, the preference actions seeking avoidance of transfers outside of

the 90-day period, which are premised on Quality King being an insider of the

debtors, fail as a matter of law and must be dismissed.

That said, the second amended complaint does allege that certain transfers

were made to the QK Entities within the 90-day period. The allegations with respect

to these transactions appear sufficient to establish the elements of a preference under

§ 547 of the Bankruptcy Code.90 Accordingly, the motion to dismiss is denied as to

any transfers alleged to have been made within 90-days of the petition date. 91

D. The claim for equitable subordination fails.

Section 510(c) authorizes the Court to “subordinate for purposes of distribution

all or part of an allowed claim to all or part of another allowed claim or all or part of

an allowed interest to all or part of another allowed interest.”92 Equitable

subordination is a remedy that allows a court to subordinate the level of priority of a

creditor’s claim in light of any inequitable conduct committed by that creditor that

may have harmed the bankruptcy estate.93

90 D.I. 98-1, at 19 of 56.

91 Barnhill v. Johnson, 503 U.S. 393 (1992) (establishing that the date to consider when

assessing a preference action under 11 U.S.C. § 547 is not the invoice or delivery date of a

check but the date the check is honored).

92 11 U.S.C. § 510(c)(1); In re Opus E., LLC, 528 B.R. at 105; In re Winstar, 554 F.3d at 411

(quoting Citicorp Venture Capital, Ltd. v. Committee of Creditors Holding Unsecured Claims,

323 F.3d 228, 233-34 (3d Cir. 2003)).

93 11 U.S.C. § 510(c); see generally In re Mobile Steel, 563 F.2d 692 (5th Cir. 1977); In re Elrod

Holdings Corp., 421 B.R. 700, 716 (Bankr. D. Del. 2010).

Three conditions must be satisfied before a court will equitably subordinate a

claim: (1) the claimant must have engaged in some type of inequitable conduct; (2) the

misconduct must have resulted in injury to the creditors of the bankruptcy estate or

conferred an unfair advantage on the claimant; and (3) equitable subordination of the

claim must not be inconsistent with the provisions of the Bankruptcy Code.94

Equitable subordination is a “drastic” and “unusual” remedy that should only be

applied in limited circumstances.95

The caselaw provides that if “the misbehaving creditor is a non-insider, the

plaintiff must generally allege gross misconduct,” whereas if the creditor is an insider,

while gross misconduct need not be found, “there still needs to be some plausible

allegation of unfair conduct.”96 For non-insiders, gross misconduct or egregious

conduct is generally that which rises to the level of fraud, overreaching, or spoilation,

or involves moral turpitude.97 The second amended complaint does not allege conduct

that would provide a basis to subordinate the defendants’ claim under the equitable

subordination doctrine. The plaintiff’s claim for equitable subordination will

accordingly be dismissed.

94 In re Winstar, 554 F.3d at 411-412.

95 In re Zohar III, Corp., 620 F. Supp. 3d 147, 152 (D. Del. 2022).

96 Id.

97 See United States v. State Street Bank and Trust Co., 520 B.R. 29, 87 (Bankr. D. Del. 2014)

(citations omitted); In re Mid-American Waste Sys., Inc., 284 B.R. 53, 70 (Bankr. D. Del.

2002).

E. The recharacterization claim fails.

The Committee also asks this Court to recharacterize Quality King’s term loan

as equity rather than a secured claim. The Committee contends that the term loan

was not a bona fide loan transaction but rather a disguised equity infusion, pointing

to what it says were non-arm’s-length terms, the absence of certain traditional

repayment features, and the debtors’ undercapitalization at the time of funding. The

Committee further argues that recharacterization is appropriate because the

economic reality of the transaction was that the term lenders were functioning as

investors whose repayment was dependent on the possibility that the debtors would

be able to return value to their shareholders, rather than as creditors expecting

repayment on standard commercial loan terms.

The recharacterization power is commonly misunderstood. In this Court’s

view, nothing in the federal bankruptcy power gives this Court the authority to

convert what is actually a loan into an equity infusion. Rather, the authority to

recharacterize is a branch of the doctrine under which bankruptcy law does not

permit form to control over substance.98 Where the underlying economic reality of

the situation is that an investment is better understood as the acquisition of equity

rather than a loan, the court has the authority to treat it in accordance with that

reality. The point is that “recharacterization” changes the name of the thing to call

it what it really is. There is no power to change what is truly a loan into an equity

98 See generally, Pepper v. Litton, 308 U.S. 295, 305 (1939) (bankruptcy law should ensure

that “substance will not give way to form”).

investment. Accordingly, recharacterization requires proof that, at the time of the

subject transaction, the economic reality of the situation was that the investor was

contributing equity capital rather than making a loan.99

Courts will infer intent “from what the parties say in their contracts, from what

they do through their actions, and from the economic reality of the surrounding

circumstances.”100 While there is a sense in which this analysis involves a fact-

dependent judgment, courts do not hesitate to dismiss recharacterization claims on a

motion to dismiss when the factual allegations of the complaint do not provide a basis

for recharacterization.101

Here, the complaint does little more than recite the elements of a

recharacterization claim. The complaint states in general terms that the term loan

was “understood to be a capital infusion.” The complaint alleges that the debtors

were in financial distress, that allegedly conflicted directors were involved in

approving the transaction, and that the debtors were otherwise unable to obtain

financing from a commercial lender.102 The complaint does not, however, include

99 See In re SubMicron Sys. Corp., 432 F.3d 448, 458 (3d Cir. 2006).

100 Id. at 456.

101 See, e.g., In re Our Alchemy, LLC, No. 16-11596/18-50633 (KG), 2019 WL 4447535, at *6-

11 (Bankr. D. Del. Sept. 16, 2019); In re Licking River Mining, LLC, 572 B.R. 812, 825 (Bankr.

E.D. Ky. 2017); In re Lyondell Chem. Co., 544 B.R. 75, 102-104 (Bankr. S.D.N.Y. 2016); In re

Personal Commc’n Devices, LLC, 528 B.R. 229, 237-239 (Bankr. E.D.N.Y. 2015); In re Moll

Indus., Inc., 454 B.R. 574, 581-585 (Bankr. D. Del. 2011); In re BH S & B Holdings LLC, 420

B.R. 112, 160 (Bankr. S.D.N.Y. 2009); In re Adelphia Commc’ns Corp., 365 B.R. 24, 74-75

(Bankr. S.D.N.Y. 2007).

102 D.I. 98 ⁋ 250 (“The facts and circumstances alleged above demonstrate that the Term Loan

Agent and Remaining Lenders advanced the funds to the Debtors not as lenders but as

investors, with the parties understanding and intending that the Term Lenders would be

factual allegations that the parties themselves intended, at the time the term loan

was consummated, to treat the funds as equity rather than debt. Nor does the

complaint allege facts sufficient to show that, under the economic realities of the

situation, this transaction was in fact an equity infusion rather than a loan.

The complaint asserts that the term loan was approved by a conflicted board

that was controlled directly or indirectly by the term lenders, and that the term loan

was understood to be a capital infusion rather than a loan because the lenders “knew

there was no known source of repayment of the Term Loan at the time the Tranche

A funding was made and that the Debtors were significantly undercapitalized at the

time.”103 The complaint alleges that the defendants’ refusal to contribute additional

funds after the initial tranche of funding indicates that the single tranche of funding

was in fact a capital infusion rather than a loan.

The Committee’s argument that the defendants’ knowledge of the debtors’

undercapitalization evidences an intent to make an equity contribution rather than

a loan is unpersuasive. As SubMicron makes clear, when existing lenders advance

funds to a distressed borrower, it is often the case that they are seeking to protect

their prior credit exposure. In such circumstances, traditional lending metrics such

repaid when the business stabilized and improved, allowing the Debtors to consummate the

IPO.”); D.I. 98 ⁋ 253 (“The Remaining Term Lenders knew there was no known source of

repayment of the Term Loan at the time the Tranche A funding was made and that the

Debtors were significantly undercapitalized at the time. Repayment was contingent upon

identifying a new investor or a new SPAC or similar IPO transaction. As a result, the Term

Loan was structured so as to only commit to funding of the Tranche A Term Loan

notwithstanding the Remaining Term Lenders’ knowledge that the Debtors required more

than the Tranche A Term Loan to fund the Debtors in the short term.”)

103 D.I. 98 ⁋ 253.

as solvency, capitalization, or cash-flow ratios are not evaluated in the same was as

they would be for a healthy borrower.104 The fact that outside lenders were unwilling

to extend additional financing does not by itself transform the term loan into an

equity contribution. Nor does the fact that the defendants declined to advance

additional funds beyond the initial tranche support an inference that the lenders in

fact made an equity investment.

In sum, the complaint’s allegations fall short of plausibly supporting

recharacterization. The Court therefore concludes that the Committee has failed to

state a claim upon which relief can be granted, and the motion to dismiss the

recharacterization claim will be granted.

F. The claim for disallowance under § 502(d) is not dismissed in

light of the remaining preference action.

The complaint alleges that certain of the defendants have filed proofs of claim,

including for the debt that was due under the term loan. Section 502(d) of the

Bankruptcy Code provides that those claims shall be disallowed unless and until any

avoidable transfer that the defendants received is in fact returned to the bankruptcy

estate. Because certain of the preference claims (those made within 90 days of the

bankruptcy filing) survive the motion to dismiss, the § 502(d) disallowance claims

against those defendants are accordingly sufficient to state a claim. The motion to

dismiss those claims will therefore be denied.

104 In re SubMicron, 432 F.3d at 457.

Conclusion

For the reasons stated above, the motion to dismiss is granted in part and

denied in part. The parties are directed to settle an appropriate order.

4?

Dated: September 5, 2025 □□□

CRAIG T. GOLDBLATT

UNITED STATES BANKRUPTCY JUDGE

37