Fishy Sale Attempt Leads to Involuntary Bankruptcy

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By Daniel Gill

A seafood business that wanted a state court to handle its restructuring couldn’t persuade a federal bankruptcy court not to hear the case as an involuntary Chapter 7 ( In re Scandia Seafood (N.Y.), Inc. , 2017 BL 160131, Bankr. S.D.N.Y., No. 17-10744 (MEW), 5/12/17 ).

The effect of the decision by Judge Michael E. Wiles of the U.S. Bankruptcy Court for the Southern District of New York might be to invalidate litigation brought against certain creditors. But the court felt that there was enough wrong with the state-court assignment for the benefit of creditors to justify the matter being handled by a new fiduciary.

Scandia Seafood (New York), Inc. recorded the assignment in a New Jersey court on Dec. 6, 2016. The assignee, a third party fiduciary, entered into an agreement for the continued operations of the business and then ultimately for the sale of its assets for only $45,000.

None of the company’s creditors objected at the time even though the management agreement allowed another company (owned in part by a co-owner of the debtor) to retain the profits of further operations without any of the liability. Also the sale (made to a new company with the same owners as the seller) was done without any professional opinions of value or any active marketing of the assets, the court said.

However, after the assignee brought state court preference litigation against certain creditors, they took notice, the court said.

In New Jersey, an assignee for the benefit of creditors can sue to recover payments that “prefer” certain creditors over the others, when those transfers are made within 120 days prior to the assignment.

Creditors File Case

The creditors filed on March 28 an involuntary Chapter 7 case against Scandia Seafood. The assignee in turn asked the court to abstain from hearing the bankruptcy case or alternatively to dismiss the case as being filed in bad faith by the creditors, only to avoid the preference litigation exposure.

Wiles said it would “require a very strong evidentiary showing that something was amiss before I ought to let an involuntary bankruptcy case be used to upset proceedings in another court where parties did not take action.” But the petitioning creditors met that burden, he said.

"[T]here was an appalling lack of diligence in ensuring that the prior owners paid a fair price for keeping the business and its assets,” the court said. Even though the bankruptcy could mean the end of the preference litigation, overall it found that it was in the best interest of the estate to allow the case to remain in Chapter 7, controlled by a new, neutral fiduciary (the Chapter 7 trustee).

The petitioning creditors were represented by Douglas T. Tabachnik, Freehold, N.J. Donald F. Campbell, the assignee for the benefit of creditors, was represented by Milissa A. Peña, New York.

To contact the reporter on this story: Daniel Gill in Washington at dgill@bna.com

To contact the editor responsible for this story: Jay Horowitz at JHorowitz@bna.com

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