Halperin v. Colgate-Pamolive Co. (In re HRB Winddown, Inc.)

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In re: HRB WINDDOWN INC., et al. ^[1] Debtors

ALAN D. HALPERIN, as Liquidating Trustee of the HIGH RIDGE BRANDS CO. LIQUIDATING TRUST, Plaintiff, v. COLGATE-PAMOLIVE COMPANY, Defendant.

No. 19-12689 (BLS)

Adv. Pro. No. 21-51337 (BLS)

United States Bankruptcy Court, D. Delaware

September 19, 2024

Chapter 11

Re Adv. D.I. 31, 32, 33, 34, 37, 38 40, 42, 43.

MEMORANDUM OPINION DENYING CROSS-MOTIONS FOR SUMMARY JUDGMENT

Brendan Linehan Shannon, United States Bankruptcy Judge

Alan D Halperin, the Liquidating Trustee of High Ridge Brands Liquidating Trust (the "Trustee"), filed an adversary complaint against Colgate-Palmolive Company ("Colgate" or the "Defendant") to avoid and recover certain pre-petition transfers made from the Debtors to Colgate as either preferential or fraudulent transfers.^[2] Colgate filed a motion for summary judgment arguing that its post- petition critical vendor agreement with the Debtor precludes the Trustee from proving all elements of a § 547(b) preferential avoidance action, and also contending that the undisputed facts establish an ordinary course of business defense under § 547(c)(2). The Trustee then filed his own motion for summary judgment, asserting that the undisputed facts show that all elements of § 547(b) are met here.

For the reasons discussed below, both cross-motions for summary judgment will be denied because there are genuine disputes regarding material facts.

BACKGROUND

High Ridge Brands Company and its affiliates (the "Debtors") were one of the ten largest independent branded personal care companies in the United States by volume.^[3] Colgate sold commercial and personal care products to the Debtors on wholesale, which the Debtors then resold at retail.^[4]

The Debtors filed voluntary petitions for relief under Chapter 11 of the U.S. Bankruptcy Code on December 18, 2019 (the "Petition Date"). On the same date, as part of the First Day Motions, the Debtors filed a motion to pay prepetition claims of "critical vendors and service providers."^[5] The Court granted the Critical Vendor Motion on December 19, 2019, authorizing (but not directing) the Debtors to pay critical vendor claims.^[6] As permitted by the Critical Vendor Order, the Debtors and Colgate entered into a Trade Agreement under which the Debtors agreed to pay Colgate's pre-petition claims in the amount of approximately $93,000 in exchange for Colgate's commitment to continue supplying goods to the Debtors.^[7]

On October 8, 2020, the Court entered the Confirmation Order approving the Joint Chapter 11 Liquidation Plan.^[8] The Plan and Confirmation Order established the High Ridge Brands Liquidating Trust (the "Trust") on October 30, 2020 (the "Effective Date") and transferred the Retained Estate Causes of Action (including avoidance actions under Chapter 5 of the Bankruptcy Code) to the Trust.^[9]

On December 14, 2021, the Trustee commenced this adversary proceeding against Colgate to avoid and recover eight transfers totaling $820,154.16 made within 90 days prior to the Petition Date pursuant to Bankruptcy Code §§ 547, 548, 550 and 502(d).^[10] Colgate filed an answer to the complaint and, thereafter, the parties held an unsuccessful mediation session. The parties engaged in discovery.

Colgate filed its motion for summary judgment and a statement of undisputed facts on September 29, 2023.^[11] The Trustee filed his response in opposition to Colgate's motion for summary judgment and Colgate filed a reply thereto.^[12] Colgate argues that the transfers cannot be avoided because:

(i) The Trustee's preference claim fails to meet all of the requirements of § 547(b), specifically § 547(b)(5), because after the Bankruptcy Court authorized the Debtors to designate "critical vendors," Colgate and the Debtors entered into a Trade Agreement providing for full payment of Colgate's pre-petition claims; and

(ii) The allegedly preferential transfers are protected by the ordinary course of business defense of § 547(c)(2).

The Trustee filed his own motion for summary judgment^[13] on the preference claim, arguing that:

(i) The Debtors never waived the right to bring avoidance claims against critical vendors. Further, the Trustee claims that the Debtor would not or could not have paid the entire amount of the prepetition preference transfers under the critical vendor Trade Agreement because the amount of those transfers [$820,154.16] is "exponentially greater" than the amount paid under the parties' Trade Agreement [$93,000]. Therefore, the Trustee claims that all necessary elements of § 547(b), including § 547(b)(5), are met with respect to the Transfers; and

(ii) Colgate cannot rely on the ordinary course of business defense due to the economic pressure exerted by Colgate against the Debtors during the prepetition preference period through credit holds and other actions designed to limit Colgate's exposure as the Debtors' financial situation worsened.

Colgate filed a response opposing the Trustee's motion for summary judgment and the Trustee filed a reply.^[14] Briefing on these matters is complete and the motions are ripe for decision.^[15]

STANDARD FOR SUMMARY JUDGMENT

Rule 56 of the Federal Rules of Civil Procedure, made applicable by Federal Rule of Bankruptcy Procedure 7056, provides that "[t]he court shall grant summary judgment if the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law."^[16] At the summary judgment stage, the court's function is not to weigh the evidence and determine the truth of the matter, but to determine whether there is a genuine issue for trial.^[17]

The movant "bears the initial responsibility of informing the district court of the basis for its motion, and identifying those portions of 'the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any,' which it believes demonstrate the absence of a genuine issue of material fact."^[18]And "[w]hen the moving party has carried its burden . . .the nonmoving party must come forward with specific facts showing that there is a genuine issue for trial."^[19]The Court must resolve all doubts and consider the evidence in the light most favorable to the nonmoving party.^[20]

Finally, the standard for summary judgment is unaffected when the parties have filed cross-motions for summary judgment. The Court must consider each party's motion separately and independently.^[21]

DISCUSSION

A. Claim to Avoid Preferential Transfers under 11 U.S.C. § 547(b).

Section 547(b) of the Bankruptcy Code allows a trustee to avoid a transfer of the debtor's property that was:

(i) made to or for the benefit of a creditor;

(ii) for or on account of an antecedent debt owed by the debtor before the transfer was made;

(iii) made while the debtor was insolvent;

(iv) made within 90 days before the filing of the petition (or longer in cases against an insider defendant); and

(v) that enabled the creditor to receive more than it would have received in a chapter 7 case or if the transfer had not been made.^[22]

In his motion for summary judgment, the Trustee relies upon affidavits, answers to interrogatories, admissions, and other materials to assert that the following facts are undisputed in this case:

(1) During the preference period in this case (September 19, 2019 through and including December 18, 2019) (the "Preference Period"), the Debtor made and Colgate received eight payments totaling $743,904 (the "Transfers").^[23]

(2) The Transfers were made via eight ACH payments from the Debtor High Ridge Brands Co.'s bank account ending in x2395.^[24] (3) The Transfers were made for Colgate's benefit when Colgate was a creditor of the Debtors.^[25]

(4) The Transfers paid antecedent debt (that is, nine invoices owing by the Debtors to Colgate).^[26]

(5) The schedules filed in this bankruptcy case show that the Debtors' liabilities greatly exceeded its assets at the time of the Transfers.^[27]Accordingly, distributions to general unsecured creditors will be far less than 100%.^[28]

(6) The Trustee knows of no evidence to rebut the presumption of the Debtors' insolvency.^[29]

(7) Colgate did not hold a fully perfected security interest in the assets of the Debtors.^[30]

The Trustee argues that the foregoing undisputed facts establish all of the elements needed to prove a prima facie case for avoiding preferential transfers under Bankruptcy Code § 547(b).

Colgate, however, disagrees that the Trustee can prove § 547(b)(5) and argues that, as permitted by the Critical Vendor Order, the Debtors selected Colgate as a critical vendor and entered into a Trade Agreement providing that all of Colgate's prepetition claims would be paid in full in exchange for Colgate's agreement "to continue to provide goods and services to HRB based on 'Customary Trade Terms'" during the chapter 11 bankruptcy case.^[31] Because the Debtors had agreed to pay all prepetition claims in full, Colgate argues that the Trustee cannot prove that payment of the Transfers enabled Colgate to receive more than it would receive if the case were converted to Chapter 7 or if the Transfers had not been made.

In Kiwi International Air Lines, the Third Circuit Court of Appeals held that the trustee's preference action against a creditor was precluded by law due to the debtor's earlier assumption of the creditor's contract under § 365, which required the debtor to cure all defaults by paying any amount owing under the agreement.^[32]The Third Circuit determined that a creditor whose contract is assumed under § 365 is not similarly situated to general unsecured creditors who will not receive 100% payment of their claims against the debtor.^[33] The Kiwi International Court held that ...