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Bankruptcy Court Allows Continuation of Lawsuit Limiting Default Interest and Subordination Claim, But Dismisses Fraudulent Transfer Claim | King and Spalding

On February 25, 2022, Judge Christopher J. Panos of the United States Bankruptcy Court for the District of Massachusetts granted in part and denied in part an assignee lender’s motion to dismiss claims brought by a group of affiliated debtors. The court first found that the debtors plausibly alleged that the lender SHS ACK, LLC was not entitled to default interest. He then considered the debtors’ assertions that the lender’s bankruptcy claim should be made conditional – asking whether the complaint alleged that the plaintiff “engaged in unfair conduct”, that the alleged wrongdoing “caused a prejudice to creditors” or had given the plaintiff “an unfair advantage,” and the subordination would not “conflict with the provisions of the federal bankruptcy law”. The court held that the debtors’ claims, although somewhat conclusive, were sufficient to state a fair subordination claim because: (a) the claim was obtained for an improper purpose – to give SHS leverage to attempt to recover the debtors – and (b) the aggressive tactics of the lender’s instruction to his predecessor to unduly charge default interest harmed debtors by forcing them into bankruptcy.

The bankruptcy court then considered the debtors’ fraudulent transfer requests. The debtors alleged that one of the debtors granted SHS a mortgage without receiving any consideration in return while the entity was insolvent. SHS argued that the debtors’ claim should fail because, among other things, the debtors had not alleged any facts demonstrating that the debtor concerned was insolvent. Because the debtors’ insolvency petition was conclusive and lacked specificity as to the value of the entity’s assets, liabilities, or capital requirements, the bankruptcy court denied that petition with leave to repeat the ask in more detail.

The deal is NESV Ice, LLC vs. SHS ACK, LCC (In re NESV Ice, LLC), No. 21-ap-1093 (Bankr. D. Mass. February 25, 2022). The debtors are represented by Downes McMahon LLP. SHS is represented by Curran Antonelli, LLP. Order is available here