On May 16, 2024, the U.S. Bankruptcy Court for the Northern District of Texas recommended that the district court largely deny cross motions for summary judgment in an action by the liquidating trust for Fresh Acquisitions, LLC (and affiliates) to avoid and recover, as fraudulent transfers, $1.85 million of settlement payments made to River North Furr’s, LLC. As holder of an indirect ownership interest in certain Fresh Acquisitions entities, River North was entitled to an annual preferred return on its investment. That return was originally guaranteed by one Fresh Acquisitions affiliate, but later substituted for another, FMP SA Management Group, LLC, after the original guarantor’s assets were sold. After not receiving any payments on its preferred return, River North sued FMP, and the parties entered into a settlement calling for thirteen periodic payments from FMP SA, totaling $1.85 million, to River North. The debtors made those payments using funds obtained from COVID-era Paycheck Protection Program (PPP). After Fresh Acquisitions filed for bankruptcy, the trustee sought to avoid the settlement payments as fraudulent transfers.

The Bankruptcy Court found that genuine disputes of material fact regarding the debtors’ intent precluded summary judgment, for either party, on the trustee’s claim that the settlement payments constituted actual fraudulent transfers by the debtors. The court considered two bases for showing the debtors’ fraudulent intent: (i) alleged fraud in connection with the substitution of FMP as guarantor for River North’s return; and (ii) alleged fraud and illegality in connection with the use of PPP loan proceeds.

With respect to the substitution of FMP, the trustee asserted that because there was a lack of any consideration when FMP assumed the guaranty, the assumption was worthless and fraudulently transferred, thereby rendering the litigation effectively inevitable and the settlement agreement and the payments thereunder fraudulent. The court noted the existence of a factual dispute over whether FMP had assets at the time. With respect to use of the PPP loan proceeds, the court explained that the evidence was clear that the PPP funds were used in violation of federal law, but the relevant question was whether, at the time the loan applications were submitted, there was an intent to misuse the funds, for which, there was a genuine issue of material fact. The court importantly noted that if PPP loan fraud did occur, that would serve as compelling circumstantial evidence of actual fraudulent intent when FMP used those funds to pay River North; however, the court was not being called on to adjudicate actual PPP loan fraud, and as such, it concluded that those considerations were better left to a jury.

The case is Gonzales v. River North Furr’s, LLC, No. 22-ap-3098 (Bankr. N.D. Tex. May 16, 2024). The trustee is represented by Dickinson Wright PLLC. River North is represented by A&G Law, LLC and Hayward PLLC. The opinion is available here.