Close-up of a bankruptcy petition

The TransVantage bankruptcy case and the resulting efforts by the Trustee to avoid carrier payments made by the defunct freight payment processor has been watched like an upcoming speed trap by the transportation industry concerned about the vulnerability of this business arrangement in bankruptcy. The more than 500 adversary Complaints filed in April of 2015 by the Trustee against the common carriers, shippers and customers of Transvantage Solutions, Inc. have been winnowed down to a just few remaining unresolved cases.

TransVantage was a New Jersey-based business that provided freight auditing and payment services on behalf of its manufacturing customers. Under the business model, TransVantage would receive and review invoices from the freight carriers of its customers and, if the invoices were accurate, would instruct its customers to forward funds to pay the approved invoices. The customers would then send the requested funds, in trust, to TransVantage for payment to the approved carrier. However, the business collapsed in early 2013 in the wake of the discovery by one of its customers of massive embezzlement perpetrated by TransVantage’s principal, Shirley Sooy. Sooy and her husband allegedly diverted, for personal and business use, funds forwarded by customers that were intended to be applied to approved carrier invoices. TransVantage filed a voluntary petition in May 2013, commencing a Chapter 11 bankruptcy petition which was soon converted to a Chapter 7 case. At the time of the bankruptcy filing, there was a purported $40 million shortfall in TransVantage’s finances.

In the spring of 2015, the Chapter 7 Bankruptcy Trustee filed more than 500 adversary proceedings seeking to avoid as fraudulent or preferential conveyances payments made to carriers for transportation services actually performed for the benefit of TransVantage’s customers. While the estate shortfall amounted to $40 million, the total sought to be avoided and recovered by the Trustee exceeded $600 million. The adversary Complaints all contained the same common legal theory: that TransVantage was operated as a Ponzi scheme and that the alleged payment of the invoices of one carrier with funds advanced by another carrier’s customer amounted to a fraudulent conveyance.

However, there was widespread concern among the adversary defendants that the allegations of the Complaints were insufficient under the rules of pleading. To promote the efficient resolution of these issues, the Bankruptcy Court allowed the filing of an Omnibus Motion to Dismiss to which more than half of the defendants joined. The Omnibus Motion sought the dismissal of the Complaints under Federal Rule of Civil Procedure 12(b)(6) on the grounds that the allegations of the Complaints, when accepted as true, still failed to state a cause of action upon which relief can be granted. As a threshold matter, the moving defendants argued that the money advanced by the customers was made in trust and, as such, never became property of the estate that is subject to avoidance. With respect to the preference claims, the defendants contended that the Complaints were deficient because the Trustee did not and could not allege that the payments to the carriers were made on account of an antecedent debt owed by TransVantage which is one of the elements of a preference. The defendants asserted that the fraudulent conveyance claims were defective for a variety of reasons. First, the actual intent claims were defective because the conclusory allegations of a Ponzi scheme — with its presumption of actual fraud — were unsupported by sufficient facts necessary to bring this case into the narrow Ponzi scheme framework. Second, the constructive fraud allegations were likewise deficient because the Trustee did not and could not allege that TransVantage failed to receive reasonably equivalent value in exchange for each payment made to the carriers since each payment reduced TransVantage’s liability to the corresponding customer in an equal amount. The defendants argued that the Complaints failed to allege the insolvency of TransVantage for the four-year period preceding the bankruptcy with sufficient specificity. Further, the Complaints demonstrated that the carrier defendants received payments for their services in good faith and for value which is a statutory defense to avoidance. Finally, the defendants argued that the Trustee’s claims against the carriers were preempted under certain federal statutes relating to interstate transportation.

The Trustee, naturally, opposed the Motion to Dismiss, contending that he should be subject to a more lenient pleading standard because he did not have any first-hand knowledge of TransVantage’s business operations; that the advances became property of the estate and subject to avoidance when they were commingled and lost their identity as trust funds; and that he should be afforded the opportunity to develop his case through discovery to support his claims.

Following the filing of the Motion to Dismiss, the Trustee began an increasingly-aggressive campaign to settle the adversaries. Concerned about the potential indemnification ramifications if their carriers were found liable for avoidance, certain customers of TransVantage engaged in settlements with the Trustee that included the dismissal of claims against their carriers who were named as avoidance defendants. The Trustee likewise entered into direct settlements with other defendant carriers for pennies on the dollar. These settlements resulted in an inflow of millions of dollars into the estate.

Oral argument for the Omnibus Motion was held in June of 2016. In October 2016, Judge Ferguson issued her opinion denying the Omnibus Motion to Dismiss. She prefaced her decision by expressing her disapproval of the recent “explosion” of 12(b)(6) dismissal motions, stating that this practice represented a misreading of recent Supreme Court decisions and embracing a broad and more forgiving notice pleading standard. Addressing the issue of whether the transfers were property of the estate subject to avoidance, Judge Ferguson excused the Trustee’s use of the word “trust” in the Complaints as merely “ill-advised” and not determinative of the legal nature of the funds advanced by the customers to pay the approved invoices of their carriers. She further found that the Complaints adequately pled that the transfers were an interest of the debtor in property because, at a bare minimum, TransVantage had a possessory interest in the funds placed into its bank account. The Court further found that the Complaints sufficiently pled fraudulent intent — even without the presumptions of a demonstrable Ponzi scheme — concluding that it would be unfair to impose the heightened pleading requirements of fraud under Rule 9(b) upon the Trustee who has no first-hand knowledge of the business operations and that fraudulent intent can be alleged generally. In responding to the contention that the Complaint allegations established that the Debtor received reasonably equivalent value for the carrier payments —because they reduced TransVantage’s liability to the customers in a like amount — the Court concluded that this might ultimately be a valid argument but that such a determination was highly fact specific that was improper on a motion to dismiss. Finally, Judge Ferguson dispensed with the preemption challenge, concluding that there was no conflict between the Bankruptcy Code and certain transportation-related statutes.

The denial of the Motion to Dismiss was the result of the Bankruptcy Court’s determination that there were plausible facts that the Trustee could possibly develop through the discovery process that potentially could support the avoidance claims set forth in the Complaints. The remaining defendants and the Trustee will engage in discovery to test the Trustee’s theories of avoidance as well as the defenses asserted in opposition. Depending on what is unearthed during the discovery process, both sides anticipate that this case may be ripe for and determined through the filing of a Motion for Summary Judgment. Until then, the transportation industry must remain on the side of the road waiting for judicial determination and guidance on whether payments made to carriers for performed services are nevertheless vulnerable in an ensuing bankruptcy of an embezzled freight auditing and payment business.


Alex BarnesMr. Barnes represents businesses and individuals facing preference and avoidance litigation, Chapter 11 debtors-in- possession, Chapter 7 and 11 Trustees, Liquidating Trustees, Creditor Committees, secured and unsecured creditors, asset purchasers, and equipment lessors in all facets of commercial bankruptcy. Additionally, Mr. Barnes represents individuals and business clients in commercial litigation and transactional matters.  He can be reached at alexander.barnes@obermayer.com or at 215.665.3184.