The lender issued two loans to the debtor, secured by liens on nearly all the debtor’s personal property, including accounts receivable. Later, a factor bought a portion of the debtor’s future receivables at a time when the debtor was in financial distress. The lender claimed that the factor either negligently failed to discover the lender’s prior security interest in the debtor’s assets, conspired with the debtor’s officers to hide the transaction, or enabled the debtor’s principals to breach their fiduciary duties to creditors. After the debtor ceased operations and several of its principals filed for bankruptcy, the lender sued the factor, seeking “(1) declaratory judgment/injunctive relief; (2) avoidance and recovery of fraudulent conveyances under state law; (3) conversion; and (4) tortious interference with contract,” and (5) “enablement of breach of fiduciary duty and deepening insolvency.” The purchaser moved to dismiss the case, arguing that the lender had failed to provide sufficient evidence of misconduct or collusion.
In Newtek Small Business Finance, LLC v. Texas. First Capital, Inc., No. 22-2461, 2025 WL 439434, 2025 U.S. Dist. LEXIS 22548 (E.D. Pa. Feb. 6, 2025) (opinion not yet released for publication), the court dismissed all the lender’s claims for failure to state a claim. First, the lender had sought a declaratory judgment that it had a senior security interest in the debtor’s funds or that the purchaser colluded with the debtor to hide the transaction. The court rejected both theories, noting that under the UCC, the factor took the funds free of the lender’s security interest because the lender failed to provide evidence of collusion. 13 Pa. C.S. § 9332(b). The court noted that the lender had merely stated conclusory arguments, and even if it were to accept these arguments, they were still insufficient to support a collusion claim. Therefore, the court dismissed for failure to state a claim. Second, the court dismissed the lender’s fraudulent conveyance claims under the Pennsylvania Uniform Voidable Transactions Act (PUVA). A transaction may be voided under PUVA if “(1) the plaintiffs are ‘creditors’ as defined by the statute; (2) the transfers were made with actual fraudulent intent; and (3) there are no viable defenses.” Carroll v. Stettler, 941 F. Supp. 2d 572, 578 (E.D. Pa. 2013). The court found that the lender failed to show that the factor acted with fraudulent intent or that the transactions lacked reasonably equivalent value. Third, the court dismissed the conversion claim because the lender had no present right to the funds at the time of the alleged conversion. Fourth, the lender’s tortious interference claim failed because the lender did not prove the factor had intentionally harmed its contractual rights or acted improperly. Finally, the court dismissed the lender’s new claim for aiding and abetting a breach of fiduciary duty because the lender did not show the factor had “actual knowledge” of the debtor’s insolvency or provided substantial assistance in breaching fiduciary duties. In short, the court found that the factor acted within the rules of commercial transactions, and the lender’s claims had lacked sufficient factual support.
By Audrey Spotts [email protected]
Edited By Maycee Redfearn [email protected]
Edited By Ashley Boyce [email protected]
Edited By Hayden Mariott [email protected]