In re: Allonhill, LLC
1:19-cv-00879
D. Del.Mar 31, 2020Background
- Allonhill, a mortgage due‑diligence/CRM firm formed in 2008, struggled financially after 2012 despite large 2011 revenue; the Allons repeatedly infused capital. A major Aurora engagement ended in litigation.
- In August 2013 Allonhill sold substantially all assets to Stewart Lender Services (SLS) for $15 million plus a three‑year earnout; SLS hired most employees and entered an Employee Leasing Agreement to let Allonhill perform some contracts post‑closing.
- After closing, Allonhill collected customer payments that belonged to SLS; in Jan–Feb 2014 Allonhill transferred $6,608,309.15 to SLS (the Turned Over Funds) and retained later collections of $675,474.75 (the Outstanding Amount).
- A Colorado trial court entered a $25.9 million judgment against Allonhill in March 2014 in the Aurora litigation, triggering Allonhill’s Chapter 11 filing on March 26, 2014; that judgment was later reduced on appeal and the parties ultimately settled for about $2.05 million in 2018.
- Allonhill sued SLS in bankruptcy court alleging breach of the APA, fraudulent transfers, and avoidance claims; SLS counterclaimed for the Outstanding Amount. The Bankruptcy Court denied all claims; both sides appealed and the district court remanded portions for further proceedings.
Issues
| Issue | Plaintiff's Argument (Allonhill) | Defendant's Argument (SLS) | Held |
|---|---|---|---|
| Valuation for solvency in preference claim (how to value Aurora liability) | Use contemporaneous evidence: Aurora liability should be valued at $25.9M (trial judgment) so Allonhill was insolvent at transfer dates | Use later final resolution: the liability was $2.05M (ultimate settlement/ judgment) making Allonhill solvent at transfer dates | District court rejects Bankruptcy Court’s hindsight valuation; holds contemporaneous valuation more appropriate and remands solvency determination to Bankruptcy Court |
| Whether the Jan–Feb 2014 Transfers were payments on antecedent debt or were SLS’s property (bailed/ purchased receivables) | Transfers were estate property and not simply turnover of SLS property; property was commingled and SLS did not perfect security | The funds were receivables SLS purchased under the APA; Allonhill acted as conduit/bailee so transfers were not avoidable | Court remands to let Bankruptcy Court further develop record and decide whether transfers were SLS property or payments on antecedent debt |
| New‑value defense to preference (APA amendment delaying earnout) | Any amendment was worthless because Allonhill received no earnout payments | SLS provided new value by agreeing to amend earnout start date in exchange for turnover; that new value defeats preference liability | Court accepts new‑value theory as plausible but remands for Bankruptcy Court to quantify and make findings under Spada if it relies on this defense |
| Constructive fraudulent transfer claim for the Turned Over Funds (separate from APA) | The post‑closing transfers were separate transactions and fraudulent because the estate was insolvent | The Turned Over Funds were purchased assets under the APA; no separate fraudulent transfer exists | Court affirms Bankruptcy Court: no separate fraudulent transfer claim because amounts were transferred pursuant to APA |
| Breach of contract — APA §2.2(c) (cooperate to adjust earnout hurdles for a Business Material Adverse Effect) | SLS failed to renegotiate earnout despite market changes and losses, breaching §2.2(c) | The APA’s BMAE definition excludes market/industry changes that occurred; SLS had no duty to renegotiate and parties submitted disputes to bankruptcy jurisdiction | Court affirms: no BMAE shown under the APA’s narrow definition and Allonhill failed to prove the multiple elements required to prevail on a renegotiation/damage theory |
| Breach of contract — APA §2.2(e) (use commercially reasonable efforts to operate Business) | SLS materially changed operations (terminated Ms. Allon, changed pricing, exited securitizations), breaching §2.2(e) | Changes were commercially reasonable, driven by market realities; SLS retained key staff and operated consistently in material respects | Court affirms: factual findings that SLS’s actions were commercially reasonable and not materially different from pre‑sale operations were not clearly erroneous |
| SLS counterclaim for Outstanding Amount ($675k) | — (Allonhill disputed obligation/ defenses) | SLS proved breach by failing to turn over funds it purchased | Bankruptcy Court denied counterclaim without clear analysis; district court remands for clarification and further findings |
Key Cases Cited
- Am. Flint Glass Workers Union v. Anchor Resolution Corp., 197 F.3d 76 (3d Cir.) (standard of review for bankruptcy appeals)
- Meridian Bank v. Alten, 958 F.2d 1226 (3d Cir.) (analysis of mixed questions of law and fact)
- Waldorf v. Shuta, 142 F.3d 601 (3d Cir.) (abuse of discretion standard for evidentiary rulings)
- In re Spada, 903 F.2d 971 (3d Cir.) (new value defense to preference requires quantification)
- S.E.C. v. Antar, 120 F. Supp. 2d 431 (D.N.J.) (use of later judgment to value earlier disputed claim)
- City of Springfield v. Ostrander, 329 F.3d 204 (1st Cir.) (property held as bailee/agent not part of bankruptcy estate)