A bankruptcy court in New Jersey recently granted a debtor’s motion to dismiss the counterclaims of two creditors who purchased a percentage of the debtor’s future receivables prepetition. The court rejected the creditors’ argument that “prior to the Petition Date, [the debtor] had the ability to sell or transfer an interest in accounts receivable that may or may not come into existence until after the Petition Date.”[1]
Prior to the bankruptcy, the debtor, M Design Village, LLC, entered into two separate agreements to sell “all payments received,” which included cash payments, credit, debit, bank and charge card payments, check payments, and wires or other electronic transfers (the “Future Receipts”). The purchasers, Dual Capital, LLC and 7even Capital, LLC, each bought approximately half a million dollars’ worth of Future Receipts.
Each agreement required the debtor to designate a bank account where it would receive all Future Receipts, and the two purchasers were entitled to debit specific amounts from that bank account on a weekly basis. The purchasers were entitled to continue debiting from the bank account until they received the full amount of the Future Receipts purchased under their respective agreements.
For three months, the debtor remitted payments to the bank account in accordance with the purchase agreements, but then it filed for bankruptcy. When the case was filed, Dual Capital and 7even were each owed approximately $331,500 in Future Receipts. M Design filed a lawsuit asserting multiple causes of action, including preference claims against the purchasers and disallowance of the purchasers’ claims. The debtor also sought declaratory judgments for (i) a determination of the nature, extent, validity, and priority of the purchasers’ securities interests, (ii) a determination that the agreements were loan agreements, and (iii) a determination that the purchasers do not have liens or perfected liens against the debtor’s assets.
Dual Capital and 7even filed identical counterclaims seeking declaratory judgments that the purchase agreements represented “true sales” and that, as a result, the Future Receipts purchased were not property of the debtor’s bankruptcy estate. The purchasers also argued that their claims were secured claims given the nature of their transactions with the debtor.
The court rejected these arguments, noting that “as of the Petition Date, there was no value in any of the Debtor’s pre-petition assets to which Dual’s and 7even’s securities interests, if any, could attach.”[2]
The court’s decision also relied heavily on an earlier order approving M Design’s use of cash collateral. The debtor’s cash collateral motion had sought authorization for M Design’s postpetition sale of certain accounts receivable to Versant Funding LLC. Neither Dual Capital nor 7even objected to the cash collateral motion, but other creditors who entered into similar prepetition accounts receivable purchase agreements did object. The debtor negotiated settlements with those creditors that provided them with general unsecured claims. Ultimately, the court approved the cash collateral motion, including the settlement and the Versant transaction. As a part of the Versant transaction, Versant also obtained priming liens.
The court’s ruling dismissing Dual Capital’s and 7even’s counterclaims found that the court’s prior rulings were “law of the case,” and the court refused to revisit any of those prior rulings. The court also held that, to the extent either purchaser had an interest in the debtor’s future receivables, that interest was junior to Versant’s interests and Versant’s liens exceeded the value of the Debtor’s assets.
As a result, no matter how the issue was approached, the court concluded that Dual Capital and 7even should be treated as general unsecured creditors. Parties seeking to enter into similar purchase agreements should be aware of the possibility that they will be treated as general unsecured creditors in a future bankruptcy case and proceed accordingly.
[1] In re M Design Vill., LLC, No. 24-21406 (MEH), 2025 WL 2088887 at *6 (Bankr. D.N.J. July 24, 2025)
[2] Id. at *7.
