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Bankrupt retailer seeks $420k from Apple in lawsuit

post #1 of 32
Thread Starter 
The company behind a newly out-of-business retailer has lodged a complaint against Apple, seeking a payment of at least $420,104 in return for financial transfers.

Ultimate Electronics, a chain of consumer electronics stores that used to operate across the U.S., filed for Chapter 11 bankruptcy in January of this year. The later company concluded a going-out-of-business sales on April 13, and was made officially defunct soon after.

But this month the group behind Ultimate Electronics, known as Ultimate Acquisition Partners, filed suit against Apple in U.S. Bankruptcy Court in the District of Delaware. Ultimate Acquisition Partners and its chapter 7 bankruptcy trustee, Alfred T. Giuliano, believe they are entitled to more than $420,000 from Apple.

The suit bases that claim on what are known as "preferential transfers." The filing claims Ultimate Electronics, which bought products from Apple to resell, transferred $420,104 in property to Apple, which the Cupertino, Calif., company benefitted from.

The claims are based on the concept of preferential transfers, or, as lawyer Robert S. Bernstein of the Bernstein Law Firm refers to them, the "double whammy."

"Almost every credit manager has been faced with the 'double whammy,'" Bernstein wrote in his series, A Primer on Preferential Transfers in Bankruptcy. "Your customer files bankruptcy and you are looking at a big write-off. You do your investigation and decide it's a dead end and you bite the bullet.

"Weeks, months or years later, you get a nice threatening letter from a Bankruptcy Trustee telling you that the last payment you did get from the debtor was a 'preference' and that you should write a check immediately to return it! That is the double whammy."



He goes on to note that even if a company has a "shaky" defense against a preferential transfer claim, any such claim can be settled for less than 100 percent of the requested sum.

The lawsuit includes a list of checks and payments allegedly sent to Apple between Nov. 1, 2010 and Jan. 24, 2011. Many of them are for amounts greater than $20,000, including a series of checks on Jan. 24 totaling $181,242.

When Ultimate Electronics went under, 71 percent of the company was owned by Ultimate Acquisition Partners, a division of Wattles Capital Management, while the other significant share of the company, 25 percent, was owned by Apple rival Hewlett-Packard.
post #2 of 32
Can someone familiar with this concept explain that a little more clearly? I'm not getting exactly what a "preference" is.

Is it that a company near bankruptcy sometimes pays for goods that never get delivered or sold because the company ceases to be before they can take delivery? Or that such goods enter some kind of limbo in which they actually do get delivered but end up having no storefront to go to?

It seems like you'd either have the stuff or not, and the allocation of monies would follow, but apparently not?
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post #3 of 32
Clearly this is Ulitimate's ultimate ultimatum!
post #4 of 32
Quote:
Originally Posted by addabox View Post

Can someone familiar with this concept explain that a little more clearly? I'm not getting exactly what a "preference" is.

Is it that a company near bankruptcy sometimes pays for goods that never get delivered or sold because the company ceases to be before they can take delivery? Or that such goods enter some kind of limbo in which they actually do get delivered but end up having no storefront to go to?

It seems like you'd either have the stuff or not, and the allocation of monies would follow, but apparently not?

I'll give it a shot. (I had a friend that was pressed for this a few years ago).

Ultimate Electronics received products from Apple to re-sell--this doesn't appear to be in question. So they had invoices. Maybe they paid them on time, maybe they didn't.

A bankruptcy court can look at all payments made in the 90 days prior to a filing. They assume that Ultimate Electronics knew that far in advance that they would file for bankruptcy and may determine that Ultimate Electronics preferred to pay Apple ahead of other creditors who may have been in arrears longer. They want Apple to return all the money paid to them in the 90 days before filing so that can be divided fairly among Ultimate Electronics' creditors.

That's my limited understanding. I'm sure others know more about the topic.
post #5 of 32
All secured creditors to a bankrupt entity are supposed to be treated equally. The trustee is alleging that Apple was given preferential treatment during the closing days of the company, in that they were paid funds that should have been distributed among the creditors at a later time.

A simplified example:

Say Ultimate Electronics owed just three companies $10,000 each, for a total of $30,000, but only had $15,000 in assets when they closed. Each company would only get $5000. But hold on, say the trustee finds out that UE had paid apple $5000 in the year leading up to the bankruptcy. Due to that preferential payment Apple would have gotten $10,000 and the other two companies only $5000. So the trustee is demanding those earlier payments back to distribute among all those owed money.
post #6 of 32
Quote:
Originally Posted by BigBillyGoatGruff View Post

That's my limited understanding. I'm sure others know more about the topic.

thanks for the clarification. (you might want to consider joining the ai staff; it seems they could use the help.)
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post #7 of 32
Quote:
Originally Posted by addabox View Post

Can someone familiar with this concept explain that a little more clearly? I'm not getting exactly what a "preference" is.

Is it that a company near bankruptcy sometimes pays for goods that never get delivered or sold because the company ceases to be before they can take delivery? Or that such goods enter some kind of limbo in which they actually do get delivered but end up having no storefront to go to?

It seems like you'd either have the stuff or not, and the allocation of monies would follow, but apparently not?

Here's a good page on preference...

http://www.bernsteinlaw.com/publicat...tial/pref2.htm

Imagine that you go bankrupt, meaning you don't have enough cash to cover your debt payments. At some point you realize this is happening, but you may continue to send non-debt payments out. For example, you know you're broke, but you continue with the out-right purchase of a TV (cashed based). It was your "preference" to pay for the TV, rather than pay off your defaulted debts.

Debt holders can use the law of "preference transfers" to reclaim the purchase price of that TV. Because it's not their fault that you spent money that clearly should have gone to them.

The "Double Whammy" is on distributors. A distributor often has only a contract with a reseller to sell goods. No, or very little, cash is swapped from reseller to distributor, until the good is sold. So if the reseller goes out of business, and all of their assets are claimed, the distributor is basically out of luck. They take it as a "loss". But then the debt holders of the reseller come along and say "no, no... not only did you loose the write off of the unsold materials, but also the last payment for sold materials", under "preference transfer".
post #8 of 32
Thanks guys, those are great explanations.
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post #9 of 32
Quote:
Originally Posted by BigBillyGoatGruff View Post

I'll give it a shot. (I had a friend that was pressed for this a few years ago).

Ultimate Electronics received products from Apple to re-sell--this doesn't appear to be in question. So they had invoices. Maybe they paid them on time, maybe they didn't.

A bankruptcy court can look at all payments made in the 90 days prior to a filing. They assume that Ultimate Electronics knew that far in advance that they would file for bankruptcy and may determine that Ultimate Electronics preferred to pay Apple ahead of other creditors who may have been in arrears longer. They want Apple to return all the money paid to them in the 90 days before filing so that can be divided fairly among Ultimate Electronics' creditors.

That's my limited understanding. I'm sure others know more about the topic.

That's exactly correct. I had the same issue last year with a small chain of stores. Besides being a graphics supplier for them, I was also good friends with a vice-president. He was aware they were struggling, but wanted to be sure I was paid. A few weeks later they were forced into bankruptcy by one of their banker's and yes, the court ordered we return the several thousand dollar check we received just before the filing.

It hurt.
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post #10 of 32
Quote:
Originally Posted by Gatorguy View Post

That's exactly correct. I had the same issue last year with a small chain of stores. Besides being a graphics supplier for them, I was also good friends with a vice-president. He was aware they were struggling, but wanted to be sure I was paid. A few weeks later they were forced into bankruptcy by one of their banker's and yes, the court ordered we return the several thousand dollar check we received just before the filing.

It hurt.

makes me wonder why they don't a apply a similar method to homeowners who decide to pay credit card off before their mortgage
post #11 of 32
so wouldn't this mean that Apple would then have to adjust the amount that they were owed as well, and the whole distribution be recalculated.

Ultimate owes APPLE "X" amount of dollars - $420,000 already paid,

so apple gets some a proportional fraction of Ultimates Bankrupt debt to dollars value

now Ultimate's debt would go up and Ultimate's dollars would go up, along with the amount owed APPLE increasing and therefore APPLE's fraction of pay out as well...

all of it probably consumed in lawyer fees by the end anyway...

\
post #12 of 32
Quote:
Originally Posted by estyle View Post

so wouldn't this mean that Apple would then have to adjust the amount that they were owed as well, and the whole distribution be recalculated.

\

Yes but it would be likely irrelevant because their debt would be the lowest seniority, along with other trade creditors. Generally the taxman is at the top, then banks, then other creditors.
post #13 of 32
I am a bankruptcy attorney so I think I am qualified to answer.

When a party files bankruptcy the party is referred to as a Debtor. The Debtor files a Petition asking the Court from Protection from its creditors. There are different types of Bankruptcies. The company here filed a Chapter 7 Bankruptcy, which means the company is being liquidated. Essentially all the companies assets are placed into trust for the benefit of the creditors. Any assets the company has are sold for the benefit of the company's Creditors. The person responsible for doing the liquidation on behalf of the Creditors is called a Bankruptcy Trustee. This person is essentially a private attorney appointed by the Department of Justice.

When a Debtor files Bankruptcy, the Bankruptcy laws carefully scrutinize payments the Debtor paid to creditors prior to the filing of the bankruptcy. Payments made in the 90 days prior to a Debtor filing bankruptcy are referred to as preference payments. If a Debtor pays any one creditor more then $600 during that time period, the Bankruptcy Trustee can demand that Creditor pay the money back. The Bankruptcy Trustee then takes a cut and distributes the rest to the Debtor's creditors more fairly (at least in theory).


The theory is that a party struggling financially is not allowed to prefer one creditor over another. Imagine if prior to filing bankruptcy you owed your mom and big bank money. You can't pay your mom back at the expense of big bank (during a certain period of time). If you do, the Bankruptcy Trustee can demand mom pay the money back.


This article clearly doesn't understand what went on here. I didn't read the complaint, but it sounds like this company owed Apple some money. In the 90 days prior to the company shutting down by filing Chapter 7, it paid Apple almost a half million dollars. Since it happened in the preference period, the Trustee can demand Apple pay the money back. Apple probably will be able to negotiate the money down or it might have a defense (although that is unlikely). The Trustee then will take his cut (which will be quite nice), and pay the creditors (including Apple) something.



Quote:
Originally Posted by addabox View Post

Can someone familiar with this concept explain that a little more clearly? I'm not getting exactly what a "preference" is.

Is it that a company near bankruptcy sometimes pays for goods that never get delivered or sold because the company ceases to be before they can take delivery? Or that such goods enter some kind of limbo in which they actually do get delivered but end up having no storefront to go to?

It seems like you'd either have the stuff or not, and the allocation of monies would follow, but apparently not?
post #14 of 32
Not correct. This rule largely benefits and applies to unsecured creditors. If you are a secured creditor and are paid in the 90 days prior to a Debtor filing bankruptcy, the Trustee generally cannot ask for the money to repaid.

For instance, if you own a car that was financed. The lender is secured by the car. If you are making payments pursuant to contract in the 90 days prior to filing Bankruptcy, the Trustee can't ask for the money back. However, if you were making payments on a credit card during the same time period, the Trustee can ask for the money back.

Quote:
Originally Posted by cheviot View Post

All secured creditors to a bankrupt entity are supposed to be treated equally. The trustee is alleging that Apple was given preferential treatment during the closing days of the company, in that they were paid funds that should have been distributed among the creditors at a later time.

A simplified example:

Say Ultimate Electronics owed just three companies $10,000 each, for a total of $30,000, but only had $15,000 in assets when they closed. Each company would only get $5000. But hold on, say the trustee finds out that UE had paid apple $5000 in the year leading up to the bankruptcy. Due to that preferential payment Apple would have gotten $10,000 and the other two companies only $5000. So the trustee is demanding those earlier payments back to distribute among all those owed money.
post #15 of 32
Also a good reason that the so called bankruptcy reform law didn't do what it really should have done.

The reform 5-6 years ago put a bit more teeth into the law IMHO so that folks couldn't hide behind bankruptcies but did nothing to fix some of the bigger holes.

The right to fail in this country was fundamental and part of the reason that some of the original settlers came to America (later the USA) to stay out of debtors prison but like many other systems (e.g., social security, income taxes) in our bloated govt it is taken advantage of till it is totally out of control.
post #16 of 32
Actually your analogy is off base. The rule only applies to creditors. If I go into a store today and buy a TV outright, the party I bought the TV from is not a creditor. In exchange for the money, the party gave me a TV. I did not owe it money at the time of purchase. There was no loan.

The rule generally only applies to parties that were owed money at the time of filing (e.g. they gave credit), were unsecured, and payments were made on the loan during the 90 days prior to filing bankruptcy (if it is an individual filing bankruptcy and a friend or family member were paid, the period of time is a year).

Quote:
Originally Posted by wildag View Post

Here's a good page on preference...

http://www.bernsteinlaw.com/publicat...tial/pref2.htm

Imagine that you go bankrupt, meaning you don't have enough cash to cover your debt payments. At some point you realize this is happening, but you may continue to send non-debt payments out. For example, you know you're broke, but you continue with the out-right purchase of a TV (cashed based). It was your "preference" to pay for the TV, rather than pay off your defaulted debts.

Debt holders can use the law of "preference transfers" to reclaim the purchase price of that TV. Because it's not their fault that you spent money that clearly should have gone to them.

The "Double Whammy" is on distributors. A distributor often has only a contract with a reseller to sell goods. No, or very little, cash is swapped from reseller to distributor, until the good is sold. So if the reseller goes out of business, and all of their assets are claimed, the distributor is basically out of luck. They take it as a "loss". But then the debt holders of the reseller come along and say "no, no... not only did you loose the write off of the unsold materials, but also the last payment for sold materials", under "preference transfer".
post #17 of 32
@TBell:

Thank you for your informed explanation. So many people know a little about a lot but not a whole lot about anything. In this case you clearly have a full understanding and are qualified and kind enough to share your info with us.

Kudos.
post #18 of 32
The part that seems least logical or fair is the part about the bankrupt company's assets also being distributed among its creditors.
Suppose five companies had sold goods to Ultimate. The goods of two of the companies have already been sold at the time of bankruptcy. Most of the goods of two others are gone, but lets pretend that the goods from Apple remain unsold (Microsoft fans cheering, Apple fans incredulous), for which they were paid the $420,000 they are now being asked to return, and which therefore form a large portion of the liquidated goods or "assets", the proceeds from which have been distributed among Ultimate's creditors (among whom, but not exclusively, may be some or all of the suppliers above).
It seems only fair that if those goods do form a significant portion of the amount distributed to other creditors, that Apple is then entitled to the previous payments, that they aren't then so simply 'preferential'.
Does the bankruptcy court have an algorithm for making that right? Meaning, would this be considered a valid point in Apple's defense against full or partial repayment?
post #19 of 32
As somebody who does this everyday, I strongly disagree with your accessment. The reforms several years ago made it tougher for people, as opposed to businesses, to file Chapter 7. Depending on your politics this was either good or bad.

This idea of preference payments has been around forever, the reforms had no effect on this concept, and the creditors who weren't paid obviously like the idea of being able to potentially recover some money. Further, preference payments fund the system. A Bankruptcy Trustee makes something like $60 from a bankruptcy case that gets paid from the Court filing fee to administer a case. That isn't very much. A Trustee also gets a percentage of any asset he or she recovers. Without the idea of preference payments, the system would be much more expensive to the tax payer.

From my perspective, in many ways, the reforms went to far.

Quote:
Originally Posted by Damn_Its_Hot View Post

Also a good reason that the so called bankruptcy reform law didn't do what it really should have done.

The reform 5-6 years ago put a bit more teeth into the law IMHO so that folks couldn't hide behind bankruptcies but did nothing to fix some of the bigger holes.

The right to fail in this country was fundamental and part of the reason that some of the original settlers came to America (later the USA) to stay out of debtors prison but like many other systems (e.g., social security, income taxes) in our bloated govt it is taken advantage of till it is totally out of control.
post #20 of 32
TBell - does Ultimate Acquisition Partners get some of this - are they allowed payments as owners of Ultimate Electronics?

I would think that owners don't qualify as creditors...
post #21 of 32
Should be called Ultimate Scams, Inc.

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post #22 of 32
I am underwhelmed by the news value of this item.
post #23 of 32
If I were at work, I would look up the legal filing.

Without reading the complaint, I can only speculate. I suspect, however, the author of this article is confused. The article starts off by talking about a Chapter 11 filing. Then it mentions Chapter 7. I am guessing the business originally filed Chapter 11 in an attempt to reorganize its business. That attempt failed, so it converted the Case to a Chapter 7 liquidation Bankruptcy.


In a Chapter 7, only the Bankruptcy Trustee can recover preference payments. The preference payments are then distributed to creditors, including Apple. So, the only way Ultimate Acquisition Partners receives money is if it is a creditor of Ultimate Electronics.

Since Corporations are treated as individuals under the law, it is possible Ultimate Acquisition Partners as a separate legal entity is a creditor of Ultimate Electronics another separate legal entity even though Ultimate Acquisition Partners may own Ultimate Electronics. For example, Ultimate Acquisition Partners may have loaned Ultimate Electronics money. It happens all the time where people loan their businesses money.

So to answer your question, yes, it is possible Ultimate Acquisition Partners will receive payment.

Quote:
Originally Posted by estyle View Post

TBell - does Ultimate Acquisition Partners get some of this - are they allowed payments as owners of Ultimate Electronics?

I would think that owners don't qualify as creditors...
post #24 of 32
Quote:
Originally Posted by Gatorguy View Post

That's exactly correct. I had the same issue last year with a small chain of stores. Besides being a graphics supplier for them, I was also good friends with a vice-president. He was aware they were struggling, but wanted to be sure I was paid. A few weeks later they were forced into bankruptcy by one of their banker's and yes, the court ordered we return the several thousand dollar check we received just before the filing.

It hurt.

Did they force you to return ALL the money? If you didn't get anything for your work, that is really unfair.

Quote:
Originally Posted by TBell View Post

I am a bankruptcy attorney so I think I am qualified to answer.

When a party files bankruptcy the party is referred to as a Debtor. The Debtor files a Petition asking the Court from Protection from its creditors. There are different types of Bankruptcies. The company here filed a Chapter 7 Bankruptcy, which means the company is being liquidated. Essentially all the companies assets are placed into trust for the benefit of the creditors. Any assets the company has are sold for the benefit of the company's Creditors. The person responsible for doing the liquidation on behalf of the Creditors is called a Bankruptcy Trustee. This person is essentially a private attorney appointed by the Department of Justice.

The merchandise Gatorguy and Apple delivered would be part of the liquidation. That would reduced in the amount they are trying to claim?
post #25 of 32
Quote:
Originally Posted by lightstriker View Post

Did they force you to return ALL the money? If you didn't get anything for your work, that is really unfair.

For practical purposes it was all of it. I'd have to get the actual from accounting, but off the top of my head we repaid close to 90% of it. And no I didn't think it was fair, especially since they made a big advertising push (using my supplied media) intended to help them avoid the bankruptcy filing. I don't think they anticipated a bankruptcy at all, instead expecting their primary banker to work with them.
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post #26 of 32
The message is to deliver your product more then 90 days after payment in full.
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post #27 of 32
My understanding just from reading the article is that the inventory was sold already. So there is nothing in terms of inventory to liquidate.

Yes, Apple would be required in theory to return the whole amount received if the amount Apple paid was in fact a preference payment. In practice if the amount is a preference payment, Apple will likely be able to negotiate the amount down. The Trustee doesn't want to spend resources fighting Apple. He will take a reasonable settlement. Apple has the best attorneys money can buy. If there is an argument it can make the money isn't a preference payment, it will make the argument. Worst case scenario is Apple probably will settle the matter for something significantly lower.

In theory, it isn't unfair that Apple has to return the whole amount if Apple was paid at the expense of other creditors. It seems in this case though Company A owned Company B. Company A loaned Company B money. Now Company A is considered a creditor of Company B. Company A will likely be entitled to receive some of the money Apple was paid by Company B if the money Apple received was in fact a preference payment.

Apple might have some arguments to make that it doesn't have to return the funds. For instance, the money wasn't a preference payment. It might decide it is cheaper to settle.

Quote:
Originally Posted by lightstriker View Post

Did they force you to return ALL the money? If you didn't get anything for your work, that is really unfair.



The merchandise Gatorguy and Apple delivered would be part of the liquidation. That would reduced in the amount they are trying to claim?
post #28 of 32
That wouldn't be required. You could solve the problem by not offering credit. You pay me. I give you the product. That is not a preference payment.

Quote:
Originally Posted by city View Post

The message is to deliver your product more then 90 days after payment in full.
post #29 of 32
Typically these things get settled for far less. A Trustee would have to sue you in Bankruptcy Court to recover the funds if you refused to pay. This costs money and time that the Trustee will not recover if he or she losses. Further, if the Trustee wins, the Court likely will not allow those costs to be added to the amount owed. So, more times then not, the Trustee will settle.

Quote:
Originally Posted by Gatorguy View Post

For practical purposes it was all of it. I'd have to get the actual from accounting, but off the top of my head we repaid close to 90% of it. And no I didn't think it was fair, especially since they made a big advertising push (using my supplied media) intended to help them avoid the bankruptcy filing. I don't think they anticipated a bankruptcy at all, instead expecting their primary banker to work with them.
post #30 of 32
Quote:
Originally Posted by TBell View Post

Typically these things get settled for far less. A Trustee would have to sue you in Bankruptcy Court to recover the funds if you refused to pay. This costs money and time that the Trustee will not recover if he or she losses. Further, if the Trustee wins, the Court likely will not allow those costs to be added to the amount owed. So, more times then not, the Trustee will settle.

TBell - thanks for offering your experience and expertise in this!!
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post #31 of 32
Quote:
Originally Posted by TBell View Post

Actually your analogy is off base. The rule only applies to creditors. If I go into a store today and buy a TV outright, the party I bought the TV from is not a creditor. In exchange for the money, the party gave me a TV. I did not owe it money at the time of purchase. There was no loan.

It will be interesting to see if that sort of 'purchase' is how Apple tries to defend the payment they received. Basically that they sold this company a chunk of product with the rights to resell it at a higher price etc. If the company was not able to resell the product, that would not be Apple's fault. But Apple was owed for the 'outright' purchase and that was what they were paid. It was not a 'loan' situation, Apple might try to say.

As I understand it, that sort of 'you can buy it from us for less than what the customers pay and resell it at that customer price' game is how they handle all their partners. And if that is true then they might be able to pull out said defense. I am curious to see.

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post #32 of 32
I was once a management consultant for a company that entered bankruptcy. In the days before the bankruptcy, the owner of the corporation paid himself money that he was owed by the corporation. Those payments were ripe for a "preferential payment" clawback. He'd taken money out of the corporation for his own benefit that belonged to all of the unsecured creditors.
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