Before getting to today's opinion, a brief programming note. Because the debtor in this case is Black Pearl Vision, I couldn't resist the obvious association with the legendary Black Pearl from the Pirates of the Caribbean films. So, with apologies to Captain Jack Sparrow, this is the first of three pirate-themed bankruptcy posts I'll be publishing this week. 

Fortunately, unlike its cinematic namesake, this Black Pearl found that bankruptcy law can sometimes provide a second chance after an encounter with a formidable adversary.

Summary:

The United States Bankruptcy Court for the Western District of North Carolina has issued another significant opinion in the growing body of merchant cash advance ("MCA") litigation. In Black Pearl Vision, LLC v. G & G Funding Group, LLC (In re Black Pearl Vision, LLC), the court held that a Chapter 11 debtor may pursue constructive fraudulent transfer claims under § 548 of the Bankruptcy Code despite the lender having already obtained a prepetition New York default judgment enforcing the agreement. The court dismissed only the debtor's attempt to use New York criminal usury law affirmatively while allowing the heart of the avoidance action to proceed.

Background

Black Pearl Vision, a North Carolina manufacturer of contact lenses, entered into what was labeled a "Future Receivables Sale and Purchase Agreement" with G & G Funding Group, a New York merchant cash advance company.

Under the agreement:

• G & G advanced approximately $191,830.

• It purportedly purchased $314,409 of future receivables.

• The debtor initially made daily ACH payments of $1,920.51, later reduced to $1,250.

• Over approximately six months, the debtor paid $233,574.06 before ultimately filing Chapter 11.

Like many MCA agreements, the contract also contained:

• a blanket UCC lien,

• an irrevocable power of attorney,

• a personal guaranty,

• a confession of judgment provision, and

• default provisions allowing G & G to sweep 100% of the debtor's receipts.

Before the bankruptcy filing, G & G obtained a default judgment in New York state court. After filing Chapter 11, Black Pearl commenced an adversary proceeding seeking to avoid both the agreement and the payments as constructively fraudulent transfers under § 548.

The Court Rejects the Lender's Procedural Defenses

The lender argued that the debtor's claims were barred by the Rooker-Feldman doctrine, res judicata, collateral estoppel, and the doctrine of in pari delicto. Judge Ashley Austin Edwards rejected each of those arguments.

Rooker-Feldman

The court held that the debtor was not asking the bankruptcy court to overturn the New York judgment. Instead, it sought to exercise federal avoidance powers that arise only upon the filing of bankruptcy. Those claims belong exclusively in bankruptcy court and therefore are not barred by Rooker-Feldman.

Res Judicata

Likewise, claim preclusion did not apply because a § 548 fraudulent transfer claim simply did not exist before the bankruptcy petition was filed. Since those claims could not have been asserted in the earlier state court litigation, they could not be barred by that judgment. The court relied on the Supreme Court's decisions in Brown v. Felsen and Archer v. Warner, emphasizing that Congress intended bankruptcy courts—not state courts—to determine bankruptcy-specific causes of action.

Collateral Estoppel

The lender also argued that the default judgment conclusively established that the agreement was a true sale of receivables rather than a loan and that fair consideration existed.

The court disagreed.

A default judgment on a breach of contract action establishes only the elements necessary for that judgment. It does not necessarily determine whether the transaction was economically a loan or whether reasonably equivalent value existed for purposes of § 548. Those issues remain open for litigation in the bankruptcy court.

In Pari Delicto

The court likewise rejected the lender's in pari delicto defense. Avoidance powers under § 548 arise only after bankruptcy and are exercised for the benefit of the estate and creditors. Even if the doctrine could theoretically apply, the lender failed to allege that both parties participated in the same wrongdoing, an essential element of the defense.

The Fraudulent Transfer Claims Survive

The court concluded that the complaint adequately alleged the elements of constructive fraudulent transfer.

The debtor alleged:

• insolvency,

• transfers within two years of bankruptcy, and

• receipt of less than reasonably equivalent value.

Importantly, Judge Edwards again recognized that determining whether an MCA agreement is truly a sale of receivables or instead a disguised loan is a highly fact-intensive inquiry that ordinarily cannot be resolved on a motion to dismiss.

The court also noted that the debtor received approximately $191,830 but paid more than $233,574 in only six months. While that disparity alone may not ultimately establish a lack of reasonably equivalent value, it was sufficient—together with the remaining allegations—to state a plausible claim under § 548.

The Court Rejects an Affirmative Usury Claim

The lender prevailed on one issue.

Consistent with several recent North Carolina bankruptcy decisions involving merchant cash advances, the court held that this corporate borrower could not affirmatively invoke New York criminal usury law to invalidate the agreement. Because the lender had not filed a proof of claim or otherwise sought affirmative relief in the bankruptcy case, the debtor could not offensively use New York's criminal usury statutes. Those claims were dismissed, although the fraudulent transfer claims remained fully intact.

Commentary

This decision represents another important contribution to what is becoming a substantial body of merchant cash advance jurisprudence in the North Carolina bankruptcy courts.

Perhaps the opinion's greatest significance is what it refuses to allow.

Merchant cash advance companies frequently obtain confessions of judgment or default judgments before a financially distressed business ultimately files bankruptcy. If those judgments automatically foreclosed later avoidance actions, lenders could effectively insulate potentially abusive transactions simply by winning the race to the courthouse.

Judge Edwards correctly recognized that Congress designed the Bankruptcy Code differently.

Avoidance powers are federal remedies that arise only upon the filing of bankruptcy. They exist not simply to benefit the debtor, but to maximize recoveries for all creditors by unwinding transfers that improperly depleted the bankruptcy estate.

The opinion also continues an encouraging trend of looking beyond labels to economic reality. Whether an agreement is called a "purchase of future receivables" matters far less than whether the purchaser actually bore the risks associated with owning future receivables or instead structured the transaction to function as a very expensive loan.

One aspect of the opinion deserves particular attention. The court held only that this corporate borrower—an LLC—could not affirmatively invoke New York criminal usury law under the circumstances presented. That should not be read too broadly. New York law generally affords individual borrowers considerably greater ability to assert usury affirmatively. Likewise, where the owner of a business signs a personal guaranty, that individual guarantor may have usury defenses or affirmative claims that are unavailable to the corporate borrower itself, depending on the nature of the guaranty and the procedural posture of the case. Those issues were not before the court, and the opinion should not be read as resolving them.

Equally important is the court's careful explanation of why neither Rooker-Feldman nor ordinary preclusion principles prevent bankruptcy courts from exercising their exclusive jurisdiction over avoidance actions, even after a creditor has obtained a state court judgment.

For bankruptcy practitioners representing debtors, trustees, or creditors, Black Pearl Vision serves as a reminder that a prepetition judgment—even a final default judgment—is not necessarily the end of the analysis. Bankruptcy creates federal rights and remedies that often did not exist before the petition date, and those rights deserve independent consideration. This opinion carefully preserves that distinction while allowing the parties to litigate the ultimate merits of the alleged fraudulent transfers.