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Unconscionability Claim Dismissed; Fraudulent Transfer Claim Survives

Ritz Camera & Image, L.L.C. v. Canon U.S.A., Inc. (In re Ritz Camera & Image, L.L.C.), Adv. No. 12-50986 (KG) (Bankr. D. Del. Feb. 4, 2014)

This Memorandum Opinion opines on a routine motion to dismiss federal bankruptcy and state law claims asserted by a chapter 7 trustee against defendant Canon U.S.A., Inc. (“Canon“).  The adversary proceeding was commenced by the trustee following the 2012 filing and conversion of the chapter 11 proceedings commenced by electronics and camera merchandisers, Ritz Camera Centers and its affiliated debtors.  In connection with the debtors’ first set of bankruptcy proceedings in 2009, Canon alleged certain claims and discontinued supplying the debtors with its products.  Years later, Canon and the debtors settled their disputes through a settlement agreement and related supply agreement and resumed a business relationship.  Following the debtors’ second set of bankruptcy proceedings in 2012, the chapter 7 trustee sought to render the prepetition agreements unenforceable and avoid and recover certain payments made to Canon thereunder, asserting fraudulent transfer claims under sections 548 and 550 of the Bankruptcy Code and state law claims of unconscionability, economic duress, unjust enrichment, and declaratory judgment.  By this Opinion, Judge Gross dismissed the trustee’s claims for unconscionability, economic duress, unjust enrichment, and declaratory judgment, but denied dismissal of the trustee’s fraudulent transfer claims.

Judge Gross’s decision is noteworthy for its discussion of unconscionability, a concept not often addressed by our Court.  The trustee claimed that the settlement agreement was unconscionable because Canon used its superior bargaining power to coerce the debtors to agree to unfair and commercially unreasonable contract terms.  According to the Opinion, Canon controls almost 50% of the digital single-lens reflect camera market in the United States and the debtors determined that they could not effectively compete in the marketplace without selling Canon’s products.

Analyzing at great length the case law in Delaware and this District, Judge Gross noted that a “claim for unconscionability must demonstrate ‘an absence of meaningful choice . . . together with contract terms which are unreasonably favorable to the other party.”  This burden is not insignificant. A plaintiff must prove that “no man in his senses and not under delusion would make [the contract at issue], . . . as no honest or fair man would accept [the contract at issue].”  According to the Bankruptcy Court, superior bargaining power or a “take-it-or-leave-it” approach will be insufficient to satisfy this burden absent an element of unreasonableness, such as the inability of one party to walk away from the proposed contract.  Ultimately, in construing the facts most favorable to the trustee, the Bankruptcy Court held that the trustee’s complaint failed to state a claim for unconscionability because both parties to the settlement agreement were sophisticated, the terms of the agreement were vetted through counsel, and the final terms of the agreement reflected the parties’ negotiations.  While Canon may have had a superior bargaining power, the debtors could have walked away from the negotiations.

The Court also dismissed the trustee’s economic duress, unjust enrichment, and declaratory judgment claims, but denied dismissing the fraudulent transfer claims.  Although, as Canon argued, the settlement agreement’s terms might reflect reasonably equivalent value provided to the debtors in exchange for the transfers to Canon (a necessary element of a section 548 fraudulent transfer claim), the Court held that such a decision required the consideration of evidence and the trustee adequately pled a claim for avoidance in his amended complaint.