scc Doc 113 Filed 04/07/17 Entered 04/07/17 11:21:18 Main Document Pg 1 of 5

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1 Pg 1 of 5 HALPERIN BATTAGLIA BENZIJA, LLP 40 Wall Street, 37 th Floor New York, NY (212) Alan D. Halperin, Esq. Debra J. Cohen, Esq. Counsel for TVII Corp., Bhungalia Family, LLC and Ronak Khichadia UNITED STATES BANKRUPTCY COURT SOUTHERN DISTRICT OF NEW YORK X In re: CHOXI.COM, INC. a/k/a NOMORERACK.COM, INC., Chapter 11 Case No (SCC) Hearing Date: April 20, a.m. Debtor X LIMITED OBJECTION OF TVII CORP., BHUNGALIA FAMILY, LLC AND RONAK KHICHADIA TO DEBTOR S MOTION FOR AN ORDER APPROVING STIPULATION OF SETTLEMENT WITH PAYSAFE MERCHANT SERVICES CORP. (f/k/a NBX MERCHANT SERVICES CORP.) PURSUANT TO FED. R. BANKR. P. 9019(a) TVII Corp., Bhungalia Family, LLC d/b/a Bhungalia, LLC and Ronak Khichadia (collectively, the Secured Creditors ) respectfully represent as follows: The Motion 1. On March 28, 2017, Choxi.Com, Inc. a/k/a Nomorerack.com (the Debtor ) made a motion (the Motion ) for entry of an order approving a Stipulation of Settlement (the Stipulation ) with Paysafe Merchant Services corp. f/k/a NBX Merchant Services Corp. ( Paysafe ) in connection with accounts receivable proceeds payable to the Debtor ( A/R Proceeds ) under its Bank Card Merchant Agreement with Paysafe (the Merchant Agreement ). [ECF Doc 109]. 2. The Secured Creditors have no objection to the collection of the A/R Proceeds in accordance with the Stipulation but object to the Debtors mischaracterization of the transaction

2 Pg 2 of 5 and A/R Proceeds in both the Motion and Stipulation, and reserve all rights in connection therewith. The Merchant Agreement 3. Prior to the Petition Date, on or about July 25, 2012, the Debtor and Paysafe entered into the Merchant Agreement whereby Paysafe agreed to process credit and debit card transactions for the Debtor. All payments collected by Paysafe on the Debtor s behalf represent credit or debit card payments made by customers for goods sold to the customers by the Debtor; i.e., accounts receivable. Upon information and belief, Paysafe would regularly remit A/R Proceeds to the Debtor but was entitled to create a reserve ( Reserve ) to cover, among other things, existing or anticipated chargebacks and returns ( Chargebacks ) or fees, fines, monetary awards or other charges and assessments imposed or anticipated to be imposed by third party credit card companies ( Fees and with Chargebacks, Charges ). As set forth in the Motion, Paysafe is presently holding approximately $738, in Reserve (the Reserved Funds ), has received claims for Chargebacks in the amount of approximately $96, and Visa Inc. asserted Fees of approximately $63, As such, there is presently about $578,125 in A/R Proceeds payable to the Debtor under the Merchants Agreement (the Net A/R Proceeds ). These Net A/R Proceeds should be remitted to the Debtor in the normal course under the same agreement that Paysafe relies upon to create the Reserve. The Secured Claims 4. Also, prior to the Petition Date, the Debtor executed those certain Secured Notes dated as of September 2, 2016 and October 25, 2016 (collectively, the Notes ) and that certain Security Agreement dated as of September 1, 2016 (as amended from time to time, the Security Agreement ) all in favor of the Secured Creditors, whereby the Notes are secured by (the 2

3 Pg 3 of 5 Prepetition Lien ) all assets of the Debtor of any kind or nature (the Collateral ). After the Petition Date, on March 21, 2017, this Court approved a Stipulation and Order (i) Authorizing Debtor s Use of Cash Collateral Pursuant to 11 U.S.C. 363 and Bankruptcy Rule 4001 and (ii) Granting Adequate Protection Pursuant to 11 U.S.C. 361, 363 [ECF Doc 104] under which, among other things, the Secured Creditors were granted replacement liens (collectively with the Prepetition Lien, the Lien ) on all assets of the Debtor of any kind or nature, wherever located, now owned or hereafter acquired, and the proceeds thereof that are or have been acquired, generated or received by the Debtor subsequent to the Petition Date as adequate protection for the Debtor s use of property constituting the Secured Creditors cash collateral, excluding recoveries from avoidance actions under Chapter 5 of the Bankruptcy Code ( Avoidance Action Recoveries ). The Limited Objection 5. In the Motion and the Stipulation, the Debtor employs a bit of alchemy with the facts by mischaracterizing the Net A/R Proceeds as Avoidance Action Recoveries, when it is nothing of the sort, in a blatant attempt to shield the funds from the Lien. Both the Motion and Stipulation were constructed to make it appear as if Paysafe and the Debtor reached a settlement regarding the rights to the Reserved Funds when, in fact, the only dispute was as to timing of payment. There is no dispute whatsoever that the Debtor is entitled to the entire Reserve Funds net of Charges because it is Net A/R Proceeds. Paysafe was only acting as the Debtor s payment processor and is holding the funds for the Debtor s benefit, not its own. The only issue is what Charges may be asserted in the future; not surprisingly, Paysafe did not want to release the Reserved Funds until it felt assured that there would be no further Charges. Indeed, the Stipulation expressly provides that the entire Reserved Funds is being paid to the Debtor net of Charges but the 3

4 Pg 4 of 5 funds will be paid in installments over a few weeks 1 as the likelihood of any additional Charges arising diminishes, with the entire remaining balance being paid by May 3, See Stipulation at Rather than acknowledging that it merely reached a resolution with Paysafe regarding the timing of the payment of the Net A/R Proceeds, the Debtor misstates that the purpose of the Stipulation is to resolve avoidance action claims against Paysafe in an attempt to shield the funds from the Lien. The Stipulation provides that each Party alleges that it has certain rights to the Reserve Funds that the other Party disputes, including the Debtor alleging that it has the ability to avoid Paysafe s interests in the Reserve Funds and recover the same for the estate pursuant to 11 U.S.C. 544 and 550, which allegations Paysafe disputes. Stipulation at p.1, see also Motion at 9. Similarly, the releases in the Stipulation are couched as releases of preference or avoidance claim or cause of action pursuant to 11 U.S.C. 544 and 550 or similar state laws. (See Stipulation at 8). This is simply not accurate. The Reserved Funds do not comprise transfers made to Paysafe that are avoidable under 544, 547, 548 or 549 of the Bankruptcy Code; indeed, Paysafe does not make any claim to these funds except to the extent 1 The installment scheme itself belies the notion that this is a settlement of any kind. As noted, all of the Reserved Funds net of Charges are being paid to the Debtor. Moreover, the Stipulation provides that the Reserved Funds will be paid with an initial payment after approval of the Stipulation by the Court and three installments every 28 days thereafter, with the final payment of all remaining Reserve Funds by May 3, 2017 (the Final Pay Date ). The Stipulation was finalized in March 6, 2017, only 58 days before the Final Pay Date so it would be impossible to have 4 payments with 28 days between them. And the Hearing on the Motion is scheduled for April 20, 2017 even if the Court enters and order approving the Stipulation on that day, it will not become final until after the Final Pay Date. Therefore, Paysafe would actually be making only a single payment to the Debtor of the entire Reserved Funds net of Chargebacks representing the Net A/R Proceeds. Thus, it is clear that the Motion and Stipulation were fashioned as a settlement to buttress a baseless assertion that the funds are Avoidance Action Recoveries. 2 Less all Chargebacks actually received that remain in dispute but, once the disputed is resolved, Paysafe must pay any net balance to the Debtor. 4

5 Pg 5 of 5 necessary to cover Charges. Paysafe was merely processing credit and debit card transactions for the Debtor. Thus, the payments to be made by Paysafe to the Debtor under the Stipulation are not Avoidance Action Recoveries but are simply Net A/R Proceeds that are subject to the Lien. 7. At this juncture, the Secured Creditors are more concerned with bringing the Net A/R Proceeds into the estate, and so it does not insist that the tortured construct created to try to deprive them of their collateral rights be cast aside as that will only waste time, further delay the collection of their collateral and cost additional fees. Instead, the Secured Creditors dispute the characterization that the Net A/R Proceeds and any other sums that Paysafe pays over to the Debtor in excess of any Paysafe chargeback rights, and reserves its rights to contest such characterization in the event the Debtor or any other party attempt to dispute the Secured Creditors rights to such collateral. Dated: April 7, 2017 TVII CORP., BHUNGALIA FAMILY, LLC, AND RONAK KHICHADIA, By their Counsel, HALPERIN BATTAGLIA BENZIJA, LLP By: /s/ Alan D. Halperin Alan D. Halperin Debra J. Cohen 40 Wall Street, 37 th Floor New York, NY (212) ahalperin@halperinlaw.net dcohen@halperinlaw.net 5