PRIVILEGED & CONFIDENTIAL ATTORNEY-CLIENT PRIVILEGED / ATTORNEY WORK PRODUCT
MEMORANDUM
October 20, 2025
From: Gabrielle Moss and Nathan Ikeda, Calderwood & Harkness LLP
To: Colette Whitman, Partner, Calderwood & Harkness LLP Priya Anand, General Counsel, Meridian Consumer Brands LLC
Re: Preference Exposure Analysis — Payments Received from Cascadia Home & Lifestyle Inc. During 90-Day Pre-Petition Period
Matter: In re Cascadia Home & Lifestyle Inc., Case No. 25-12087 (Bankr. D. Del.)
C&H Matter No.: 1011-00002
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I. Executive Summary
The purpose of this memorandum is to analyze Meridian Consumer Brands LLC's ("Meridian" or the "Company") exposure to potential preference avoidance actions under Section 547 of the Bankruptcy Code, 11 U.S.C. § 547, in connection with the Chapter 11 filing of Cascadia Home & Lifestyle Inc. ("Cascadia," "CHL," or the "Debtor"). Cascadia filed its voluntary petition for relief under Chapter 11 of the Bankruptcy Code on October 14, 2025, before the Honorable Christine M. Aldridge in the United States Bankruptcy Court for the District of Delaware, Case No. 25-12087.
During the 90-day preference period preceding the petition date — July 16, 2025 through October 14, 2025 — Meridian received approximately $8,430,000 in payments from Cascadia across fourteen (14) separate wire transfers. These payments were made on account of pre-petition trade receivables arising from Meridian's sale and delivery of consumer products to Cascadia for resale in Cascadia's retail stores and through its e-commerce platform.
Certain parties-in-interest in the bankruptcy case may seek to recover some or all of these payments as preferential transfers under Section 547(b). The most likely claimant would be the Debtor itself, acting as debtor-in-possession, or the Official Committee of Unsecured Creditors (the "Committee") that was appointed by the United States Trustee on October 28, 2025 and which has retained Garvey & Holbrook LLP (Diana Prescott, lead partner) as its counsel. If the Debtor were to decline to pursue preference actions, the Committee could seek derivative standing from the Bankruptcy Court to prosecute such claims on behalf of the estate. In the event of a conversion of the case to Chapter 7, a Chapter 7 trustee would have standing to bring preference actions and may, as a practical matter, be more inclined to do so aggressively.
It is important to note at the outset that Meridian currently serves as a member of the Committee. This dual role — as both a Committee member and a potential preference defendant — presents potential conflict-of-interest considerations, particularly if the Committee itself elects to pursue preference claims against its own members. These conflict issues are addressed separately in our memorandum regarding Committee participation considerations, dated October 18, 2025.
Based on our preliminary assessment, Meridian has strong defenses that should substantially reduce or eliminate its net preference exposure, but rigorous document preservation and thorough analysis are essential to ensure these defenses are properly documented and preserved. The principal defenses available to Meridian are the ordinary course of business defense under Section 547(c)(2), the subsequent new value defense under Section 547(c)(4), and, to a more limited extent, the contemporaneous exchange defense under Section 547(c)(1).
In summary, our preliminary quantification of Meridian's preference exposure is as follows:
These estimates are preliminary and subject to meaningful refinement as we complete the payment-level analysis described in this memorandum. The net exposure range could move in either direction depending on the results of that analysis. A worst-case scenario in which no defenses are sustained would result in exposure equal to the full $8,430,000. Conversely, if the ordinary course defense is sustained as to all fourteen payments — which we believe is a plausible outcome — net exposure could be reduced to zero.
We recommend the following immediate steps: (1) issuance of a litigation hold and commencement of document preservation across all relevant Meridian departments; (2) assembly of complete payment and invoice records to support the detailed payment-by-payment defense analysis; and (3) development of a comprehensive defense strategy in coordination with Meridian's broader case strategy, including its § 503(b)(9) administrative claim, reclamation demand, trade credit insurance claim, and critical vendor negotiations.
II. Background
A. The Parties and Their Commercial Relationship
Meridian Consumer Brands LLC is a Delaware limited liability company headquartered at 575 Lexington Avenue, 22nd Floor, New York, New York 10022. Meridian is a portfolio company of Briarstone Capital Partners Fund IV, LP ("Briarstone"), which holds an approximately 78% equity interest in Meridian, having acquired the company in 2021 for approximately $680 million. Meridian's management team and certain co-investors hold the remaining equity. For its fiscal year ending December 31, 2024 ("FY2024"), Meridian reported revenue of approximately $1.24 billion and adjusted EBITDA of approximately $167 million.
Meridian develops, manufactures, and distributes a portfolio of branded household cleaning products, personal care items, and small kitchen appliances. Its products are sold through national and regional retailers, mass-market merchandisers, club stores, grocery chains, and e-commerce platforms. Meridian's product portfolio includes several well-known consumer brands with significant market share in their respective categories.
Cascadia Home & Lifestyle Inc. is a Delaware corporation headquartered at 1200 NW Everett Street, Suite 800, Portland, Oregon 97209. As of the petition date, Cascadia operated approximately 347 retail stores across 38 states, in addition to its e-commerce platform. Cascadia was a publicly traded company until 2019, when it was taken private by Pinecrest Equity Group ("Pinecrest") in a leveraged buyout valued at approximately $2.1 billion. The significant debt burden incurred in connection with the LBO, combined with declining foot traffic, shifting consumer preferences toward online retail, and margin compression, ultimately contributed to the company's financial distress and Chapter 11 filing.
Cascadia has been one of Meridian's top-five retail customers, ranked as Meridian's fourth-largest customer by revenue during FY2024. Meridian's sales to Cascadia during FY2024 totaled approximately $58.3 million, representing roughly 4.7% of Meridian's total revenue. The commercial relationship between Meridian and Cascadia has been in place for over a decade and has been governed by a Master Supply Agreement that has been periodically renewed and amended.
The trade terms between Meridian and Cascadia, as reflected in the current Master Supply Agreement (dated March 15, 2022, as amended) and as consistently applied in practice, are Net 60, with an optional 2% early payment discount if payment is received within 15 days of invoice date (Net 15/2%). Historically, Cascadia infrequently availed itself of the early payment discount, and the predominant payment pattern reflected payment within the standard Net 60 window.
As of the petition date, Meridian's total pre-petition receivables outstanding from Cascadia were $14,726,418.37, spread across 83 unpaid invoices. The oldest outstanding invoice is MCB-092174, dated July 18, 2025, and the most recent is MCB-095301, dated October 10, 2025. A substantial portion of these receivables relates to goods shipped during the latter part of the preference period and in the weeks immediately preceding the filing, as discussed further below in connection with Meridian's § 503(b)(9) administrative claim and reclamation demand.
B. The Chapter 11 Filing
Cascadia filed a voluntary petition for relief under Chapter 11 of Title 11 of the United States Code on October 14, 2025, in the United States Bankruptcy Court for the District of Delaware (the "Bankruptcy Court"). The case has been assigned Case No. 25-12087 and is pending before the Honorable Christine M. Aldridge.
The Debtor's restructuring professionals are as follows:
• Debtor's Lead Counsel: Brindoval Baines & Lord LLP (Harrison Caldwell, lead partner)
• Debtor's Delaware Co-Counsel: Borwick Sato LLP (Michael Donnelly, lead partner)
• Debtor's Financial Advisor: Ashworth Partners LLC (Sandra Ng, lead managing director)
• Chief Restructuring Officer: Philip Kellner of Kellner & Associates LLC, appointed as CRO in September 2025, approximately one month prior to the filing
At the time of filing, Cascadia's capital structure consisted of total funded indebtedness of approximately $1.379 billion, composed as follows:
For its most recently completed fiscal year ending January 31, 2025, Cascadia reported revenue of approximately $1.87 billion, a net loss of approximately $214 million, and negative adjusted EBITDA of approximately ($42 million). The company's financial performance had deteriorated markedly from prior years, reflecting the compounding effects of its leveraged capital structure, competitive pressures in the retail sector, and unsuccessful attempts to reposition its brand and store format.
The estimated total pool of general unsecured claims is in the range of $180 million to $220 million, based on preliminary schedules filed by the Debtor and the claims analysis conducted by the Committee's financial advisor. This figure includes trade payables, lease rejection claims, and the senior unsecured notes. The ultimate recovery for general unsecured creditors remains uncertain at this early stage of the case but is widely expected to be substantially less than full recovery.
On the first day of the case, the Debtor obtained interim approval of a $275 million debtor-in-possession ("DIP") financing facility from Ridgeline National Bank, N.A., consisting of $150 million in new money and a $125 million roll-up of pre-petition first lien revolving credit facility obligations. The DIP facility bears interest at a rate of SOFR plus 450 basis points, with a SOFR floor of 1.00%. The final DIP financing order was entered on November 3, 2025.
On October 28, 2025, the United States Trustee for the District of Delaware appointed the Official Committee of Unsecured Creditors pursuant to Section 1102 of the Bankruptcy Code. The Committee has retained Garvey & Holbrook LLP (Diana Prescott, lead partner) as its counsel and Broadleaf Advisory Group LLC (Robert Tanaka, lead managing director) as its financial advisor. As noted above, Meridian was appointed to and currently serves on the Committee.
C. Potential Preference Claimants
Under Section 547(b) of the Bankruptcy Code, standing to bring a preference avoidance action resides with the trustee — or in a Chapter 11 case, the debtor-in-possession exercising the trustee's avoidance powers under Section 1107(a). Accordingly, Cascadia, as debtor-in-possession, has standing to bring preference actions against Meridian and other creditors who received payments during the preference period.
If the Debtor declines to pursue preference actions — which is not uncommon, particularly in the early stages of a Chapter 11 case where the debtor may wish to maintain relationships with key suppliers — the Committee may seek derivative standing from the Bankruptcy Court to prosecute preference claims on behalf of the estate. In the Third Circuit, a creditors' committee may obtain derivative standing upon a showing that the debtor-in-possession has unjustifiably failed to bring a colorable claim. See Official Committee of Unsecured Creditors of Cybergenics Corp. v. Chinery, 330 F.3d 548 (3d Cir. 2003) (en banc). However, as noted, Meridian's membership on the Committee creates potential complications that would need to be addressed if the Committee sought to pursue preference claims against its own members.
As a practical matter, preference actions are typically not commenced until the later stages of a bankruptcy case, often near the end of the applicable statute of limitations. Under Section 546(a)(1), the statute of limitations for preference actions is two years from the date of filing of the petition, i.e., by October 14, 2027. In some cases, the two-year period may be extended by agreement of the parties. We should therefore anticipate that any preference demand or complaint would likely be served at some point during the two-year window, with activity potentially accelerating in the months leading up to the October 2027 deadline.
It is important to confirm that Meridian is not an "insider" of Cascadia as that term is defined under Section 101(31) of the Bankruptcy Code. Meridian does not hold any equity interest in Cascadia, does not have any officers, directors, or managing agents in common with Cascadia, and is not otherwise related to Cascadia through ownership or control. Consequently, the relevant look-back period for preference purposes is the standard 90-day period preceding the petition date — not the extended one-year period applicable to insiders under Section 547(b)(4)(B). The 90-day preference period runs from July 16, 2025 through October 14, 2025.
III. Legal Framework — 11 U.S.C. § 547
A. Elements of a Preference Under § 547(b)
Section 547(b) of the Bankruptcy Code authorizes the trustee (or debtor-in-possession) to avoid any transfer of an interest of the debtor in property if five statutory elements are satisfied. All five elements must be established by the party seeking avoidance. The elements are as follows:
1. The transfer was of an interest of the debtor in property;
2. The transfer was made to or for the benefit of a creditor;
3. The transfer was made for or on account of an antecedent debt owed by the debtor before such transfer was made;
4. The transfer was made while the debtor was insolvent; and
5. The transfer enables the creditor to receive more than it would have received if (a) the case were a case under Chapter 7 of the Bankruptcy Code, (b) the transfer had not been made, and (c) the creditor received payment of such debt to the extent provided by the provisions of the Bankruptcy Code.
See 11 U.S.C. § 547(b)(1)–(5). We analyze each element as applied to Meridian's receipt of payments from Cascadia during the preference period.
Element 1 — Transfer of an Interest of the Debtor in Property. The fourteen payments at issue were wire transfers from Cascadia's bank accounts to Meridian's bank accounts. Funds held in a debtor's bank accounts are property of the debtor's estate. See, e.g., Begier v. IRS, 496 U.S. 53, 58–59 (1990). Each wire transfer constituted a transfer of the debtor's interest in property within the meaning of Section 547(b)(1). This element is satisfied.
Element 2 — To or for the Benefit of a Creditor. Meridian is a creditor of Cascadia, holding trade receivables arising from the sale and delivery of consumer products. Each payment reduced the outstanding balance on Meridian's account and was made directly to Meridian's benefit. A "creditor" is defined under Section 101(10) of the Bankruptcy Code as an entity that has a claim against the debtor. Meridian indisputably holds pre-petition claims against Cascadia. This element is satisfied.
Element 3 — For or on Account of an Antecedent Debt. Each of the fourteen payments was applied to invoices for goods that had been previously delivered by Meridian to Cascadia. The invoices represent debts that arose at the time of delivery (or, under the applicable trade terms, at the time of invoicing), prior to the date of the respective payment. Accordingly, each payment was made "for or on account of an antecedent debt owed by the debtor before such transfer was made." See 11 U.S.C. § 547(b)(2). This element is satisfied.
Element 4 — While the Debtor Was Insolvent. Under Section 547(f), the debtor is presumed to have been insolvent during the 90 days immediately preceding the date of the filing of the petition. This is a rebuttable presumption, but in this case, the presumption is strongly supported by the underlying financial reality. Cascadia's total funded debt of approximately $1.379 billion, combined with a net loss of $214 million and negative EBITDA of ($42 million) for FY2024, make it virtually certain that Cascadia was balance-sheet insolvent throughout the 90-day preference period. The debtor's liabilities almost certainly exceeded the fair value of its assets during this entire period. We do not anticipate any meaningful challenge to this element. This element is satisfied.
Element 5 — Creditor Receives More Than in a Hypothetical Chapter 7 Liquidation. In order to satisfy this element, the trustee must show that the transfer enabled Meridian to receive more than it would have received in a hypothetical Chapter 7 liquidation. Given the Debtor's heavily leveraged capital structure and the estimated unsecured claims pool of $180 million to $220 million against limited unencumbered estate value, general unsecured creditors are expected to receive substantially less than full (i.e., 100 cents on the dollar) recovery in a hypothetical liquidation. Preliminary indications suggest that unsecured creditor recovery could be in the single-digit percentage range. Each payment of Meridian's pre-petition trade receivables in full during the preference period therefore enabled Meridian to receive 100 cents on the dollar for the paid invoices, far exceeding the pro rata distribution it would have received in a Chapter 7 liquidation. This element is satisfied.
Conclusion on Prima Facie Case. All five elements of Section 547(b) are satisfied with respect to each of the fourteen wire transfer payments received by Meridian during the 90-day preference period. Accordingly, absent the application of one or more statutory defenses under Section 547(c), the $8,430,000 in aggregate payments is potentially avoidable and recoverable by the estate.
B. Statutory Defenses Under § 547(c)
Section 547(c) provides several affirmative defenses to preference avoidance. The burden of proof on these defenses rests with the transferee — i.e., with Meridian. See 11 U.S.C. § 547(g) ("the trustee has the burden of proving the avoidability of a transfer . . . [and] the creditor or party in interest against whom recovery or avoidance is sought has the burden of proving the nonavoidability of a transfer under subsection (c)"). The three principal defenses available to Meridian are:
1. Section 547(c)(1) — Contemporaneous Exchange for New Value. This defense applies to transfers that were intended by the debtor and the creditor to be contemporaneous exchanges for new value given to the debtor, and that were in fact substantially contemporaneous exchanges. 11 U.S.C. § 547(c)(1).
2. Section 547(c)(2) — Ordinary Course of Business. This defense protects transfers made in the ordinary course of business or financial affairs of the debtor and the transferee, or made according to ordinary business terms. 11 U.S.C. § 547(c)(2). This is Meridian's strongest available defense and is discussed in detail in Section V.A below.
3. Section 547(c)(4) — Subsequent New Value. This defense applies to the extent that, after the preferential transfer, the creditor extended new value to or for the benefit of the debtor that remains unpaid or that was not otherwise secured by an unavoidable security interest. 11 U.S.C. § 547(c)(4). This defense is discussed in detail in Section V.B below.
In addition to the three principal defenses, we briefly note the following additional defenses, each of which has limited or no applicability to Meridian's circumstances:
Section 547(c)(3) — Purchase Money Security Interest ("PMSI"). This defense protects transfers that create a security interest in property acquired by the debtor to secure new value given to enable the debtor to acquire such property. This defense is designed for secured lending transactions and is inapplicable to Meridian's unsecured trade receivables.
Section 547(c)(9) — Small Preference Threshold. Under Section 547(c)(9), as amended by the Bankruptcy Threshold Adjustment and Technical Corrections Act and as most recently adjusted, a transfer is not avoidable in a case filed by a debtor whose debts are not primarily consumer debts, if the aggregate value of all property that constitutes or is affected by such transfer is less than $7,575. This threshold applies to the aggregate of all transfers to a single creditor during the preference period. Given that Meridian received $8,430,000 across fourteen payments — each of which individually exceeded $7,575 — this defense is plainly inapplicable.
IV. Detailed Payment Analysis — Preference Period Transfers
A. Summary of Preference-Period Payments
The 90-day preference period for purposes of Section 547(b)(4)(A) runs from July 16, 2025 through October 14, 2025 (inclusive of the petition date). During this period, Meridian received a total of approximately $8,430,000 in payments from Cascadia, distributed across fourteen (14) wire transfers. All payments were transmitted by wire transfer from Cascadia's operating accounts maintained at Severin Financial to Meridian's accounts at Beaumont Trust Bank
The following summary statistics describe the preference-period payments:
B. Payment-by-Payment Schedule
The following table presents a preliminary summary of the fourteen preference-period payments. A complete payment-by-payment schedule with full invoice cross-references, delivery dates, and payment timing calculations will be set forth in Appendix A upon receipt and reconciliation of the complete accounts receivable records from Meridian's finance department (Douglas Hargrove coordinating).
Note: Individual invoice matching is preliminary and based on available remittance data. Complete cash application records are required to finalize the payment-to-invoice matching. Certain payments were applied across multiple invoices. The table above reflects the primary invoice references; a complete listing will appear in Appendix A.
C. Invoice-Level Detail and Matching
Accurate matching of each payment to the specific invoices it satisfied is critical for several reasons. First, the ordinary course of business defense requires analysis of the payment timing for each transfer — the number of days between the invoice date and the payment date must be compared to historical norms on a transfer-by-transfer basis. Second, the new value defense requires a chronological sequencing of payments and subsequent shipments, which in turn depends on knowing precisely which invoices were satisfied by each payment. Third, to the extent that any individual payments were applied across multiple invoices with varying invoice dates, the "days to payment" calculation may differ significantly depending on which invoices are used, potentially affecting the strength of the ordinary course defense for that particular payment.
Some of the fourteen payments may have been applied by Cascadia's accounts payable department to multiple invoices — a common practice for high-volume commercial accounts. In such cases, the remittance advices accompanying the wire transfers should specify the invoices being paid. We need to obtain and review these remittance advices to confirm the proper matching.
Request to Client: We ask that Meridian's accounts receivable department, under the coordination of Douglas Hargrove, promptly provide the following records:
(a) Complete cash application records for all Cascadia payments from January 2023 through October 14, 2025;
(b) All remittance advices received from Cascadia in connection with the fourteen preference-period payments;
(c) All payment correspondence from Cascadia, including any communications regarding payment timing, disputed invoices, credits, returns, or adjustments; and
(d) Copies of all bank statements and wire transfer confirmations reflecting the receipt of each of the fourteen payments.
These records are essential to complete the detailed payment-by-payment and shipment-by-shipment analysis necessary to quantify the available defenses with precision.
V. Defense Analysis
A. Ordinary Course of Business Defense — § 547(c)(2)
1. Legal Standard. Section 547(c)(2) provides that a transfer is not avoidable to the extent that it was:
(A) made in the ordinary course of business or financial affairs of the debtor and the transferee; or
(B) made according to ordinary business terms.
11 U.S.C. § 547(c)(2) (emphasis added). This defense is one of the most frequently invoked and litigated defenses in preference law.
Prior to the enactment of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 ("BAPCPA"), Section 547(c)(2) required the transferee to satisfy both a subjective prong (that the transfer was made in the ordinary course of the parties' dealings) and an objective prong (that the transfer was made according to ordinary business terms in the relevant industry). BAPCPA amended the statute to make these two prongs disjunctive rather than conjunctive — that is, the transferee need only establish one of the two prongs to sustain the defense, not both. This amendment significantly expanded the protection afforded by the ordinary course defense.
Subjective Prong (§ 547(c)(2)(A)) — "Between the Parties." Under the subjective prong, the transferee must demonstrate that the challenged transfer was consistent with the historical course of dealing between the debtor and the creditor. Courts examine range factors in assessing ordinary course between the parties, including:
• The length of time the parties have engaged in the type of dealing at issue;
• Whether the amount or form of the tender differed from past practices;
• Whether the debtor or creditor engaged in any unusual collection or payment activity; and
• The timing of the payments relative to contractual terms and historical payment patterns.
See, e.g., In re Tolona Pizza Prods. Corp., 3 F.3d 1029, 1032 (7th Cir. 1993); In re Roblin Indus., Inc., 78 F.3d 30, 41 (2d Cir. 1996). The most commonly analyzed factor is the timing of payments — specifically, the number of days between the invoice date and the payment date, compared against the historical baseline. Courts generally recognize that some variance in payment timing is normal and expected in commercial transactions, and a modest departure from historical averages does not defeat the defense.
Objective Prong (§ 547(c)(2)(B)) — "Industry Standards." Under the objective prong, the transferee must demonstrate that the challenged transfer was consistent with ordinary business terms in the relevant industry or trade. This analysis typically focuses on the range of payment terms and timing that is customary among similarly situated businesses in the same industry. Expert testimony or industry surveys may be relevant to establish the objective prong. Because BAPCPA made the prongs disjunctive, a creditor who can establish the subjective prong alone need not present evidence regarding industry standards, and vice versa.
2. Application — Subjective (Course of Dealing) Analysis. The foundation of Meridian's ordinary course defense is the comparison between Cascadia's historical payment patterns and its payment patterns during the 90-day preference period. Based on our preliminary analysis:
Contractual Payment Terms: Net 60 (with an optional 2% discount at Net 15, rarely utilized by Cascadia).
Historical Average Payment Timing (24-Month Pre-Preference Baseline: July 2023 – July 2025): Based on our preliminary review of available accounts receivable data, Cascadia's average days-to-payment over the 24-month period preceding the preference period was approximately Net 53 — that is, on average, Cascadia paid Meridian's invoices approximately 53 days after the invoice date, roughly 7 days earlier than the contractual Net 60 term.
Preference-Period Average Payment Timing (July 16 – October 14, 2025): The fourteen payments made during the preference period reflected an average days-to-payment of approximately Net 58 — only 2 days faster than the contractual Net 60 term.
Analysis of Variance: The preference-period average of Net 58 represents a deviation of only 5 days from the historical baseline average of Net 53. Notably, the preference-period payments were slower than the historical average, not faster, which cuts in Meridian's favor — it suggests that Cascadia was not accelerating payments to Meridian in the period leading up to bankruptcy (a fact pattern that would raise red flags), but was instead paying somewhat more slowly than usual, which is entirely consistent with the financial strain that typically precedes a bankruptcy filing.
Courts in the Third Circuit and the District of Delaware have generally been receptive to ordinary course defenses where the variance between historical and preference-period payment timing falls within a reasonable range. A 5-day variance is well within the tolerances that courts have accepted as consistent with the ordinary course. See, e.g., In re Molded Acoustical Prods., Inc., 18 F.3d 217, 224–26 (3d Cir. 1994) (analyzing range of payment timing and permitting ordinary course defense where preference-period payments fell within the range of historical payments); In re US Airways, Inc., No. 04-13819 (SSM), 2009 WL 1044556 (Bankr. E.D. Va. Apr. 16, 2009) (recognizing that modest variations in payment timing do not defeat the ordinary course defense).
Key Consideration — Individual Payment Analysis. While the averages are favorable, it is essential to examine whether any individual payments deviated significantly from historical norms, even if the overall average is consistent. A preference defendant cannot rely solely on aggregate averages; courts may examine individual payments and exclude from the ordinary course defense any specific transfers that constitute "outliers." See In re Archway Cookies, LLC, 435 B.R. 234, 241 (Bankr. D. Del. 2010).
Specifically, we need to analyze:
(a) Whether any individual payments were made significantly faster or slower than the historical range (not just the average);
(b) Whether the pattern of payments changed during the preference period — for example, whether Cascadia shifted from regular, periodic payments to erratic or lump-sum "catch-up" payments, which courts have found indicative of departures from ordinary course;
(c) Whether the amounts of individual payments were consistent with historical payment amounts — in particular, the $1,275,000 payment on August 22, 2025 (wire ref. CHL-WR-082225) is the largest single payment in the preference period and should be analyzed to determine whether a payment of this magnitude was consistent with historical practice; and
(d) Whether any payments were preceded by unusual collection efforts by Meridian or unusual payment communications from Cascadia, which could suggest the payments were outside the ordinary course.
Based on our preliminary review of the payment schedule, the fourteen preference-period payments appear to follow a regular weekly or biweekly cadence that is broadly consistent with Cascadia's historical payment behavior. However, we will need the complete 24-month historical dataset to perform the rigorous statistical analysis necessary to confirm this assessment.
3. Application — Objective (Industry Standards) Analysis. Even if the subjective prong were challenged as to any particular payment, Meridian should be able to establish the objective prong — that the payments were made "according to ordinary business terms" in the consumer products / retail trade industry.
The relevant industry for purposes of this analysis is the market for consumer products sold to national retail chains. Standard industry payment terms for major national retailers purchasing branded consumer goods from manufacturers and distributors typically range from Net 30 to Net 90, with Net 45 and Net 60 being the most common terms. Meridian's Net 60 terms with Cascadia fall squarely within this range, and the preference-period payment timing of Net 58 is well within the norms of the industry.
To support the objective prong, we may wish to gather additional evidence, including:
• Industry surveys or publications regarding standard payment terms and timing in the consumer products sector;
• Data from Meridian's other comparable retail customers showing that similar payment terms and timing are standard;
• If necessary, engagement of an industry expert witness who can testify regarding customary trade terms and payment practices in the industry.
Given the BAPCPA disjunctive standard, we believe the subjective prong alone should be sufficient for most or all of the fourteen payments, but the objective prong provides a valuable alternative or supplementary basis for the defense.
4. Strength Assessment. We assess the ordinary course of business defense as strong for the substantial majority of the fourteen preference-period payments. The key factors supporting this assessment are:
• The narrow variance between historical payment timing (Net 53) and preference-period payment timing (Net 58) — only 5 days;
• The direction of the variance — payments slowed during the preference period, not accelerated;
• The regular cadence of payments throughout the preference period, without evidence of unusual lump-sum or catch-up payments;
• All payments fell within the contractual Net 60 payment terms;
• The disjunctive standard under BAPCPA allows Meridian to succeed on either the subjective or objective prong independently; and
• The objective prong is well-supported by standard industry payment terms in the consumer products / retail sector.
We expect the ordinary course defense to protect a substantial majority of the $8,430,000 in gross preference exposure. However, the defense may be vulnerable as to specific individual payments that fall outside the historical range, and we will be able to assess that risk with greater precision once the detailed payment-by-payment analysis is completed.
B. New Value Defense — § 547(c)(4)
1. Legal Standard. Section 547(c)(4) provides that a transfer is not avoidable to the extent that, after such transfer, the creditor gave new value to or for the benefit of the debtor that:
(A) is not secured by an otherwise unavoidable security interest; and
(B) on account of which new value the debtor did not make an otherwise unavoidable transfer to or for the benefit of such creditor.
11 U.S.C. § 547(c)(4). The purpose of the new value defense is to recognize that a creditor who continues to extend credit and provide goods or services to a debtor during the preference period is, in effect, replenishing the estate with value that benefits all creditors. It would be inequitable to allow the estate to both retain the new value provided by the creditor and recover the preferential payments received by that creditor.
"New value" is defined broadly to include "money or money's worth in goods, services, or new credit, or release by a transferee of property previously transferred to such transferee in a transaction that is neither void nor voidable by the debtor or the trustee under any applicable law." 11 U.S.C. § 547(a)(2).
The new value defense is applied on a rolling basis: each shipment of goods or extension of credit that occurs after a preferential payment creates a new value offset against that payment. The calculation proceeds chronologically through the preference period, matching each preferential payment with subsequent shipments, and then determining whether the new value created by those subsequent shipments was itself consumed by a later preferential payment.
The "Subsequent Payment" Issue in the Third Circuit. In the Third Circuit, which includes the District of Delaware, courts apply the rule that new value can serve as a defense only if it remains unpaid as of the petition date — that is, the new value shipment cannot have been subsequently paid by another preferential transfer. See In re New Era Building Sys., Inc., 221 B.R. 122, 127–28 (Bankr. W.D.N.Y. 1998); In re Friedman's Inc., 738 F.3d 547, 556–57 (3d Cir. 2013). This is sometimes referred to as the "subsequent payment" rule and operates to limit the new value defense to the extent that later preferential payments "used up" the new value by paying for the subsequently delivered goods.
This rule is significant for Meridian's analysis because some of the new value shipments made after earlier preference-period payments may themselves have been paid by later preference-period payments. The new value defense is most powerful with respect to shipments that occurred late in the preference period and that remain unpaid as of the petition date — precisely the shipments that give rise to Meridian's $14,726,418.37 in outstanding receivables.
2. Application to Meridian's Payments. Meridian continued to ship goods to Cascadia in substantial volume throughout the preference period. As a major supplier providing household cleaning products, personal care items, and small kitchen appliances, Meridian's monthly shipment volume to Cascadia averaged approximately $4.8 million per month in the months leading up to the bankruptcy filing. Even as Cascadia's financial distress became more apparent, Meridian continued to fulfill purchase orders and ship goods pursuant to the Master Supply Agreement, as failing to do so could have exposed Meridian to breach-of-contract claims and jeopardized its ongoing commercial relationship with one of its top-five customers.
As of the petition date, Meridian holds $14,726,418.37 in unpaid pre-petition receivables. A substantial portion of these receivables represents goods shipped during or after the later portions of the preference period. These unpaid receivables include the following key subcategories:
Reclamation Claim Value: Meridian has asserted a reclamation demand under Section 546(c) of the Bankruptcy Code for approximately $3,218,650 in goods shipped to Cascadia within the 45 days preceding the petition date (i.e., between August 30, 2025 and October 14, 2025). These shipments represent value delivered to the Debtor during the later portion of the preference period.
Section 503(b)(9) Administrative Claim: Meridian has asserted a claim for administrative expense priority under Section 503(b)(9) for approximately $1,847,200 in goods received by the Debtor within the 20 days preceding the petition date (i.e., between September 24, 2025 and October 14, 2025). These shipments were received by the Debtor very late in the preference period and remain entirely unpaid.
These post-transfer shipments constitute "new value" given to the Debtor after various preferential payments and serve as the basis for Meridian's new value defense. Critically, because these shipments remain unpaid as of the petition date — they are part of the $14.7 million in outstanding receivables — they fully qualify under Section 547(c)(4). The requirement of Section 547(c)(4)(B) — that the debtor not have made an "otherwise unavoidable transfer" on account of the new value — is satisfied because no subsequent payment was made by Cascadia to Meridian in respect of these shipments.
To properly calculate the new value defense, we will need to construct a detailed payment-by-payment, shipment-by-shipment chronological ledger covering the entire preference period. This ledger will sequence all fourteen preferential payments and all shipments of goods during the period, enabling us to calculate the "rolling" new value offset as follows:
(a) For each preferential payment, identify all goods shipped by Meridian to Cascadia after that payment and before the next preferential payment;
(b) Determine whether those subsequent shipments were themselves "paid for" by a later preferential transfer (i.e., whether the new value was consumed by a subsequent avoidable transfer);
(c) To the extent the new value shipments remain unpaid (i.e., they form part of the $14.7 million unpaid receivable balance), they provide a full offset against the earlier preferential payment.
3. Quantification (Preliminary). A detailed shipment-by-shipment schedule will be prepared and included as Appendix B to this memorandum upon receipt and reconciliation of the relevant shipping and delivery records. For each of the fourteen preferential payments, we will identify all subsequent shipments of goods and calculate the net new value offset.
Based on the preliminary information available — specifically, Meridian's average monthly shipment volume to Cascadia of approximately $4.8 million and the $14.7 million in unpaid receivables as of the petition date — we expect the new value defense to provide a significant offset against any preference-period payments not fully covered by the ordinary course defense. The precise quantification depends on the chronological sequencing of payments and shipments, which we cannot finalize without the complete records requested above.
We note that the interaction between the ordinary course defense and the new value defense is complementary: payments that are protected by the ordinary course defense do not need new value offsets, and new value offsets can be applied to any payments that fall outside the ordinary course defense. The combination of these two defenses should provide robust protection against the bulk of Meridian's gross preference exposure.
C. Contemporaneous Exchange Defense — § 547(c)(1)
1. Legal Standard. Section 547(c)(1) provides that a transfer is not avoidable to the extent that it was:
(A) intended by the debtor and the creditor to or for whose benefit such transfer was made to be a contemporaneous exchange for new value given to the debtor; and
(B) in fact a substantially contemporaneous exchange.
11 U.S.C. § 547(c)(1). This defense is designed to protect transactions where the parties intended and achieved an exchange of approximately equal value at or near the same time — such as cash-on-delivery ("COD") transactions, point-of-sale transactions, or payments made simultaneously with or immediately upon delivery of goods or services.
The two-part test requires both subjective intent (the parties must have intended a contemporaneous exchange) and objective fact (the exchange must have been substantially contemporaneous). Courts have recognized that absolute simultaneity is not required — minor delays of a few days between delivery and payment may still qualify as "substantially contemporaneous" depending on the circumstances. See, e.g., In re Stewart, 274 B.R. 503, 512–13 (Bankr. W.D. Ark. 2002). However, payments made weeks after delivery generally do not qualify.
2. Application to Meridian's Payments. Meridian's trade terms with Cascadia are Net 60 — not COD or payment-on-delivery. The trade relationship was structured as a credit arrangement, with invoices rendered upon or shortly after delivery and payment expected within 60 days. This credit arrangement reflects the parties' intent to operate on open-account credit terms rather than on a contemporaneous exchange basis.
Most, if not all, of the fourteen preference-period payments were made weeks after the delivery of the corresponding goods, as reflected in the payment schedule above (average days-to-payment of Net 58). A Net 58 payment timeline plainly does not constitute a "substantially contemporaneous exchange" within the meaning of Section 547(c)(1).
Accordingly, we assess the contemporaneous exchange defense as having limited applicability to Meridian's preference-period payments. However, we recommend preserving this defense as an alternative argument for any payments that may, upon detailed analysis, prove to have been made at or very near the time of the corresponding delivery. This could arise if, for example, a particular payment was applied to an invoice that was issued on or very near the payment date due to delayed invoicing, or if particular goods were delivered very shortly before a payment that was nominally applied to an earlier invoice.
To evaluate whether any specific payments qualify, we will need to cross-reference payment dates against delivery dates (using bills of lading and delivery receipts) and compare them on a transaction-by-transaction basis. Our preliminary assessment is that this defense is unlikely to provide meaningful additional protection beyond the ordinary course and new value defenses, but it remains worth analyzing for completeness.
D. Other Potential Defenses
1. Section 547(c)(9) — De Minimis Transfers. As noted in Section III.B above, Section 547(c)(9) provides a safe harbor for aggregate transfers below $7,575 in cases involving non-consumer debts. Meridian's individual payments range from approximately $215,000 to $1,275,000, and the aggregate payments total approximately $8,430,000. This defense is not applicable to any of Meridian's preference-period payments.
2. Earmarking Doctrine. The earmarking doctrine provides that a transfer is not a preference if the funds used to make the payment were "earmarked" by a third party to pay a specific creditor — that is, the funds never became part of the debtor's estate because they were designated by a third-party source specifically for the creditor's benefit. Under this doctrine, the payment does not constitute a "transfer of an interest of the debtor in property" because the funds were never the debtor's property in the relevant sense. See, e.g., In re Bohlen Enters., Ltd., 859 F.2d 561 (8th Cir. 1988).
The earmarking doctrine is typically invoked in situations where a new lender provides funds specifically designated to pay off a prior creditor, rather than being deposited into the debtor's general operating account. There is no indication in the record that any of the fourteen payments from Cascadia to Meridian were funded by a specific third-party lender with the specific intent to pay Meridian. All fourteen payments were standard wire transfers from Cascadia's operating accounts at Severin Financial, funded from the debtor's general cash flows or revolving credit facility draws.
We have no current evidence that the earmarking doctrine applies to any of the payments at issue. If information comes to light suggesting that any particular payment was funded from an earmarked source, we will reevaluate this defense at that time. For present purposes, we do not include the earmarking doctrine in our defense calculations.
VI. Quantification of Net Preference Exposure
A. Summary Exposure Table
The following table summarizes Meridian's estimated gross and net preference exposure, incorporating the defenses analyzed above:
We emphasize that these estimates are preliminary and are subject to meaningful refinement as we complete the detailed payment-by-payment and shipment-by-shipment analysis. The net exposure range could shift in either direction. Additionally, any quantification of defense coverage depends on a number of factual and legal assumptions — including the resolution of potential disputes regarding the historical baseline period, the treatment of outlier payments, and the application of the Third Circuit's subsequent-payment rule to the new value defense — that could affect the ultimate outcome.
For planning purposes, we present the following scenario analysis:
B. Sensitivity Analysis
The outcome of the preference exposure analysis is most sensitive to the following variables:
Ordinary Course Defense Coverage. If the ordinary course defense is sustained as to all fourteen payments — which we believe is a plausible outcome given the minimal 5-day variance between historical and preference-period payment timing — net exposure reduces to $0. This is the most impactful variable in the analysis. The defense is most likely to succeed if:
(a) The detailed payment-by-payment analysis confirms that no individual payments constitute significant outliers from the historical range;
(b) The payment pattern during the preference period maintained a regular cadence with historical practice; and
(c) There were no unusual collection efforts by Meridian or unusual payment communications from Cascadia suggesting departures from the ordinary course.
Individual Payment Outliers. If the ordinary course defense fails on select outlier payments — for example, the $1,275,000 payment on August 22, 2025, if its magnitude or timing is found to deviate from historical norms — the new value defense must be relied upon to offset those specific transfers. The availability and quantum of new value offsets will depend on the chronological sequencing of payments and subsequent shipments, as discussed above.
New Value Offset Quantification. If both the ordinary course and new value defenses are partially successful, the estimated net exposure falls in the $750,000 to $1,500,000 range. The new value defense is most effective for payments made earlier in the preference period (where subsequent shipments are most likely to have occurred), and less effective for payments made very late in the period (where there is less time for subsequent shipments to create new value offsets, though the substantial unpaid receivable balance helps significantly).
Litigation Dynamics. Even if Meridian's defenses are strong, the cost of litigating a preference action through trial — including discovery, expert witness fees, and trial preparation — could be substantial. In many cases, preference claims are resolved through negotiated settlements at a fraction of the gross exposure. The strength of Meridian's defenses should provide significant leverage in any settlement negotiations.
VII. Interaction with Other Claims and Strategies
A. Coordination with § 503(b)(9) Administrative Claim
Meridian has asserted a claim for administrative expense priority under Section 503(b)(9) of the Bankruptcy Code in the amount of $1,847,200, representing the value of goods received by Cascadia within the 20 days immediately preceding the petition date (September 24, 2025 through October 14, 2025). Section 503(b)(9) provides administrative expense priority for "the value of any goods received by the debtor within 20 days before the date of commencement of a case under this title in which the goods have been sold to the debtor in the ordinary course of such debtor's business."
The goods underlying the § 503(b)(9) claim were shipped and received by the Debtor during the final weeks of the preference period, generally after most of the fourteen preferential payments were made. These shipments constitute "new value" for purposes of the Section 547(c)(4) defense, as they represent goods and value provided to the Debtor subsequent to preferential transfers.
Importantly, there is no conflict between asserting § 503(b)(9) administrative priority for these goods and using the same shipments as the basis for a new value defense under § 547(c)(4). These are complementary, not duplicative, claims. The § 503(b)(9) claim seeks priority treatment for Meridian's pre-petition receivable, while the new value defense seeks to shield Meridian from clawback of separate preferential payments. The goods serve different purposes in each context: under § 503(b)(9), they support a priority claim for their value; under § 547(c)(4), they demonstrate that Meridian replenished the estate with new value after receiving preferential payments. Courts have consistently permitted creditors to assert both claims simultaneously. See, e.g., In re Circuit City Stores, Inc., 426 B.R. 560, 572–73 (Bankr. E.D. Va. 2010).
B. Coordination with Reclamation Demand
Meridian has asserted a reclamation demand under Section 546(c) of the Bankruptcy Code for approximately $3,218,650 in goods shipped to Cascadia within 45 days of the petition date (August 30, 2025 through October 14, 2025). Under Section 546(c), a seller of goods may reclaim goods received by the debtor while the debtor was insolvent, provided the seller makes a written demand within 45 days after the date of receipt of the goods. Meridian timely asserted its reclamation demand on October 18, 2025.
The goods subject to the reclamation demand — to the extent they represent shipments made after earlier preferential payments — also potentially serve as "new value" for purposes of the Section 547(c)(4) defense. However, there is an important strategic interaction to consider: if the reclamation demand is successful and the goods are returned to Meridian, the "new value" represented by those specific goods would no longer be available to the Debtor's estate, and the basis for using those shipments as a Section 547(c)(4) defense could be undermined. In essence, if Meridian recovers the goods themselves, it may not be able to simultaneously claim that it "gave new value" to the estate in the form of those same goods.
As a practical matter, successful reclamation of goods from a retail debtor is relatively uncommon — particularly where the goods have been commingled with other inventory, sold to consumers, or are no longer identifiable in their original form. More commonly, reclamation claims are resolved through a grant of administrative expense priority (effectively converting the reclamation claim into a § 503(b)(9)-type claim) or are subordinated to the DIP lender's interests under the terms of the DIP financing order.
We recommend coordinating the reclamation strategy with the preference defense strategy to avoid any inconsistency and to maximize Meridian's overall recovery. If reclamation is resolved through an administrative expense claim rather than through physical return of goods, the new value defense should remain fully available for those shipments.
C. Coordination with Trade Credit Insurance
Meridian maintains a trade credit insurance policy with Clearwater Surety & Insurance Co., Policy No. TCI-2024-00783. The policy provides coverage for trade receivable losses arising from the insolvency of covered buyers, subject to per-buyer sub-limits and a co-insurance retention. The key terms as they relate to Cascadia are:
• Cascadia Sub-Limit: $5,000,000
• Co-Insurance Retention: 10% (i.e., $500,000 retention on the $5,000,000 sub-limit)
• Net Coverage: $4,500,000
• Waiting Period: 180 days from the date of the insolvency event (October 14, 2025)
• Earliest Claim Payment Date: Approximately April 12, 2026
If Meridian receives insurance proceeds of up to $4,500,000 reducing its outstanding claim against the Cascadia estate, and the Debtor or Committee subsequently pursues and recovers preferential payments from Meridian, Meridian could face a situation in which the clawback amount exceeds its remaining claim against the estate. For example, if Meridian receives $4,500,000 in insurance proceeds (reducing its $14.7 million claim to approximately $10.2 million) and then is required to return, say, $1,000,000 in preferential payments, Meridian's net recovery would be affected but would likely still result in a positive outcome overall. However, the sequencing and interaction of these various claims and recoveries must be carefully managed.
We also need to review the subrogation provisions of the Clearwater policy. Upon payment of an insolvency claim, Clearwater will typically be subrogated to Meridian's rights against the Cascadia estate to the extent of its payment. This subrogation right could affect Meridian's preference defense strategy if, for example, Clearwater seeks to direct the handling of Meridian's claims against the estate or if Clearwater's subrogation interest creates complications in the preference defense. We recommend a detailed review of the Clearwater policy with particular attention to the subrogation clause, the duty-to-cooperate clause, and any provisions regarding the handling of preference demands.
Timing: The 180-day waiting period under the Clearwater policy means that the earliest date on which Meridian could receive insurance proceeds is approximately April 12, 2026. This timing provides a window of several months during which the preference exposure analysis can be refined and defense strategy developed before the insurance proceeds introduce additional complexity.
D. Coordination with Critical Vendor Payment
In its first-day motions, the Debtor filed a critical vendor motion seeking authority to pay pre-petition claims of certain vendors deemed critical to the ongoing operations of the business. The Debtor's proposed critical vendor program contemplates payment of $2,500,000 of Meridian's pre-petition claim, subject to Meridian's agreement to continue supplying goods to Cascadia on customary trade terms during the Chapter 11 case.
If Meridian accepts the critical vendor payment, several considerations arise in connection with the preference analysis:
The Critical Vendor Payment Itself Is Not a Preference. A critical vendor payment is a post-petition transfer authorized by court order. It does not constitute a "transfer of an interest of the debtor in property" made during the 90-day pre-petition period and therefore is not subject to avoidance under Section 547. The critical vendor payment and the preference-period payments are legally distinct.
The Critical Vendor Payment Does Not Insulate Pre-Petition Transfers. Acceptance of the critical vendor payment does not immunize the separate pre-petition preference-period payments from avoidance. Even if Meridian receives the $2,500,000 critical vendor payment, the estate (or Committee) retains the right to pursue avoidance of the $8,430,000 in preference-period transfers. These are independent claims with independent legal bases.
Conversion Risk. If the Chapter 11 case is subsequently converted to Chapter 7, there is a risk that a Chapter 7 trustee could seek to disgorge the critical vendor payment from Meridian on the theory that the payment was not authorized under Chapter 7 procedures or that the conditions justifying the payment no longer exist. To mitigate this risk, we should ensure that the critical vendor order entered by the Bankruptcy Court includes protections against disgorgement in the event of case conversion. Specifically, the order should provide that Meridian's receipt of the critical vendor payment is protected and not subject to avoidance or disgorgement regardless of whether the case is converted.