In Re Carr's Plumbing and Maintenance, LLC

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hearing on the motion to show a violation of the automatic stay and denies Debtor's motion without prejudice.¹A more robust presentation of evidence is necessary to determine if a stay violation has occurred, and if so, what the remedy for that violation should look like.

I. Findings of Fact

Debtor is a plumbing and maintenance contactor providing services around the Wichita, Kansas area, and employs about seventy-five individuals. Debtor's principal, Christopher Carr, has been employed by Debtor since 2016. In March 2021, Debtor began a lending relationship with Intrust Bank, and Intrust Bank obtained a security interest in all Debtor's assets, including its accounts and receivables.

A couple of years later, in February 2023, Debtor signed its first contract with Fox Funding. Fox Funding filed a UCC financing statement at this same time. For collateral, the UCC financing statement says:

Secured party has purchased an interest in accounts and proceeds from Debtor, described as "Receipts" in the agreement between Debtor and Secured Party, and as a result, Secured Party has a security interest in such Receipts. "Receipts" means all accounts receivable and payment rights arising out of or relating to for [sic] Merchant's sale or delivery of goods and/or services due to Debtor after the date of the agreement, whether paid directly by Merchant's customers or paid by others on Merchant's customers' behalves or as reimbursements. Debtor and Secured Party intend that the sale of Receipts is a sale and not an assignment for security.

Secured Party has been granted a security interest in: all accounts and proceeds.²

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The current version of the parties' agreement, modified several times over the next couple of years, is reflected in a "Future Receivables Sale and Purchase Agreement," dated February 19, 2025.³The Agreement, signed by Mr. Carr on behalf of Detor and as a guarantor,⁴is seventeen single spaced pages and difficult to parse. The Agreement begins with a heading that seems to be a definition of terms:

"Purchase Price"

$625,000.00

"Purchased Percentage"

9.64%

"Purchased Amount"

$868,750.00

"Daily Remittance"

$3,999.00

"Net Purchase Price"

$606,250.00 The rest of the Agreement, however, is not as clear as those initial terms would suggest.

Under the Agreement, Debtor "sells, assigns, and transfers" to Fox Funding

"the Purchased Percentage" of all Debtor's "accounts receivable and payment rights

. . . up to the Purchased Amount, which shall be remitted to [Fox Funding] in the manner set for forth in this Agreement until the entire Purchased Amount has been delivered."⁵In consideration of the sale, under the Agreement Debtor would receive the $625,000 Purchase Price, less fees, for a net of $606,250. The testimony and evidence about what Debtor actually received, however, was unclear. In an

"Addendum to Secured Merchant Agreement for Transfer of Prior Balance" included as the final page of the seventeen-page Agreement, a prior agreement is identified, under which Fox Funding "purchased" Debtor's receivables in the amount of

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$1,147,500. Of that amount, a balance of $506,006 had "not yet been delivered to [Fox Funding]."⁶Under this Addendum, Debtor authorized Fox Funding to

"withhold, deduct or debit" the $506,006 from the $625,000 Purchase Price, leaving only $100,244 to be transferred to Debtor after payment of fees.⁷ The next paragraph of the first page of the Agreement expressly disavows the Agreement is a loan, stating "THIS IS NOT A LOAN."⁸The Agreement claims:

"There is no interest rate or payment schedule and no time period during which the Purchased Amount must be collected by [Fox Funding]. In lieu of calculating the value of the Purchased Percentage of the Receipts each day, [Debtor] shall remit the Daily Remittance."⁹Despite the Agreement expressly disavowing the existence of a payment schedule or a time period to collect, the Agreement also identifies strict payment terms. In the Agreement itself, Debtor authorizes Fox Funding to debit the Daily Remittance (defined above) each business day from Debtor's bank account. But then in an "Addendum to Secured Merchant Agreement for Weekly Remittance," that schedule changes the remittance to a weekly remittance in the amount of $19,950.¹⁰

At some point in the spring of 2025, Debtor apparently defaulted under the terms of the parties' Agreement, but the basis of that default was not explained (or

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even addressed).¹¹On May 7, 2025, the parties entered a "Settlement Agreement."

Under the Settlement Agreement, Debor agreed "to pay to [Fox Funding] . . . $872,000.00 . . . as settlement in full of [Fox Funding's] claims against [Debtor] and [Mr. Carr]."¹²The $872,000 would be paid by Debtor sending $12,576 to Fox Funding every Friday as a weekly payment "until paid in full."¹³ About nine months later, on or around February 1, 2026, Debtor stopped making payments to Fox Funding.¹⁴On February 3, 2026, Fox Funding sent letters to at least some of the general contractors who owed Debtor on open accounts. The February 3, 2026 letters informed the general contractors Fox Funding purchased Debtor's receipts, filed a UCC-1 financing statement, and had obtained "a perfected security interest in the [Debtor's] receipts."¹⁵The letters then stated Debtor "has assigned its receipts to [Fox Funding] and $570,149.48 is due and owing."¹⁶The letters directed the general contractors to direct all funds to the law firm acting on Fox Funding's behalf "until the amount of $570,149.48 accrues."¹⁷At least two entities, Intuit, Inc. and Simpson's Construction Services, received the letters, both asking for the same $570,149.48.¹⁸

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The next day, on February 4, 2026, Debtor filed its Chapter 11 petition. Fox Funding was provided notice of Debtor's bankruptcy. The petition was a quick-file, with no supporting Schedules, Statement of Financial Affairs, or other supporting documents. On the same date the petition was filed, and apparently after being provided notice of the filing, Fox Funding sent a letter to multiple entities stating:

As you know, our firm represents FOX FUNDING GROUP LLC. This letter is to inform you that any funds that have been placed on hold and have accumulated from February 4, 2026, to the present should be released to [Debtor]. Please note that any funds that are from prior to February 4, 2026, shall remain on hold.¹⁹

Again, the Court is unclear who or how many entities received this postpetition letter.

Just two days after the bankruptcy filing, on February 6, 2026, the Court entered an Order granting Debtor's Motion for Interim Use of Cash Collateral and Providing Adequate Protection.²⁰Fox Funding had notice of the motion and the expedited hearing set thereon but did not appear. The Interim Order states: "Debtor owns accounts receivable which totaled approximately $677,000 as of the Petition Date."²¹The Interim Order also states: "the accounts receivable are the cash collateral of each Secured Lender," identifying each alleged Secured Lender on an Exhibit 1 to the Interim Order, "to the extent that: (a) such Secured Lender's security interest is perfected; and (b) the amount of such Secured Lender's claim equals or exceeds the present value of the accounts receivable after deducting the

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amount of any Secured Claim having priority over such Secured Lender's claim."²² The Interim Order's Exhibit 1 identifies Fox Funding with an approximate balance owed of $495,000, although as noted above, Fox Funding claims the amount it is owed is $570,149.48.²³Mr. Carr testified he believes Debor owes Fox Funding about $395,000, although he gave no basis for the computation of that number, and owes about $1.1 million to Intrust Bank. The Court is unclear if the parties agree or dispute that Intrust Bank is first in line as secured party in the receivables.²⁴ Mr. Carr testified that Debtor billed just under $12 million in 2025. Debtor's accounts receivable aging summary as of February 5, 2026, shows total receivables owed of $676,834.27.²⁵Mr. Carr believes Debtor has not received these funds because of the letters from Fox Funding. Debtor's counsel requested Fox Funding contact all entities who received letters "directing them to ignore [the] prior directive and directing them to make payments on their invoices" to Debtor,²⁶but Fox Funding did not do so.

Debtor then filed its motion seeking relief from this Court. Debtor's most

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recently amended motion (a second amended motion) argues Fox Funding's February 4, 2026 letters violate §§ 362(a)(3) and (a)(6).²⁷The second amended motion seeks an order: (1) requiring Fox Funding to immediately produce an exhaustive list of each person—including name, phone number, email, and company—to whom the February 4, 2026 letters or similar notices were sent; (2) requiring Fox Funding to cease communication with Debtor's general contractors regarding Debtor's receivables; (3) requiring Fox Funding to notify in writing each recipient of the February 4, 2026 letters that Fox Funding withdraws its directive; and (4) awarding Debtor reasonable attorney fees and costs incurred in connection with the motion and compensatory sanctions.

The Court granted Debtor's request for an expedited hearing on its motion. Debtor provided Fox Funding notice of its motion and the expedited hearing thereon. The evening before the expedited hearing, Fox Funding filed an objection to the motion, arguing the receivables were not estate property, but even if they are property of Debtor's bankruptcy estate, there was no stay violation.²⁸

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At the conclusion of the evidentiary hearing on this matter, the Court concluded Debtor had not carried its burden of proof to show a stay violation, and denied the motion without prejudice, with this Order to follow.

II. Conclusions of Law

Motions regarding the automatic stay are core proceedings over which this Court may exercise subject matter jurisdiction.²⁹Venue is proper in this District.³⁰ Under the Bankruptcy Code, Debtor's filing of its bankruptcy petition triggered an automatic stay of collection efforts by creditors.³¹The purpose of the Bankruptcy Code's automatic stay is "to protect the debtor and his creditors by allowing the debtor to organize his affairs" and to ensure "that the bankruptcy procedure may operate to provide an orderly resolution of all claims."³² Debtor claims the receivables are interests of the Debtor in property and are property of the estate under § 541(a).³³Debtor then argues the February 4, 2026, letters were postpetition acts to interfere with and exercise control over Debtor's property and acts to collect on a prepetition claim, and, as noted above, asserts

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violations of §§ 362(a)(3) and (a)(6). Section 362(a)(3) stays "any act to obtain possession of property of the estate or of property from the estate or to exercise control over property of the estate." Section 362(a)(6) stays "any act to collect, assess, or recover a claim against the debtor that arose before the commencement of the case under this title."

Debtor carries the burden of proof on its motion,³⁴which Debtor acknowledged at the evidentiary hearing. The Court concludes Debtor has not carried its burden of proof to show a stay violation under either § 362(a)(3) or § 362(a)(6).

Regarding § 362(a)(3), Debtor has not shown Fox Funding is exercising control over property of the estate. First, procedurally, in this matter, there has been no determination of the interests in the property at issue—the receivables. Under Federal Rule of Bankruptcy Procedure 7001(b), a "proceeding to determine the validity, priority, or extent of a lien or other interest in property" is an adversary proceeding, to be governed by the Federal Rules governing those proceedings.³⁵A

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threshold issue to determine whether there has been a violation of the automatic stay is a determination of what constitutes estate property. And "the issue of whether the estate has an interest in particular property ordinarily should be determined in an adversary proceeding."³⁶To the contrary, relief was sought here via a motion and expedited hearing. The Court concludes an adversary proceeding is necessary here to address the threshold issue of what constitutes estate property.³⁷

That said, "in the absence of an adversary proceeding, bankruptcy courts addressing requests for relief that raise questions about an asserted property interest should assess . . . whether the party asserting the interest has made a prima facie showing of the validity and scope of that interest."³⁸Here, the Court cannot make even that preliminary determination on the record before it. Although the trend in the case law appears to be a conclusion that merchant cash advance

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agreements are secured loans and not true sales,³⁹and therefore the receivables would be property of Debtor's bankruptcy estate, the decision is a multi-factor, fact- intensive inquiry, and the Court does not have the facts necessary to make that determination.

State law determines whether a debtor has a particular property interest.⁴⁰ Federal law then determines whether that property interest is included within the scope of "property of the estate."⁴¹Under the Uniform Commercial Code, receivables are "accounts."⁴²Fox Funding contends that under U.C.C. § 9-318, a debtor who sells an account does not retain a legal or equitable interest in that account. For this reason, Fox Funding argues the receivables were sold outright prepetition, and Debtor had no property interest in them (at all) at filing. Debtor argues the receivables remain its property and Fox Funding is simply a junior lien claimant—a secured party, but junior to Intrust Bank.⁴³

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"The Uniform Commercial Code does not provide rules for distinguishing between sales transactions and security transactions."⁴⁴As a result, "courts have developed a series of factors to be employed in determining whether assets transfers are 'true sales' or transfers of collateral in connection with secured financing."⁴⁵

"[T]he case law focuses on the economics of the transaction and which party bears the risk of non-collection from the account debtor in determining whether a sale of accounts is a true sale or a secured transaction. While the terminology and characterization of the transaction in the agreement itself is a factor to be considered, it is not conclusive."⁴⁶Where the risk "remains with the debtor, the transaction." The Court is not reaching a decision on the issue and again, the parties will need to address the argument in future proceedings.

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transaction appears to be treated as a loan, and the receivables . . . remain property of the estate."⁴⁷

The facts necessary to make the analysis here have not yet been properly developed. Debtor's case was filed on an emergency basis only a few weeks ago. Debtor has not filed its Schedules, Statement of Financial Affairs, or other supporting documents. The hearing on Debtor's motion was expedited, and the parties have only minimally identified the issues, and have not briefed any of them. At the evidentiary hearing on the motion, Debtor admitted many exhibits but rarely developed the details contained in them. Most importantly, Debtor did not address the Agreement's provisions in any detail.

As a result, the Court does not have sufficient facts to make a determination about who is a secured creditor, what amounts are owed to each creditor, or who is first in line on the receivables as collateral. The Court cannot determine the total receivables that remain "owed" to Fox Funding, how much of those receivables are being held by third parties—i.e., the general contractors, or how much Fox Funding has been paid to date. The Court is unclear how Debtor's weekly payment to Fox Funding was computed, how many weekly payments were transmitted, and what remains due. It appears probable there is at least some portion of the total receivables that are property of the estate (because even using Fox Funding's

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number of $570,149.48 for the amount owed to it by Debtor, the total receivables are approximately $676,834.27), but the Court cannot determine what that portion is, or whether Fox Funding has acted against that total amount. The Court does not know the basis for any alleged default by Debtor, or when or how the default occurred.⁴⁸The record did not provide the evidence needed to reach a conclusion about the fundamental facts necessary to a decision under § 362(a)(3). Regarding § 362(a)(6), Debtor has not shown Fox Funding has acted "to collect . . . a claim against the debtor." Fox Funding's postpetition letter was sent to third parties, and not to or against Debtor individually. As one bankruptcy court noted, § "362(a)(6) is very similar to and complements § 362(a)(3), with the major distinction between the two provisions being that § 362(a)(3) protects property of the estate, while § 362(a)(6) protects the debtor, individually."⁴⁹Here, there was no evidence of Fox Funding acting postpetition to collect a claim from Debtor individually.

Debtor's requested relief at the hearing on its motion was an order to Fox Funding to retract its postpetition letter. It is not clear to the Court how that relief would solve Debtor's concerns and Debtor presented no evidence from any of the

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third-party general contractors. Retraction of the February 4, 2026, postpetition letter does not tell those entities what to do with the receivables on hand and does not require the entities to turnover the funds to Debtor. If the February 4, 2026 letter was a violation of the automatic stay, the "law in the Tenth Circuit is clear that actions taken in violation of the automatic stay are void ab initio; that is, they are without legal effect."⁵⁰But voiding an action that violated the automatic stay does not then equate to requiring a third party to turnover funds held by that third party. Again, additional actions would be necessary—an adversary proceeding to determine who is the proper owner of the receivables at issue would be the first step, and then a turnover action if those receivables are property of the estate.⁵¹ Finally, Debtor raised the issue of this Court's Interim Order on cash collateral. Debtor intimates that because the Interim Order says "Debtor owns" the receivables, the Court has already determined the receivables are estate property.⁵² But the order is interim, not final, and a cash collateral order does not establish property interests. In an interim order on cash collateral a court concludes a debtor has made a colorable claim that the collateral is estate property and creditors with

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claimed liens were as they claimed, and adequate protection is granted to the extent of those liens. An adversary proceeding is required to conclusively "determine the validity, priority, or extent of a lien or other interest in property," per Rule 7001(b).

III. Conclusion

The Court denies without prejudice "Debtor's Second Amended Motion for Order (i) Enforcing Automatic Stay; (ii) Compelling Fox Funding Group, LLC to Immediately Cease Interfering with Debtor's Accounts Receivable; and (iii) Awarding Sanctions."⁵³The Court's ruling is limited to concluding Debtor did not carry its burden of proof at the expedited hearing on this motion to show violations of the automatic stay under either § 362(a)(3) or § 362(a)(6), and a fuller factual record needs developed in an adversary proceeding under Fed. R. Bankr. P. 7001(b). All other issues are merely raised but not decided.

It is so Ordered. ###