Decision in Everything But Water, LLC Requires Preference Claimants to Identify Transferees Specifically in Granting Motion to Dismiss
In an 11 page decision signed June 30, 2011, Judge Walrath of the Delaware Bankruptcy Court granted a motion to dismiss, holding that a preference complaint must clearly identify the alleged preference transferee. Judge Walrath’s opinion is available here (the “Opinion”). A number of decisions on motions to dismiss under Federal Rule of Civil Procedure 12(b)(6) have been released recently. If you’d like to review some of these rulings, the following blog posts provide a solid start:
Everything But Water, LLC (the “Debtor”) and certain of its affiliates filed for bankruptcy under chapter 11 on February 25, 2009. The case was converted to chapter 7 and Montague Claybrook was appointed as the trustee (the “Trustee”) on July 30, 2009. The Trustee filed a complaint against JDH Management (“JDH”) and various affiliates of Bear Stearns in which he asserted claims for preferential and fraudulent transfers. In response, JDH filed a motion to dismiss for failure to state a claim under FRCP 12(b)(6), arguing both that JDH did not have a relationship with the Bear Stearns entities that would create a liability and that the Trustee failed to adequately state a claim. The Opinion was written in response to JDH’s motion.
Judge Walrath’s Opinion
Judge Walrath's legal analysis begins with a discussion of the standard for ruling on motions under FRCP 12(b)(6). She cites the usual suspects, including Ashcroft v. Iqbal, 129 S. Ct. 1937 (2009); Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007); Fowler v. UPMC Shadyside, 578 F.3d 203 (3d Cir. 2009); and Kost v. Kozakiewicz, 1 F.3d 176 (3d Cir. 1993). Opinion at *4-5. Judge Walrath then turns to JDH’s assertion that it has no affiliation with the Bear Stearns entities in question. Because the Court must accept the non-moving party’s factual allegations as true in considering a motion to dismiss, Judge Walrath had to accept the Trustee’s allegations that JDH was affiliated with the Bear Stearns entities in question. Opinion at *6.
Judge Walrath then moved to an analysis of the preferential and fraudulent transfer claims. She cited In re Valley Media, Inc., 288 B.R. 189, 192 (Bankr. D. Del. 2003) in opining that “to survive a motion to dismiss a claim for avoidance of a preferential transfer, the Plaintiff must plead the following: (a) an identification of the nature and amount of each antecedent debt and (b) an identification of each alleged preference transfer by (i) date, (ii) name of debtor/transferor, (iii) name of transferee and (iv) the amount of the transfer.” Opinion at *6. Judge Walrath held that “the Trustee’s Complaint is deficient because it contains no information regarding who received any of the transfers.” Thus, the “Trustee does not meet the pleading requirements for preferential transfers.” Opinion at *8. Judge Walrath also states that the “Trustee’s Complaint fails to plead properly a claim for avoidance of fraudulent transfers for the same reason….” Opinion at *9. Because of the deficiencies in the complaint, Judge Walrath grants the motion to dismiss, but in an effort to preserve fairness given the technicality of the reason for dismissal, she explicitly allows the Trustee to file an amended complaint. Opinion at *11.
In some situations, minor mistakes are all that it takes to leave a filing vulnerable to a motion to dismiss under FRCP 12(b)(6). Recent opinions published by the judges in the Delaware Bankruptcy Court seem to indicate that they are becoming more strict in their interpretation of pleading requirements. Regardless of which side of a preference action you are on, knowledge of the ever changing local rules and precedents is vital to successful litigation, or settlement.