Decision in AE Liquidation, Inc. Allows Preference Complaint to be Amended After the Expiration of the Statute of Limitations
In an 8 page decision signed January 6, 2012, Judge Walrath of the Delaware Bankruptcy Court allowed a plaintiff to amend a preference complaint to include additional transfers, even though the statute of limitations had expired. Judge Walrath’s opinion is available here (the “Opinion”). Numerous posts on this blog discuss other opinions issued by the Delaware Bankruptcy Court dealing with preference payments, as can be seen here: Preference Opinion Posts.
The Debtors, filed for bankruptcy on November 25, 2008, and the Court converted the cases to chapter 7 and appointed the Trustee, Jeoffrey L. Burtch, on March 5, 2009. On November 19, 2010, the Trustee filed a complaint against Henry Production, Inc., d/b/a Pumps and Service (the “Defendant”) for recovery of any preference payments. In the original complaint, the Trustee specifically identified only one transfer as a preference payment, but included a spreadsheet showing all of the transactions between the Debtor and the Defendant. This spreadsheet included payments made within the preference period for which the Trustee was unable to identify a check or wire transfer payment (the “October Transfers”). Opinion at *2.
On July 6, 2011, in the course of discovery, the Defendant provided the Trustee with credit card receipts evidencing payment of the October Transfers. The Trustee then waited until November 8, 2011, well after the expiration of the statute of limitations to bring preference complaints, to file his motion to amend the complaint in order to include the October Transfers. The Defendant objected, and the Court issued the Opinion to decide the conflict.
Judge Walrath’s Opinion
As her opinions always do, this opinion of Judge Walrath begins with a legal analysis of the standard for the requested relief. Opinion at *4. She begins by citing the legal standard of FRCP 15(a), which provides that absent a few specific situations, leave to amend “should be freely given.” She then cites Coventry v. United States, 856 F.2d 514, 519 (3d Cir. 1988) for the proposition that the “potential for undue prejudice [to the other party] is the touchstone for the denial of the leave to amend.” Opinion at *4. Additionally, FRCP 15(c)(1)(B) provides that if the conduct set out in the original pleading gave rise to the additional claims in the amended pleading, the amendment will relate back to the date of the initial pleading. Opinion at *5.
The main argument of the Defendant in this matter is that the amendment should not relate back, as the October Transfers were made by a different method than the other alleged preference transfer and was not part of a payment schedule such that it would be considered to have arisen out of the same conduct, transaction, or occurrence. This argument finds some measure of support in MCB Greenhouse Co. v. CTC Direct, Inc., 307 B.R. 787, 792-93 (Bankr. D. Del. 2004). Opinion at *7.
Judge Walrath does not provide much credence to this defense, however, holding that the Defendant needed to show that it would be prejudiced if the amendment was allowed. Opinion at *7. Because the Trustee included the list of transactions, which included the October Transfers, in the complaint in which it made clear that it sought to avoid all preference transfers, the Defendant received adequate notice and would not be prejudiced by allowing the amendment to be related back to the time of the initial filing of the complaint. Judge Walrath then provided the Trustee 14 days to file an amended complaint.
When prosecuting or defending a preference action, it is very important to be aware of the relevant bankruptcy statutes and rules. However, lacking a knowledge of relevant case law can sink a party in a preference case. For this reason, it is vital that defendants and trustees, or their counsel, are well versed in current case law for the district and court in which a preference action is prosecuted.