The debtor in the Friedman’s bankruptcy recently filed preference complaints against various defendants. Days later, Charles Stanziale, the liquidating trustee in the Custom Foods bankruptcy, filed preference complaints against various parties as well. The plaintiffs in both actions seek the avoidance and recovery of alleged preference payments under sections 547 of the United States Bankruptcy Code. Given the commencement of these two preference programs, this post will look at a 2004 decision by the Delaware Bankruptcy Court, TWA v. Marsh USA, et. al., (In re TWA), 305 B.R. 228 (Bankr. D.Del. 2004), addressing the pleading requirements in an avoidance complaint.
In TWA, the plaintiff, the post-confirmation estate of TWA, sought to recover alleged preferential transfers from several defendants. Defendants sought to dismiss the complaint, arguing the complaint lacked sufficient information to put the defendants on notice of a cause of action. Id. at 230-31. In support of their motion to dismiss, defendants cited the Valley Media decision which addresses the necessary components of a preference complaint. See Valley Media, Inc., v. Borders, Inc. (In re Valley Media, Inc.), 288 B.R. 189, 192 (Bankr. D.Del. 2003). In Valley Media, the court found that in order to survive a motion to dismiss, a preference complaint must (i) identify the nature and amount of each antecedent debt, and (ii) identify each alleged preferential transfer by date, name of transferor, name of transferee and amount of the transfer. Id. at 192 (citations omitted).
The Court in TWA found that the plaintiff’s complaint was deficient “for a failure to provide the nature and amounts of the debts, dates of payment transactions, amounts of the payment transactions, etc.” TWA at 232-33. Having found that the complaint was deficient, the court next looked at whether the plaintiff should be given an opportunity to amend the complaint. Amendments to pleadings are governed by Federal Rule of Civil Procedure 15(a), providing that “[a] party may amend the party’s pleadings once as a matter of course at any time before a responsive pleading is served … Otherwise a party may amend the party’s pleading only by leave of court or by written consent of the adverse party; and leave shall be freely given when justice so requires …” Id. at 233.
Defendants argued that the plaintiff’s delay was unreasonable and prejudicial to the defendants. In rejecting this argument, the court recognized that the complaint placed defendants on notice of the “essential issues involved” and that defendants are “larger sophisticated creditors” that lack any risk that their records would be lost or discarded due to the delay. Id. Instead of dismissing the complaint, the court provided plaintiffs with an opportunity to amend.
Judge Walsh’s decision in TWA provides a bright line rule as to the contents required for a properly plead preference complaint. Plaintiffs in preference actions should identify the amount of each debt, the parties who made and received the transfers, as well as the date and the amount of each transfer. Any less, and the complaint may be subject to dismissal.