In a 12 page decision signed July 6, 2011, Judge Walrath of the Delaware Bankruptcy Court granted a motion to dismiss, holding that a complaint that sets forth only conclusory allegations parroting the statutory language of the Bankruptcy Code is insufficient. Judge Walrath’s opinion is available here (the “Opinion”).
Crucible Materials Corporation (“Crucible”) produced steel products, primarily for automotive manufacturers. Following the disruption in the American auto industry, Crucible filed for bankruptcy. Judge Walrath confirmed the plan of reorganization of Crucible and certain of its affiliates (the “Debtors”) on August 26, 2010. At the same time, Richard D. Caruso was appointed Litigation Trustee (the “Trustee”).
On November 8, 2010, the Trustee filed an adversary proceeding (the “Complaint”) against The Lenick Company (the “Defendant”) to avoid transfers pursuant to section 547 (“Count 1″), to avoid fraudulent conveyances pursuant to section 548 (“Count 2″), to recover post-petition transfers pursuant to section 549 (“Count 3″), to recover property transferred pursuant to section 550 (“Count 4″), and to disallow any claims the Defendant may have pursuant to section 502 (“Count 5″). On January 12, 2011, the Defendant moved to dismiss the complaint pursuant to Rule 12(b)(6). Counts 2 and 3 were withdrawn by the Trustee and the Defendant withdrew its motion regarding the same two counts.
In its motion to dismiss, the Defendant argued that the Trustee’s failure to include proof of the transfers and the lack of detail concerning the transfers made the complaint insufficient to provide notice of what transfers the Trustee sought to avoid. Opinion at *6. Rather, the Defendant argued that “the Trustee simply asserts the elements of section 547(b) and relies on legal conclusions rather than factual assertions.” Opinion at *7. The details that the Trustee included were: the name of the transferee, check numbers, check amounts, invoice dates, invoice numbers, and the clear dates of the transfers. Id. The Trustee argued that this was sufficient detail to put the Defendant on notice and survive the motion to dismiss.
Judge Walrath’s Opinion
Judge Walrath’s legal analysis begins with a fairly standard analysis of the requirements of a motion to dismiss under Federal Rules of Civil Procedure (“FRCP”) 12(b)(6). A pair of posts discussing opinions that detail the requirements of a motion to dismiss are below:
Decision in Tweeter Opco Once Again Reminds Trustees of the Specificity Requirement in Pleading Preference Actions
Decision in DBSI Inc., Holds that the “Particularity” Requirement of F.R.C.P. 12(b)(6) and 9(b) was Satisfied, Notwithstanding the Number of Alleged Fraudulent Transfers
Following her summary of the precedent surrounding a motion to dismiss, Judge Walrath turned to a discussion of each of the three counts remaining in the Complaint. In examining the motion to dismiss Count 1, Judge Walrath held that the Trustee must identify the transferor by name (which debtor received the transfer), and must include information detailing the nature of the antecedent debt. Without any proof of an antecedent debt or creditor/debtor relationship, the complaint fails. Opinion at *8-10. Judge Walrath continued by acknowledging that Count 4 is derivative of Count 1, and the failure of Count 1 necessarily requires Count 4 to likewise be dismissed. Opinion at *10-11. Similarly, Count 5 is derivative of Count 1, and would also be dismissed. Opinion at *11.
Judge Walrath concluded by quoting FRCP 15(a), which states that “leave to amend shall be freely given when justice so requires.” Opinion at *12. Because the Defendant provided no reasons why leave to amend should not be granted, Judge Walrath determined that justice would best be served by granting the requested leave to amend. Id.
When arguing for a dismissal of a complaint, never forget to include argument as to why the plaintiff should not be granted leave to amend. Some attorneys may think that a mention of FRCP 15 will give their opponent the idea to argue for amendment. However, failing to argue that leave should not be granted means that any argument to the contrary by opposing counsel, almost guarantees that leave to amend will be granted.