In a straight-forward 11 page decision signed January 7, 2015, Judge Walrath of the Delaware Bankruptcy Court granted a defendant’s motion to dismiss a preference complaint, but granted the plaintiff leave to amend. 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.
Additionally, this opinion is very similar to that discussed in these prior posts:
Tri-Valley Corporation and its affiliates (the “Debtors”) were crude oil and natural gas exploration, development, and production companies operating in California. Opinion at *2. They filed for bankruptcy relief on August 7, 2012. On March 25, 2013, the case was converted to chapter 7 and Charles A. Stanziale, Jr. was appointed as the chapter 7 trustee (the “Trustee” or “Plaintiff”). The Trustee filed a complaint seeking to avoid allegedly preferential transfers from the “Defendant” DMJ Gas-Marketing Consultants, LLC. The Defendant filed its Motion to Dismiss and after a complete briefing, the Court issued the Opinion.
As we are now in the post-Stern v. Marshall world, the Opinion lays out the legal authority for its granting a motion to dismiss. The main rationale is stated in the Trinsum case: In re Trinsum Grp., Inc., 467 B.R. 734, 739 (Bankr. S.D.N.Y. 2012) (“After Stern v. Marshall, the ability of bankruptcy judges to enter interlocutory orders in . . . proceedings has been reaffirmed . . . .”).
The motion to dismiss argues that the Trustee failed to state which debtor owed the antecedent debt to the Defendant and the nature of the antecedent debt. Opinion at *7. Judge Walrath agreed. “the Court finds that the Complaint fails to allege sufficient facts detailing the nature of the alleged antecedent debt.” Opinion at *9.
Judge Walrath then quickly granted the Motion to Dismiss. However, the Trustee asked for leave to amend the Complaint, and as Rule 15(a) of the F.R.C.P. provides that “leave to amend shall be freely given when justice so requires” Judge Walrath granted the Trustee 28 days to amend the Complaint. Opinion at * 11.
As was the case in prior opinions granting a motion to dismiss a preference complaint, the plaintiff’s request to allow an amended complaint to be filed was granted. While I certainly believe that preference plaintiffs should be required to due the groundwork prior to filing a complaint, there is a cost in having an attorney file and prosecute a motion to dismiss.
In the Ultimate Acquisition case discussed in my prior post, the litigants ended up settling. For those not aware, settlement is the typical resolution in preference litigation. Was it worth the cost of prosecuting a motion to dismiss that was, effectively, just a delay tactic (given the Delaware Bankruptcy Courts interpretation of Fed. R. Civ. P. 15(a))? Since I don’t know what the settlement stances of the litigants were, I cannot say. I provide this information to illustrate one principle. For most people, most of the time, it makes sense from a financial perspective to settle before incurring significant legal costs. For a quick primer on preference litigation, please take a look at the Preference Reference which I co-authored.