In yet another straight-forward 15 page decision signed April 18, 2016, 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
My colleague, Carl Neff, published a blog post when THQ first started filing preference actions. You can read it here: THQ Inc. Preference Actions Filed
THQ was a publisher of video games, including such franchises as Saints Row and Darksiders. Unfortunately for fans of those series, however, THQ was unable to keep pace with its secured debt. After it failed to make a loan payment, it filed for bankruptcy. Prior to bankruptcy, THQ had engaged the Starcom defendants to provide media and marketing services. On December 19, 2014, THQ, Inc., the Plaintiff, filed its Complaint seeking recovery of certain transfers as preference and/or fraudulent transfers from the Starcom Defendants. The Defendant filed its Motion to Dismiss and after a complete briefing, the Court issued the Opinion. Opinion at *3.
The motion to dismiss was made pursuant to Rule 12(b)(6). In Delaware the primary precedents for motions to dismiss are Iqbal, 129 S. Ct. 1937 (2009) and Twombly, 550 U.S. 544 (2007), both of which are cited by the Opinion at *4. The Third Circuit has expanded on these precedents in its opinion Fowler v. UPMC Shadyside, 578 F.3d 203 (3d Cir. 2009). The Third Circuit has articulated a two-part analysis to be applied in evaluating a complaint. First, the court “must accept all of the complaint’s well-pleaded facts as true, but may disregard any legal conclusions.” Second, the court must determine “whether the facts alleged in the complaint are sufficient to show that the plaintiff has a ‘plausible claim for relief.’” Opinion at *5 (quoting Fowler at 210-211).
The motion to dismiss argues that the Trustee failed to make any of the factual allegations required. Judge Walrath agreed “with the Movants that the Complaint does not adequately identify the transferors and the transferees, the nature of the antecedent debt, and the dates of the alleged transfers to the Additional Defendants. There are no specific allegations of what transfers were actually made to the Additional Defendants and by whom.” Opinion at *8.
Judge Walrath then quickly granted the Motion to Dismiss and held that “the Plaintiff is not allowed to engage in discovery until it has properly pled its Complaint.” Opinion at * 9.
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. Considering that most of the plaintiffs handling preference litigation have filed hundreds of prior preference cases, I wonder if a time will come when the Court will begin to require mass-filing preference plaintiffs to pay the litigation costs of the defendants.
While this motion to dismiss may have only delayed the process, it succeeded in denying the Plaintiff an opportunity to go on a fishing expedition of discovery. I don’t know whether this case will continue through to a trial or will be finalized through a settlement. But I can say with certainty that for most preference litigants, most of the time, it makes financial sense 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.