On August 9, 2016, Judge Kevin Carey of the Delaware Bankruptcy Court issued an Order both dismissing a complaint and striking a defendant’s Notice of Supplemental Authority.   The decision was issued in the Quantum Foods bankruptcy, in the adversary proceeding No. 16-50045.  A copy of the Opinion is available here.

On February 18, 2016, the Committee filed its complaint against the defendant, IPC, seeking to avoid and recover allegedly preferential transfers.  On April 25, 2016, IPC filed the motion to dismiss.  The Committee filed its response on May 23, 2016 and IPC filed a reply on June 6, 2016.  Then, on June 29, 2016, IPC filed a Notice of Supplemental Authority in Support of Motion to Dismiss.  On June 30, 2016 the Committee filed the Motion to Strike the notice of supplemental authority.  Opinion at *2.

Judge Carey quickly covered the standard governing motions to dismiss, which was provided by the Supreme Court in Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) and Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 570 (2007), and was then distilled into a three-step process by the Third Circuit:

First, the court must “tak[e] note of the elements a plaintiff must plead to state a claim.” Second, the court should identify allegations that, “because they are no more than conclusions, are not entitled to the assumption of truth.” Finally, “where there are well-pleaded factual allegations, a court should assume their veracity and then determine whether they plausibly give rise to an entitlement for relief.”

Burtch v. Milberg Factors, Inc., 662 F.3d 212, 221 (3d Cir. 2011).  Opinion at *3.  Judge Carey then states that the complaint contains “only a few vague factual allegations,” “fails to allege any facts to support a claim under § 502(d),” and “the information in the exhibit does not provide any context or describe the nature of the transfers.”  Opinion at *4-5.  He then dismissed the complaint.  However, as is the standard for Delaware Bankruptcy judges, he states that “leave to amend a complaint should be freely given when justice so requires” and gives the Committee leave to amend its complaint.  Opinion at *5.

Judge Carey then turns to the motion to strike, looking initially to Local Rule 7007-1(b), which states: No additional briefs, affidavits or other papers in support of or in opposition to the motion shall be filed without prior approval of the Court, except that a party may call to the Court’s attention and briefly discuss pertinent cases decided after a party’s final brief is filed or after oral argument.  Local Rule 7007-1(b).  As IPC did not seek permission for its additional filing, Judge Carey granted the motion to strike without further ado.

One of the first practice pointers I received when I started practicing law was to regularly review the the Local Rules to ensure that I always comply with them.  I have seen the Local Rules violated with regularity, but only with prior court approval.  This is NOT one of those times when it is better to ask for forgiveness than permission.

Defenses to a Preference Action

The Bankruptcy Code provides creditors with many defenses to preference actions. While the efficacy of the preference defendants’ attempt to reduce exposure in this case is still in question, it does not look like it will be an easy decision for the court or a briefly litigated issue.  Other defenses are more common, and more easily gauged.  Included among these are the “ordinary course of business defense” and the “new value defense.” For reader’s looking for more information concerning claims and defenses in preference litigation, attached is a booklet I prepared on the subject: “A Preference Reference: Common Issues that Arise in Delaware Preference Litigation.”