Not uncommonly, a preference complaint fails to adequately allege that the transfers sought to be recovered by the trustee were made “for or on account of an antecedent debt owed by the debtor before such transfer was made”, as required under Section 547(b) of the Bankruptcy Code. Thus, when faced with a complaint to recover alleged preferential transfers, a defendant can proceed in one of two ways: (i) file an answer and raise affirmative defenses, or (ii) move to dismiss under Rule 12(b)(6).
Generally, if a motion to dismiss is filed on this basis, the Court will grant plaintiff leave to amend the complaint to adequately assert that such transfers are recoverable under Section 547(b) of the Bankruptcy Code. But does the analysis change if the trustee files an amended complaint which continues to fail to meet pleading standards, and defendant once again moves to dismiss?
This question was addressed in the recent Delaware Bankruptcy Court decision of Solmonese v. Shyamsundar, et al. (In re AmCad Holdings, LLC, et al.), Adv. No. 15-51979 (Del. Bankr. Apr. 7, 2017). There, the Liquidating Trustee commenced a lawsuit against defendants, which included former directors and officers of AmCad Holdings, LLC, et al. (“Debtors” or “AmCad”), for breach of fiduciary duty, preferential transfers, and claim disallowance. The Court previously dismissed the original complaint because it lacked “related-to” jurisdiction over the fiduciary duty claims, and because the preference claims were not adequately pled. The Liquidating Trustee was permitted to file an amended complaint to address the deficiencies as it related to the preference claims.
The Liquidating Trustee filed the Amended Complaint seeking to avoid and recover $651,496.50 of alleged preferential transfers made to Visagar M. Shyamsundar (“Defendant”) within one year of the petition date pursuant to sections 547 and 550 of the Bankruptcy Code. Defendant again moved to dismiss, asserting that the Amended Complaint continued to fail to adequately allege that the transfers were made for or on account of an antecedent debt.
The Court granted dismissal as to five of the alleged transfers to Defendant for “car payments,” “payroll,” and “records storage”, totaling approximately $100,000. The Court held that the allegations did not support a claim that they were made in satisfaction of an antecedent debt owed to the Defendant.
In addition, the Court separately dismissed these transfers from the Amended Complaint because the Liquidating Trustee failed to satisfy his burden of demonstrating insolvency. While insolvency is presumed within the 90 day period prior to the bankruptcy filing, the burden rests with a trustee to adequately allege insolvency for claims arising before such 90 day period.
Finally, the Court denied the Liquidating Trustee’s request to further amend as to the aforementioned transfers. The Court noted that the Liquidating Trustee was put on notice of his deficiencies when the Court previously granted dismissal of the original Complaint, and did little to correct the deficiencies. See Krantz v. Prudential Invs., 305 F.3d 140, 144 (3d Cir. 2002) (denying leave to amend previously amended complaint where motion to dismiss original complaint put plaintiff on notice of deficiencies, yet plaintiff failed to rectify them in his first amended complaint). Accordingly, dismissal was granted with prejudice as to the five aforementioned transfers.
Carl D. Neff is a partner with the law firm of Fox Rothschild LLP. You can reach Carl at (302) 622-4272 or at firstname.lastname@example.org.