On February 13, 2018, Judge Silverstein of the Delaware Bankruptcy Court granted a motion to dismiss the Rent-A-Wreck of America bankruptcy case (Bankr. D. Del. case 17-11592). Judge Silverstein’s opinion is available here (the “Opinion”).

In summarizing her holding, Judge Silverstein provides: These privately-owned debtors are not in financial distress (or at least they have not proven they are), and they seek to use 11 U.S.C. § 365 to redistribute value from a long-time adversary to enrich their ultimate shareholder.  The one entity that may be adversely affected by the Debtors’ bankruptcy filing is the Movant, David Schwartz.  Mr. Schwartz was held by the Maryland District Court, and affirmed by the Fourth Circuit, to be the the holder of an implied-in-fact royalty and fee-free franchise in West Los Angeles.  Opinion at *7.  He argues that the Debtors filed bankruptcy for the sole purpose of rejecting his franchise, and are not filed in good faith, but are instead a continuation of the Maryland District Court litigation.  Opinion at *12

The Debtors argued that they filed for bankruptcy protection to maximize the value of the Rent-A-Wreck trademark, to reject burdensome franchise agreements, and to relieve Debtors’ balance sheet of significant debt, all of which Debtors posit constitute valid reorganizational purposes. Opinion at *12.

Judge Silverstein began her analysis of this case by reviewing the inquiry of the Debtors’ good faith as directed by  precedential holdings of the Third Circuit.  Opinion at *14.  The Third Circuit considers two primary factors to determine good faith – first, whether the petition serves a valid bankruptcy purpose, second, whether the petition was filed to gain a tactical advantage.  Id.  The main precedential opinion cited by Judge Silverstein is In re Integrated Telecom Express, Inc., 384 F.3d 108 (3d Cir. 2004).

According to the Opinion, good faith is a predicate to a debtor’s ability to use provisions of the Bankruptcy Code, and financial distress is a part of if not itself a predicate to—a good faith analysis.  Opinion at *15.  Judge Silverstein continues: The ability to use the redistributive
provisions of the Bankruptcy Code assumes the existence of a valid bankruptcy, which, in turn, assumes a debtor in financial distress.  Id.  In this case, the Debtors never represented that they were insolvent, and Judge Silverstein, accordingly, determined that they were solvent.  Opinion at *18.  Neither did the Debtors provide evidence indicating that they were unable to pay their debts as they came due.  Opinion at *19.  Judge Silverstein determined that, in sum, the lack of credible facts demonstrating financial distress supports a finding that these cases were not filed in good faith.  Opinion at *26.

Pursuant to the Opinion, Judge Silverstein understood the Debtors’ argument that their filing was in good faith as follows: the rejection of the Schwartz franchise agreement maximizes Debtors’ assets thus permitting them to stay in business, satisfying both prongs of the bankruptcy purpose.  Opinion at *28.  Judge Silverstein disagreed, quoting Integrated Telecom:

To be filed in good faith, a petition must do more than merely invoke some distributional mechanism in the Bankruptcy Code. It must seek to create or preserve some value that would otherwise be lost—not merely distributed to a different stakeholder—outside of bankruptcy.

Opinion at *28 (quoting Integrated Telecom, 384 F.3d at 128-29) (emphasis in Opinion).  Judge Silverstein concludes my opining that the Debtors bankruptcy filing was made for the purpose of redistributing the value of the Rent-A-Wreck trademark in the Los Angeles territory from Mr. Schwartz to Bundy.  Opinion at *29.   Accordingly, the primary, if not sole, beneficiaries of that value would be the Debtors’ equity holders, not its creditors.  Judge Silverstein states that she has “no doubt these petitions were just another chapter in the attempt to terminate Mr. Schwartz’s franchise and obtain the benefits for JJFMS.”  Opinion at *36.

Judge Silverstein provides in the Opinion, that a financially distressed debtor’s recognition of the outcome of litigation and/or a desire to avoid future litigation may serve as a legitimate basis for the filing of a bankruptcy case. Opinion at *36.  I note, however, that the thread running throughout the Opinion is the requirement that a debtor be financially distressed in order to take advantage of the relief provided by the Bankruptcy Code.  Financial distress is a broad term, that can be applied to entities ranging from those suffering a liquidity crisis with substantial equity – to those suffering from over-leverage or long-term non-profitability.  In these situations, and countless others, the Bankruptcy Code can provide relief.  It is important, however, to ensure that your company can satisfy the Court’s scrutiny of whether a petition was filed in good faith – recognizing that the burden of proof is on the debtor.

In a decision signed September 21, 2017 in an adversary proceeding related to the Boomerang Systems bankruptcy (case 15-11729), Judge Walrath of the Delaware Bankruptcy Court denied a defendants FRCP 12(b)(6) motion to dismiss a preference complaint. Judge Walrath’s opinion is available here (the “Opinion”).

Judge Walrath first provided the requirements for a preference action to survive a motion to dismiss.  Quoting Stanziale v. DMJ Gas-Mktg. Consultants, LLC (In re Tri-Valley Corp.), Adv. No. 14-50446 (MFW), 2015 WL 110074, at *2 (Bankr. D. Del. Jan. 7, 2015), Judge Walrath stated that “to satisfy Rule 8, the complaint must identify each alleged preferential transfer by the date of the transfer, the name of the debtor/transferor, the name of the transferee, and the amount transferred.”  Opinion at *5.

In this case, Gavin Solmonese, LLC, the liquidating trustee of Boomerang Systems (the “Liquidating Trustee”), filed a preference action that is, in Delaware, a fairly routine pleading.  In its complaint, the Liquidating Trustee alleged the amount, date, and method of payment made by the Debtors to the Defendant.  Judge Walrath held that “this allegation is sufficient to allege a preferential transfer.”  Opinion at *6.

The Defendant asserted its affirmative defenses as grounds for dismissal of the complaint.  However, as the Court held, “these defenses are not grounds to dismiss the action under Rule 12.”  Opinion at *6.  A 12(b)(6) dismissal requires a deficiency in the plaintiff’s pleading.

Avoidance actions are painful for defendants – particularly when they are innocent actors.  But the innocence of a preference defendant is not a defense.  The only defenses available are those provided by statute – 11 U.S.C. § 547(c). We have provided an overview of these defenses in our short booklet A Preference Reference.

In a decision signed September 8, 2017 in an adversary proceeding related to the Money Center of America bankruptcy (case 14-10603), Judge Sontchi of the Delaware Bankruptcy Court denied a defendants FRCP 12(b)(6) motion to dismiss a complaint filed in the adversary proceeding 15-50250. Judge Sontchi’s opinion is available here (the “Opinion”).

The chapter 7 trustee of the Money Center of America bankruptcy, Maria Aprile Sawczuk (the “Trustee”) filed a complaint against Christopher Wolfington, Jason Walsh and Lauren Anderson, alleging breach of fiduciary duty, aiding and abetting breach of fiduciary duty, corporate waste, conversion, recovery of avoidable transfers, and equitable subordination.  Defendant Walsh filed a motion to dismiss, arguing that the Trustee failed to adequately plead non-dischargeability in his personal bankruptcy or fraud.  His motion to dismiss was the subject of the Opinion.

After analyzing and reciting the complaint, the Court determined that “the Trustee’s Complaint sufficiently alleged that Walsh perpetrated fraudulent transfers through conduct “of the kind” specified in sections 523(a)(2) and (a)(4) in order to withstand a motion to dismiss.”   Opinion at *6.  The Court further held that “the Trustee has sufficiently alleged facts showing that Walsh’s conduct of the kind specified under sections 523(a)(2) and (a)(4).”  Opinion at *7.

This Opinion, although short, provides a strong reminder of the requirements of the pleading standards in the Delaware Bankruptcy Court.  Complaints do not need to contain long recitations of facts supported by extensive evidence.  Rather, a complaint need only contain allegations of sufficient facts to support the claims alleged.  In a prior blog post I discussed a time when this did not occur: You Don’t Get Three Strikes when Filing a Complaint – Lessons from Tropicana.  When a complaint clears this hurdle, it will not be dismissed by the Bankruptcy Court.

In a 33 page decision released March 29, 2017, Judge Sontchi of the Delaware Bankruptcy Court ruled on competing motions to dismiss the remaining claims and counterclaims in an adversary proceeding in the Affirmative Insurance bankruptcy – Adversary Proceeding Case No. 16-50425.  Judge Sontchi’s opinion is available here (the “Opinion”).  As Judge Sontchi stated in the Opinion, the issue was a simple one, Opinion at *3, there is a dispute of a material fact between the parties, and dismissal is therefor inappropriate.  Opinion at *4.

The issue arises as the result of the allocation of sales proceeds between parties with a claim on the debtor’s assets.  The plan appointed liquidator (the “AIC Liquidator”) asserts that the funds from the sale should be in its control pursuant to the plan, and held in trust to pay the estate’s tax liability.  Opinion at *12.  JCF AFFM Debt Holdings, L.P. (“JCF”) is the other party in interest in the Opinion.  JCF was a major lender to the debtor, and claimed to hold a validly perfected security interest in the account into which the sales proceeds were eventually deposited.

JCF had filed the complaint that initiated the adversary proceeding.  The AIC Liquidator filed its counterclaims and also moved to dismiss for lack of subject matter jurisdiction, arguing that this was a conflict between two creditors with no impact on the Debtor.

Judge Sontchi first addressed the argument of subject matter jurisdiction, determining that “the threshold question here is whether the funds [at issue] are property of the estate or not.”  Opinion at *21.  As Judge Sontchi ruled, the account at issue is in the name of the Debtor, and accordingly, “its funds are presumably property of the estate under section 541(a) of the Bankruptcy Code.” Opinion at *26. Citing In re BankUnited Financial, Judge Sontchi instructed that “what is or is not property of a bankruptcy estate is an issue that stems from the bankruptcy itself, one that can only arise in a bankruptcy proceeding…”  Opinion at *28.

On pages 31 and 32 Judge Sontchi examines the counterclaims and whether they should be dismissed.  It is interesting to note that a key aspect of his analysis, as I read the Opinion, is the remedy sought in the counterclaims – establishment of a constructive trust.  Judge Sontchi states: “The imposition of a constructive trust may be an appropriate remedy for any of the causes of action asserted.  Thus, if the AIC Liquidator prevails on any of the counterclaims it would be determinative of the ultimate issue of whether the funds are property of the estate. The Court finds that the Counterclaims contain specific factual allegations, taken they are true, to suggest that the AIC Liquidator is entitled to the funds in the …Account.. As such, it is apparent that there is a dispute of a material fact.”  I can’t help but wonder, if the counterclaims had sought relief of a different sort, such as damages, would the outcome have been the same?

At the end of the day, it’s hard to argue that a bankruptcy court doesn’t have jurisdiction over a matter that can, by definition, only arise in a bankruptcy – including determining what constitutes a debtor’s estate.  The determination of what is property of a debtor’s estate is a highly fact sensitive issue, and if there are facts in dispute, it is unlikely that a motion for summary judgment or a motion to dismiss will be granted.  We will, no doubt, continue to see them filed as they play an important role in narrowing the scope of a conflict, but in my experience and observation of the bankruptcy court, they are denied far more frequently than they are granted.

On February 19, 2016, Judge Brendan L. Shannon of the Delaware Bankruptcy Court granted in part the motion of K. Ivan F. Gothner (the “Defendant”) to dismiss a complaint filed by JLL Consultants, the Liquidating Trustee (the “Trustee”) in the AgFeed bankruptcy.  I summarized that opinion in a prior post: Opinion in AgFeed USA – Another (Mostly) Successful Motion to Dismiss

Since publishing that post, the Trustee filed his amended complaint, to which the Defendant filed another motion to dismiss (the “Motion”).  On September 13, 2016, Judge Shannon issued an opinion (the “Opinion”) deciding this Motion.  The “Opinion” is available here.

Because of the length of the complaint and the Motion, the Opinion weighs in at 32 pages.  The analysis in this Opinion is substantially similar to that of the prior opinion.  The Opinion indicates several times that no new information was provided in support of, or against, several of the claims of the complaint.  Thus, for purposes of this post I’ll focus on the single largest issue of new analysis provided by the Court – fraud.

The Third Circuit precedent that is followed in the Delaware Bankruptcy Court is provided in Seville Indus. Machinery Corp. v. Southmost Machinery Corp., 742 F.2d 786, 791 (3d Cir. 1984), cert. denied, 469 U.S. 1211, 105 S.Ct. 1179, 84 L.Ed.2d 327 (1985).  For those of you without ready access to Lexis or Westlaw, here is a link to the case in Google Scholar.

As Judge Shannon provided in the course of dismissing the Trustee’s allegation of Intentional Misrepresentation by Nondisclosure (which is a common law fraud claim), “Fraud requires: (1) a false representation of material fact; (2) the knowledge or belief that the representation was false, or made with reckless indifference for the truth; (3) the intent to induce another party to act or refrain from acting; (4) the action or inaction taken was in justifiable reliance on the representation; and (5) damage to the other part as a result of the representation.”  Opinion at *28.

In this claim, the Trustee failed to allege with particularity that any action was taken in reliance of the Defendant’s representations.  Judge Shannon includes a quote from the Delaware Chancery Court that the “conclusory statement [that plaintiff ‘relied upon’ a statement] is insufficient; to plead reliance with particularity, plaintiff must explain what he did or refrained from doing, in justifiable reliance upon the statement.”  Opinion at *29 (quoting Smith v. Smitty McGee’s, Inc., 2998 WL 246681, 15 *5 (Del. Ch. May 8, 1998)).  In this case, the Trustee includes only the conclusory statement that shareholders relied upon the Defendant’s representations without providing any specific instance in which this occurred.

In the end, the result of the amended complaint was essentially identical to the original complaint.  The same causes of action survived the Motion and no new actions survived the Motion.  Judge Shannon closed the Opinion with what should be considered a firm warning to the Trustee – “the Court has previously expressed and now reiterates its profound concerns with respect to the dissipation of monies otherwise available for distribution to stakeholders being burned up in litigation of dubious merit and questionable collectability.”  Opinion at *32.

My $.02

Having already provided the Trustee a second bite at the apple, Judge Shannon declined to allow them another opportunity to amend the complaint.  The Delaware Bankruptcy Court, like other courts across the U.S., takes a hard look at allegations of fraud, and requires them to comply with the elevated pleading standard of Fed. R. Civ. P. 9(b).  Counsel looking to defeat a motion to dismiss may want to consider having a fresh set of eyes review complaints containing fraud allegations.  Ideally, this ‘fresh set of eyes’ will handle the review with no more background than the Judge would have, and with either no bias or with a bias towards dismissal.  This will help ensure that the complaint complies with the enhanced requirements of Fed. R. Civ. P. 9(b).  It is said that you can’t make any shot you don’t take — but you also can’t make any shot you take with 1/2 the force needed to reach the goal.

On June 7, 2016, Judge Laurie Selber Silverstein of the Delaware Bankruptcy Court ruled on a motion to dismiss Diamondhead’s involuntary bankruptcy petition.  The Creditors who filed the bankruptcy admitted to the Court that their intent in filing for bankruptcy was to remove management and to obtain a recovery for their equity investments.  The “Opinion” is available here.  This is the second recent opinion issued in this case.  The prior opinion was discussed in this blog post: Diamondhead Casino Bankruptcy – and the Challenge to Trustee Appointments.

While the parties involved in Diamondhead’s bankruptcy proceeding agreed to have the Court address the motion to appoint a trustee prior to addressing the Debtor’s motion to dismiss the involuntary petition, claiming it was filed in bad faith and that there is a bona fide dispute as to the debt held by the petitioning creditors.  Opinion at *2.

As became clear at trial, “the petitioning creditors’ primary purpose in filing this case was to effect a change in management, and their secondary purpose was to collect a debt. On the facts of this case, neither of these goals serves a proper bankruptcy purpose.”  Opinion at *1.

Continue Reading Diamondhead Casino Bankruptcy – Motion to Dismiss Involuntary Petition – Granted


In a 10-page decision dated June 6, 2016, Judge Carey of the Delaware Bankruptcy Court denied a motion to dismiss filed by a holder of a “Golden Share” of Intervention Energy Holdings, LLC (the “Debtor”).  Judge Carey’s opinion is available here (the “Opinion”).  A “Golden Share” is “A type of share that gives its shareholder veto power over changes to the company’s charter. A golden share holds special voting rights, giving its holder the ability to block another shareholder from taking more than a ratio of ordinary shares. Ordinary shares are equal to other ordinary shares in profits and voting rights. These shares also have the ability to block a takeover or acquisition by another company.” Opinion at n.9 (quoting Investopedia – Golden Share, INVESTOPEDIA, http://www.investopedia.com/terms/g/goldenshare.asp.

In this case, the holder of the Golden Share was EIG Energy Fund XV-A, L.P. (“EIG”).  EIG had provided multiple rounds of debt financing to the Debtors.  However, the Debtors were unable to service their loans and eventually defaulted on their payments.  In exchange for EIG entering into a forbearance agreement, EIG was granted a single common unit (a share of an LLC), and the Debtors revised their LLC Agreement to require unanimous consent in order to file bankruptcy.  Opinion at *4.  The Debtors filed bankruptcy without EIG’s consent, and EIG responded by filing its motion to dismiss.  The Opinion ruled on EIG’s motion to dismiss.

While Delaware is well known for allowing companies liberal freedom of contract when creating an LLC agreement, there are some rights that courts have not allowed entities to give up.  Opinion at n.7.  Numerous courts have held that “an advance agreement to waive the benefits conferred by the bankruptcy laws is wholly void as against public policy.”  Opinion at *6.  Judge Carey held that because the forbearance agreement required “that [the Debtor] both amend its LLC Agreement to institute the unanimous Consent Provision and grant the blocking share, the intent of the parties is unmistakable.”  Opinion at *8.

Thus, because it was the intent of the parties to take action that is against public policy, Judge Carey denied EIG’s motion to dismiss the bankruptcy and held that the Debtors had authority to file for bankruptcy.  Judge Carey opined (in a rather lengthy sentence), “A provision in a limited liability company governance document obtained by contract, the sole purpose and effect of which is to place into the hands of a single, minority equity holder the ultimate authority to eviscerate the right of that entity to seek federal bankruptcy relief, and the nature and substance of whose primary relationship with the debtor is that of creditor—not equity holder—and which owes no duty to anyone but itself in connection with an LLC’s decision to seek federal bankruptcy relief, is tantamount to an absolute waiver of that right, and, even if arguably permitted by state law, is void as contrary to federal public policy.”  Opinion at *9.

While Bankruptcy is an issue of law many people don’t think about until they hit rock bottom, given the success statistics for companies in the U.S., particularly new companies, it is worth taking a page out of the playbook of the doomsday preppers – preparing for the worst, while hoping for the best.

In addition, a newly-published Alert on the decision penned by my colleague Raymond Patella can be found on the Fox Rothschild website.

In a 9-page opinion issued in the Syntax-Brillian case on May 11, 2016, Chief Judge Brendan L. Shannon lays out three principles of law that all litigants should know (if they don’t already).  A copy of the Opinion is available on the Court’s website: Here.  The Opinion was issued as a ruling on the motion of Alan Levine for relief from the order accepting the first-day-declaration of Gregory F. Rayburn.

As Judge Shannon provides in the Opinion, it appears that Mr. Levine filed his motion under the belief that if the first day declaration was found to be fraudulent, that all the relief provided in the bankruptcy case would be undone.  Opinion at *6.  This leads to lesson #1.  Judge Shannon quickly puts this misbelief to rest, stating “Striking or vacating the First Day Affidavit, even if ordered by this Court, will not affect or unwind these steps and transactions.”  Id.

Mr. Levine supports his motion by arguing that new evidence has come to light.  Judge Shannon recently denied a motion to dismiss an adversary complaint filed by the Liquidating Trustee, holding that he was required to treat all pleadings as true for the purpose of ruling on a motion to dismiss, including allegations of fraud.  Mr. Levine argued that this ruling was tantamount to the Court finding that there was fraud, which should result in the reversal of all orders which were entered in reliance on that fraud.  This leads to lesson #2.  Judge Shannon made clear the difference between a ruling on a motion to dismiss and one made after a full trial.  Opinion at *8.  “When the Court stated in the Rule 12(b) Decision that “it accepts as true” the allegations made in the Trustee’s complaint, it does not mean that the Trustee has conclusively proven such allegations.”  Id.

Mr. Levine also requested to be able to seek discovery.  The Liquidating Trustee argued vigorously against such relief, claiming that opening this door would create excessive costs for the Trust.  This brings us to our final lesson.  Judge Shannon held that because “there is no pending proceeding before this Court to which the Movant’s document request would relate” he would deny the request.  Opinion at *9

We can learn this lessons from others or experience them ourselves.  The former is far less costly.


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 Opinion

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.

My $.02

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.

On February 19, 2016, Judge Brendan L. Shannon of the Delaware Bankruptcy Court granted in part the motion of K. Ivan F. Gothner (the “Defendant”) to dismiss a complaint filed by JLL Consultants, the Liquidating Trustee (the “Trustee”) in the AgFeed bankruptcy.  The “Opinion” is available here.

This is just one of many motions to dismiss adversary proceedings in the AgFeed case.  I previously posted about another successful motion to dismiss: Opinion in AgFeed USA – A Release of all Known and Unknown Causes is Binding.

On December 14, 2009, Mr. Gothner joined AgFeed’s board.  Opinion at *7.  However, well before that time, AgFeed was “engaged in a massive fraud,” including reporting ownership  of tens of millions of dollars of fictitious assets.  Opinion at *6.  Over the course of the next several years, AgFeed began investigating its assets and engaged in a series of corrective reports as it discovered new information.  At this time, AgFeed was becoming more exposed to the U.S. market, and started replacing its directors.  See Opinion at *8-9.  On December 20, 2011, Mr. Gothner was appointed Chairman of the Board and Interim CEO.  On September 18, 2012, he was appointed as the permanent CEO of AgFeed.  Opinion at *12.

On July 25, 2013, AgFeed filed for bankruptcy.  On March 11, 2014, the SEC filed a complaint against AgFeed and several of its officers and directors, including Gothner.  On February 23, 2015, the AgFeed trustee filed the complaint in the adversary proceeding which gave rise to the motion to dismiss, and thus this Opinion.  The complaint alleged 12 different causes of action.  The motion to dismiss was granted for the first 8 causes of action, granted in part for causes 9 and 10, and denied for causes 11 and 12.  Notably, however, causes 11 and 12 were for the recovery of avoidable transfers and denial of claims.  Both of these causes of action are entirely contingent upon a successful judgment that there was a fraudulent transfer or preference payment, rather than independent causes of action.  The remaining independent causes of action allege that Gothner is guilty of constructive fraud in that he caused funds totaling “not less than” $293,000 to be transferred for the benefit of his wife or stepdaughter.  Opinion at *38-43.

My $.02

Most of the causes of action were dismissed pursuant to a 12(b)(6) motion.  This requires the Court to (1) treat all facts alleged in the complaint as true and (2) draw all reasonable inferences in favor of the plaintiff.  Even with this substantial advantage, the Trustee failed to carry its burden.  In large part, this is because the Trustee alleged fraud, which has a heightened pleading standard.  As the Court recognized, this rule is “relaxed and interpreted liberally where a trustee or a trust formed for the benefit of creditors … is asserting the fraudulent transfer claims.”  Opinion at *16.  This is because a trustee is an outsider to the case and inevitably lacks knowledge concerning the fraud.  Id.  As this Opinion illustrates, this disadvantage can easily outweigh the relaxed standard to which a trustee is subject.  It’s comparable to a fireman trying to examine the cause of a forest fire.  They can usually tell where the fire started and can easily survey the damage, but determining the exact cause is far more difficult.  To carry the analogy to its conclusion, it’s why Smokey the Bear preaches prevention – it’s much easier to prevent a fire, or a fraud, than it is to clean up afterwards.