Companies that conduct business with a debtor prior to the debtor’s bankruptcy filing often are later sued in bankruptcy court for recovery of payments made by the debtor to the company (“Creditor”) within ninety (90) days of the bankruptcy filing date.  A trustee or debtor in possession (“Trustee”) will often commence hundreds of these claw-back suits against unsuspecting Creditors.  Given the large number of claw-back suits filed by Trustees against Creditors, many of the complaints are factually insufficient to withstand a motion to dismiss challenge.

The U.S. Bankruptcy Court for the District of Delaware (“Delaware Bankruptcy Court”) has repeatedly noted its intolerance of insufficiently pleaded preference action complaints.  Further, though the Court has repeatedly warned Trustees that the Court requires sufficiency of pleading in litigation commenced in its jurisdiction, the Court recently had to crack down on yet another deficient complaint.

This article discusses the sufficiency requirements for preference cause of action complaints and the Delaware Bankruptcy Court’s recent decision to dismiss a complaint in the case Giuliano v. Haskett (In re MCG Limited Partnership)[1].

Standard Complaints Must Meet to State a Claim for Relief

Rules 8(a)(2) and 12(b)(6) of Federal Rules of Civil Procedure

Rule 8(a)(2) of the Federal Rules of Civil Procedure (“FRCP”) requires that a plaintiff commencing litigation, among other things, provide “a short and plain statement of the claim showing that the [plaintiff] is entitled to relief.”  A company defending against a preference action may have the litigation dismissed, if, pursuant to FRCP 12(b)(6), the plaintiff’s complaint, including any attachments, does not “state a claim upon which relief can be granted.”[2]

Heightened Standard Promulgated by Federal Courts

In applying FRCP 12(b)(6), the U.S. Supreme Court and lower federal courts have over time promulgated a heightened standard or pleading for civil action complaints.

In the 2007 Twombly case, the U.S. Supreme Court, concluded that the complaint in that case was insufficient on its face to allege a claim against the defendants. [3]  The Supreme Court explained that “[w]hile a complaint attacked by a Rule 12(b)(6) motion to dismiss does not need detailed factual allegations . . . .  a plaintiff’s obligation to provide the ‘grounds’ of his ‘entitle[ment] to relief’ requires more than labels and conclusions, and a formulaic recitation of the elements of a cause of action will not do.” [4]   Further, “[f]actual allegations must be enough to raise a right to relief above the speculative level.”[5]  The factual allegations in the complaint must provide the defendant with “‘fair notice’ of the nature of the claim” against the defendant and the “‘grounds’ on which the claim rests.”[6]  The plaintiff must nudge his “claims across the line from conceivable to plausible” to withstand a motion to dismiss.[7]  The Supreme Court stressed the importance of dismissing a deficient complaint at the pleading stage, which is “the point of minimum expenditure of time and money by the parties and the court.”[8]

Later, in the Iqbal case, the Supreme Court analyzed the Twombly decision and explained that Twombly articulated a two-prong analysis with respect to determining whether a complaint is facially sufficient.[9]  The first step in the analysis is to take “note of the elements a plaintiff must plead to state a claim” with respect to a particular cause of action.[10]  The second step is to determine whether the complaint on its face contains sufficient factual matter to state a plausible claim for relief.[11]  “A claim has factual plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.”[12]  Further, “[t]hreadbare recitals of the elements a cause of action, supported by mere conclusory statements, do not suffice.” [13]

A similar two-prong analysis has been adopted in the Third Circuit.[14]  As the Delaware Bankruptcy Court has explained, “[f]irst the factual and legal elements of a claim should be separated.  The [court] must accept all of the complaint’s well-pleaded facts as true, but may disregard any legal conclusions.”[15]  The Court next determines if the plaintiff’s factual allegations in the complaint nudge the plaintiff’s claims “‘across the line from conceivable to plausible.’”[16]  Moreover, “[s]imply quoting the statutory language is insufficient to withstand a motion to dismiss.”[17]

Statutory Elements of a Preferential Transfer Avoidance Cause of Action

To establish a prima facie case for the avoidance of a preferential transfer, a plaintiff must establish that the transfer was made

(1) to or for the benefit of a creditor; (2) for or on account of an antecedent debt owed by the debtor before such transfer was made; (3) made while the debtor was insolvent; (4) made— (A) on or within 90 days before the date of the filing of the petition; or (B) between ninety days and one year before the date of the filing of the petition, if such creditor at the time of such transfer was an insider; and
(5) that enables such creditor to receive more than such creditor would receive if— (A) the case were a case under chapter 7 of this title; (B) the transfer had not been made; and (C) such creditor received payment of such debt to the extent provided by the provisions of [the Bankruptcy Code].[18]

To withstand a motion to dismiss challenge, the Delaware Bankruptcy Court has generally required a preference action complaint go beyond the mere parroting of the statutory elements set forth in section 547(b) and/or state bare legal conclusions and identify (i) the nature and amount of each alleged antecedent debt; (ii) the date of each alleged preferential transfer; (iii) the transferor by name, (iv) the transferee by name; and (v) the amount of each alleged transfer.[19]

Numerous preference action complaints filed in the Delaware Bankruptcy Court have failed to meet this standard of pleading, thus, they were dismissed.[20]   Further, the Court has iterated to litigating parties that the Iqbal and Twombly “decisions have shifted federal pleading standards from notice pleading to a heightened standard of pleading.”[21]

Recent Preference Action Complaint Dismissal

Most recently, in the bankruptcy case In re MCG Limited Partnership,[22]  the Delaware Bankruptcy Court dismissed yet another preference action complaint for failure to meet the new heightened federal pleading standard.

In the MCG Limited Partnership case, the chapter 7 trustee (“Chapter 7 Trustee”) sought to claw back payments made to defendant James Haskett (“Defendant”) within 90 days before the bankruptcy filing date.

In the Complaint, the Chapter 7 Trustee alleged that a transfer was made by debtor Monitor Group Limited Partnership (“MCG”) to the Defendant in the amount of $14,110.77 via check number 75212 and the following additional facts:

(i)  that the transfers were made because of prior contractual obligations or invoices owed by MCG to Defendant before the transfers were made;

(ii)  the transfers were made in payment of goods sold or services provided by Defendant to MCG;

(iii)   the goods or services paid for by each of the transfers were provided by Defendant to MCG before each transfer was made;

(iv)   the transfers constitute a transfer of an interest in property of MCG;

(v)    the transfers were made on September 18, 2012, while MCG was insolvent;

(vi)   each of the transfers was to or for the benefit of Defendant;

(vii)  the transfers enabled Defendant to receive more than he would have received in the case if: (i) the transfer had not been made; and (ii) Defendant received payment of such debt to the extent provided by the provisions of the Bankruptcy Code.[23]

After analysis and application of case law to the facts alleged in the Complaint, the Court concluded that the complaint against the Defendant was insufficient given

(i)  “the Complaint merely parrots the language of section 547 and offers no particularized facts giving context to the transfer that took place on September 18, 2012”;

(ii)  “the Complaint blends facts and legal conclusions”; and

(iii)  “it does not allege any facts that give context or a description of the transfer made from Debtors to Defendant beyond whom the check was sent to, the dates the check were sent and received, and the amount of the transfer.”[24]

Though the Court dismissed the factually insufficient complaint, the Court, pursuant to FRCP 15, allowed the Chapter 7 Trustee leave to amend the complaint to correct the deficiencies.[25]

Conclusion

The Delaware Bankruptcy Court’s recent decision to yet again dismiss a factually insufficient preference action complaint serves as further warning to Trustees that they should exercise more diligence in providing sufficient facts in the complaint to satisfy the new heightened pleading standard.  Creditors who find themselves defending against preference actions filed against them in bankruptcy court should thoroughly review and analyze the complaint for any factual deficiencies.  Should a Creditor find the complaint against it is deficient, the Creditor should seek assistance of counsel to file a motion to dismiss the complaint due to the Trustee’s failure to state a plausible claim for relief.

Disclaimer:  This article represents the views of the author and such views should not necessarily be imputed to Simmons Legal PLLC, or its respective affiliates and clients.  This publication should not be considered legal advice and receipt of this publication does not establish an attorney-client relationship.

About the Author:  Ms. Simmons is the Founder and Managing Member of the law firm Simmons Legal PLLC.  She is a business lawyer and primarily focuses her practice on the representation of debtors, creditors and other parties in complex restructuring, finance, bankruptcy, litigation and business transactional matters.  She can be reached at camisha@simmonslegal.solutions.


[1]  (f/k/a Monitor Company Group Limited Partnership), Case No. 12-13042(CSS), Adv. Pro. No. 14-50536 (CSS), Dkt. No. 33, (Bankr. D. Del. Jan. 28, 2016).

[2]  See Fed. R. Civ. P. 12(b)(6).  See also Fed. R. Bankr. P. 7012 (making FRCP 12 applicable to adversary proceedings).  See also Fed. R. Civ. P. 8(a)(2); Fed. R. Bankr. P. 7008 (making FRCP 8 applicable to adversary proceedings).

[3]  Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 555-56 (2007).

[4]  Id.

[5]  See id. at 555.

[6]  See id. n.3.

[7]  See id. at 570.

[8]  See id. at 558-59 (quotation marks and citations omitted).

[9]  See Aschcroft v. Iqbal, 556 U.S. 662, 678-79 (2009).

[10]  See id.

[11]  See id. at 678.

[12]  See id.

[13]  See id.

[14]  See, e.g., Fowler v. UPMC Shadyside, 578 F.3d 203, 210-11 (3d Cir. 2009).

[15]  Gellert v. The Lenick Company (In re Crucible Materials Corp.), Nos. 09-11582, 10-55178, 2011 WL 2669113, at *2 (Bankr. D. Del. July 6, 2011) (quoting Fowler, 578 F.3d at 210-11).

[16]  See Fowler, 578 F.3d at 212 (quoting Twombly, 550 U.S. at 570).

[17]  See Crucible Materials Corp., 2011 WL 2669113, at *3.

[18]  11 U.S.C. § 547(b).

[19]  Crucible Materials Corp., 2011 WL 2669113, at *2 (citing OHC Liquidation Trust v. Credit Suisse First Boston (In re Oakwood Homes Corp.), 340 B.R. 510, 522 (Bankr. D. Del. 2006); Valley Media Inc. v. Borders, Inc. (In re Valley Media, Inc.), 288 B.R. 189, 192 (Bankr. D. Del. 2003)).

[20]  See, e.g., Crucible Materials Corp., Nos. 09-11582, 10-55178, 2011 WL 2669113, at *4; Miller v. Mitsubishi Digital Elecs. Am. Inc. (In re Tweeter OpCo), 452 B.R. 150 (Bankr. D. Del. 2011); Charys Liquidating Trust. v. Hades Advisors, LLC (In re Charys Holding Co.), Nos. 08-10289, 10-50211, 2010 WL 2788152, at *5 (Bankr. D. Del. July 14, 2010).

[21]  See, e.g., In re Washington Mutual, Inc., Adv. No. 10-53158, 2013 WL 3757330, at 1 (Bankr. D. Del. July 16, 2013) (citation omitted).

[22]  (f/k/a Monitor Company Group Limited Partnership), Case No. 12-13042(CSS), Adv. Pro. No. 14-50536 (CSS), Dkt. No. 33, (Bankr. D. Del. Jan. 28, 2016).

[23]  Id. at 13-14 (internal citations omitted).

[24]  Id. at 17.

[25]  See id. at 19.