In a letter opinion entered on October 30, 2024, Delaware Bankruptcy Judge Craig Goldblatt denied a motion to dismiss a complaint filed by a Chapter 11 creditors’ committee (the “Committee”) that had been conferred standing to bring derivative claims.
In its complaint, the Committee sought to avoid and recover payments made by one of the Debtors to defendant Nimble Gravity, LLC (“Nimble”) for certain goods and services as either preferential transfers or, alternatively, constructively fraudulent transfers. The Committee also sought to disallow Nimble’s claim until it repaid the avoidable transfers.
Nimble asserted that the Committee had failed to state a claim pursuant to Federal Rules of Civil Procedure 12(b)(3) and 12(b)(6).
Preference Claim
Judge Goldblatt observed that in the Third Circuit:
To identify a preference properly, the plaintiff must specify the (i) date of transfer; (ii) name of the transferor; (iii) name of the transferee; and (iv) amount of the transfer. If there are multiple debtors, the plaintiff must also “identify the particular debtor” that made the transfer (or transfers) at issue.
The Committee has satisfied each of these requirements. In the complaint and the attached exhibit, the Committee identifies Pharmapacks, LLC as the transferring debtor and Nimble as the transferee. Exhibit A also contains the alleged transfer date and amount of each transfer. (internal citations omitted)
The Court rejected Nimble’s assertion that the claim was insufficient without identifying the specific contract paid with the preferential transfer, indicating “that is not required at this stage”.
The letter opinion echoes the decision made by Judge John K. Olson, of the United States Bankruptcy Court for the Southern District of Florida in In re Tousa, Inc., 442 B.R. 852, 856 (2010), wherein he stated:
so long as the complaint makes clear who transferred what to whom and when, a preference defendant will have enough information to mount whatever defenses may be available. To require more is to mandate pedantry and to return federal courts to the days of gotcha pleadings before the adoption of the Federal Rules of Civil Procedure.
As articulated by the late Bankruptcy Judge A. Jay Cristol, in In re Arrow Air, Inc., Bankr. Court, SD Florida 2012,
To sufficiently allege the Preference Claim against Defendant, there must be sufficient facts in the Complaint to plausibly show: (a) Defendant was a creditor; (b) the transfers were made to or for the benefit of Defendant; (c) the transfers were for or on account of antecedent debt of [Debtor]; (d) [Debtor] was insolvent when the transfers were made; and (e) Defendant received the transfers and would have received less than [the amount of the avoidable transfers] in a case under Chapter 7 of the Bankruptcy Code.
Reasonable Due Diligence
When considering the sufficiency of the Committee’s alleged diligence in assessing Nimble’s prospective defenses, as required under Section 547(b), the Court stated
Because the diligence element is a condition precedent governed by Rule 9(c) of the Federal Rules of Civil Procedure, it is not subject to the Iqbal and Twombly standard. So, to plead due diligence adequately, the plaintiff need only advance a “general allegation” that “all conditions precedent have occurred.” (internal citations omitted)
Notwithstanding Judge Goldblatt’s conclusion that a general allegation that “all conditions precedent have occurred” would be sufficient for the complaint to survive the motion to dismiss, the Committee alleged that it conducted its “own due diligence” into Nimble’s reasonably knowable affirmative defenses by reviewing “the books and records” in its possession and also sent Nimble a demand letter seeking additional information about any potential affirmative defenses. The Court found that such allegations satisfied the required due diligence element.
Constructive Fraudulent Transfer
In his letter opinion, Judge Goldblatt stated
To plead constructive fraud adequately, the plaintiff need only allege that “there was a transfer for less than reasonably equivalent value at a time when the [debtor was] insolvent.”
Here, the complaint adequately alleges the transfer date, face amount, not made on account of an antecedent debt, then they were for less than reasonably equivalent value. (citations omitted)
Nimble merely argued that the Committee’s allegations did not satisfy the heightened pleading requirement applicable to claims for actually fraudulent transfers, which argument the Court rejected as being inapplicable to constructive fraudulent transfer claims.
In In re Arrow Air, Inc., Judge Cristol determined that merely tracking relevant statutory language to be insufficient in a case where a liquidating Chapter 11 Trustee sued American Express to avoid and recover more than $6 million as fraudulent transfers in addition to nearly $400,000 in preferential transfers. Judge Cristol noted that
the Complaint must include sufficient factual allegations which would permit the Court to draw an inference that: (a) [Debtor] received less than reasonably equivalent value in exchange for the alleged transfers; and (b) (i) [Debtor] was insolvent at the time of the transfers or rendered insolvent from the transfers; or (ii) Arrow was engaged in business or a transaction and any remaining property or assets of Arrow were unreasonably small; or (iii) [Debtor] intended to incur debts beyond its ability to pay them upon maturity; or (iv) [Debtor] made the alleged transfers for the benefit of an insider under an employment contract and not in the ordinary course of business.
Judge Cristol found that the allegations of the complaint fell short because they lacked “specific factual allegations regarding the value of the goods or services provided and [an explanation] in some detail how such amounts are less than reasonably equivalent value.” The liquidating trustee was granted leave to replead.
Takeways
The prudent plaintiff should do and allege more than that “all conditions precedent have occurred.” Resorting to such language renders Section 547(b) meaningless. The better practice would be to consider prospective defenses based on the available documents and information and to send pre-suit demand letters asking for information supporting statutory defenses. As noted in Tousa, a plaintiff does not have a duty to negative affirmative defenses. Adopting the “reasonable due diligence” requirement as part of the SBRA did not change that. Indeed, the majority of Courts have concluded that Section 547(b) did not shift the burden of proof on a statutory defense to a plaintiff
A plaintiff trustee or duly authorized committee pursuing a preference claim may sometimes be constrained by the lack of or limited availability of the debtor’s records when undertaking reasonable due diligence. Section 547(b) accommodates such a scenario, wherein it states, “based on reasonable due diligence in the circumstances of the case” (emphasis added). When confronted with deficiencies in the available information with which to undertake reasonable due diligence, the mindful plaintiff should make allegations in the complaint relating to the circumstances of the case and why its efforts to undertake due diligence were reasonable in light of those circumstances.