Proper service and the degree of complaint detail are recurring issues in avoidance action jurisprudence. In the United States Bankruptcy Court for the District of Delaware, at least, Judge Sontchi has provided guidance on both issues in an opinion that should be equally instructive to plaintiffs and defendants. In Giuliano v. Haskett (In re MCG Limited Partnership), Adv. Pro. No. 14-50536 (CSS), 2016 WL 362990, at *1 (Bankr. D. Del. Jan. 28, 2016), the Court found that (1) the Defendant’s mere denial – even when presented by sworn declaration – of proper service by the Plaintiff-Trustee (“Plaintiff” or “Trustee”) was insufficient for purposes of a motion to dismiss under 12(b)(5); and (2) Twombly, Iqbal, and the Third Circuit’s subsequent Fowler decision all require that the Plaintiff-Trustee allege more than just whom the transfer was made to, the dates of the transfer, and the amount. Given the volume of avoidance actions the District of Delaware continues to see, it is an opinion practitioners in that jurisdiction need to be aware of.
The Bankruptcy and Adversary Cases
MCG Limited Partnership, et al. (the “Debtors”), a global consulting firm at one time, filed their cases under Chapter 11 in November 2012, but by August 2013 had converted to Chapter 7. Thereafter, the appointed Chapter 7 Trustee sought and obtained entry of a procedures order (the “Order”) governing the mechanics of various preference actions that he was pursuing on behalf of the estate, including the instant proceeding.
In August 2014, the Trustee filed the complaint (“Complaint”) against Defendant, seeking to avoid and recover a single payment to Defendant (the “Transfer”) pursuant to 11 U.S.C. §§ 547 and 550, and disallow claims under 11 U.S.C. § 502(d). Trustee served Defendant by mailing the Defendant at the same address at which he allegedly received the Transfer, and the same address the Trustee would later use to serve the procedures motion and corresponding Order. Defendant responded with a Motion to Dismiss (“MTD”) on grounds of deficient process, insufficiency of service of process, and failure to state a claim upon which relief can be granted, pursuant to Federal Rules of Civil Procedure (“FRCP”) 12(b)(4), (5), and (6) respectively.
FRCP 12(b)(4) and 12(b)(5) – Sworn Denial is Not Enough
Defendant argued that under FRCP 12(b)(5), the Trustee needed and failed to allege the “location of Defendant’s dwelling house, his usual place of abode, or the physical address where Defendant regularly conducts business”; in support, Defendant submitted a sworn declaration stating that the address on the Summons and Complaint was none of these places and as such, did not receive a copy of the pleadings. Further, Defendant argued that FRCP 12(b)(4) isn’t met, given that the summons fails to state the date, time, and place for the pre-trial conference.
The Trustee argued in response that the Order permitted the abrogation of the pre-trial requirements, and that the MTD showed that Defendant received actual notice of the Complaint and timely filed a response. The Trustee also pointed out that Defendant had knowledge of the instant proceedings for at least six months, as his prior counsel had previously contacted Trustee’s counsel in an attempt to resolve the matter.
The Court found in the Trustee’s favor on this point. First, the Court noted that a plaintiff has the burden of proof to show proper service by a preponderance of evidence; a defendant may then rebut a plaintiff’s prima facie case as to adequacy of service of process by providing “sufficient evidence”, at which time the burden shifts back to plaintiff. Citing and using the rationale provided in Garcia v. Cantu, 363 B.R. 503 (Barnkr. W.D. Tex. 2006), the Court found that “mere denial that the address is incorrect, even in a sworn affidavit, is generally insufficient for challenging service.” The Court found it important that the Complaint was sent to the same address to which the Transfer was sent – a check that was ultimately negotiated. Further, the Court agreed that the MTD and the parties’ pre-Complaint negotiations evidenced Defendant’s awareness and actual notice of the Complaint.
As to Defendant’s FRCP 12(b)(4) argument, the Court found that the Order governed the necessity (or lack thereof) of providing pre-trial conference details.
Thus, the MTD’s 12(b)(4) and (5) grounds were rejected.
What does Twombly, Iqbal, and Fowler require for a Preference Complaint?
Defendant also argued that FRCP 12(b)(6) warranted dismissal of the Complaint. Specifically, he argued that the Complaint fails to describe with particularity the business relationship between the Debtors and Defendant, as well as what gave rise to the antecedent debt. Defendant argued that the Trustee alleged “prior contractual obligations” as the basis of the debt, and no contract was attached. The Trustee responded and described that the elements of 11 U.S.C. § 547 were met.
The Court found for Defendant. After citing Ashcroft v. Iqbal, 556 U.S. 662 (2009) and Bell Atlantic v. Twombly, 550 U.S. 544, 570 (2007) for the proposition that threadbare recitals of the elements of a cause of action and conclusory statements were insufficient to meet the heightened pleadings standard, Judge Sontchi found that Fowler v. UPMC Shadyside, 578 F.3d 203 (3d Cir. 2009) governed the analysis here. Under Fowler, a two-part test must 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”.
For preferential transfer complaints in particular, the Court referred back to the mandates of Valley Media, Inc., v. Borders, Inc. (In re Valley Media, Inc.), 288 B.R. 189 (Bankr. D. Del. 2007) and Miller v. Mitsubishi Digital Elecs. Am. Inc. (In re Tweeter Opco), 452 B.R. 150 (Bankr. D. Del. 2011). The Valley Media decision, issued by former Judge Walsh, provides that preference complaints should include the following: (a) an identification of the nature and amount of each antecedent debt and; (b) an identification of each alleged preference transfer by (i) date, (ii) name of debtor/transferor, (iii) name of transferee and (iv) the amount of the transfer. The later Tweeter decision, issued by Judge Walrath, endorsed Valley Media, adding the complaint must plead particularized facts alleging the nature of the contractual or other business relationship between the preference defendant and debtor which give rise to the antecedent debt.
Applying that framework here, the Court found that the Complaint “merely parrots the language of section 547 and offers no particularized facts giving context to the [Transfer]…” This fell short of Twombly/Iqbal as well as Fowler’s two-part test. To the latter point, the Court ruled that the Complaint blended facts and legal conclusions, instead of keeping them separate; moreover, the Complaint did not allege any facts that gave context or a description of the Transfer beyond whom the check was sent to, the dates the check were sent and received, and the amount of the Transfer. The Court held that such detail was insufficient.
Can the Complaint’s Defects Be Cured by Amendment?
Notwithstanding the Court’s 12(b)(6) ruling, it allowed the Trustee to amend the Complaint. In so finding, the Court noted that there was no evidence of bad faith or intentional undue delay on the Trustee’s part; nor did it see any evidence that Defendant would suffer undue delay “because this is the first attempt at seeking approval to amend”; lastly, there was no evidence of repeated failures on the part of the Trustee to cure the deficiencies. Accordingly, the Court dismissed Defendant’s argument that the amended complaint draft had to be submitted with a motion for leave to amend, finding no support for such a requirement in FRCP 15.
Although the avoidance complaint at issue here was fairly typical in its scope – as were the 12(b) defenses to the same – this opinion highlights the nuances that make or break a case for a preference defendant. The amount of pre-complaint communications between the parties, the existence of an address used to receive a preference, the absence of any proof supplemental to Defendant’s sworn declaration, and the very fact that Defendant filed the MTD, all factored into the Court’s rejection of Defendant’s 12(b)(5) defense and adoption of the Garcia framework.
Plaintiffs should also take note of this case. Though the Trustee ultimately received leave to amend the Complaint, thereby potentially limiting the value Defendant’s 12(b)(6) success, the Court made clear that merely stating the preference recipient, the amount of the transfer and date thereof does not comply with Delaware’s bankruptcy jurisprudence.
A copy of the opinion can be found here.