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The Delaware Bankruptcy Insider is a premier blog designed to bring its readers a comprehensive analysis of the latest Delaware corporate bankruptcy news and rulings. Brought to you by Ashby & Geddes, P.A.
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- Third Circuit Reversal Paves the Way For NextEra to Potentially Recover Administrative Expenses Incurred in Connection With Failed Merger
- Delaware District Court Disagrees with Bankruptcy Court’s Ruling and Holds That Committee’s Challenge Rights Survived Entry of the Sale Order and Consummation of Sale
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Practice Point: Substance Matters – Recent Rulings Confirm and Clarify Pleading Standards under Section 547
THQ, Inc. v. Starcom Worldwide, Inc. (In re THQ, Inc.), No. 14-51079 (MFW), 2016 WL 1599798 (Bankr. D. Del. Apr. 18, 2016).
Giuliano v. Haskett, (In re MCG Ltd. P’ship), No. 14-50536 (CSS), 545 B.R. 74 (Bankr. D. Del. Jan. 28, 2016).
Two recent rulings by the Delaware Bankruptcy Court confirm the well-known pleading standards that a preference complaint must do more than “merely parrot the language of section 547” to survive a motion to dismiss. The cases also clarify the type of particularized facts that must be alleged to state a claim under section 547.
In THQ, Inc. v. Starcom Worldwide, Inc. (In re THQ, Inc.), Judge Mary Walrath dismissed a preference action filed by THQ, Inc. against certain defendants where the complaint failed to include “specific allegations of what transfers were actually made … and by whom.” THQ Op. at *3. Her Honor’s ruling confirmed again that the substantive pleading standards for claims under section 547 of the Bankruptcy Code established by the Court in In re Valley Media, Inc., 288 B.R. 189 (Bankr. D. Del. 2003) and In re Oakwood Homes, Corp., 340 B.R. 510 (Bankr. D. Del. 2006) remain valid in the wake of the Supreme Court’s rulings in Twombly and Iqbal. See Ashcroft v. Iqbal, 556 U.S. 562 (2009); Bell Atlantic v. Twombly, 550 U.S. 544 (2007).
As set forth by Judge Walrath, “in order to survive a motion to dismiss, [a preference complaint] must include: ‘(a) an identification of the nature and amount of each antecedent debt and (b) an identification of each alleged preference transfer by (i) date [of the transfer], (ii) name of the debtor/transferor, (iii) name of transferee and (iv) the amount of the transfer’” THQ Op. at *4. (citations omitted). Additionally, “[i]n a case with multiple debtors,…the Complaint must sufficiently allege which debtor owed the antecedent debt and that the same debtor made the preferential transfer.” Id.
Similarly, in Giuliano v. Haskett, (In re MCG Ltd. P’ship), Judge Christopher Sontchi dismissed a preference complaint that “merely parrot[ted] the language of section 547.” MCG Op. at 82-83. His Honor found the complaint not only lacked the particularized facts required under the heightened pleading standards of Twombly and Iqbal, but also failed to clear the “two-part pleading hurdle” established by the Third Circuit in Fowler v. UPMC Shadyside, 578 F.3d 203 (3d. Cir. 2009). Under Fowler, courts must first separate factual and legal allegations in a complaint, and then determine whether the facts are sufficient to state a plausible claim for relief. Where the plaintiff failed to allege contextual facts concerning a transfer beyond the recipient and the dates and amount of the check, Judge Sontchi found the facts insufficient to state a claim. MCG Op. at 83.
Though Judge Walrath and Judge Sontchi dismissed the complaints in the above cases for failing to meet pleading standards, both judges permitted the respective plaintiffs leave to amend. THQ Op. at *6; MCG Op. at 84. While these cases illustrate the pitfalls a trustee may face in pleading a preference claim, they may also highlight cost-benefit considerations for defendants who, upon prevailing on a procedural motion to dismiss, may nonetheless be required to defend an amended complaint.