Delaware Bankruptcy Judge Clarifies the Pleading Standard for Preferential and Fraudulent Transfer Claims
Official Committee of Unsecured Creditors v. Nimble Gravity, LLC (In re Pack Liquidating, LLC, et al.), Case No. 22-10797, Adv. Proc. No. 24-50048, 2024 WL 4633499 (Bankr. D. Del. Oct. 30, 2024).
Delaware bankruptcy judge Craig T. Goldblatt clarified the pleading standards necessary for preference and fraudulent transfer complaints to survive a Rule 12(b) motion to dismiss, applying the standards in the U.S. Supreme Court’s Twombly and Iqbal decisions,[1] in which the court made clear that plaintiffs cannot “merely recite elements of a cause of action.”
In Official Committee of Unsecured Creditors v. Nimble Gravity, LLC (In re Pack Liquidating, LLC, et al.),[2] the Committee filed a complaint to recover preferential and constructively fraudulent transfers made to defendant Nimble Gravity, LLC. The defendant sought dismissal under, among other grounds, Federal Rule of Civil Procedure 12(b)(6) (failure to state a claim upon which relief can be granted), but Judge Goldblatt denied the motion, emphasizing that complaints need not include all details that will emerge during discovery.
Following the Supreme Court’s Twombly and Iqbal decisions, a federal court complaint must contain plausible facts to state a claim, rather than merely reciting legal elements of the claim(s). In the Third Circuit, a three-step test is applied: (1) identifying the elements a plaintiff must plead, (2) accepting well-pleaded facts as true while disregarding legal conclusions, and (3) determining if the factual allegations plausibly support a claim for relief. The court must draw reasonable inferences in favor of the non-moving party and consider only the allegations within the complaint and its attachments.
For preference claims, the plaintiff must identify the nature and amount of each antecedent debt, each alleged preference payment, and allege reasonable due diligence into the defendant’s known or reasonably knowable affirmative defenses. Here, the Court found that the Committee sufficiently alleged these elements, providing enough detail for the defendant to identify the payments in question and that further details could be obtained through discovery. The court determined that the diligence element is a condition precedent governed by Rule 9(c) of the Federal Rules of Civil Procedure and that the Committee’s general allegation of conducting due diligence was deemed adequate, which does not require the heightened pleading standard of Twombly and Iqbal.
Judge Goldblatt clarified that the Committee’s fraudulent transfer claim was adequately pled because it was predicated on a theory of constructive, rather than actual, fraud. Since constructively fraudulent transfers are not subject to the heightened pleading standard required for claims of actual fraud, the Committee only needed to allege that the transfers were made for less than reasonably equivalent value when the debtor was insolvent. The complaint met this standard by detailing the transfer date, amount, transferee, and transferor, and asserting that the payments were not on account of an antecedent debt. As a result, the court found the Committee’s constructive fraud theory sufficiently pled and denied the defendant’s motion to dismiss.
For a deeper understanding of the legal principles and nuances discussed, we suggest reading the full case in its entirety. You may find the Link HERE. The content of this blog post is for informational purposes only and does not constitute legal advice. It provides a summary, and the referenced materials should be reviewed for full details. The information may not reflect current legal developments. Please consult with your attorney for legal guidance.
[1] Ashcroft v. Iqbal, 556 U.S. 662 (2009); Bell Atlantic v. Twombly, 550 U.S. 544 (2007)
[2] Case No. 22-10797, Adv. Proc. No. 24-50048, 2024 WL 4633499 (Bankr. D. Del. Oct. 30, 2024).