Better Pleading of Voidable Transfer Claims is Coming

The United States Supreme Court raised the standard for pleading complaints in Bell Atl. Corp. v. Twombly, 550 U.S. 544 (2007). Previously, the rule was that a complaint would not be dismissed for failure to state a claim unless “it appears without a doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief.” Conley v. Gibson, 355 U.S. 41 (1957). The rule changed in Twombly, an antitrust case, when the Supreme Court stated that a plaintiff must plead the grounds that entitle him to relief and that “a formulaic recitation of the elements of a cause of action will not do.” Twombly at 555. The Twombly rule was extended beyond antitrust cases in Ashcroft v. Iqbal, 129 S.Ct. 1937 (U.S. 2009).

The trend to more complete pleading is arriving in bankruptcy courts around the country. Several courts are raising the bar with respect to pleadings that purport to set forth voidable transfer claims. See, for example, In re Oakwood Homes, 340 B.R. 510 (Bankr. D. Del. 2006). One such case is discussed below.

I have defended a large number of voidable transfer cases (preferences or fraudulent conveyances). Any experienced creditor’s counsel has observed that some trustees and debtors who file a large number of these cases, prepare a rudimentary complaint that mimics the elements of their claim as set forth in 11 U.S.C. Section 547 or 548 and then file several complaints using that template. Those plaintiffs tend to attach a list or schedule to each complaint that lists dates and payments that are alleged to be voidable transfers. That attachment and the named defendants in the caption are sometimes the only changes in the various complaints. In the past, these complaints have been adequate because the pleading standard was low and because the specialized bankruptcy courts and bankruptcy practitioners believed they knew what the plaintiff was required to prove and hence what the plaintiff really intended to assert. This cozy relationship has been changing.

The trustee in In re Care America, Inc. filed his several complaints in just this manner. In this decision, the court stated that a trustee may not simply allege the required legal conclusion, such as quoting the statute and asserting simply that the transferred property was property of the debtor. In re Care America, Inc., Case No. 06-02913-8-JRL (Bankr. E.D. N.C. July 23, 2009). In this case, Judge Leonard noted that the trustee had quoted the statute and alleged that a transfer was voidable under Section 548 because the transferor “received less than reasonably equivalent value” and was “insolvent on the date” of each transfer. While noting that the trustee’s allegations “mirror the elements of” section 548, Judge Leonard also noted that those legal conclusions were made without any supporting factual allegations “other than dates, amounts and names of transferees included in Exhibit B.” This pleading was inadequate. Judge Leonard held that the trustee needed to assert facts, for example, “as to why the value of such consideration was less than the amount transferred. . . .”

I am not suggesting that defense counsel routinely file motions to dismiss. After all, Judge Leonard did permit the trustee to amend his complaints and the date of those amendments “related back” to the original filing date under Fed. R. Civ. P. 15 (this was important because the statute of limitations had expired so the trustee could not just start over). Still, an appropriate motion to dismiss might cause a plaintiff to scale back the transfers that it alleges are voidable when the plaintiff must do some investigation and assert facts applicable to each transfer.