06/06/2011 – Plaintiff’s Brief in Opposition to Motion to Dismiss filed in the AbitibiBowater~Inc. Adversary Proceedings by GL &V Beloit-Lenox Inc. et al before Judge Kevin J. Carey in the District of Delaware.

The Claims Agent for AbitibiBowater, Inc., et al., (the “Plaintiff”) urges Judge Kevin J. Carey to apply In re Valley Media, Inc., 288 B.R. 189, 192 (Bankr. D. Del. 2003) in light of the original complaint’s allegation regarding the relationship between the Debtors and the Defendants. If the original complaint actually had included allegations regarding this relationship, the Court might have had to address this new battle line question. In fact, the original complaint barely contains any allegation regarding the business relationship. Also, the Plaintiff already has filed an amended complaint meeting even the most stringent requirement for pleading the payment of antecedent debts. However, the response provides a fairly comprehensive summary of the authority in Delaware and in other jurisdictions supporting a lower pleading standard for bankruptcy preference complaints and for that reason the response is noteworthy.

Pleading Relationships and Reasonable Inferences

Plaintiffs in mass preference recovery actions are desperate to find some other way to meet a heightened pleading standard for “antecedent debt” without having to match up invoices and payments. Plaintiffs are looking at “relationship pleading” as the solution – plead enough facts about the business relationship between the debtor and the defendant to permit the court to “draw a reasonable inference” that the transfers were made in satisfaction of antecedent debts.

Reading the Plaintiff’s brief, you would think the issue had been squarely presented for Judge Carey’s consideration. In fact, the original complaint’s relationship allegations are only that “Upon information and belief, the Defendants are corporations, partnerships, governmental units or individuals who submitted one or more invoices to the Debtors for goods provided or services rendered.” The “information and belief” precursor as well as the absence of any indication as to the timing of invoicing versus provision of goods and services, renders this allegation meaningless in the context of antecedent debt.

The Plaintiff’s True Objective – An Advisory Opinion on “Relationship Pleading”

Following the Defendant’s motion to dismiss, the Plaintiff filed an amended complaint. This amended complaint added identification of each invoice paid by each preference period transfer thus meeting even a heightened pleading standard. Nevertheless, the Plaintiff also added extensive factual allegations regarding the business relationship of the Debtors. The Plaintiff also extensively stresses the sufficiently of “relationship pleading” as providing a factual basis to infer the payment of antecedent debts.  Clearly, the Plaintiff is hoping that Judge Carey will provide an “advisory opinion” agreeing that “relationship pleading” can suffice.

Not all is Well in the Land of Valley Media

In the course of trying to create this opportunity for an expansive ruling, the Plaintiff provides an instructive (although plaintiff oriented) view of the recent decisions in Delaware addressing bankruptcy preference pleading standards. The Plaintiff also provides a good summary of decisions in other jurisdictions that have rejected application of a heightened pleading standard to preference complaints. These two areas of interest are contained in the following paragraphs of the Plaintiff’s brief:

13.  Additionally, prior to the Supreme Court’s decisions in Twombly and Iqbal, the Delaware Bankruptcy Court had found that the following information must be included in preference complaints to survive motions to dismiss: (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. In re Valley Media, Inc., 288 B.R. 189, 192 (Bankr. D. Del. 2003). Each Complaint satisfies the Valley Media pleading standard for preference complaints.5

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15.  Each complaint is similar to other complaints that have survived motions to dismiss under the heightened Valley Media pleading standard. For example, in the IHDG Litigation Trust case, the complaint adequately identified the “‘nature’ of each antecedent debt” by stating payments were received within 90 days prior to filing date and attaching a schedule that listed the amount, date, name of debtor/transferor, name of transferee, and amount of each transfer. See IHDG Litigation Trust v. Westaff (USA), Inc. (In re Imperial Home Decor Group, Inc.), 2005 Bankr. LEXIS 264, at *3-4 (Bankr. D. Del. Feb. 24, 2005). The court found that the complaint met “the heightened pleading standard for complaints to avoid preferential transfers” and denied the defendant’s motion to dismiss. Id. at * 6. See also OHC Liquidation Trust v. Credit Suisse First Boston (In re Oakwood Homes Corp), 340 B.R. 510, 522–23 (Bankr. D. Del. 2006) (denying defendants’ motion to dismiss where complaint sufficiently detailed nature and amount of antecedent debt, relationship between parties, and provided fair notice of transferors’ identities even if failing to precisely identify transferors’ names).

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FN5 The Valley Media standard has not been accepted wholesale by bankruptcy courts in considering complaints alleging preferential transfers. See IHDG Lit. Trust v. Westaff (USA), Inc. (In re Imperial Home Décor Group), 2005 Bankr. LEXIS 264 at *5 (Bankr. D. Del. Feb. 24, 2005) (questioning, without deciding, whether so-called “heightened standard” is proper for preference complaints). In In re C.R. Stone Concrete Contractors, Inc., 434 B.R. 208 (Bankr. E.D. Mass. 2010), the court refused to apply the Valley Media standard to a complaint for avoidance of preferential payments: 

While plaintiffs should be encouraged to provide specific information in support of their claims whenever possible, to require them to do so in their initial pleading in all cases, particularly with the specificity demanded by Valley Media, is in this court’s view inappropriate and unnecessarily harsh. The fact that Bankruptcy Rule 7008, which contains special pleading requirements in certain adversary cases before bankruptcy judges, fails to provide any such additional requirements for preference actions indicates it was intended that the adequacy of pleadings in such actions be judged under the notice pleading standard of Civil Rule 8(a)(2), which requires only a short and plain statement of the claim showing that the pleader is entitled to relief. So long as the defendant is provided fair notice of what the plaintiff’s claim is and the grounds upon which it rests, the complaint should not be dismissed for failure to state a claim. Further elaboration, if required, may be obtained through the discovery process.

C.R. Stone, 434 B.R. at 220-21. In In re TOUSA Inc., et al., 442 B.R. 852, 856 (Bankr. S.D. Fla. 2010), the court cited C.R. Stone in refusing to dismiss a preference complaint, stating that “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.” The TOUSA court further pointed out that “[t]o 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.” Id.

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