In George L. Miller v. Mitsubishi Digital Electronics America, Inc. (In re Tweeter Opco, LLC), Ap. No. 10-54038 (Bankr. Del. June 14, 2011), Delaware Bankruptcy Judge Mary F. Walrath again applies the Iqbal and Twombly standards to the pleading of a bankruptcy preference claim. Given the precedent in the Delaware Bankruptcy Courts, the decision is no surprise. What will be disappointing to defenders of bankruptcy preference claims is Judge Walrath’s willingness to allow the Plaintiff to amend his complaint to address the pleading deficiencies. To see a copy of Judge Walrath’s opinion click this link.
The complaint in Mitsubishi did not even come close to meeting the pleading standards of Twombly and Iqbal as repeatedly interpreted in prior Delaware Court decisions. The identification of the transfers listed only the creditor, check number, “clear date” and check amount without any identification of the antecedent debt satisfied by such transfers. Additionally, although the case joined multiple debtors, the complaint failed to identify the Debtor or Debtors who purportedly made each transfer.
Given these pleading deficiencies, dismissal of the complaint should have been expected. The Defendant, however, requested that Judge Walrath deny the Plantiff’s request for leave to amend. The following is the heart of Judge Walrath’s decision on these two issues.
The Court finds the Complaint does not meet the pleading standards of Twombly and Iqbal. The Court has previously held that alleged preferential transfers must be identified with particularity to ensure that the defendant receives sufficient notice of what transfer is sought to be avoided. See, e.g., Buckley v. Merrill Lynch & Co., Inc. (In re DVI, Inc.), 08-50248, 2008 WL 4239120, at *5 (Bankr. D. Del. Sept. 16, 2008); Pardo v. Gonzaba (In re APF Co.), 308 B.R. 183, 188-89 (Bankr. D. Del. 2004) (concluding that preference complaint must identify each transfer by date, amount, name of transferor, and name of transferee). The standards for pleading a cause of action have increased, and cases decided before Iqbal and Twombly may no longer be good law.
The Court finds that, in this case, the Trustee has not sufficiently identified the transferor of the alleged preferential payments to Mitsubishi. Because there is more than one debtor in this case, the Court concludes that the Trustee must identify the transferor precisely by name.
The Court is also not convinced that the Trustee provided Mitsubishi with sufficient detail regarding the nature of the transfer in this proceeding. The Court finds that the present proceeding and Complaint are distinguishable from Oakwood Homes [OHC Liquidation Trust v. Credit Suisse First Boston (In re Oakwood Homes Corp.), 340 B.R. 510, 522 (Bankr. D. Del. 2006)]. In Oakwood Homes, the complaint extensively detailed transfers the Debtor made to its securities underwriter involving a Loan Assumption Program and detailed the relationship between the parties including how the transfers arose, which adequately provided the defendant with the nature of the transfer and sufficient notice of what transfers were sought to be avoided. Oakwood Homes, 340 B.R. at 522. No such detail regarding the antecedent debt which the transfer satisfied is present in the Trustee’s Complaint in this case. See In re Insilco Techs. Inc., 330 B.R. 512, 520 (Bankr. D. Del. 2005) (concluding that the complaint failed to identify the antecedent debt).
Although the Complaint here does provide the check numbers, dates and amount of each check, no other information is provided to explain the nature of the antecedent debt which the checks satisfied. TWA, 305 B.R. 228 at 233 (finding the complaint deficient, inter alia, for failing to provide the nature and amount of the antecedent debt). The Complaint provides no detail of any relationship between the Debtors and Mitsubishi such as the identity of contracts between the parties or any description of goods or services exchanged. Without such information, the Court determines that the Trustee has failed to describe sufficiently the nature of the antecedent debt.
If the Complaint is found to be insufficient in detail, the Trustee has asked the Court for leave to amend the Complaint. Rule 15(a) states that “leave to amend shall be freely given when justice so requires.” Fed. R. Civ. P. 15(a).
Mitsubishi argues, however, that leave to amend should be denied. “A denial of leave to amend is justified if there is undue delay, bad faith, dilatory motive, prejudice, or futility.” Valley Media, 288 B.R. at 193; Alston v. Parker, 363 F.3d 229, 236 (3d Cir. 2004). Granting leave to amend is futile if “the complaint, as amended, would fail to state a claim upon which relief could be granted.” In re Burlington Coat Factory Sec. Litig., 114 F.3d 1410, 1434 (3d Cir. 1997) (citing Glassman v. Computervision Corp., 90 F.3d 617, 623 (1st Cir. 1996).
Mitsubishi argues that any amendment would be futile and should be denied because the Trustee failed to exercise this right within 21 days of service of the Complaint, as a matter of course. Fed. R. Bankr. 7015(a)(1)(B).
The Court is not persuaded by Mitsubishi’s argument. While the Trustee could have amended the Complaint under Rule 7015(a)(1)(B) without leave of Court, his failure to do so does not preclude his amending with leave of Court under Rule 7015(a)(2). Although the Complaint is insufficient in detail to survive the Motion to Dismiss, the Court believes that there is enough basis for the Trustee to allege a claim if granted leave to amend.