In a rare motion practice loss for a Chapter 7 Trustee, District of Delaware Bankruptcy Judge Brendan Linehan Shannon grants the motion of Defendant International Securities Exchange (“ISE”) to dismiss a bankruptcy preference avoidance complaint for failure to state a claim for relief. Judge Shannon holds that the Chapter 7 trustee’s Section 547 preferential transfer count in its amended complaint fails to sufficiently identify the nature of the antecedent debt. Giuliano v. International Securities Exchange, Adv. Proc. No. 12-50921 Dkt No. 48 (Bankr.D. Del. May 1, 2013). Unfortunately, procedural posture and factual context dispel any comfort preference defendants might find in the holding.
The dismissal followed the Trustee third attempt to plead preference and fraudulent transfer claims against Defendant ISE. ISE had previously filed a motion to dismiss the Trustee’s original complaint. The Trustee had countered with its own proposed amended complaint and motion to file the same. The Court granted the motion to dismiss without prejudice and granted the Trustee 60 days to amend its complaint.
Importantly, the Court also had directed ISE to produce copies of the invoices identified on Exhibit A to the complaint. In response, ISE served the Trustee with copies of the invoices. With copies of these invoices in hand, the Trustee then filed a third revision to its complaint. Defendant ISE again moved to dismiss.
The Court observed that the amended complaint still was lacking any identification of the antecedent debt :
the Amended Complaint fails to show that there was an antecedent debt. The Trustee states that “[t]he 547 Transfer were made, or caused to be made, for or on account of one or more antecedent debts owed by Debtor to the Defendant prior to the date on which such 547 Transfer was made.” However, this description does not meet the standard under a motion to dismiss a preference complaint. This Court has previously dismissed a complaint where “[t]he Complaint fails to provide any details to show that there was in fact an antecedent debt. (Compl. at ¶ 14 (stating only that ‘Rifle Transfers were for, or on account of, antecedent debts owed by one or more of the Debtors before the Transfers were made’).)” In re Crucible Materials Corp., 2011 WL 2669113, at *4. The Trustee’s allegation is almost identical to the complaint that was dismissed in Crucible Materials, and thus, the Court finds that the Amended Complaint fails to sufficiently describe the nature of the antecedent debt. Count I must be dismissed. [Footnotes and footnote references omitted]
What about the invoices Defendant ISE produced? The Trustee’s amended complaint failed to attach or even mention the invoices. A possible reason may be indicated in ISE’s reply brief:
Finally, the invoices that Defendant produced, attached to its Motion as Ex. C, and that Plaintiff failed to attach to the Amended Complaint all state that payment should be made to an “LLC,” not the Defendant, which is a corporate entity. Compl. at ¶ 11 (the “Defendant … is a Delaware corporation ….”). Plaintiff received the invoices well over sixty (60) days ago. It had ample time to include the LLC as an additional defendant but chose not to for strategic reasons (i.e., a lawsuit against ISE Stock Exchange, LLC would not clear the venue threshold).
Ultimately, the Chapter 7 Trustee’s failure to make any factual allegations regarding the nature and existence of an antecedent debt is inexplicable. And perhaps this is the best “take away”: the leeway given Chapter 7 Trustees to address pleading deficiencies reaches an end when such failures reach the point of inexplicability.