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Judge Walrath Applies Pleading Standards for Dismissal for Failure to State a Claim to Avoid a Preference to Grant in Part and Deny in Part a Motion to Dismiss

By Charlene D. Davis

On April 7, 2017,  Judge Mary F. Walrath of the United States Bankruptcy Court for the District of Delaware, (the Court”)  issued and opinion and order denying in part and granting in part a motion to dismiss an action in which a liquidating trustee (the “Liquidating Trustee”) sought to avoid and recover alleged preferential transfer to an insider.   Gavin Solmonese v. Visagar M. Shyamsundar, et al., (In re: Amcad Holdings LLC, et al.) Adv. Pro.  No.  15-51979.  In rendering its decision the Court essentially dismissed claims related to all transfer alleged in an amended complaint , but permitted the Trustee an opportunity to amend the amended complaint with respect to 19 of the transfers.

On December 17, 2015, the Plaintiff sued a number of former managers and officers of Amcad Holdings LLC, et al. (the “Debtors”), including Visagar M. Shyamsunder (the “Defendant”) for alleged breaches of fiduciary duties and avoidance of alleged preferential transfers to insiders (the “Action”).   Thereafter on June 14, 2016,, the Court dismissed the Action because  it lacked related to jurisdiction over the fiduciary claims and because the preference claims were inadequately pled.  The Court subsequently authorized the Liquidating Trustee to file an amended complaint with respect to the preference claims.

On October 12, 2016, the Liquidating Trustee filed an amended complaint (the “Amended Complaint”) seeking to avoid and recover $651,496.50 as preferential transfers to the Defendant and entities in which he was the majority owner.  On November 23, 2016, the Defendant moved to dismiss the Amended Complaint on the basis that it failed to state a claim on which relief could be granted because 1) it did not adequately identify the antecedent debt; 2) it did not adequately plead facts in support of the Debtors insolvency at the time of the transfers; and 3) it pled claims that were barred by the Court’s order permitting amendment of the original Action.

Applying the pleading standards applicable to Rule 12(b)(6) motions to dismiss preference actions, the Court found that five of the alleged transfers did not identify an antecedent debt and granted to the motion to dismiss them with prejudice.  Applying those same standards, the Court found that the Amended Complaint failed to plead any facts in support of the Debtors’ insolvency at the time of the transfers and since the transfers all occurred outside the 90 day period for the presumption of insolvency, granted the motion to dismiss all avoidance claims.   The Court proceeded to find that the claims for recovery of preferential transfers, that the Defendant argued were barred, were permissible but without merit where the avoidance claims had been dismissed.    Finally the Court considered the Defendant’s request the dismissal be with prejudice, deciding to grant the Liquidating Trustee leave to further amend the Amended Complaint with respect to 19 of the alleged preferential transfers.

A copy of the Court’s opinion is available here.

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