United States Supreme Court Lends Hand to Preference Defendants: Trustees Need to State a Case
Thorne, Deborah, Business Credit
Before defendants in preference cases go through the laborious process of analyzing a plaintiff's case, a quick review of the complaint to identify whether there are any supporting facts may give them an escape route or leverage in defending the case.
That's the insight many have gleaned from United States Supreme Court and several bankruptcy cases over the last several years that have provided new pleading requirements.
Before a discussion on the requirements, it is important to understand the context.
Preference Defense: A Primer
Once you are served with a summons in a preference case, creditors and attorneys naturally jump to analyzing whether new value or ordinary course defenses can be asserted to the claims of the trustee. While this is important to do, many preference defendants fail to examine whether the plaintiff trustee or debtor has or can state a case for the recovery of a preferential payment. A brief review of the facts contained in the complaint and whether the facts support the legal claim may allow a defendant to cut to the chase in defending a claim.
As anyone who has been sued by a trustee or creditors' trust knows, the plaintiffs generally send a demand letter and file suit against anyone who received a payment during the 90 days prior to the bankruptcy petition date. The information relied upon to file the complaint may only extend to the debtor's check register. The plaintiff has not looked to see what antecedent debt was the basis for the transfer and may be suing to recover transfers made when the debtor was solvent.
The complaint generally states the legal components of Section 547 of the Bankruptcy Code that the trustee must prove to make his case. Most often, a list of transfers is the only factual allegation supporting the complaint. The remaining components of Section 547 are merely stated without any factual support. Under recent decisions rendered by the U.S. Supreme Court and now applied to preference cases, this is simply insufficient pleading practice. Knowledge of these new pleading requirements may help you ward off a preference judgment against your company or at least provide leverage to assist a fair settlement.
The Supreme Court New Pleading Requirements
During the last several years, the Supreme Court has instructed the lower courts in non-bankruptcy cases that a plaintiff must state a prima facie case in a complaint filed in a federal court. A prima facie case is one that states a cause of action for all the elements that the plaintiff is required to prove. Several bankruptcy courts have recently applied these Supreme Court instructions to preference cases with the result providing creditors and potential preference defendants with assurances that trustees no longer can just sue everyone who received a transfer during the 90 days prior to the bankruptcy petition filing (the "Preference Period) without pleading facts to support the legal requirements of a preference case.
The principles the Supreme Court has emphasized make clear that a court is not required to accept as true any legal conclusion "couched as a factual allegation." Secondly, "only a complaint that states a plausible claim for relief survives" a motion to dismiss. The Supreme Court intended as a policy matter to weed out meritless cases prior to the commencement of discovery so that the expenditure of the judicial system's resources is minimized. What this really means is that a preference complaint must contain facts which support the legal requirements of Section 547 of the Bankruptcy Code.
Preference Pleading Requirements
In the preference context this means that a complaint that states just the legal requirements is inadequate. The Bankruptcy Code authorizes the avoidance of "any transfer of an interest of the debtor in property" if five conditions are satisfied, subject to one of several defenses. …