In a 10 page decision signed May 5, 2011, Judge Walsh of the Delaware Bankruptcy Court denied a motion to dismiss and held that the plaintiff Litigation Trustee satisfied the “particularity” requirements of Federal Rules of Civil Procedure 12(b)(6) and 9(b), despite having his complaint allege that each transfer within a 13 page list of transfers was fraudulent.  Judge Walsh’s opinion is available here (the “Opinion”).


DBSI and certain of its affiliates filed for bankruptcy on November 6, 2008. A plan of liquidation was confirmed October 26, 2010, and a Litigation Trust was formed. The Litigation Trustee was given the power to pursue the Debtors’ causes of action, including bringing lawsuits to recover preference payments and fraudulent transfers.

The Litigation Trustee brought a claim against certain DBSI insiders, including Douglas L. Swenson, alleging fraudulent transfers were made to these insiders prior to DBSI’s bankruptcy. Opinion at *2. As part of a 208 page complaint, the Litigation Trustee includes a list of transfers that is 13 pages long, each of which the Trustee alleges were fraudulently made as part of “the Insiders elaborate pyramid or ‘Ponzi’ scheme…” Opinion at *3.

The defendants moved to dismiss the complaint, arguing that Federal Rules of Civil Procedure 12(b)(6) and 9(b) require a complaint to allege with particularity the specific facts that would support a claim. Essentially, the defendants argue that each specific transfer must be addressed by the complaint. Opinion at *4.

Judge Walsh’s Opinion

Judge Walsh’s Opinion was issued following the defendants’ motion to dismiss, so he viewed all facts in the light most favorable to the Trustee.  As judges often do when addressing motions to dismiss, Judge Walsh cited Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 557 (2007) for the proposition that the factual allegations need only establish “plausible grounds” for a claim in order to survive a motion to dismiss. Opinion at *6. Additionally, Judge Walsh cited Pardo v. Gonzaba (In re APF Co.), 308 B.R. 183, 188 (Bankr. D. Del. 2004) in opining that “Rule 9’s requirements, however, are relaxed in the bankruptcy context, particularly in cases such as the present in which a trustee has been appointed.” Opinion at *6-7.

In this case, the Litigation Trustee identified a large number of transfers and pleaded that certain “badges of fraud” were indicative of fraudulent intent. The badges of fraud alleged therein were: (1) the relationship between the debtor and the transferee; (2) consideration for the conveyance; (3) insolvency or indebtedness of the debtors; (4) how much of the debtor’s estate was transferred; (5) reservation of benefits, control or dominion by the debtor over the property transferred; and (6) secrecy or concealment of the transaction. Opinion at *8.

The purpose of a pleading is to set forth the facts with particularity to apprise the defendant fairly of the charges made against it so that it can prepare an adequate answer. Opinion at *7. In this case, the Litigation Trustee alleged that each transfer to Swenson from all DBSI entities were fraudulent, and the Litigation Trustee identified what he intended to prove in order to substantiate his claim of fraud.  Judge Walsh found the Litigation Trustee’s pleading sufficient and held that because the “Trustee has adequately pleaded badges of fraud and has specifically identified every transfer made to Swenson, I will deny the motion [to dismiss].” Opinion at *10.

Just because the size of a fraudulent scheme is broad and sweeping, doesn’t necessarily make the allegations related thereto broad and sweeping. Opinion at *9. And don’t forget that when there is a lawyer on the “wrong side” of a lawsuit, there is almost always a lawyer on the “right side.”