Summary

In an 11 page opinion published June 14, 2011, Judge Walrath ruled that a Chapter 7 Trustee’s lack of specificity in pleading a preference action was grounds for dismissal under FRCP 12(b)(6). Judge Walrath’s opinion is available here (the “Opinion”).

Background

Tweeter Opco, LLC and its affiliates (the “Debtors”), filed voluntary petitions for bankruptcy on November 5, 2008. On December 5, 2008, the case converted to a chapter 7 liquidation and George L. Miller was appointed as the chapter 7 trustee (the “Trustee”). On November 2, 2010, the Trustee brought an action against Mitsubishi Digital Electronics America In. (“Mitsubishi”) to recover alleged preference payments. The Opinion was given in response to Mitsubishi’s motion to dismiss the complaint under FRCP 8(a) and 12(b)(6).

Judge Walrath’s Opinion

In the Opinion, Judge Walrath cited heavily from Supreme Court opinion. In this Opinion, she made numerous citations to Bell Atl. V. Twombly, 550 U.S. 554 (2007) and Ashcroft v. Iqbal, 129 S. Ct. 1937 (2009). These cases dealt extensively with the standards necessary for a pleading to survive a motion to dismiss. Judge Walrath also quoted Valley Media Inc. v. Borders, Inc. (In re Valley Media, Inc.), 288 B.R. 189 (Bankr. D. Del. 2003), for the requirement that in addition to the statutory elements of a preference, a preference pleading must include: “(a) an identification of the nature and amount of each antecedent debt and (b) an identification of each alleged preference transfer by (i) date [of the transfer], (ii) name of debtor/transferor, (iii) name of transferee and (iv) the amount of the transfer.” Opinion at *6.

In the instate case, Mitsubishi argued that the complaint should be dismissed under FRCP 12(b)(6) as it (i) failed to identify the nature of the antecedent debt, (ii) failed to allege which Debtor made the payment, and (iii) failed to describe the relationship between the transferor and Mitsubishi. Opinion at *6. Judge Walrath agreed with Mitsubishi’s arguments and held: (i) “the Trustee must identify the transferor precisely by name,” Opinion at *9; (ii) the Trustee has not “provided Mitsubishi with sufficient detail regarding the nature of the transfer in this proceeding,” Opinion at *9; and (iii) that without “detail of any relationship between the Debtors and Mitsubishi,” “the Trustee has failed to describe sufficiently the nature of the antecedent debt,” Opinion at *10.

Judge Walrath then followed the provisions of FRCP 15(a), which provides “leave to amend shall be freely given when justice so requires.” Despite Mitsubishi’s argument that amendment should not be allowed, Opinion at *10, Judge Walrath held that there was sufficient basis to allow the addition of the lacking detail to the Complaint. So while she granted the motion to dismiss, Judge Walrath also granted leave for the Trustee to amend the Complaint. Opinion at *11.

A Motion to Dismiss is an extreme remedy, and in order to ensure justice, Courts will often allow a party whose complaint is dismissed to amend their complaint, if that could resolve the complaint’s legal inadequacies. In situations where a court lacks jurisdiction, or a complaint is filed in the wrong venue, however, amending the complaint won’t solve the problem. In those types of instances, the dismissal will not include the option to amend the complaint.