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Whether a Complaint Adequately Identifies a Particular Transfer is Determined by Asking Whether a Defendant Could Respond to the Claims with Appropriate Affirmative Defenses

March 24, 2017 – Spradlin v. Pryor Cashman LLP (In re Licking River Mining, LLC), Nos. 14-10201, 16-1031, 2017 Bankr. LEXIS 805 (U.S. Bankr. E.D. Ky. Mar. 24, 2017)

Chapter 7 Trustee Phaedra Spradlin for Debtor U.S. Coal Corporation and its nine co-debtor subsidiaries brought a complaint against Defendant Pryor Cashman LLP for an avoidance of preference and fraudulent transfers under Sec. 547 and 548 of the Bankruptcy Code. The Defendant filed a motion to dismiss under Civil Rule 12(b)(6), alleging that the Trustee’s allegations failed to state a claim upon which relief could be granted as a matter of law, the claims were implausible as plead and the claims were not pleaded with requisite particularity. The Trustee filed an amended complaint in response to the Defendant’s motion to dismiss. The Trustee argued that the transfers made by the Debtor to the Defendant between July 2010 and May 2014 totaling $1,633,286.18 were fraudulent because the Defendant rendered no legal services to the Debtor’s subsidiaries and they received no benefit from the Defendant’s services, yet the Debtor used the subsidiaries’ funds to pay the Defendant’s legal fees.

The Court found that the Trustee’s Complaint failed to describe any specific transfers from the subsidiaries to the Debtor. It did not state which subsidiary made a transfer to the Debtor, the amount each subsidiary transferred, or the date of any transfer. Instead, the complaint simply alleged that all transfers occurred via “sweep accounts,” which was not sufficient enough to identify challenged transfers under Civil Rule 8. The Court further determined that whether a complaint adequately identifies a particular transfer is determined by asking whether the defendant could respond to the claims with appropriate affirmative defenses. The Court observed that in the case at bar, since the amended complaint did not identify any particular avoidable transfer from the subsidiaries to the Debtor, the Defendant could not assess its potential defenses concerning any specific transfer, including defenses available under § 550(b). The Court ruled that the blanket allegations, like unspecified subsidiaries, generally transferred funds to the Debtor, were insufficient to plead the facts necessary to state a claim for recovery against the Defendant as a subsequent transferee.

The Court further held that the Trustee’s amended complaint did not identify any specifically challenged transfer, did not contain any dates or amounts of the alleged fraudulent transfers and instead lumped all transfers from the Debtor to the Defendant via a total dollar amount. Since this information was strictly required in the context of claims of actual fraud to give the answering party notice of the misconduct that is being challenged, the Court held that the Trustee’s actual fraud claims fail to satisfy Civil Rule 9(b).

About the preference payments, the Court held that the Trustee could pursue the claim against the Defendant as the initial transferee of transfers from the Debtor. The Court found that the amended complaint did allege that the total of the transfers to be $135,000, that it was made within 90 days, made in connection with the promissory note and the Trustee did attach the payment schedule. The Court stated that with these allegations and the exhibit, the Defendant can assert its defenses and can also use discovery methods to discern whether additional facts exist to defend itself against this claim.