Factual Allegation in Trustee’s Complaint Not Sufficient to Pass Muster Under Rule 9(b), Delaware Court Dismisses Trustee’s Intentional Fraudulent Transfer Claim

January 14, 2022, District of Delaware – Debtor Education Management Corporation (EDMC) and its affiliates ran for-profit colleges. As pointed out in the Court opinion – the primary allegation in the complaint filed by the Chapter 7 Trustee, George Miller, was that after a 2006 leveraged buyout, the Debtors implemented a series of aggressive recruiting practices designed to increase enrolment (and thus revenue) without regard for the student’s qualifications. It was further alleged that the Debtors established compensation systems that encouraged such aggressive recruiting practices violating various state and federal laws. The central theme of the complaint was that the Debtors’ business was allegedly fundamentally fraudulent. 

Miller filed an adversary proceeding against ten defendants, who were alleged to have served as an officer or director of EDMC or one or more of the Delaware holding companies. The defendants moved to dismiss the complaint for failure to state a claim. The issue before the Court was to assess whether the complaint’s factual allegations give rise to causes of action.

The Court found that the complaint sufficiently alleges that the defendants breached a fiduciary duty owed to the corporation for which they allegedly served as an officer or director. However, the Court dismissed the Trustee’s intentional fraudulent transfer claim because it found that there was no specific factual allegation (that would pass muster under Rule 9(b)) to support the Trustee’s claim that the transfers were made with the requisite intent to hinder, delay or defraud creditors. The Court next concluded that the Trustee fails adequately to state a preference claim because the complaint did not identify which debtor made the allegedly preferential transfers, as the Court’s precedent required. The Court also found that the complaint fails to allege that the Trustee conducted “reasonable due diligence.” Finally, however, the Court found that the allegations in the complaint were sufficient to state a claim for constructive fraudulent conveyance under the Bankruptcy Code and the Delaware Uniform Fraudulent Transfer Act.   

Accordingly, the Court granted the defendants’ motion to dismiss except for the claims for breach of fiduciary duty and the claims for constructive fraudulent conveyance.

Miller v. Nelson (In re Art Inst. of Phila. LLC), 2022 Bankr. LEXIS 68, United States Bankruptcy Court for the District of Delaware. 

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