Miller v. Mitsubishi Digital Elecs. Am. Inc. (In re Tweeter Opco), 2011 Bankr. LEXIS 2206 (Bankr. D. Del. June 14, 2011)

Bankruptcy Courts continue to apply the Supreme Court’s heightened pleading standards enunciated in Bell Atl. Corp. v. Twombly, 550 U.S. 544 (2007) (“Twombly”) and Ashcroft v. Iqbal, 129 S. Ct. 1937 (2009) (“Iqbal”) to preference actions.  The latest application has been by the United States Bankruptcy Court for the District of Delaware in In re Tweeter Opco, et al. 

On November 5, 2008, Tweeter, a consumer retailer of electronic equipment, and its affiliates, filed for bankruptcy under chapter 11 of the Bankruptcy Code.  On December 5, 2008, the Court converted the chapter 11 cases to cases under chapter 7.  On November 2, 2010, the chapter 7 trustee filed an adversary proceeding against Mitsubishi Digital Electronics America Inc. (“Mitsubishi”) seeking to avoid alleged preferential payments under Section 547 of the Bankruptcy Code.

Bankruptcy Code Section 547 allows a trustee or debtor in possession to avoid a transfer made by a debtor while insolvent to or for the benefit of a creditor on account of an antecedent debt within 90 days (or one year in the case of an insider) of the petition date, where such transfer enables the creditor to receive more than it would have received in a chapter 7 liquidation.

Mitsubishi filed a motion to dismiss the complaint asserting that the trustee did not sufficiently plead the factual allegations under the heightened pleading standards of Twombly and Iqbal, which set forth what claims for relief must include under Rule 8 of the Federal Rules of Civil Procedure (which is applied to bankruptcy adversary proceedings through Bankruptcy Rule 7008).

Rule 8 states that a complaint must contain, among other things, “a short and plain statement of the claim showing that a pleader is entitled to relief.”  Prior to Twombly and Iqbal, courts held this to mean that a complaint should not be dismissed for failure to state a claim unless it appeared “beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief.” Conley v. Gibson, 355 U.S. 41, 45-46 (1957).  

In Twombly, an antitrust case, the United States Supreme Court stated that while factual allegations need not be detailed to survive a motion to dismiss for failure to state a claim under Rule 8, they require more than “labels and conclusions, and a formulaic recitation of the elements of a cause of action.”  The Supreme Court further stated that allegations contained in the complaint must be sufficient to raise a right to relief beyond mere speculation, and must state enough factual matter to make a claim “plausible.”  In Iqbal, the Supreme Court held that the heightened pleading standards set forth in Twombly apply to all civil suits in federal courts, not just antitrust cases.

In its motion to dismiss, Mitsubishi argued that the trustee failed to (i) identify the nature of the antecedent debt, (ii) allege which debtor made the transfers, and (iii) describe the relationship between the transferor and Mitsubishi.

Applying Twombly and Iqbal to the complaint, the Court held that the complaint was not sufficiently pled under Rule 8 for the following reasons: (1) the trustee did not identify which Tweeter affiliate made the transfers; (2) the trustee did not allege the particular antecedent debt on account of which the transfers were made; and (3) the complaint provided no detail of the relationship between Tweeter and Mitsubishi, such as any contracts between the parties or a description of the goods or services exchanged.

Based on the foregoing, the Court granted Mitsubishi’s motion to dismiss but also granted the trustee leave to amend the complaint.

Tweeter follows recent bankruptcy courts applying Twombly and Iqbal to preference actions, including the Bankruptcy Court for the Southern District of New York in In re Delphi Corp., et al., the Bankruptcy Court for the Eastern District of North Carolina in In re Caremerica, Inc., and the Bankruptcy Court for the District of Delaware in In re Troll Comm., LLC  (which were discussed in the last issue of the Avoidance Action Report).

Commentary

Tweeter reinforces the recent trend of bankruptcy courts to subject preference action complaints to the heightened pleading standards set forth in Twombly and Iqbal.   Form complaints with bare recitations of elements that may have survived motions to dismiss under Rule 8 prior to Twombly and Iqbal, may now be subject to dismissal.  Notwithstanding, courts have been pragmatic and liberal in allowing plaintiffs leave to amend complaints.  Practitioners prosecuting avoidance actions should seek to provide as much factual support for each cause of action as possible.  Practitioners defending avoidance actions should scrutinize complaints to see if they could be dismissed on the basis that they are not sufficiently pled under Twombly and Iqbal.