In a 71-page opinion deciding a host of issues on a motion to dismiss a complex fraudulent transfer suit, Bankruptcy Judge Marvin Isgur of Houston made two notable rulings for bankruptcy practice generally:
- To sustain an avoidance claim under Section 544(b)(1), the claim of the so-called triggering creditor need not be the same claim at the time of the bankruptcy filing as it was when the challenged transfer took place; and
- The heightened pleading standards under Rule 9(b) apply to actual fraudulent transfers.
Judge Isgur is presiding over a big-money suit by a post-confirmation litigation trust against several corporate and individual insiders. The complaint raises a host of claims typically lodged against insiders, including actual and constructive fraudulent transfer, breach of fiduciary duty, conspiracy, and aiding and abetting.
The defendants demanded a jury trial and filed a motion to withdraw the reference. Judge Isgur previously issued a report recommending that the district court withdraw the reference when the case is ready for trial. The district court adopted the recommendation, allowing Judge Isgur to issue his April 20 opinion that largely denied the defendants’ motion to dismiss.
The litigation trustee asserted claims for actual and fraudulent transfer under both the Bankruptcy Code and Texas law. The state law claims were made under Section 544(b), which allows a trustee to avoid a transfer “that is voidable under applicable law by a creditor holding an [allowable] unsecured claim . . . .”
The defendants wanted Judge Isgur to dismiss the claims under Section 544(b), arguing that the actual creditors who could assert fraudulent transfer claims under state law did not hold the same claims on the date of the transfer and on the date of filing.
Judge Isgur nixed the argument, relying largely on the Collier treatise. He cited the treatise for the proposition that the “unsecured creditor need not exist at the time the action is filed,” if the creditor had a claim on the date of bankruptcy.
Significantly, Judge Isgur quoted Collier as saying that “the so-called ‘triggering’ creditor must be the same creditor on both the transfer date and the date of commencement of the case.” Nonetheless, the creditor “need not hold the same claim at these two essential points in time.”
Judge Isgur therefore denied the motion to dismiss under Section 544(b), holding that “the Trustee must identify an unsecured creditor with a claim, which is avoidable under Texas law, on both the transfer date and the petition date, even if that claim at those two points in time is different.”
The defendants also sought dismissal on the theory that the complaint did not allege the fraudulent transfer claims with sufficient specificity in compliance with F.R.C.P. 9(b), made applicable by Bankruptcy Rule 7009.
When alleging fraud or mistake, the rule requires the party to “state with particularity the circumstances constituting fraud or mistake. Malice, intent, knowledge, and other conditions of a person’s mind may be alleged generally.”
Judge Isgur observed that the Fifth Circuit has not decided whether the heightened pleading requirements of Rule 9(b) apply to fraudulent transfers.
Judge Isgur reasoned that fraud is an “essential element” of a pleading in “an actual fraudulent transfer case.” [Emphasis in original.] He therefore applied “Rule 9(b)’s heightened pleading standards to actual fraudulent transfers.”
For students of Texas law, the opinion is valuable for its discussion of esoteric issues under the Texas Uniform Fraudulent Transfer Act.
In a 71-page opinion deciding a host of issues on a motion to dismiss a complex fraudulent transfer suit, Bankruptcy Judge Marvin Isgur of Houston made two notable rulings for bankruptcy practice generally:
- To sustain an avoidance claim under Section 544(b)(1), the claim of the so-called triggering creditor need not be the same claim at the time of the bankruptcy filing as it was when the challenged transfer took place; and
- The heightened pleading standards under Rule 9(b) apply to actual fraudulent transfers.
Judge Isgur is presiding over a big-money suit by a post-confirmation litigation trust against several corporate and individual insiders. The complaint raises a host of claims typically lodged against insiders, including actual and constructive fraudulent transfer, breach of fiduciary duty, conspiracy, and aiding and abetting.
The defendants demanded a jury trial and filed a motion to withdraw the reference. Judge Isgur previously issued a report recommending that the district court withdraw the reference when the case is ready for trial. The district court adopted the recommendation, allowing Judge Isgur to issue his April 20 opinion that largely denied the defendants’ motion to dismiss.
The litigation trustee asserted claims for actual and fraudulent transfer under both the Bankruptcy Code and Texas law. The state law claims were made under Section 544(b), which allows a trustee to avoid a transfer “that is voidable under applicable law by a creditor holding an [allowable] unsecured claim . . . .”
The defendants wanted Judge Isgur to dismiss the claims under Section 544(b), arguing that the actual creditors who could assert fraudulent transfer claims under state law did not hold the same claims on the date of the transfer and on the date of filing.