A Trustee Sufficiently Pled Constructive Fraudulent Transfer Claims

By: Michael Phillips

St. John’s Law Student 

American Bankruptcy Institute Law ReviewStaff 

            Under federal and state law, certain transfers may be avoided as a fraudulent transfer.  In Stanziale v. Brown-Minneapolis Tank ULC, LLC(In re BMT-NW Acquisition LLC), the United States Bankruptcy Court for the District of Delaware refused to dismiss the Trustee’s fraudulent transfer claims because the pleadings showed that the claims were plausible on their faces.[1]The debtor, BMT-NW Acquisition, LLC (“the Debtor”), filed a voluntary petition for relief under chapter 7 of title 11 of the United States Code (the “Bankruptcy Code”), and Charles A. Stanziale, Jr. (“the Trustee”) was appointed as the trustee.[2]  Longroad Asset Management, LLC (“Longroad”) formed the Debtor in order to acquire the assets and business of Brown-Minneapolis Tank-Northwest, LLC(“BMTN”).[3]  Prior to filing for bankruptcy, the Debtor entered into five contractual agreements to obtain funding in order to purchase BMTN.[4]The Debtor entered into a loan purchase and sale agreement with JP Morgan Chase Bank, N.A.; a secured revolving credit agreement with Broad Street Holdings Co., Inc. (“Broad Street”); amended its revolving credit agreement to make payments to BMTN; a foreclosure agreement to acquire BMTN’s assets; and a loan and security agreement with Private Bank.[5]From October 30, 2012 to February 13, 2014, the Debtor made asset transfers to each of the defendants while suffering from financial losses.[6]

          Stanziale, as trustee,  asserted causes of action for avoidance of fraudulent transfers, breach of fiduciary duty, and turnover of payments against Brown-Minneapolis Tank ULC (“ULC”); Longroad; Broad Street; BMT Acquisition, LLC (“BMT-Acquisition”); BMT-WA Contracting, LLC (“BMT-WA”); and Graver Tank Co.[7]  Upon Longroad’s motion, the court dismissed certain claims.[8] The complaint was subsequently amended, but the court still dismissed the claims, the bankruptcy court, however, allowed the Trustee to amend the complaint for a second time.[9] In the second amended complaint, the Trustee alleged that the defendants engaged in constructive fraudulent transfers.[10]The Defendants moved to dismiss the second amendment complaint, but the Court denied the motion on the grounds that the complaint was sufficient on its face.[11]According to the bankruptcy court, the complaint sufficiently “alleges the Debtor intended to incur debts beyond its ability to pay as such debts matured, detailed the relationship between Debtor and its subsidiaries, and alleged Debtor was insolvent at the time of transfers.”[12]

            The trustee sought avoidance of the constructive fraudulent transfers under the Bankruptcy Code and applicable state law. Because these statutes are very similar, the court considered the arguments together.[13]  Under the Bankruptcy Code and applicable state law, the claimant must allege that[14]the debtor received less than reasonably equivalent value in exchange for the transfers.[15]In addition to that, the claimant must also allege at least one of the following; (1) the debtor was insolvent on the date of the transfer;[16](2) the debtor was engaged in a transaction with a small amount of capital;[17]or (3) the debtor was taking on debts beyond its ability to pay.[18] Additionally, the statute required that the transfers had been made within two years of the petition date.[19]  During the pleading stage, whether or not these elements have been sufficiently alleged is evaluated under Fed. R. Civ. P. 8(a)(2).[20] But, “[a] fraudulent transfer complaint need only set forth facts with sufficient particularity to apprise the defendant fairly of the charges made against him.”[21]  Here, the Court applied the standard set forth by the Third Circuit,[22]and it found that the Defendants received less than reasonably equivalent value for each transfer.[23]  Insolvency is also a factual determination, and the Court determined that the trustee met the requirement to show that the Debtor was insolvent at the time of the transfer.[24]Also, the court applied a similar standard with regards to determinations pertaining to the level of capital, and it determined that the Debtor did have an unreasonably low level of capital when it was engaged in transactions.[25] Finally, the court concluded that the trustee does not have to show the Debtor’s “subjective intent” not to pay back the debts that he was incurring; therefore, he has met the burden with respect to the fourth element.[26]Because all four elements were sufficiently pled, the Court ruled that the claims for fraudulent transfer would not be dismissed.[27]

          Pleadings will be evaluated on a case-by-case analysis, and a court will likely evaluate a motion on the pleadings in light of the facts that support them. The Court examined each element for avoidance of fraudulent transfers, applying the standard set forth in the Third Circuit, and held that the facts were alleged with sufficient particularity. This decision emphasized that, “Determining ‘reasonably equivalent value’ and ‘insolvency’…requires factual determinations discouraging a motion to dismiss while encouraging testing in the discovery process.”[28]Additionally, “[m]uch like the insolvency inquiry, unreasonably small capital often turns on questions of fact, thus being inappropriate to decide on a motion to dismiss.”[29]As a result, the court made it clear that the trustee “need only state facts with sufficient particularity to provide the defendant fair notice of the charges against him,”[30]while the party moving to dismiss has a much higher burden if he or she wishes to succeed. 

[1]See In re BMT-NW Acquisition, LLC, 582 B.R. 846 (Bankr. D. Del. 2018). 

[2]See id.at 851. 

[3]See id.at 852

[4]See id.at 852-54. 

[5]See id.

[6]See id.at 854.

[7]See id.at 851. The Trustee also filed asserted causes of action for avoidance of preferential transfers, declaratory relief to pierce the corporate veil, and disallowance of claims, but these are not discussed here. See id.

[8]See id.

[9]See id. at 851-52. 

[10]See id.at 855. 

[11]See id.at 860. 


[13]See id.at 856. 

[14]See 11 U.S.C. § 548(a)(1)(B). 

[15]Id.§ 548(a)(1)(B)(i).

[16]Seeid.§ 548(a)(1)(B)(ii)(I).

[17]See id.§ 548(a)(1)(B)(ii)(II).

[18]Seeid.§ 548(a)(1)(B)(ii)(III). 

[19]Id.§ 548.

[20]SeeIn re Pillowtex Corp., 427 B.R. 301, 310 (Bankr. D. Del. 2010) (holding that Rule 8(a)(2) is the standard to determine whether there constructive fraudulent transfer was sufficiently pled). 

[21]In reMervyn’s Holdings, LLC, 426 B.R. 488, 495 (Bankr. D. Del. 2010). 

[22]See Barrett v. Commonwealth Fed. Sav. And Loan Ass’n, 939 F.3d 20, 23 (3d Cir. 1991) (stating that determining reasonably equivalent value requires a case-by-case analysis). 

[23]In re BMT-NW Acquisition, LLC, 582 B.R. 846, 857 (Bankr. D. Del. 2018). 

[24]See id.at 859. 

[25]See id.

[26]See id.at 860.

[27]See id.

[28]Id.at 857. 

[29]Id.at 859. 

[30]Id.at 856.