For third parties that had prepetition business relationships with a debtor—particularly where such third parties may also themselves be creditors of that debtor—threatened or actual litigation on these grounds may be viewed as particularly vexatious.
In Mendelsohn v. Dole Fresh Fruit Co. (In re Barnett Corp.), the Bankruptcy Court for the Eastern District of New York conditionally granted an adversary proceeding defendant’s motion to dismiss a complaint asserting, among other things, federal and state fraudulent transfer claims on the basis that the plaintiff failed to meet federal pleading standards.
Background
In December 2022, Barnett Corp. and Barnett Forest LLC (collectively, the debtors) filed Chapter 7 petitions. In December 2024, the appointed Chapter 7 trustee initiated an adversary proceeding against Dole Fresh Fruit Company. The trustee’s complaint alleged 11 causes of action regarding a total of approximately $22 million of the debtors’ property that was allegedly transferred to Dole prior to the bankruptcy petition date (the Dole transfers). Among other causes of action, the trustee alleged actual and constructive fraudulent transfer under section 548 of the Bankruptcy Code and the New York state law equivalents.
Dole filed a motion to dismiss the complaint on the grounds that, for the fraudulent transfer claims, the trustee had failed to establish a prima facie claim under the Federal Rule of Civil Procedure 9(b), which governs causes of action involving fraud.
The Bankruptcy Court’s Decision
The court ultimately granted Dole’s motion to dismiss as to all causes of action asserted in the complaint because the trustee failed to allege sufficient facts to support a claim for relief, but, exercising its discretion, allowed the trustee to amend its complaint to re-assert certain claims.
Actual Fraudulent Transfer Claims
The trustee alleged that the debtors had made the Dole transfers with “actual” intent to defraud creditors and consequently sought to “avoid” or unwind and return the transferred property to the debtors’ estates pursuant to section 548 of the Bankruptcy Code and New York state law equivalents.
Although the trustee alleged that the debtors and its principal had conducted a “general fraud,” the court found that the trustee had failed to allege with particularity how the debtors had made the Dole transfers with the actual intent to defraud the debtors’ creditors. Indeed, the court noted that the only allegations connecting the Dole transfers and the debtors’ “general” fraud were the “wholly conclusory” allegations that the debtors’ books and records did not contain documentation of a “proper basis” for the Dole transfers.
Under the same analysis, the court reached the same conclusion with respect to “actual” fraudulent transfer claims alleged under New York law.
Constructive Fraudulent Transfer
The trustee similarly sought to avoid the Dole transfers pursuant to section 548 of the Bankruptcy Code and New York state law equivalents on the basis that such transfers were “constructively” fraudulent. Unlike “actual” fraudulent transfer claims, a plaintiff need not demonstrate why a debtor made particular transfers with an intent to defraud creditors. Instead, courts look to evidence of a debtor’s financial condition and the terms of the transaction from which the transfer arose—namely, what value the debtor received in exchange. Consequently, “constructive” fraudulent transfer claims are reviewed under the general pleading standard set forth in Federal Rule of Civil Procedure 8, which requires merely a “short and plain statement of the claim showing that the [plaintiff] is entitled to relief.”
Even under this comparatively lower standard, the court held that the trustee’s allegations as to the value that the debtors did or did not receive in exchange for the Dole transfers were insufficient to state a facially plausible claim. Again, the trustee had alleged only that the Dole transfers were part of the debtors’ “general” fraud scheme and were not supported in the debtors’ books and records.
The court reached the same conclusion under New York state law equivalent. In addition to the trustee’s allegations being insufficient regarding the value provided by Dole to the debtors in exchange for the Dole transfers, the court further noted that the trustee’s allegations as to the debtors’ insolvency at the time of the Dole transfers were wholly conclusory. Specifically, the trustee had merely alleged that the debtors were borrowers under certain third-party loans, but not why the debtors were insolvent as a result of such loans.
Key Takeaways
Claims for fraudulent transfer are a common tool employed by Chapter 7 trustees to obtain additional recoveries for a debtors’ general creditor body. For third parties that had prepetition business relationships with a debtor—particularly where such third parties may also themselves be creditors of that debtor—threatened or actual litigation on these grounds may be viewed as particularly vexatious.
This case is a notable reminder to defendants or potential targets of such causes of action that the mere filing of a complaint is not a death knell. Indeed, although federal pleading standards may sometimes be viewed as imposing a minimal burden on plaintiffs, the court’s reasoning here highlights the utility of considering filing a motion to dismiss, particularly where the complaint alleges fraud by a debtor. Of particular importance is that a plaintiff must demonstrate with non-conclusory facts that the specific transfers received by a creditor were either made with an actual intent to defraud or the value (or lack thereof) allegedly received by the transferor.
For More Information
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