- Nos. 1373 and 13-1959 (3d Cir. Aug. 11, 2014)
- The Third Circuit held that the Bankruptcy Court erred in dismissing avoidance claims under both the Bankruptcy Code and Delaware law because there is no requirement to plead that the defendant had knowledge of the debtor’s fraudulent intent as part of the prima facie case. The Court vacated the Bankruptcy Court’s dismissal of the avoidance action and affirmed the dismissal of the common law claims of aiding and abetting a breach of fiduciary duty and fraud, denial of the Plaintiff’s motions for relief from the dismissal order, and motion for leave to amend the complaint, and remanded to the Bankruptcy Court for further proceedings.
- Procedural context:
- Bankruptcy Court granted Defendant Preferred Bank’s Motion to Dismiss the Complaint. The Plaintiff was granted a direct appeal of the dismissal to the Third Circuit. While the appeal was pending, the Plaintiff filed a motion for relief from the dismissal order pursuant to Federal Rule of Civil Procedure 60(b) based on newly discovered evidence and requested leave to file an amended complaint. The Bankruptcy Court denied the Rule 60 motion and motion for leave to amend, and the Plaintiff was again granted a direct appeal of the ruling to the Third Circuit. The two appeals were consolidated in this action.
- Prior to the petition date, several officers and directors of Syntax-Brillian Corporation (“SBC” or “Debtor”) allegedly engaged in a series of fraudulent activities that ultimately led to SBC’s insolvency. SB Liquidating Trust (the “Trust”), the liquidating trust formed pursuant to the Debtor’s plan of liquidation, asserted that the alleged fraud was only made possible through substantial assistance provided by Preferred Bank (“Preferred”). Specifically, the Trust contended that certain credit instruments issued to SBC by Preferred were part of a fraudulent scheme to siphon money to Taiwan Kolin Company, Ltd. (“Kolin”), an overseas company for which several of SBC’s officers and directors also served as officers, directors and/or shareholders (the “Kolin Faction”), at the expense of SBC. The Trust commenced an adversary proceeding against Preferred seeking to avoid and recover fraudulent conveyances under section 548(a) of the Bankruptcy Code and the Delaware Uniform Commercial Code, 6 Del. Code §§ 1304 and 1305, as well as common law claims of aiding and abetting a breach of fiduciary duty and fraud purportedly committed by insiders of the Debtor. The Trust asserted that by providing financing to SBC, Preferred “enabled the Kolin Faction’s fraud and delayed SBC’s ultimate demise, thus allowing the Kolin Faction to divert millions of dollars away from SBC’s creditors.” In evaluating the fraudulent transfer claims, the Bankruptcy Court looked to the “collapsing” doctrine—in which several apparently innocuous transactions are collapsed for the purposes of a fraudulent transfer analysis and considered the economic reality of the integrated whole, and for which many courts require a defendant to have knowledge of the scheme. Applying this doctrine, the Bankruptcy Court held that because the Trust did not sufficiently allege Preferred’s knowledge of the Kolin Faction’s fraudulent scheme, the transactions could not be collapsed and, accordingly, the claims failed. The Third Circuit, however, found that the fraudulent transfers the Trust sought to avoid under section 528(a)(1)(A) of the Bankruptcy Code and 6 Del. Code § 1304 could survive without application of the collapsing doctrine and, thus, absent allegations of Preferred’s knowledge of the scheme. Under this view, Preferred’s intent would only become relevant as an affirmative defense and not required to be plead as an element of the Trust’s prima facie case. The language of both the Bankruptcy Code and Delaware law on avoidance of fraudulent conveyances focus on the debtor’s intent to “hinder, delay or defraud” its creditors, with no reference to the defendant’s intent. Innocent defendants, the Court found, who unwittingly participate in a debtor’s fraudulent scheme, are protected by the good faith exception in section 548(c) of the Bankruptcy Code and its counterpart under Delaware law for transferees “that take for value and in good faith.” These sections give a defendant an opportunity to avoid liability by asserting its good faith as a defense to a fraudulent transfer action. The Third Circuit noted that “reading a bad faith element into § 548(a)(1) or 6 Del. Code § 1304 would only serve to shift the burden on the good faith defense, requiring the representative of the bankruptcy estate to prove that the transferee did not act in good faith, in derogation of the statutory language.” Moving to the Trust’s common law claims for aiding and abetting a breach of fiduciary duty, the Third Circuit first had to apply a choice of laws analysis to determine whether Delaware or California law governed. In comparing the laws, the Court found that they were sufficiently similar and the Trust’s claims failed under both for failing to allege facts in the complaint from which it could be inferred that Preferred knew of the Kolin Faction’s alleged fraud and breach of fiduciary duty. Similarly, the Trust’s claim for aiding and abetting fraud failed under California law (which the parties agreed was applicable) because the California Financial Code insulates banks from suits based on presumed knowledge. Finally, the Third Circuit affirmed the Bankruptcy Court’s denial of the Trust’s motion for relief from the judgment under Fed. R. Civ. P. 60(b) and motion for leave to amend the complaint. Though the Trust did cite to newly discovered evidence which it believed supported its common law aiding and abetting claims, the Third Circuit found that the Bankruptcy Court did not abuse its discretion in finding that the new evidence failed to implicate Preferred in any new way. The Court noted that based on its decision on the fraudulent conveyance claims, on remand the Bankruptcy Court is free to reconsider whether to allow the Trust to amend its complaint.
- Jordan, Vanaskie and Van Antwerpen (opinion by Vanaskie)
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