Trustee's Fraudulent Transfer Complaint Survives Motion To Dismiss


This article originally appeared in The Legal Intelligencer and is republished here with permission from

In its Jan. 11 opinion in In re DBSI Inc., the U.S. Bankruptcy Court for the District of Delaware held that a trustee's complaint seeking to recover actual and constructively fraudulent transfers satisfied the heightened pleading requirements set forth in Rule 9(b) and post-Twombly.

In Twombly, the U.S. Supreme Court heightened the pleading requirement, requiring that plaintiffs include enough facts in their complaint to make it plausible — not merely possible or conceivable — that they will be able to prove facts to support their claims. In this case, the defendants argued, among other things, that the trustee had neither satisfied the pleading requirements set forth in Twombly, nor those dictated by Federal Rule of Civil Procedure 9(b).

According to the opinion, DBSI Inc. and its affiliates were involved in: (a) the syndication and sale to investors of tenant-in-common interests in real estate; (b) the purchase of real estate; and (c) investments in technology companies. On Nov. 6, 2008, DBSI Inc. and certain of its affiliates filed petitions under Chapter 11 of the Bankruptcy Code. On June 29, 2010, the Chapter 11 trustee commenced adversary proceedings seeking to avoid, among other things, allegedly fraudulent transfers made by certain of the debtors to Walter E. Mott and John D. Foster, who were equity holders, general partners and directors and/or managing officers of the various debtors.

According to the complaints, in 2002 and 2006, Mott and Foster sold their equity and partnership interests in DBSI and certain of its affiliates through Stock Repurchase Agreements and Partnership Interest Redemption Agreements (the agreements) for payments to be made over several years totaling, in the aggregate, approximately $7 million, the opinion said. The trustee's complaint alleged that the agreements were actually and/or constructively fraudulent because: (i) Mott and Foster were insiders of the DBSI enterprise; (ii) the DBSI enterprise was insolvent at the time the agreements were signed; and (iii) due to the DBSI enterprise's insolvency, the equity and partnership interests of Mott and Foster were of no value. After commencement of the adversary proceeding, the bankruptcy court, in the main bankruptcy case, made findings of fact and conclusions of law that "DBSI ran its business and [affiliated] entities as a unified enterprise under common ownership and control" with a "small group of insiders [that] employed that control to raise cash, commingle it...

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