Court: District Court, D. Delaware; May 15, 2008; Federal District Court
An appeal was filed by Chapter 7 Trustee William Brandt against the April 20, 2007 Order of the United States Bankruptcy Court for the District of Delaware, which dismissed his adversary complaint alleging fraudulent transfers made to selling shareholders under 11 U.S.C. 544 and Delaware law. The Bankruptcy Court determined that the transfers were "settlement payments" under Section 546(e) of the Bankruptcy Code, making them non-avoidable, and concluded that the complaint failed to state a claim, as the transfer was executed by a non-debtor entity, Plassein Packaging Corporation, rather than the debtor, Plassein International Corp. The Court found no allegations of intent to defraud, which were necessary for collapsing the transactions.
The Trustee contends that the Bankruptcy Court incorrectly applied Section 546(e), asserting it is limited to publicly traded securities and that actual intent to defraud is not required to collapse transactions. He also argues that Plassein International and Plassein Packaging are effectively the same entity under Delaware law. The Appellees argue that Section 546(e) applies broadly and that intent to defraud is required to collapse transactions based on Third Circuit case law. They maintain that the complaint does not sufficiently allege that Plassein Packaging was a debtor and cannot be amended through the Trustee’s motion papers or exhibits.
The Court has jurisdiction over the appeal under 28 U.S.C. 158(a) and applies a clearly erroneous standard to fact findings and a plenary standard to legal conclusions, accepting the Bankruptcy Court’s factual findings unless clearly erroneous while reviewing legal interpretations de novo.
The Third Circuit reviews Bankruptcy Court decisions on a de novo basis. In this case, the Court determined that the Bankruptcy Court correctly dismissed the Adversary Complaint. The Court referenced the case of Resorts International, which interpreted "settlement payment" broadly under Section 546(e), rejecting the Trustee’s argument that it should be confined to publicly traded securities. The Trustee's cited cases do not hold binding authority in this Circuit.
Additionally, the Court found no error in the Bankruptcy Court's dismissal based on the lack of a claim. The Appellants argued that the Bankruptcy Court should have identified Plassein International and Plassein Packaging as the same entity using public records; however, the Adversary Complaint did not allege this, and deficiencies in the initial pleading cannot be rectified by later statements or affidavits.
The Court also agreed that the allegations did not support the collapsing of transactions, as courts typically require evidence of bad faith or intent to defraud, which was absent in this case. Therefore, the Court affirmed the Bankruptcy Court's April 20, 2007 Order, with a final order issued on May 15, 2008.
