Issues: The Court consolidated trial of two adversary proceedings in this bankruptcy case: (1) an adversary proceeding filed by the Chapter 7 Trustee against the ex-spouse of the Debtor to recover multiple real properties as fraudulent transfers (Fraudulent Transfer Adversary Proceeding); and (2) an adversary proceeding filed by the U.S. Trustee against the Debtor to deny the Debtor his bankruptcy discharge (Discharge Adversary Proceeding). In the Fraudulent Transfer Adversary Proceeding, the Trustee sought to avoid the transfer of the Debtor’s real properties under § 548 of the Bankruptcy Code and the Texas Uniform Fraudulent Transfer Act (“TUFTA”) and to recover the real properties from the Debtor’s ex-spouse under § 550 of the Bankruptcy Code. In the Discharge Adversary Proceeding, the U.S. Trustee sought to deny the Debtor’s discharge under § 727(a)(2)(A), § 727(a)(2)(B), and/or § 727(a)(4) of the Bankruptcy Code. Holdings: In the Fraudulent Transfer Adversary Proceeding, the Court held that the transfer of the Debtor’s real properties were avoidable under § 548(a)(1)(A) (actual fraudulent transfer), § 548(a)(1)(B) (constructive fraudulent transfer), and TUFTA. The Court also held that the real properties were recoverable from the Debtor’s ex-spouse under § 550 of the Bankruptcy Code. The Court dealt with several issues, including the date a transfer is made under fraudulent conveyance laws, “good faith” for “value” defenses, and the impact of an uncontested divorce decree. In the Discharge Adversary Proceeding, the Court held that the Debtor’s discharge should be denied based on false oaths under § 727(a)(4) of the Bankruptcy Code. The Court found that the Debtor omitted assets from his Bankruptcy Schedules, made false statements in his Statement of Financial Affairs, and provided false testimony at the creditors meeting. The Court’s ruling is set forth in a Consolidated Opinion.
Issues: Plaintiff Litigation Trust brought adversary proceeding against multiple Defendants, who were former officers and directors of the Debtor. Defendants filed multiple Motions to Dismiss under Rule 12(b)(6) of the Federal Rules of Civil Procedure (“Rules”), which is incorporated into Bankruptcy Rule 7012. In general, the Defendants asserted that Plaintiff failed to state a claim for: (1) breach of fiduciary duties under Delaware law; (2) gross negligence; (3) fraud on stockholders; (4) preferential transfers under 11 U.S.C. §547; (5) fraudulent transfers under 11 U.S.C. § 548; (6) breach of contract; (7) disallowance of claims under 11 U.S.C. §502(b)(2); (8) subordination of claims under 11 U.S.C. §510(b) and/or 11 U.S.C. §510(c). Alternatively, Defendants requested transfer of venue to the U.S. District Court for the District of Delaware (the state where Debtor was incorporated). Holdings: The Court denied most of the Motions to Dismiss under Rule 12(b)(6), providing every reasonable inference to Plaintiff as required under Rule 12(b)(6). First, the Court concluded that Plaintiff had sufficiently alleged a plausible claim that the Defendants (the Debtor’s former directors and officers) breached their fiduciary duties to the Debtor, including the duty of care, duty of loyalty, and duty of good faith. The Court refused to consider, in the context of Rule 12(b)(6), an affirmative defense and extrinsic evidence which purportedly contained an exculpatory provision in the Debtor’s charter under Delaware General Corporate Law §102(b)(7). The Court also found that the business judgment rule defense and the Bangor Punta doctrine did not provide a basis to dismiss Plaintiff’s claims for breach of fiduciary duty in the Rule 12(b)(6) context. Second, the Court dismissed the fraud on the stockholders claim for Plaintiff’s failure to sufficiently allege standing and damages. Third, the Court denied dismissal of Plaintiff’s preferential transfer claims, and adopted the “exact date” approach and rejected the “arranged transfer” theory for the date of a preferential transfer. Fourth, the Court found that Plaintiff sufficiently alleged a plausible claim for an actual fraudulent transfer claim (applying a Rule 9(b) standard) and constructive fraudulent transfer (applying a Rule 8(a) standard). Fifth, the Court held that Debtor’s confirmed plan contained a sufficient reservation to preserve and maintain Plaintiff’s claim for breach of contract. Sixth, to the extent that the Defendants could assert a claim back against the Debtor’s estate, the Court determined that Plaintiff sufficiently alleged a cause of action under 11 U.S.C. §502(d) to disallow their claims. Seventh, the Court dismissed any mandatory subordination claims of Plaintiff under 11 U.S.C. §510(b) as they were inapplicable to the facts of the case, but determined that the equitable subordination claims of Plaintiff under 11 U.S.C. §510(c) would survive dismissal. Eighth, the Court denied dismissal of Plaintiff’s declaratory judgment seeking disallowance and subordination of the claims of the Defendants, to the extent that the Defendants could file a claim back against the Debtor’s estate.
Finally, the Court denied the Defendants’ Motion to Transfer Venue of the adversary proceeding to the District of Delaware. The Court determined that the Defendants failed to demonstrate by a preponderance of the evidence that the transfer of venue furthered the “interest of justice” or “convenience of the parties” under 28 U.S.C. §1412. The only real connection to Delaware was that the Debtor was incorporated in Delaware so that Delaware law applied to certain issues in the adversary proceeding, which by itself was not sufficient to warrant transfer of venue.