New Pleading Standards for Avoidance Actions in Bankruptcy Courts

New Pleading Standards for Avoidance Actions in Bankruptcy Courts

 
Pleading standards in bankruptcy avoidance actions have historically been set extremely low. The standards were so low that practitioners seldom saw a motion to dismiss under Rule 12(b)(6). The rules have just changed.
 
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Excerpt:
 
Sue First; Ask Questions Later. For decades, standard operating procedure has dictated that a bankruptcy trustee sue everyone whom the debtor has paid in the ninety (90) days preceding the bankruptcy filing. The cause of action? Preference. Those defendants always ask their counsel "What did I do wrong?" The answer, for the most part, is "Nothing."
 
Trustees have justified such blanket suits by invoking the time-honored rationale that there undoubtedly were preferences in the days or months before the filing and it simply costs the bankruptcy estate too much to thoroughly investigate and make an informed decision on which payments by the debtor should be recovered. After all, trustees have little or no idea when goods and services were received by the debtor, relative to when the payments were made. Making that investigation can be time consuming and expensive. Their approach has been to print out a list of all checks issued by the debtor for ninety (90) days and sue everyone on that list. Let the defendants prove that they have defenses.
 
As unfair as that position may seem to payees, the law has tended to support the trustees' approach. Typical defenses to a preference action, like contemporaneous exchange, have been characterized as affirmative defenses so trustees need not concern themselves with pleading around them. See, e.g., K-Mart Corp. v. Uniden American Corp., 318 B.R. 409 (Bankr. N.D. Ill. 2004). See also, U.S. v. Northern Trust Co., 372 F.3d 886 (7th Cir. 2004).
 
 
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