Visteon Corporation v. Global Asset Protection Services, LLC (In re Visteon Corporation), Adv. Proc. No. 11-52070 (Bankr. Del. July 21, 2011) Delaware District of Delaware United States Bankruptcy Judge Christoper S. Sontchi issues an order imposing sanctions against plaintiff’s counsel for the “filing of a grossly deficient” complaint seeking recovery of preferential transfers under Section 547 and constructively fraudulent transfers under section 548(a)(1)(B).   In this two page order, Judge Sontchi also (1) denies Defendant’s motion to dismiss, (2) grants leave to Plaintiff to file the First Amended Complaint (which Plaintiff had already filed), and (3) prohibits any further amendments to the complaint.  Defendant already had signaled in its reply brief that the First Amended Complaint also is deficient, so the problems for Visteon’s claims against Defendant may not be over.

The sanctions portion of Judge Sontchi’s order is in the following paragraph:

Pursuant to 11 U.S.C § 9011(c)(1)(B), the Court hereby imposes sanctions against plaintiff’s counsel, jointly and severally, for the filing of a grossly deficient complaint. Defendant is hereby awarded and plaintiff’s counsel shall pay all of the defendant’s attorneys fees and costs incurred in connection with the Motion. Such fees and costs shall be paid within 14 days of plaintiff’s counsel’s receipt of an invoice from defendant. Said invoice need not provide any detail other than the gross amount due.

This award of sanctions is remarkable but should not have been totally unexpected.  As a reorganized debtor, Visteon filed 252 bankruptcy preference complaints between May 20, 3001 and May 26, 2011.  The complaint against Defendant Global Asset Protection Services LLC was among those mass filings.  A report of complaints, answers (and other responsive pleadings), dismissals, defaults and judgments (“CADDJ”) is can be seen by clicking this link. The complaints by almost any measure failed to meet the pleading requirements previously, clearly articulated by the Judges of the Delaware Bankruptcy Court.  The complaints were also filed after Chief, United State Bankruptcy Judge Kevin J. Carey, citing these prior decisions, had issued a stern warning:

However, pleading requirements in preference suits must be met, a view consistently expressed by the members of this Bench. See, e.g., Valley Media, Inc. v. Borders, Inc. (In re Valley Media, Inc.), 288 RR. 189, 192 (Bankr. D. Del. 2003). See also Official Comm. of Unsecured Creditors of Champion Enter., Inc. v. Credit Suisse (7n re Champion Enter., Inc.), 2010 WL 3522132, *21 (Bankr. D. Del. Sept. 1, 2010), Charys Liquidating Trust v. Hades Advisors, LLC (In re Chart’s Holding Co., Inc.), 2010 W.L. 2788152, *4-*5 (Bankr. D. Del. July 14, 2010), OHC Liquidation Trust v. Credit Suisse First Boston (In re Oakwood Homes Corp.), 340 B.R. 510, 521-22 (Banks. D. Del. 2006). The complaint filed here was clearly a form complaint, merely parroting statutory language and lacking sufficient averments of fact, hence, lacking adequate notice of the bases for the various causes of action under applicable law and rule. While the plaintiff did attach a schedule reflecting the transfers sought to be avoided, this complaint is what has been referred to as a “virtual” complaint: “a form preference complaint generated with the push of a mail-merge button  . … ” Hon. Lisa Hill Forming and Jayne South, Pleading Preferences In Delaware: Signs of an Emerging Doctrinal Split or Merely Pent-Up Frustrations with Sloppy Practice?, 2004 No. 5, Norton Bank.L.Adviser 1, 2 (2004).

Nevertheless, I have granted the trustee’s request for leave to amend, but with the caution that, with respect to deficient form preference complaints filed after today, plaintiffs should expect no such accommodation.

Miller v. Alston & Bird LLP (In re HomeBanc Mortgage Corporation), Adv. Proc. No. 10-50621 (Bankr. Del. Oct 29, 2010) [Emphasis Added].

Judge Sontchi did not explain his decision to award sanctions beyond the reference to the complaint as “grossly deficient”.   The motion, however, included two key points that may have had a substantial influence on the decision:

1. The Defendant stressed that the Plaintiff is the reorganized debtor and not a Chapter 7 trustee.  As a reorganized debtor, the plaintiff had no argument that it had been deprived of books and records that precluded a compliant complaint.  Defendant argued that “Whatever lenience a chapter 7 trustee or liquidating trustee might be afforded, as a reorganized debtor Visteon is not entitled to it.”
2. The Defendant argued that Plaintiff’s counsel had failed to address, or even respond to, Defendant’s counsel’s efforts to address the issues through an informal dialogue.  Defendant stated that “almost two weeks before Visteon’s counsel filed the Complaint, counsel for GAPS sent counsel for Visteon a detailed email describing GAPS’s defenses to Visteon’s threatened preference claim. Visteon’s counsel did not respond to that e-mail, or request more information from GAPS’s counsel, and it plainly did not use the information to buttress its “threadbare allegations.”

Regardless of what aggravating factors may have influenced Judge Sontchi, this sanctions award in combination with Judge Carey’s statement in Miller v. Alston & Bird make it clear that the days of “virtual, mail merge” complaints are over and the Delaware Bankruptcy Court is no longer willing to tolerate “plead thin and amend” tactics.