On July 22, 2008, SemCrude, L.P. and 26 affiliated debtors (the “Debtors”) filed bankruptcy petitions in Delaware Bankruptcy Court (Lead Case No. 08-11525).  On July 21, 2010, one day before the expiration of the 2 year statute of limitations, Bettina M. Whyte as the litigation trustee of the SemGroup Litigation Trust filed 356 adversary proceedings seeking recovery of alleged Section 547 preferential transfers.

SemCrude Preference Complaints Show Impact of Judge Shannon’s Decision in In re Charys Holding Company, Inc.

The adversary proceedings are pending before United States Bankruptcy Judge Brendan Linehan Shannon, and plainly evident is the impact of his decision on July 14, 2010 in Charys Liquidating Trust v. Hades Advisors, LLC (In re Charys Holding Company, Inc.), 2010 WL 2788152 (Bkrtcy.D.Del.).

In Charys, Judge Shannon dismissed without prejudice the bankruptcy preference count of the plaintiff’s complaint on the grounds that “[t]he Complaint contains no facts from which the Court could infer that the Transfer was made on account of an antecedent debt.”  More importantly, Judge Shannon embraced the bankruptcy preference pleading requirements articulated by fellow Delaware Bankruptcy Judge Peter J. Walsh in Valley Media v. Borders (In re Valley Media ), 288 B.R. 189, 192 (Bankr.D.Del.2003), noting:

On several occasions, courts in this Circuit have found complaints asserting preferential transfer claims must contain particularized facts including: (i) an identification of the nature and amount of each antecedent debt; and (ii) an identification of each alleged preferential transfer including date, name of debtor/transferor, name of transferee, and amount of transfer. OHC Liquidation Trust v. Credit Suisse First Boston (In re Oakwood Homes Corp ), 340 B.R. 510, 522-23 (Bankr.D.Del.2006); Valley Media v. Borders (In re Valley Media ), 288 B.R. 189, 192 (Bankr.D.Del.2003).

Judge Shannon also acknowledged, however, that the pleading standard articulated in Valley Media for bankruptcy preference actions was rejected by Delaware bankruptcy Judge Paul B. Lindsey in Official Comm. of Unsecured Creditors of The IT Group ex rel. the Estate of The IT Group, Inc. v. Brandywine Apartments (In re The IT Group, Inc.), 313 B.R. 370, 373 (Bankr.D.Del.2004) (“while the information identified by Valley Media might ultimately be necessary to adjudicate the preference claims, it does not follow that it must be pleaded on pain of dismissal.”).

Judge Shannon’s clearly articulated position in Charys compelled the SemCrude Debtors to attach as “Exhibit 2” to the complaints (Exhibit 1 being an identification of the transfers) an identification of the antecedent debts paid for by the allegedly preferential transfers.

Allegations of Insolvency Based on Consolidated Financials

Other allegations of the SemCrude complaints were also tailored to meet the requirements articulated in Charys, including extensive allegations regarding the Debtors’ insolvency during the preference period.  The SemCrude allegations are expressly based on the consolidated financial position of all 27  SemCrude Debtors.  Because the individual Debtor bankruptcy cases have not been substantively consolidated, this might be seen as giving an invitation to challenge the sufficiency of the insolvency allegation in the pleadings.

In Charys, Judge Shannon found that an allegation of “Charys (including its affiliates)” total assets and total liabilities supported the adequacy of the insolvency pleading.  However, Judge Shannon in Charys did not hold that a consolidated financial position allegation was alone sufficient to plead insolvency.  He also noted other allegations supporting insolvency that were not attributed to “Charys and its affiliates” on a consolidated basis.  Finally, the presence of joint, non-contingent and liquidated obligations among the debtors in Charys might explain the reference to apparently consolidated results in that case.

A Potential Rich Source of Bankruptcy Preference Law Developments

The 356 avoidable preferential transfer adversary proceeding complaints also present a number of other interesting aspects, not the least of which is the inclusion in the alleged preferences of increases in letter of credit amounts during the preference period.  The proceedings promise numerous opportunities for the making of new bankruptcy preference law.