Delaware Court Terminates Trustee’s One Year Discovery Rule Gambit
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June 27, 2022, US Bankruptcy Court for Delaware – The Delaware Bankruptcy Court grants the motion to dismiss filed by Anderson Media Corporation; ANConnect, LLC; et al. (“Defendants”) to the extent of dismissing Trustee George L. Miller’s complaint counts of constructive fraudulent transfer, breach of fiduciary duty and aiding and abetting breach of fiduciary duty against the Defendants in the bankruptcy case of Our Alchemy, LLC, et al. (“Debtors”).
Debtor ‘Our Alchemy, LLC’ allegedly purchased certain assets from Defendant ‘ANConnect, LLC’ in 2015. In the next year of the purchase, ANConnect filed a complaint against Our Alchemy, in Delaware state court, alleging that Our Alchemy owed ANConnect post-closing adjustments and certain other payments and compensation in connection with the asset transaction. Our Alchemy alleged that it is a creditor of ANConnect and asserted counterclaims against ANConnect for breach of the asset purchase agreement.
The Debtors, including Our Alchemy, filed their bankruptcy petition in 2016 and Trustee Miller commenced adversary proceedings against the Defendants seeking to avoid the 2015 asset transaction as allegedly “fraudulent”. In 2021, the Trustee made new allegations that while ANConnect was winding down operations, ANConnect intentionally made several transfers to alleged “insiders” (“Transfers”) in the approximate amount of $23.8 million in order to allegedly defraud known creditors while it was insolvent or in the zone of insolvency. Apart from the claim of alleged “fraudulent transfer”, the Trustee also brought claims of “breach of fiduciary duty” and “aiding and abetting breach of fiduciary duty” against the management of the Defendants.
Defendants claimed that the Trustee’s action is time-barred since the transfers to alleged insiders occurred more than five years before the Trustee initiated this action. The Trustee asserted the one year discovery rule.
The one year discovery rule extends the time in which a claimant may file a claim by one year after the plaintiff knew or could have reasonably discovered the transfer and its alleged fraudulent nature.
The Court found that the Delaware Uniform Fraudulent Transfer Act and the Texas Uniform Fraudulent Transfer Act allow the application of one year discovery rule only where the claim is based on actual fraud and not in case of constructive fraud. The Court granted the Defendant’s motion to dismiss only to the extent of dismissing claim for constructive fraud.
The Defendants, while claiming that the ‘trust-fund’ doctrine has been abrogated under Texas law, argued that the Trustee lacks standing to bring claims for breach of fiduciary duty against the management of Defendants. However, the Court, after examining several decisions of Texas state and federal court and the Texas Supreme Court’s decision in Hunter v. Fort Worth Capital Corp., 620 S.W.2d 547 (Tex. 1981), concluded that the trust fund doctrine still holds good in Texas unless a company has undertaken the process of dissolution under the Business Organization Code. Since none of the parties alleged dissolution of ANConnect, the Court allowed the ‘trust-fund’ doctrine to apply to the case.
However, the Court concluded that the claims under ‘trust-fund’ doctrine can only be brought derivatively and on behalf of all the creditors of ANConnect. Since, the Trustee’s complaint made direct claims of breach of fiduciary duty and aiding and abetting breach of fiduciary duty, both the counts of claim were dismissed by the Court.
Miller v. Anderson Media Corp. (In re Our Alchemy, LLC), 2022 Bankr. LEXIS 1784