United States: Opinion In AgFeed USA – Another (Mostly) Successful Motion to Dismiss

On February 19, 2016, Judge Brendan L. Shannon of the Delaware Bankruptcy Court granted in part the motion of K. Ivan F. Gothner (the "Defendant") to dismiss a complaint filed by JLL Consultants, the Liquidating Trustee (the "Trustee") in the AgFeed bankruptcy.  The "Opinion" is available here.

This is just one of many motions to dismiss adversary proceedings in the AgFeed case.  I previously posted about another successful motion to dismiss: Opinion in AgFeed USA – A Release of all Known and Unknown Causes is Binding.

On December 14, 2009, Mr. Gothner joined AgFeed's board.  Opinion at *7.  However, well before that time, AgFeed was "engaged in a massive fraud," including reporting ownership  of tens of millions of dollars of fictitious assets.  Opinion at *6.  Over the course of the next several years, AgFeed began investigating its assets and engaged in a series of corrective reports as it discovered new information.  At this time, AgFeed was becoming more exposed to the U.S. market, and started replacing its directors.  See Opinion at *8-9.  On December 20, 2011, Mr. Gothner was appointed Chairman of the Board and Interim CEO.  On September 18, 2012, he was appointed as the permanent CEO of AgFeed.  Opinion at *12.

On July 25, 2013, AgFeed filed for bankruptcy.  On March 11, 2014, the SEC filed a complaint against AgFeed and several of its officers and directors, including Gothner.  On February 23, 2015, the AgFeed trustee filed the complaint in the adversary proceeding which gave rise to the motion to dismiss, and thus this Opinion.  The complaint alleged 12 different causes of action.  The motion to dismiss was granted for the first 8 causes of action, granted in part for causes 9 and 10, and denied for causes 11 and 12.  Notably, however, causes 11 and 12 were for the recovery of avoidable transfers and denial of claims.  Both of these causes of action are entirely contingent upon a successful judgment that there was a fraudulent transfer or preference payment, rather than independent causes of action.  The remaining independent causes of action allege that Gothner is guilty of constructive fraud in that he caused funds totaling "not less than" $293,000 to be transferred for the benefit of his wife or stepdaughter.  Opinion at *38-43.

My $.02

Most of the causes of action were dismissed pursuant to a 12(b)(6) motion.  This requires the Court to (1) treat all facts alleged in the complaint as true and (2) draw all reasonable inferences in favor of the plaintiff.  Even with this substantial advantage, the Trustee failed to carry its burden.  In large part, this is because the Trustee alleged fraud, which has a heightened pleading standard.  As the Court recognized, this rule is "relaxed and interpreted liberally where a trustee or a trust formed for the benefit of creditors ... is asserting the fraudulent transfer claims."  Opinion at *16.  This is because a trustee is an outsider to the case and inevitably lacks knowledge concerning the fraud.  Id.  As this Opinion illustrates, this disadvantage can easily outweigh the relaxed standard to which a trustee is subject.  It's comparable to a fireman trying to examine the cause of a forest fire.  They can usually tell where the fire started and can easily survey the damage, but determining the exact cause is far more difficult.  To carry the analogy to its conclusion, it's why Smokey the Bear preaches prevention – it's much easier to prevent a fire, or a fraud, than it is to clean up afterwards.

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