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The Bankruptcy StrategistFeaturesBankruptcyCivil ProcedureLitigation

Court Rules Mere Conduit Defense Not Suitable for a Motion to Dismiss

By Daniel A. Lowenthal
November 01, 2024

At the motion to dismiss stage, courts usually won't consider affirmative defenses. This issue arose recently in a preferential transfer case, where a defendant sought to dismiss a complaint by arguing it was a mere conduit, not an initial transferee. But the court ruled against the defendant, explaining why it would not adjudicate a mere conduit defense on a motion to dismiss. Official Comm. of Unsecured Creditors of Pack Liquidating, LLC v. Kepler Grp., LLC, Adv. Proc. No. 23-50536 (In re Pack Liquidating, LLC), Case No. 22-10797, 2024 Bankr. LEXIS 2444 (Bankr. D. Del. Oct. 4, 2024).

Before their bankruptcy filings, the debtors sold consumer products online. The defendant in the preference action was an e-marketing services provider and an alleged agent of the debtors. In the debtors' Chapter 11 cases, the unsecured creditors' committee (Committee) sued the defendant to recover $389,000 transferred from the debtors. The complaint alleged that the defendant was the initial transferee of the funds. The complaint asserted a preferential transfer claim under Bankruptcy Code section 547 and a constructive fraudulent transfer claim under Bankruptcy Code section 548. The complaint also sought recovery from the defendant under Bankruptcy Code section 550.

The defendant licensed and installed advertising campaigns for the debtors that the defendant obtained from a third-party service provider. The service provider would bill the defendant for its services, then the defendant would invoice the debtors that amount plus a fee for its own work. The defendant would pay the service provider when the debtors paid the defendant.

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