Miller v. Metal Exchange Corporation (In re: IH 1, Inc. f/k/a Indalex Holdings Finance, Inc.), Adv. Case No. 11-51329 (PJW) (Bankr. D. Del., Dec. 30, 2011), read opinion here.
This summary was prepared by Tara Lattomus of Eckert Seamans.
Whether a Chapter 7 trustee could amend a preference complaint pursuant to Federal Rule of Civil Procedure 15 to add a defendant and relate the amendment back to the date of the original filing to avoid the expiration of the statute of limitations with respect to the claims against such defendant?
The motion to amend was granted and the amendment related back to the date of the original filing because: (1) the amendment asserted a claim arising out of the same transaction described in the original complaint; (2) the new defendant had received notice of the action within 120 days of the original filing and would not be prejudiced by defending the action; and (3) the new defendant knew or should have known that it would have been originally named as a defendant but for a mistake concerning its proper identity.
On March 20, 2009, IH 1, Inc. and several related companies filed voluntary petitions for relief under Chapter 11 of the Bankruptcy Code. Subsequently, the cases were converted to cases under Chapter 7 and George L. Miller was appointed as the Chapter 7 trustee.
Approximately two years later on March 14, 2011, the trustee filed a complaint against Metal Exchange Corporation (“MEC”) seeking to avoid and recover preferential transfers. The original complaint was amended once to correct a formatting error. MEC was named as a sole defendant in both versions of the complaint. However, both complaints also indicated that the trustee sought to avoid the preferential transfers from MEC and another entity named Pennex Aluminum Company (“Pennex”) described as a trade name of MEC. The complaint stated that the debtor had transacted business with the defendant as MEC and Pennex although separate invoicing and billing was used.
Prior to the preference complaint being filed, the trustee sent two demand letters; one addressed to the defendant as MEC and one addressed to Pennex requesting the return of the preferential transfers. The trustee received no response from MEC, but received a preference defense letter from the law firm Bryan Cave LLP on behalf of Pennex. Although Bryan Cave did not respond to the demand letter on behalf of MEC, it did subsequently represent MEC in the preference action and filed an answer to the amended complaint on its behalf. MEC’s answer indicated that it had only done business with the debtor under the name MEC and also asserted that Pennex was a separate Missouri limited liability company. Approximately three months after MEC filed its answer, the trustee filed a motion for leave to file a second amended complaint to add Pennex as a separate defendant. The trustee also sought a ruling that the amendment would relate back to the date of the original filing as the statute of limitations had run on the claims against Pennex.
The Bankruptcy Court first addressed the ability of the amendment to relate back to the original filing date because due to the expiration of the statute of limitations, an amendment that could not relate back would be futile. The Court noted that under Federal Rule of Civil Procedure 15(c), a complaint can be amended to name a new party and the amendment will relate back to the date of the original filing if three conditions are met. First, the amendment must assert a claim arising out of the same transaction or occurrence described in the original pleading. Second, a new party must have received notice of the action within 120 days of the original filing and not be prejudiced by defending on the merits. Third, during that 120 day period, the new party must have known or should have known that but for a mistake concerning the party’s identity, it would have been named in the original complaint.
The parties agreed that the claim against Pennex arose out of the same transaction as described in the original complaint and also that Pennex received notice of the action within 120 days of the filing. However, the parties disagreed over whether Pennex knew or should have known that it would have been named as a defendant but for a mistake concerning its identity. The Court confirmed that the first condition was met because the transfers to Pennex were clearly described in the original complaint. The Court also found that Pennex had received constructive notice of the filing because Pennex shared an attorney with MEC as well as a registered agent. The only dispute concerned the third condition; whether Pennex knew or should have known that but for a mistake about its identity it would have been named as a defendant. MEC argued that since Pennex sent a response to the demand letter and the trustee failed to file suit before the statute of limitations period ran, Pennex reasonably concluded that the trustee had accepted its defenses and decided not to file suit. The problem with this reasoning was that the response letter was dated three days after the original complaint was filed. Putting all other factual issues aside, the Court held that the only reasonable explanation for the trustee to seek recovery of the transfers made to Pennex from MEC was the trustee’s mistaken belief that Pennex was a trade name of MEC. Accordingly, the Court concluded that all three factors of Rule 15(c) had been met and the amendment would be allowed to relate back to the date of the original complaint. The Court also granted the trustee leave to amend given the absence of prejudice and the lack of undue delay, bad faith or dilatory motive.