District Court Grants Defendants' Motion to Strike Damages Claims, Finding Plaintiff Did Not Give Notice of Grounds Upon Which Claims Rested
Stanziale v. Pepper Hamilton LLP (In re Student Finance Corp.), No. 04-1551 (JJF), 2007 WL 2936195 (D. Del. Oct. 5, 2007) (Judge Joseph J. Farnan, Jr.)
In this adversary proceeding in the United States District Court for the District of Delaware, certain defendants moved to strike damages claims alleged by the trustee of the estate of Student Finance Corporation. The Court granted the motion, finding that the trustee failed to provide fair notice of these damages claims, as required under Fed. R. Civ. P. 8(a) (made applicable to this adversary proceeding by Fed. R. Bankr. P. 7008(a)).
In this adversary proceeding in which the trustee of Student Finance Corporation (“SFC”) asserted, inter alia, fraudulent transfer and preference claims against defendants Pamela Bashore Gagne, Robert L. Bast, the Brennan Family Trusts, and W. Roderick Gagne as trustee of the Brennan Family Trusts (collectively, the “Family Defendants”), the Family Defendants moved to strike certain damage claims. The trustee raised the damage claims in his initial disclosures. The damages allegedly arose from (1) the asserted overpayment of loan commitment fees paid by SFC to the Family Defendants during the period from 1999 through 2001, and (2) stock redemption payments in the total amount of approximately $7 million made by SFC to the Family Defendants during the period from February 2000 through January 2001.
This adversary proceeding was commenced on December 22, 2004, and, thereafter, the District Court withdrew the reference, and granted defendants’ motion to dismiss various counts, including those for deepening insolvency, negligent misrepresentation, aiding and abetting a breach of fiduciary duty, civil conspiracy and turnover of estate property. The trustee then amended his complaint. At the time that the Court wrote this opinion, only two causes of action remained – the fraudulent transfer and preference claims. The Family Defendants contended that they did not receive fair notice of the damage claims, as required under Fed. R. Civ. P. 8(a). The question at the center of this motion was whether the remaining causes of action were encompassed by the damages asserted in the initial disclosures.
The trustee contended that the Family Defendants had notice of the transactions from the start of the lawsuit. The Court disagreed. In the factual background sections of the amended complaint preceding the surviving claims, the trustee described certain transactions that the Family Defendants allegedly entered into with SFC, but did not describe the transactions giving rise to the damages claims at issue. The trustee contended that the transactions were discussed elsewhere in the complaint in the context of the dismissed counts, and applied to the remaining counts because of incorporation clauses. The Court dismissed this argument as “empty formalism.” The Court noted that not every transaction described elsewhere in the complaint related to the surviving claims, and also noted that the trustee misquoted his own complaint in advancing his argument, by contending that the fraudulent conveyance claim related to “transactions,” when the actual complaint only cited a single transaction, which was unrelated to the damage claims at issue. Likewise, a reading of the preference count did not reveal any intention to include the loan commitment or stock redemption payments. Therefore, the Court concluded that the fraudulent conveyance and preference counts did not give the Family Defendants fair notice of the claims at issue.
The trustee next contended that the Family Defendants’ answer and affirmative defenses were “stated broadly enough to cover the claims at issue.” The Court rejected this argument too, as the burden is on the plaintiff to state his claim. The question is not whether the defendant might appear to be aware of the claims.
The trustee also contended that his responses to certain of the Family Defendants’ interrogatories and his expert reports provided sufficient notice of the claims at issue. However, those responses, which went to the issue of damages were stated in general terms, and were inadequate to put the Family Defendants on notice. Moreover, the trustee served the expert reports and interrogatory responses after the close of discovery, by agreement between the parties. The Court noted, however, that an extension of time to answer discovery does not open the door for the plaintiff to assert new claims at that late date. The Court also noted that an expert report is not a pleading, and is not a vehicle for asserting new claims.
Last, the Family Defendants asserted that permitting the trustee to go forward with these new claims would prejudice them because it would require that discovery be re-opened. The Court agreed, finding it would prejudice the Family Defendants to require them to defend against these damage claims at this late date.
Therefore, the Court granted the motion to strike the damage claims, but denied, without discussion, the Family Defendants’ request for costs.