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Chancery Dismisses Claims Seeking to Unwind Secondary Transactions that Allegedly Jeopardized Recovery for Primary Fraudulent Transfers

Posted In Chancery, DUFTA

Burkhart v. Genworth Fin., Inc., C.A. No. 2018-0691-JRS (Del. Ch. May 10, 2022)
The plaintiffs were a putative class of policyholders and insurance agents with an interest in long-term care insurance policies written by the defendant's insurance company. Plaintiffs alleged that the company’s parent and related entities fraudulently removed assets and support from the company and impaired the company’s ability to make payments to the policyholders and agents. The plaintiffs sought to unwind the purported fraudulent transactions under Delaware’s Uniform Fraudulent Transfer Act. After failing to obtain the dismissal of the DUFTA claims, the defendants allegedly diverted assets away from the initial transferees. Plaintiffs subsequently amended their complaint to include additional DUFTA claims seeking to unwind these secondary diversions. Defendants moved to dismiss the new claims on the grounds that plaintiffs were not creditors of the transferees, and thus lacked standing, and that plaintiffs had sought improperly to unwind transactions, rather than plead a right to payment.

The Court granted the defendant's motion to dismiss. In a case of first impression under Delaware law, the Court turned to authorities from other jurisdictions and concluded that there was no clear answer whether a claim under DUFTA alone could create creditor standing. The Court reasoned, however, that even if a DUFTA claim could create creditor standing, plaintiffs had not pled a right to payment from the initial transferee or subsequent transferees. The plaintiffs’ original DUFTA claims had been based on their contractual contingent rights to payment from the insurance company. Thus they were creditors who could invoke DUFTA for the diversion of funds from the insurance company. Plaintiffs’ amended claims, however, only sought to unwind secondary transactions related to entities against which plaintiffs had no right to payment, and thus the Court found that plaintiffs could not state claims under DUFTA with respect to those transfers.

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