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District Court Grants Motion for Judgment on the Pleadings

Magten Asset Mgmt. Corp. v. Paul Hastings Janofsky & Walker LLP, No. 04-1256-JJF (D.Del. Jan. 12, 2007)

In this opinion, the District Court of Delaware found that both Montana’s substantive fraudulent transfer law and Plaintiff’s inability to establish standing warranted granting Defendant’s motion for judgment on the pleadings. Plaintiff, a creditor of a Montana limited liability company by virtue of an indenture agreement, sued Defendant, alleging that Defendant assisted the LLC in transferring assets to its parent corporation in order to defraud the LLC’s creditors. Defendant moved for judgment on the pleadings, arguing that as a non-transferee of the assets, it could not be held liable for any alleged fraudulent transfer under Montana’s fraudulent transfer act, and that as a creditor of the LLC, Plaintiff did not have standing to bring its derivative claims against Defendant on behalf of the LLC. The court agreed with Defendant, and granted the motion for judgment on the pleadings.

Plaintiff asserted four causes of action individually and derivatively on behalf of the LLC, arguing that Defendant: (1) aided and abetted the officers of the LLC in breaching fiduciary duties owed to the LLC’s creditors; (2) aided and abetted the allegedly fraudulent transfer by structuring the transaction to leave the LLC insolvent; (3) engaged in a civil conspiracy to conduct the allegedly fraudulent transfer; and (4) committed malpractice by breaching its duties to the LLC in failing to disclose a conflict of interest. Defendant argued that liability could not be imposed on a non-transferee under the Montana fraudulent transfer statute, and that Plaintiff lacked standing because the claims were derivative and under Montana law could only be brought on behalf of the LLC by members. Defendant also argued that Plaintiff lacked standing because it was not a creditor at the time of the contested transfer. Plaintiff responded that courts have upheld claims of conspiracy to defraud creditors under the Uniform Fraudulent Conveyance Act, and that it had standing as a named third-party beneficiary of the indenture agreement. The court, however, followed what it determined to be the majority position, holding that liability could not be imposed on a non-transferee under aiding and abetting or conspiracy theories. The court also found the Plaintiff lacked standing to pursue the malpractice and fiduciary duty claims, holding that they were derivative claims that under Montana law could not be brought by anyone other than an LLC member at the time of the transaction.

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