Rule 9(b) of the Federal Rule of Civil Procedure imposes a heightened pleading standard in cases where the Plaintiff alleges fraud or mistake. Compared to Rule 8(a), which requires a “short and plain statement of the claim,” Rule 9(b) demands pleading the "circumstances" of fraud "with particularity." In the Fifth Circuit, when the Rule 9(b) pleading standard applies, the complaint must contain factual allegations stating the “time, place, and contents of the false representations, as well as the identity of the person making the misrepresentation and what that person obtained thereby.” Tuchman v. DSC Commc’ns Corp., 14 F.3d 1061, 1068 (5th Cir. 1994). In Life Partners Holding, Inc. v. Cowley, 926 F.3d 103 (5th Cir. 2019), the Fifth Circuit, for the first time, recently touched the issue on pleading standards for claims of fraudulent transfer. Although the Court avoided taking sides on a Circuit split regarding the pleading standards for fraudulent transfers, this 34-page opinion provides some guidance as to how the Rule 9(b) standard applies in the Fifth Circuit.
Actual Fraudulent Transfer
The complaint alleged that commissions paid to the licensees of Life Partners Holding, Inc. were actual fraudulent transfers under The Texas Uniform Fraudulent Transfer Act (TUFTA) and 11 U.S.C. § 548(a)(1)(A). In its opinion, the Court acknowledged that the Fifth Circuit has yet to decide whether the Rule 9(b) heightened pleading standard applies to actual fraudulent transfer claims and the lower courts in the Fifth Circuit are split. Among the Circuits that have addressed this issue, the First, Second, and Eighth Circuits have concluded that Rule 9(b) applies. The Court further concluded that it did not need to “weigh in on this vexing question” because the Trustee's actual fraudulent transfer allegations were sufficient under either standard. The Court further concluded that the complaint was sufficient under Rule 9(b) because it identified the transferor, transferee, amount and time periods, plus "pages of allegations detailing the underlying fraudulent scheme."
Constructive Fraudulent Transfer
The Trustee also alleged that the payments of commissions were constructive fraudulent transfers under TUFTA and 11 U.S.C. § 548(a)(1)(B). Similar to the actual fraudulent transfer claims, the Fifth Circuit has not yet decided on whether the Rule 9(b) heightened pleading standard applies to constructive fraudulent transfers. The Court concluded that it did not need to reach this question since the Trustee's allegations were, again, sufficient under either standard. However, the Court’s analysis seems to imply that the Fifth Circuit would hesitate to apply the Rule 9(b) standard to constructive fraudulent transfer claims.
The Fifth Circuit stated that district courts in the Fifth Circuit have "suggested" that only Rule 8(a) applies to constructively fraudulent transfers. The Court cited cases from the Northern District of Texas in reaching the conclusion that "fraud has nothing to do with a constructive fraudulent transfer claim" because "the transaction is based on the transferor's financial condition and the sufficiency of the consideration provided by the transferee'”. The Court also acknowledged that such reasoning has “persuasive value”. The Court noted that “even if” the constructive fraudulent transfer claims were subject to the Rule 9(b) standard, the complaint would be sufficient if it plead that the transferor did not receive reasonably equivalent value and that the transfers rendered the transferor insolvent.
Recommended Course of Action
Although the Fifth Circuit did not expressly pick a side on the district split regarding the pleading standards for fraudulent transfers, its opinion does lay out helpful instructions in that regard. Specifically, for actual fraudulent transfer allegations, the best practice would be to apply the Rule 9 standard and plead the “who, what, when, where, and why as to the fraudulent conduct.” As to the constructive fraudulent transfer allegations, the Court's opinion implies that the Rule 9(b) standard should not apply because fraud is not a factor to establish a fraudulent transfer claim. In any event, before the Fifth Circuit takes a clear cut position on this issue, the best practice would appear to be to plead that “the transferor did not receive reasonably equivalent value and that the transfers rendered the transferor insolvent” to avoid a 12(b)(6) dismissal.
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