Courts Apply Heightened Pleading Standards to Fraud Claims in Adversary Proceeding

In re Andrew Velez Constr., Inc., 373 B.R. 262 (Bankr. S.D.N.Y. 2007)

This adversary proceeding was brought by Andrew Velez Construction, Inc. (“Velez”), a general contractor on a major construction project for Con Edison Company of New York, Inc. (“Con Edison”), against Con Edison.  After substantial cost overruns, delays and changes in the scope of work, the parties each claimed that the other committed pre-petition defaults under their contract.  The parties asserted numerous causes of action, including claims for: fraudulent transfers, turnovers, declaratory relief, fraud, fraudulent inducement, quantum meruit, unjust enrichment, trust fund violations, and defamation.  Because the court was presented with Con Edison’s motion to dismiss, this decision examined the pleading standards for each claim.

The court dismissed several counts for failure to state a claim or plead with particularity in accordance with the heightened pleading standard imposed on fraud claims.  Of particular importance was the debtor’s claim alleging a fraudulent transfer.  Dismissing that claim on the basis of actual fraud, the court held that a creditor’s superior bargaining position is insufficient from which to impute fraudulent intent to the transferor.  Similarly, the court dismissed the claims for fraudulent conveyances on the basis that the complaint failed to allege fraudulent intent of the transferor.  Likewise, the court dismissed the fraudulent inducement claims because the complaint did not set forth the time, place or specific statement upon which that claim was brought, or identify the person who allegedly made the misrepresentation.  That claim also was dismissed because it arose out of the same facts as the breach of contract claim, and thus recovery was limited to the contract claim.

The court also dismissed a claim for turnover of the debtor’s alleged legal and equitable interest in its claims against Con Edison regarding amounts owed under their contract.  The court dismissed this count, with leave to amend, because the complaint only alleged an entitlement to turnover of disputed claims.  The court reasoned that it is well-established that a debtor cannot use the turnover provision of the Bankruptcy Code to recover amounts in dispute.