Hot Topics in Bankruptcy Litigation Hot Topics in Bankruptcy … · 2015-01-17 · HOT TOPICS IN...

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Hon. Robert A. Mark, ModeratorU.S. Bankruptcy Court (S.D. Fla.); Miami

Hon. Frank J. BaileyU.S. Bankruptcy Court (D. Mass.); Boston

Prof. Jessica D. GabelGeorgia State University College of Law; Atlanta

Paul J. McMahonPaul Joseph McMahon, P.A.; Miami

Roger G. SchwartzLatham & Watkins LLP; New York

Hot Topics in Bankruptcy Litigation

Hot Topics in Bankruptcy Litigation

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HOT TOPICS IN BANKRUPTCY LITIGATION

Moderator

Hon. Robert A. Mark U.S. Bankruptcy Court

Southern District of Florida

Panelists

Hon. Frank. J. Bailey U.S. Bankruptcy Court

District of Massachusetts

Professor Jessica D. Gabel Georgia State University College of Law

Paul J. McMahon Paul Joseph McMahon, P.A.

Miami, Florida

Roger G. Schwartz Latham & Watkins, LLP

New York, N.Y.

Caribbean insolvenCy symposium 2015

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QUICK FIX OR QUAGMIRE?

Involuntary Bankruptcy: An Offensive Strategy for Loss Recovery

Paul J. McMahon, Esq.

Paul Joseph McMahon, P.A. The Wiseheart Building

2840 S.W. Third Ave. Miami, Florida 33129

Tel. No. (305) 285-1222 Fax No. (305) 858-4864

[email protected]


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INTRODUCTION

Loss recovery in either a state or federal court civil proceedings can prove to be a long and

prohibitively expensive process for individual creditors. This is especially true for victims of

Ponzi schemes or similar fraud. Bankruptcy courts, compared to state and federal courts, are

uniquely equipped to more swiftly and effectively administer appropriate loss recovery matters

for the benefit of all creditors. Indeed, involuntary bankruptcy proceedings offer creditors an

opportunity for an economically efficient and, relatively speaking, quick fix for certain loss

recoveries. However, ill-conceived or bad faith involuntary filings offer the opportunity for an

economically exhausting quagmire of protracted litigation. This paper will consider examples of

such strategic quick fixes and quagmires.

BACKGROUND

The filing of an involuntary bankruptcy petition is controlled by Bankruptcy Code § 303

(“Section 303”). Involuntary proceedings may only be commenced under chapter 7 or chapter

11 of the Bankruptcy Code. The involuntary petition can be filed against most persons and

entities not paying their debts as they become due, except those specifically excluded, like

farmers and not-for-profit corporations.

The petition generally is made by three or more entities holding aggregate net claims of at

least $15,325 that are not contingent as to liability, or the subject of a bona fide dispute as to

liability or amount. If there are fewer than twelve such claim holders, the petition may be filed

by a single creditor.


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Foreign representatives of estates in foreign proceedings may also file involuntary petitions.

Thus, an involuntary bankruptcy as an offensive strategy for loss recovery is equally available to

a foreign representative.

QUICK FIX

Involuntary bankruptcy proceedings are particularly well suited to situations involving Ponzi

schemes and other fraud. The victims of such schemes and fraud are often stripped of their life

savings, leaving them emotionally and financially devastated. Facing this stark reality, these

victims are turned away by lawyers because the victim cannot meet the lawyer’s retainer

demands and because the victim’s individual claim is too small to justify a contingency fee

arrangement with the lawyer.

Section 303 provides a viable, cost-effective solution: a relative quick fix from both an

emotional and economic perspective. For a three hundred thirty-five dollar filing fee, a chapter 7

involuntary petition provides a loss recovery vehicle at no additional out-of-pocket expense to

any of the creditors. The act of filing itself provides some immediate solace to the victims.

When an Order for Relief is entered, a trustee is automatically appointed in a chapter 7

involuntary to serve as a fiduciary for the benefit of all creditors. The trustee serves without any

additional upfront cost to creditors. A trustee also can be appointed by the court for cause in a

chapter 11 involuntary. The trustee is imbued with all of the recovery tools under the

Bankruptcy Code, including those, like preference actions, unique to bankruptcy proceedings.

Pursuant to Bankruptcy Rule 2014, the petitioner’s counsel may seek appointment as special

counsel to the trustee to pursue the estate’s total available claims for the benefit of all creditors.

This often will present a more attractive economic incentive for counsel, either on a normal


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hourly fee or on a contingency fee. Like the trustee, such counsel serves without any additional

upfront costs to the creditors. The trustee and his counsel only will be paid from any recoveries.

Thus, the involuntary proceeding may serve to overcome the hurdle of representing a small

claim victim who lacks the necessary resources to cover attorney’s fees and costs. Hopefully, as

fraud seems to breed greed, a deep pocket may be found to have been complicit with the

proposed debtor and serve as a source for recovery. Alternatively, the involuntary provides an

opportunity for counsel to represent the small claim victim on a pro bono basis, or seek

compensation for benefit to the estate pursuant to 11 U.S.C. §503(b)(4), while the trustee and his

or her chosen counsel undertake the loss recovery effort. Here are a few quick fix examples:

In re The Florida Fund of Coral Gables, Ltd., Case No. 99-40395-BKC-RAM

Following the suicide of its trusted accountant/investment advisor (the “Accountant”), the

retirement income of a Homestead temple’s congregation (along with the investment income of

many others) vanished. The Accountant had been running a successful Ponzi scheme by

convincing retirees to invest in participations in his Florida Fund (the “Fund”).

While the probate court was administering to the needs of the deceased Accountant’s widow

and children, the Fund’s victims were left to fend for themselves. No one knew where the

investment money went and the victims lacked the necessary investigative tools, much less the

necessary funds, to pursue potential defendants.

A chapter 7 involuntary was filed against the Fund. The involuntary petition was

uncontested. A trustee was appointed and counsel retained on a normal hourly basis.

Discovery revealed that the Miami Chief of Police (the “Chief”) had invested the police

pension plan (the “Pension Plan”) in the Fund. The Chief learned that the Fund was a Ponzi


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scheme and confronted the Accountant. Rather than expose the scheme, the Chief pressured the

Accountant to maintain the Ponzi scheme to repay the Pension Plan.

As a direct consequence of the filing, the chapter 7 bankruptcy trustee and his professionals

successfully avoided nearly eight hundred thousand dollars in preferential payments to the

Pension Plan. Miami Police Relief & Pension Fund v. Tabas (In re The Florida Fund of Coral

Gables, Ltd.) 144 Fed. Appx. 72 (11th Cir. 1998). [The recovery was paid by the Pension

Plan’s deep pocketed insurance carrier.] Absent the petition, there would have been no recovery

for the Fund’s victims.

In re Bankest Capital Corporation, Case No. 04-10941-BKC-AJC

Bankest Capital Corporation (the “Company”) was a fraudulent factoring operation that

attracted unsuspecting investor/noteholders. Espirito Santo Bank (“Bank”) had been a 50%

shareholder in the Company but, in 2002, the Bank exercised a put option under its shareholder

agreement to force the Company to repurchase the Bank’s 50% interest for ten million dollars.

The Bank’s holding company (“Holding Company”) held outstanding secured loans to the

Company while the Company continued to conduct its business through the Bank. Eventually,

payments on the Company’s notes ceased and in 2004 the Company’s principals were indicted.

The Holding Company immediately sought foreclosure of its lien in the federal district court and

had a receiver (“Receiver”) appointed. But the Receiver selected by the Holding Company had

no interest in seeking avoidance of the ten million dollar payment to the Bank.

Lacking sufficient economic resources to individually pursue loss recovery litigation, an

involuntary chapter 7 was filed by three of the Company’s victims. The Receiver consented to

relief but then exercised his right to convert to chapter 11 in an effort to retain control as a debtor


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in possession. Given the absence of any hope of reorganization, the case was quickly

reconverted to a chapter 7.

An independent trustee was appointed. The petitioners’ counsel was employed as special

counsel to the trustee on a contingency fee basis and an avoidance action was commenced

against the deep pocketed Bank.

Two years later, the payment to the Bank ultimately was determined to meet all elements of a

constructively fraudulent transfer and a ten million dollar summary judgment was entered against

the Bank. Kapila v. Espirito Santo Bank (In re Bankest Capital Corp.), 374 B.R. 333 (Bankr.

S.D. Fla. 2007). The trustee’s objection to the Holding Company’s claims was favorably settled.

The judgment and subsequent settlement with the Bank’s Holding Company achieved a net

recovery of nearly thirty cents on the dollar for all of the victims. Without the petition, the

Holding Company’s foreclosure would have precluded any recovery for the victims who were

defrauded of their life savings.

In re Rothstein Rosenfeldt Adler, P.A., Case No. 09-34791-BKC-RBR

An involuntary petition can also be useful for well heeled victims. The Rothstein Ponzi

scheme is a good example. Attorney Rothstein was in the business of selling phony litigation

settlement agreements to high roller investors. In 2009 Rothstein fled to Morocco and his law

firm successfully sought appointment of a receiver.

Recognizing a massive Ponzi scheme, the receivership was quickly superseded by an

involuntary chapter 11 petition filed by several of Rothstein’s victims. The petition was

uncontested and the Rothstein receiver became the Rothstein trustee with all the available

remedies afforded by the Bankruptcy Code.


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In 2010 the Rothstein trustee sought approval of a Bankruptcy Rule 9019 (“9019”) settlement

agreement with one of his many litigation targets, along with a bar order. The bar order would

have precluded litigation against related party defendants: i) the main Rothstein feeder fund; and

ii) its principal/guarantor. Fearing loss of their pending litigation rights, with no guarantee of a

greater return from the Rothstein chapter 11, these deep pocketed creditors filed chapter 7

involuntary petitions against the two related party defendants. The petitions circumvented the

proposed bar order and temporarily derailed the 9019 settlement. These additional bankruptcy

proceedings provided the petitioners an opportunity to negotiate a greater recovery.

Ultimately, the chapter 7 trustee for the main feeder fund, together with the Rothstein trustee,

achieved a global settlement with the deep pocketed Ponzi scheme participant, TD Bank. A

Joint Liquidating Plan was approved in 2013. Presently, a 100% recovery for all of Rothstein’s

victims is anticipated.

QUAGMIRE

The involuntary proceeding examples just described involved Ponzi schemes or other

fraud such that a true contest of the petition was unlikely. In closer situations, the utmost care

and caution is warranted as a potential quagmire awaits.

Section 303(i) provides a two-step remedy where the involuntary petition is successfully

contested or otherwise dismissed without the consent of the proposed debtor. Section 303(i)(1)

(“Paragraph 1”) allows for an award of attorney fees and costs for an ill-conceived filing. Section

303(i)(2) (“Paragraph 2”) provides for an additional award of compensatory and punitive

damages for a bad faith filing. For cause shown the court also may require a bond from the

petitioner to indemnify the alleged debtor for such potential fees, costs, and damages.


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In re Myron Orlinsky, Case No. 06-15417-BKC-RAM

The Honorable Robert A. Mark’s unpublished opinion (affirmed on appeal by both the

district court and the Eleventh Circuit) applying Paragraph 1 to an ill-conceived involuntary

filing is instructive on a petitioner’s exposure to attorney fees and costs. In Orlinsky, the

judgment creditor (the “Petitioner”) utilized Section 303 as an alternative collection device.

Following a two-week trial and a six million dollar jury verdict, Petitioner obtained a judgment

against Orlinsky. Orlinsky appealed but failed to seek a stay or file an appeal bond.

Petitioner proceeded with unsuccessful collection efforts, including mediation. Seven

years following his initial lawsuit, Petitioner chose to file a chapter 7 involuntary petition against

Orlinsky. The petition was contested on multiple grounds including Petitioner’s ineligibility to

file an involuntary because the appeal constituted a bona fide dispute of Petitioner’s claim and

the petition’s failure to meet the numerosity requirements of Section 303(b)(1).

After substantial litigation in the bankruptcy court on the contested issues, Petitioner’s

state court judgment was reversed on appeal and review was denied. Thus, Judge Mark sua

sponte dismissed the involuntary petition because the Petitioner was no longer Orlinsky’s

creditor.

Orlinsky sought damages under Paragraphs 1 and 2, but did not request a jury trial.

Judge Mark determined that, while the petition was not filed in bad faith, it was ill-conceived

given the “totality of the circumstances,” especially the pending appeal. Judge Mark noted that

Paragraph 1 raises a rebuttable presumption that fees and costs should be awarded to the alleged

debtor who successfully defends a petition. Here, not only did Petitioner lose his six million

dollar judgment, but he also was assessed over $100,000 in fees and costs for his misguided

petition.


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In re Rosenberg, Case No. 09-13196-BKC-AJC

After protracted litigation, the Honerable A. J. Cristol dismissed the individual chapter 7

involuntary petition in In re Rosenberg. The matter involved multiple loans from multiple

entities with Rosenberg acting as a five million dollar guarantor. The petitioners were found not

to be the real parties in interest. Indeed, one of the three petitioners was merely a servicing agent

for an entity that had no claim under Rosenberg’s guarantee. Judge Cristol’s dismissal was

affirmed on appeal to the district court.

Following the dismissal, Rosenberg moved for damages under Paragraphs 1 and 2 (and

common law theories) against the petitioners and certain related third parties. Rosenberg

demanded a jury trial and was ordered to proceed in the form of an adversary to acquire

jurisdiction over the related third parties.

Judge Cristol determined that Section 303 preempted Rosenberg’s common law theories,

including Rosenberg’s malicious prosecution claim. Judge Cristol also determined that the term

“petitioner” in Section 303(i) was broad enough to include the corporate agent signing the

petition. He entered an attorney fee and cost award under Paragraph 1 (including those incurred

in the appeal and for litigating Rosenberg’s Paragraph 2 claim) of over one million dollars.

Judge Cristol reserved jurisdiction to award future damages attendant to the ongoing litigation.

This decision was affirmed on appeal to the district court in DVI Receivables XIV, LLC v.

Rosenberg (In re Rosenberg), 500 B.R. 174 (S.D. Fla. 2013).

The petitioners took advantage of Rosenberg’s jury demand and moved for withdrawal of

the reference on Rosenberg’s Paragraph 2 bad faith claim. Petitioners successfully argued under

Granfinanciera v. Nordberg, 492 U.S. 33 (1989) and Glannon v. Carpenter (In re Glannon), 245

B.R. 882 (D. Kan. 2000) that, although a Paragraph 2 claim is admittedly core, Rosenberg’s


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Paragraph 2 claim was akin to a malicious prosecution claim for which Rosenberg was entitled

to the jury trial he originally demanded. Because Rosenberg was not permitted to withdraw his

jury demand as a matter of law, petitioners were deemed entitled to a jury trial and their motion

to withdraw the reference was granted by the district court.

Following an eleven-day jury trial, the petitioners were found to have filed the petition in

bad faith as a means of pressuring Rosenberg into settling related actions. The district court

thereupon entered an additional six million dollar judgment, including five million dollars in

punitive damages, against the petitioners. Twenty-eight days following entry of the district

court’s judgment, the petitioners filed their post-trial motions, including their Rule 50(b) motion

seeking judgment as a matter of law. Rosenberg moved to strike the motions as untimely based

upon application of the shorter fourteen-day jurisdictional time limits imposed under Bankruptcy

Rule 9023.

Without addressing Rosenberg’s Rule 81(a)(2) argument (i.e. “These Rules apply to

bankruptcy proceedings to the extent provided by the Federal Rules of Bankruptcy Procedure”),

the district court nevertheless: i) determined petitioner’s motions timely; ii) reversed the five

million dollar punitive damage award for Rosenberg’s failure to seek a special verdict as to “the

exact nature of the bad faith;” and iii) disallowed Rosenberg’s compensatory damage awards for

lost wages and reputational harm as unsupported by the evidence, leaving only Rosenberg’s three

hundred-sixty thousand dollar bad faith award for emotional distress.

All of the foregoing presently is on appeal, and cross appeal, to the Eleventh Circuit. The

issues to be addressed should include application of Bankruptcy Rule 9023 to withdrawn

proceedings and the right to jury trial in Paragraph 2 actions. An opinion is expected in early

2015.


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CONCLUSION

An involuntary petition invoking bankruptcy court jurisdiction can be a useful tool for

achieving cost-effective recoveries in the proper circumstances. The involuntary bankruptcy

proceeding is more appropriate when dealing with fraud, such as Ponzi schemes where a petition

contest is unlikely. Indeed, deep pockets in league with these schemes may be recognized at the

outset or uncovered during initial discovery, making the recovery effort economically feasible.

The involuntary also may be utilized to forestall bar orders emanating from proposed settlements

within the main bankruptcy proceeding of such schemes. In these situations, the involuntary can

be relatively a quick fix.

The involuntary bankruptcy strategy for loss recovery is far less suitable in garden variety

collection situations and may well result in damages awarded against the petitioners. Collection

frustration must not be permitted to supersede caution and considered judgment. In re Orlinsky

teaches that simply getting it wrong can subject the petitioner to an award of attorney fees and

costs. In re Rosenberg appears to be the poster child for the potential consequences of a bad

faith filing. Both of these cases serve to exemplify the improper utilization of involuntary

proceedings leading to an unintended loss recovery quagmire.


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POWERFUL SHIELD OR PROCEDURAL INCONVENIENCE?

Current Developments Concerning the Scope and Practical Effect of Section 546(e) and (g)’s Safe Harbors

Roger G. Schwartz, Esq. Aaron M. Singer, Esq.

David F. McElhoe, Esq.

Latham & Watkins LLP 885 Third Avenue

New York, NY 10022

Tel. No. (212) 906-1766 Fax No. (212) 751-4864

[email protected]


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Section 546 of the Bankruptcy Code generally provides exceptions to a trustee’s ability to avoid certain prepetition transfers of a debtor’s property. Sections 546(e) and (g) provide safe-harbors for recipients of the debtor’s property through certain securities-related transactions, whether such transfers relate to a “securities contract” or otherwise involve a financial institution or intermediary. Sections 546(e) and (g) were enacted to minimize the risk to the financial markets that could result if such transfers were avoidable. More specifically, requiring financial institutions to repay settled amounts to a debtor’s estate that result from securities-related transactions could leave such financial institutions with insufficient liquidity and thereby create a chain-reaction that could place the financial markets at risk. However, as the scope and reach of the Section 546 safe harbors have broadened and expanded over time, controversy has arisen as to whether application of these provisions in particular cases is consistent with the original policy rationales underpinning enactment of these safe harbors.

This outline discusses recent developments and case law regarding the scope and application of the Bankruptcy Code Section 546(e) and (g) safe-harbors.

STATUTORY BACKGROUND

Section 546(e) – Safe Harbor for Margin Payments, Settlement Payments, and Transfers in connection with Securities Contracts.

Under Section 546(e), “Notwithstanding sections 544, 545, 547, 548 (a)(1)(B), and 548 (b) of this title, the trustee may not avoid a [prepetition] transfer that is:

a margin payment, as defined in section 101, 741, or 761 of [the Bankruptcy Code], or settlement payment, as defined in section 101 or 741 of [the Bankruptcy Code], made by or to (or for the benefit of) a commodity broker, forward contract merchant, stockbroker, financial institution, financial participant, or securities clearing agency; or

. . . a transfer made by or to (or for the benefit of) a commodity broker, forward contract merchant, stockbroker, financial institution, financial participant, or securities clearing agency, in connection with a securities contract, as defined in section 741 (7), commodity contract, as defined in section 761 (4), or forward contract, that is made before the commencement of the case, except under section 548 (a)(1)(A) of this title.”

Section 546(e) is inapplicable to avoidance claims by the trustee under Section 548(a)(1)(A) for actual fraud.

Significantly, by its express terms, Section 546(e) only applies to claims brought by the trustee.


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As mentioned above, “Settlement Payment” and “Margin Payment” are defined under the Bankruptcy Code. See 11 U.S.C. §§ 101(38), (51A), 741(5), (8), 761(15).

The respective definitions are somewhat vague, generally referring to the particular type of payment or similar payments.

Accordingly, courts have interpreted the definitions and Section 546(e)’s safe harbor broadly to apply to a wide range of transactions. See,e.g., Picard v. Ida Fishman Revocable Trust (In re Bernard Madoff Investment Securities LLC), Case No. 12-2557-bk(L) (2d Cir. Dec. 8, 2014) (transfers by stockbroker to clients pursuant to account documents authorizing broker to trade securities on clients’ behalf were covered by the safe harbor notwithstanding the facts that (i) stockbroker did not actually make any trades and (ii) stockbroker falsified information as part of a ponzi scheme and repaid clients from fake profits from a commingled account); Enron Creditors Recovery Corp. v. Alfa, S.A.B. de C.V., 651 F.3d 329, 336 (2d Cir. 2011) (“The phrase ‘commonly used in the securities industry’ [in the definition of “settlement payment”] is thus properly read as modifying only the term ‘any other similar payment.’ The phrase is not a limitation . . . but rather, . . . ‘a catchall phrase intended to underscore the breadth of the § 546(e) exemption.’” (citations omitted))].

Section 546(g) - provides a nearly identical safe harbor for transfers “under or in connection with any swap agreement.” 11 U.S.C. § 546(g). Like Section 546(e), Section 546(g) was enacted to prevent destabilization of the swap markets.

THE BROAD SCOPE OF SECTION 546(e)- PICARD V. IDA FISHMAN REVOCABLE TRUST

Picard v. Ida Fishman Revocable Trust, decided by the Second Circuit on December 8, 2014, underscores the breadth of transactions that can be shielded by the Section 546(e) safe harbor.

The Court held that payments to Madoff’s clients pursuant to various agreements were both “settlement payments” and transfers made “in connection with a securities contract” such that the safe harbor would cover the payments, even though Madoff never actually “initiated, executed, completed, or settled the securities transactions contemplated by the [ ] agreements.”

Background


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Prior to the collapse of its ponzi scheme, Bernard L. Madoff Investment Securities LLC (“BLMIS”) entered into agreements with its customers which (i) authorized BLMIS to carry out securities transactions on behalf of customers and (ii) permitted its customers to withdraw money from their accounts. BLMIS, however, never executed any trades on behalf of its customers. When customers withdrew money from their accounts, BLMIS provided money from a commingled customer account.

After the BLMIS ponzi scheme collapsed, a trustee was appointed pursuant to the Securities Investor Protection Act (“SIPA”). SIPA authorizes such trustees to recover payments made by a debtor that would have been subject to avoidance under the Bankruptcy Code.

The trustee brought actions under Section 548(a)(1)(B) against certain BLMIS customers to recover the cash withdrawals/profit payment received through BLMIS’s ponzi scheme. Section 548(a)(1)(B) permits a trustee to avoid certain prepetition constructive fraudulent transfers made by a debtor.1

Trustee’s Arguments

The trustee made the following three arguments in support of its assertion that the Section 546(e) safe harbor should not apply to prevent avoidance of payments made by BLMIS to its customers:

First, “that Section 546(e) should not apply because BLMIS never initiated, executed, completed, or settled the securities transactions contemplated by the customer agreements[;]”

Second, that the transfers were not “made in connection with a securities contract” or “settlement payment[s,]” and, therefore, Section 546(e) does not apply; and

Finally, that “permitting the application of § 546(e) in this case would be tantamount to giving legal effect to Madoff’s fraud.” Picard v. Ida Fishman Revocable Trust, Case No. 12-2557-bk(L) at *13.

Court’s Holding

The court rejected each of the trustee’s arguments and held that the Section 546(e) safe harbor protected from avoidance payments made by BLMIS to its customers.

1 The trustee also brought claims under Section 548(a)(1) for actual fraud to which Section 546(e) is inapplicable.


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The court noted that Section 546(e) was intended to “sweep broadly” to cover transfers made “in connection with a securities contract” or “any other agreement or transaction that is similar to . . . [a] contract for the purchase, sale, or loan of a security[.]” Because, by its terms, Section 546(e) does not contain a purchase and sale requirement, the court found it irrelevant that BLMIS did not actually transact any securities and that the agreements did not obligate BLMIS to trade on the customers’ behalf.

The court also noted that the transfers made by BLMIS to its customers were protected because they were made in connection with the customer agreements, which are “securities contracts,” and that such transfers were also protected as “settlement payments.”

To qualify as a “settlement payment,” the court held that it was enough that BLMIS’s customers intended BLMIS to “dispose of securities and remit payment to the customer.”

Finally, the court emphasized that, although the trustee’s argument that applying the Section 546(e) safe harbor would be tantamount to giving legal effect to Madoff’s fraud was compelling, “[p]ermitting the clawback of millions, if not billions, of dollars from BLMIS clients—many of whom are institutional investors and feeder funds—would likely cause the very ‘displacement’ that Congress hoped to minimize in enacting § 546(e).”

CREDITOR STANDING - A LOOPHOLE IN THE SECTION 546(e) SAFE HARBOR?

Several recent cases address whether the Section 546(e) safe harbor also shields prepetition transfers that are challenged by creditors instead of the trustee.

Background: Fraudulent Transfers under State Law

Outside of bankruptcy, a creditor ordinarily can bring applicable state law constructive fraudulent transfer (“SLCFT”) claims against a debtor’s transferee if a debtor did not receive reasonably equivalent value for the property it transferred, provided such debtor was (or was close to being) insolvent or became insolvent as a result of the transaction.

In bankruptcy, however, a debtor typically has exclusive standing to bring avoidance actions on behalf of unsecured creditors, including, for example, SLCFT claims, 11 U.S.C. § 544(b)(1), and creditors are bound by such debtor’s resolution of the avoidance actions and claims. St. Paul Fire & Marine Ins. Co. v. PepsiCo, Inc., 884 F.2d 688, 701 (2d Cir. 1989).


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A debtor’s exclusive right to bring avoidance actions lasts for a maximum of two years from the filing of the bankruptcy petition. 11 U.S.C. § 546(a).As a result of the automatic stay, during the two-year period and while any avoidance action is continuing, creditors are barred from bringing SLCFT claims. 11 U.S.C. § 362(a)(1); see also In re Tribune Co. Fraudulent Conveyance Litig., 499 B.R. 310, 323 (S.D.N.Y. 2013) (“Section 362(a)(1) stays fraudulent conveyance claims by creditors for as long as the trustee is exercising its avoidance powers . . . .”).

Generally, a debtor’s causes of action can be assigned under the Bankruptcy Code. See, e.g., Advanced Magnetics, Inc. v. Bayfront Partners, Inc., 106 F.3d 11, 17, 36 F.3d 1458 (2d Cir. 1997) (“In general, claims or [causes of] action may be freely transferred or assigned to others.”). Several courts have found that SLCFT claims, specifically, are property of the estate and may be assigned by a debtor, notwithstanding the fact that such claims are, in essence, creditor claims against the debtor’s transferees rather than claims of the debtor itself. Lyondell, 503 B.R. at 358-59; seealso Cadle Co. v. Mims (In re Moore), 608 F.3d 253 (5th Cir. 2010); Duckor Spradling & Metzger v. Baum Trust (In re P.R.T.C. Inc.), 177 F.3d 774 (9th Cir. 1999); but see Official Comm. of Unsecured Creditors of Cybergenics Corp. v. Chinery (In re Cybergenics Corp.), 226 F.3d 237, 243 (3d Cir. 2000) (fraudulent transfer claims are not property of the estate and, therefore, cannot be sold).

Alternatively, although no provision of the Bankruptcy Code specifically provides for such treatment, several courts have held that once a debtor’s two-year period to bring avoidance actions expires, the SLCFT claims “automatically revert” to individual creditors subject to the applicable state law statute of limitations. Tribune, 499 B.R. at 322; see also Barber v. Westbay (In re Integrated Agri, Inc.), 313 B.R. 419, 427-28 (Bankr. C.D. Ill. 2004). Such courts reach this conclusion based on the minority view that fraudulent transfer claims are not property of the estate. Seee.g., Tribune, 499 B.R. at 321-22. “Because [such claims] are not property of the estate, the trustee has a limited time in which to bring them, and the bankruptcy court need not discharge the debtor from bankruptcy in order for the avoidance claims to revert.” Id. at 322.

Because creditors can reacquire their SLCFT claims, either by waiting out the two-year period or through assignment, the applicability of the Section 546(e) safe harbor comes into question because, by its terms, Section 546(e) only applies to a trustee (or a debtor) asserting avoidance actions.

Tearing Down the Safe Harbors - Tribune and Lyondell

Background


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Both cases involved bankruptcies following leveraged buy-outs (“LBOs”)in which shareholders received large distributions.

In Tribune, the court designated the creditors’ committee to stand in the shoes of the trustee to bring fraudulent transfer claims against shareholders who profited from the LBO.2 Exercising such derivative standing, the creditors’ committee only asserted claims for actual fraud against the shareholders. Individual creditors, however, sought to simultaneously bring SLCFT claims to recover the same shareholder profits that the creditors’ committee was targeting.

In Lyondell, claims relating to the LBO were abandoned by the debtors pursuant to the chapter 11 plan of reorganization and individual creditors subsequently asserted SLCFT claims against shareholders that profited from the LBO.

In response to the individual creditors’ actions in each case, each shareholder group asserted that the distributions received from the debtors were protected by the Section 546(e) safe harbor.

Holdings

Both courts held that Section 546(e) does not bar creditors from asserting SLCFT claims. Each court found that:

Section 546(e) and its legislative history only reference actions brought by “the trustee” (and, by implication, a debtor).

There is no indication that Congress intended to block individual creditors from asserting SLCFT claims through the implementation of Section 546(e).

“[T]ellingly, Congress chose not to extend Section 546(e) to [SLCFT] claims filed before bankruptcy or to intentional fraudulent conveyance claims brought after a bankruptcy filing, even though these types of claims pose the very same threat to the stability of securities markets. . . . Obviously, Congress has struck some balance between various policy priorities, which means that it has

2 The creditors’ committee filed a motion seeking and was granted derivative standing in Tribune to assert and bring claims belonging to the trustee/the debtor.. In order to receive derivative standing to bring a claim on behalf of a debtor, the creditors’ committee must demonstrate that (i) a colorable claim exists, (ii) the debtor unjustifiably refused to pursue such colorable claim and (iii) the creditors’ committee has received permission from the bankruptcy court to initiate the action. See Infinity Investors Ltd. v. Kingsborough (In re Yes! Entm’t Corp.), 316 B.R. 141, 145 (Bankr. D. Del. 2004). It is unclear, based on the holdings in Tribune and Lyondell, whether the creditors’ committee would have been subject to the safe harbors that explicitly apply only to the “trustee” if the creditors’ committee had sought to bring claims other than claims for actual fraud.


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determined that fraudulent conveyance actions are not necessarily and in all cases ‘repugnant’ to the interest of market stability.” Lyondell, 503 B.R. at 365.

Individual creditors have standing to assert SLCFT claims.

In Tribune, individual creditors had standing because SLCFT claims “automatically revert” to creditors when the trustee can no longer assert such claims.

In Lyondell, individual creditors had standing because the trustee may abandon SLCFT claims for the benefit of creditors.

Because, after abandonment, these claims are brought on behalf of the individual creditors, Section 546(e) does not apply.

In Tribune, however, the court held that individual creditors lacked standing to pursue actions due to the automatic stay because the creditors’ committee was simultaneously bringing actual fraud claims on the same grounds as the SLCFT claims. The court reached this conclusion notwithstanding the fact that the bankruptcy court originally lifted the stay specifically to permit individual creditors to bring such claims.

Building Back Up the Safe Harbors - Whyte v. Barclays Bank PLC, 494 B.R. 196 (S.D.N.Y. 2013).

Background

Barclays Bank PLC (“Barclays”) entered into an agreement with the debtor to purchase its portfolio of commodity derivatives, which became profitable during the debtor’s bankruptcy. The debtor’s chapter 11 plan established a litigation trust for the prosecution of all claims, including avoidance actions, of the debtor and additional claims assigned to the litigation trust by contributing creditors. After the plan was confirmed, the litigation trustee brought an action under New York state law against Barclays to avoid the transfer of the debtor’s commodity derivatives portfolio.

Holding

The court found that allowing the litigation trust to bring SLCFT actions on behalf of creditors “would, in effect, render section 546(g) a nullity.”


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Section 546(g) “impliedly preempts the Trustee’s attempt to resuscitate fraudulent avoidance claims . . . [the trustee] would [otherwise] be expressly prohibited by section 546(g) from asserting . . . .”

The court noted that “[t]he patent purpose [of protecting swap markets] and intended effects of section 546(g) would be totally undercut if” a litigation trustee could bring claims that were either assigned to it or that the trustee was time-barred from asserting, where the trustee was prohibited from bringing the same claims pursuant to Section 546(g).

The court emphasized that permitting a litigation trust to bring claims in this manner would “make a mockery of Congress’s purpose of minimizing volatility in the swap markets” by potentially unwinding swap market transactions several years later. See alsoContemporary Indus. Corp. v. Frost, 564 F.3d 981, 988 (8th Cir. 2009); In re Hechinger Inv. Co. of Del., Inc., 274 B.R. 71, 96 (D. Del. 2002).

Second Circuit Appeal

Arguments in both Barclays and Tribune were heard by the Second Circuit on November 5, 2014, though no time-frame for a decision has been indicated. The various issues raised on appeal are focused on the following questions:

Do Sections 546(e) and (g) preempt individual creditors from bringing certain SLCFT claims?

If not, how can individual creditors acquire standing?3

In Tribune, the court found that creditors may acquire standing to assert SLCFT claims automatically, when the trustee is time-barred from asserting such claims. Property of the estate, however, is only transferred from a debtor’s estate through administration of a chapter 11 plan. See 11 U.S.C. §§ 349(b), 350(a). Thus, whether the underlying SLCFT claims are estate property or not will likely determine whether such claims automatically revert to individual creditors.

While not subject to the appeals, in Lyondell, the court held that SLCFT claims are property of a debtor’s estate and, accordingly, found that creditors may acquire standing to assert SLCFT claims (a) through assignment of such claims by the trustee or debtor or (b) if the trustee or debtor abandons such claims for the creditors’ benefit.

3 Because Barclays ruled that Section 546(g) preempts certain SLCFT claims, it did not reach the issue of standing.


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Does the automatic stay bar individual creditor SLCFT claims while the trustee (or another party standing in the shoes of the trustee, as in Tribune)litigates its actual fraud claims based on the same facts?

Notably, the bankruptcy court in Tribune specifically lifted the automatic stay to permit individual creditors to pursue SLCFT claims. Nonetheless, the district court held that the automatic stay prevented the individual creditors from pursuing SLCFT claims while the creditors’ committee pursued actual fraudulent transfer claims on the same basis because “Section 362(a)(1) stays fraudulent conveyance claims by creditors for as long as the trustee is exercising its avoidance powers.” Tribune, 499 B.R. at 323. Other courts have reached the same conclusion. See e.g., Nat'l Am. Ins. Co. v. Ruppert Landscaping Co. Inc., 187 F.3d 439, 441 (4th Cir. 1999) (finding individual creditors lacked standing to avoid transfers that the trustee has the power to avoid despite lifting of the automatic stay).

However, in Tribune, the district court enforced the automatic stay notwithstanding the fact that both the trustee and individual creditor actions were brought post-confirmation when the automatic stay arguably no longer applies. See 11 U.S.C. 362(c)(2) (“the stay . . . continues until the earliest of—(A) the time the case is closed; (B) the time the case is dismissed; or (C) if the case is a case . . . under [Chapter 11], the time a discharge is granted or denied.”).

LOOKING AHEAD: THE IMPACT OF A SECOND CIRCUIT DECISION AND OTHER OPEN SAFE HARBOR ISSUES

If the Second Circuit were to hold that Sections 546(e) and (g) do not bar creditors from bringing SLCFT claims with respect to securities-related transactions – in other words that the safe harbor provisions only apply to the trustee and/or the debtor:


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As the defendants in Tribune observed in their appellate brief, a trustee could potentially abandon and/or assign SLCFT claims. The parties noted that it could be argued that it would be a breach of the trustee’s bankruptcy-related fiduciary duties not to disclaim SLCFT claims where the safe harbors would only apply to the trustee. Cross-Appellants’ Reply Brief On Section 546(e) at 19, In re Tribune Co. Fraudulent Conveyance Litig.,Case No. 13-3992 [Docket No. 229]. This perspective may ignore the reality that a trustee, often the debtor, may be reluctant, for ongoing business, reputational, or other reasons, to initiate avoidance actions against its shareholders, financial partners and institutions, customers, or other entities. In such circumstances, a debtor may be conflicted on the question of whether to provide creditors with the opportunity to initiate such avoidance actions. Additionally, the safe harbor would likely only provide temporary protection for the debtors’ transferees until the trustee’s claims were abandoned (as in Lyondell), assigned, or automatically reverted to creditors (as in Tribune).

While Picard did not address the issue of standing, it would be difficult for the Second Circuit to reconcile Picard, which stressed Congress’s intent to safeguard the financial markets, with a forthcoming decision in either Barclays or Tribune that individual creditors are not subject to the safe harbor. The courts in Tribune and Lyondell (each decided prior to the Second Circuit decision in Picard) distinguished the trustee from individual creditors in applying the safe harbor partially due to the “balance” that Congress struck between making creditors whole and protecting financial markets. If making creditors whole were an appropriate consideration in whether Section 546(e) or (g) applies, however, it bears note that the Second Circuit did not consider such policy rationales in Picard when the court prevented potentially billions of dollars in creditor recoveries based on essentially fictitious agreements that were never intended to be performed partially due to Congress’s purpose to ensure the safety of the financial markets.

While the issue was not raised in Tribune, a committee that is granted derivative standing could use portions of the rulings in Tribune and Lyondell to argue that Section 546(e) and (g) do not apply to parties granted derivative standing, since such parties are not “trustees.” If the Second Circuit were to find that individual creditors can have standing to bring SLCFT claims, parties granted derivative standing may raise this argument in the future.


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ESTOPPEL PRINCIPLES IN THE INTERNATIONAL ARENA

Hon. Frank J. Bailey United States Bankruptcy Court for the District of Massachusetts

John W. McCormack Post Office and Court House 5 Post Office Square, Suite 1150

Boston, MA 02109-3945 (617) 748-5300

Suzanne N. Boyd Alston & Bird LLP

1201 West Peachtree Street, NW Atlanta, GA 30309

(404) 881-7000 [email protected]

Special thanks to Kerime Sule Akoglu, Boston College Law School, Chestnut Hill, Massachusetts


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ESTOPPEL PRINCIPLES IN THE INTERNATIONAL ARENA

Four common law estoppel doctrines that arise under the laws of the United States are:

(1) judicial estoppel; (2) equitable estoppel; (3) issue preclusion (collateral estoppel); and (4)

claim preclusion (res judicata). Each is a tool that can be used offensively or defensively to

convince a court that some or all of the claims or defenses alleged in an action should be

dismissed. The two former doctrines focus on the equities of positions a litigant takes in a

proceeding and the two latter doctrines focus on a decision reached by another court. While any

of the four doctrines may arise in a case that has litigation pending in the U.S. and abroad, the

focus of this portion of the Hot Topics in Bankruptcy Litigation panel is on the doctrines of

judicial and equitable estoppel. The purpose of these materials is to (a) provide an overview of

each doctrine (b) explore timely or otherwise relevant nuances of each doctrine and (c) discuss

how courts in the U.S. have viewed or applied the doctrines in the cross-border context.4

Judicial Estoppel

Overview of Doctrine

Judicial estoppel is also known as the “doctrine of preclusion of inconsistent positions.”5

Judicially created, it is a doctrine that aims to prevent a litigant from asserting a position that is

inconsistent with a position the litigant asserted previously, thereby protecting the integrity of the

judicial process.6 Successfully applied, judicial estoppel should result in the dismissal of a claim

or defense that is premised upon an inconsistent position taken by the same party in another

action. Unlike issue preclusion (collateral estoppel) and claim preclusion (res judicata), for the

doctrine of judicial estoppel to apply, the other court need not have made a determination (final

4 The focus of these materials is on U.S. federal courts. But as Levin (discussed below) reflects, the issue may present in U.S. state courts as well. 5 Black’s Law Dictionary 554 (9th ed. 2009). 6 New Hampshire v. Maine, 532 U.S. 742, 749–50 (2001).


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or otherwise). By contrast, the doctrine of judicial estoppel focuses (narrowly, perhaps) on

positions taken in another court.7

While there is no uniform judicial formulation of the doctrine of judicial estoppel,8 in

New Hampshire v. Maine the Supreme Court established “several factors [that] typically inform

the decision whether to apply the doctrine in a particular case.” 532 U.S. 742, 750 (2001). But

bear in mind that these are merely factors that do not establish a mandatory standard. The factors

are as follows:

1. A party has taken a “clearly inconsistent” position in a legal proceeding;

2. That party “has succeeded in persuading a court to accept that party’s earlier position, so

that judicial acceptance of an inconsistent position in the later proceeding would create

‘the perception that either the first or the second court was misled;’” and

3. That party “would derive an unfair advantage or impose an unfair detriment on the

opposing party if not estopped.”

Id. at 750–51 (citations omitted).

Despite this list of “factors,” the Supreme Court itself conceded “[t]he circumstances

under which judicial estoppel may appropriately be invoked are probably not reducible to any

general formulation of principle.” Id. at 750 (quotation omitted). Accordingly, good practice

instructs reviewing the binding decisions on the relevant court. Certain commentators have

advocated the adoption of a flexible approach—because ambiguity pervades the circuit courts,

litigants may be able to persuade a court to adopt or emphasize a factor in a manner that has not

7 Adelphia Recovery Trust v. HSBC Bank USA (In re Adelphia Recovery Trust), 634 F.3d 678, 697 (2d Cir. 2011). 8 See Estop Me If You Haven’t Heard This Before, NORTON ANNUAL SURVEY OF BANKRUPTCY LAW 123, 142 (William L. Norton, Jr. ed., 2011 ed.) (claiming “there are no universally accepted elements of the [judicial estoppel] doctrine.”).


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necessarily been considered by earlier decisions.9

Noteworthy Nuances

As noted above, the Supreme Court has not mandated a concrete test for judicial estoppel.

Amidst this ambiguity, courts in different circuits have emphasized different factors in applying

the doctrine. For example, in certain circuits the third element referenced in New Hampshire v.

Maine—preventing the party against whom the doctrine is asserted from deriving an unfair

advantage—is eliminated or at least diminished in importance.10 Other circuits plainly require

this element.11 Until a uniform standard for application of the doctrine emerges there will be

uncertainty in its application in the federal courts. The current state of the law presents both a

barrier and an opportunity for parties wishing to assert the defense.

Another example, which may be highly relevant in bankruptcy cases, is whether it

matters if the prior inconsistent position was asserted intentionally. For example, if an individual

files for protection under chapter 7 of the Bankruptcy Code, the Code requires that the individual

list (or “schedule”) all assets and liabilities. The definition of assets is intentionally broad and

specifically requires the individual to list any law suit, claim, or right to sue. It is not uncommon

that the individual debtor fails to list a cause of action, receives a discharge, and the bankruptcy

case is closed. Later, the debtor may bring a law suit on the undisclosed claim that existed on the

9 K.M. Lewis and Paul M. Lopez, Recent Developments in Estoppel and Preclusion Doctrines in Consumer Bankruptcy Cases, 66 Okla. L. Rev. 459, 465 (2014) (“[T]his article’s first takeaway is that practitioners should not necessarily feel restricted by the way that courts in their jurisdiction have defined the elements of judicial estoppel. In other words, if a particular element would particularly help or harm one’s case, and if there is a good faith legal argument for adopting it in the case at hand, the practitioner should not hesitate to respectfully request that the court consider or disregard that element in the interests of equity and tailor the doctrine to the particular facts of each case.”). 10 Guay v. Burack, 677 F.3d 10, 16–17, 19 (1st Cir. 2012) (“We have generally not required a showing of unfair advantage. . . . [U]nfair advantage ‘is not a formal element of a claim of judicial estoppel,’ but is frequently considered an important factor in whether to apply the doctrine.”) (citations omitted); Barger v. City of Cartersville, Ga., 348 F.3d 1289, 1293–94 (11th Cir. 2003); Browning v. Levy, 283 F.3d 761, 775 (6th Cir. 2002). 11 Wells Fargo Bank, N.A. v. Oparanji (In re Oparanji), 698 F.3d 231, 235 (5th Cir. 2012); Ryan Operations G.P. v. Santiam‐Midwest Lumber Co., 81 F.3d 355, 362–64 (3d Cir. 1996); Cannon‐Stokes v. Potter, 453 F.3d 446, 448 (7th Cir. 2006).


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petition date. The issue is whether the doctrine of judicial estoppel applies. The party seeking

to apply judicial estoppel as a defense will argue that the bankruptcy court relied on the

individual’s representation in the bankruptcy case that the individual did not have a claim and the

discharged debtor is now asking the court to accept the opposite position. Most courts say yes.

“[I]t is well-established that a failure to identify a claim as an asset in a bankruptcy proceeding is

a prior inconsistent position that may serve as the basis for application of judicial estoppel,

barring the debtor from pursuing the claim in a later proceeding.”12 But some courts require a

showing that omitting the claim from the bankruptcy schedules was intentional.13

The circuit courts have developed a wide variety of factors in the wake of the New

Hampshire v. Maine decision. Some circuits require a showing that allowing the position, and

risking inconsistent results, is certain to impact the integrity of the judicial system.14 And others

require that the position to be estopped “be one of fact rather than law or legal theory.”15 Other

circuits only allow courts to apply judicial estoppel if its application “is tailored to address the

harm identified and no less sanction would adequately remedy the damage done by the litigant’s

misconduct.”16

It is against this far-from-uniform backdrop that we explore how judicial estoppel may be

employed in the context of cross-border litigation and bankruptcies.

Cross-Border Application

The body of case law on whether a U.S. court will apply judicial estoppel in light of a

position a litigant has taken in a court of a foreign country is sparse, but mostly consistent. The

12 Guay v. Burack, 677 F.3d 10, 17 (1st Cir. 2012). 13 See Love v. Tyson Foods, Inc., 677 F.3d 258, 261 (5th Cir. 2012). 14 Adelphia Recovery Trust v. HSBC Bank USA (In re Adelphia Recovery Trust), 634 F.3d 678, 696 (2d Cir. 2011). 15 Lowery v. Stovall, 92 F.3d 219, 224 (4th Cir. 1996) (citations omitted). 16 See Montrose Med. Grp. Participating Sav. Plan v. Bulger, 243 F.3d 773, 779–780 (3d Cir. 2001).


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following is a non-exhaustive discussion of cases selected to provide an understanding of how

U.S. courts have handled the issue.

In Rapture Shipping v. Allaround Fuel Trading B.V., 350 F. Supp. 2d 369 (S.D.N.Y.

2004), the plaintiff filed an action seeking recovery of property and punitive damages after a

similar action was dismissed by the Rotterdam (The Netherlands) Court of First Instance. Before

the Rotterdam court, the plaintiff (unsuccessfully) argued that a contractual relationship existed

between the plaintiff and defendant. Before the U.S. court, the plaintiff argued that no such

contract was ever created. The defendant urged the U.S. court to preclude plaintiff’s claim on

judicial estoppel grounds. The plaintiff responded that the Rotterdam action should have no

preclusive bearing on the U.S. court and, particularly so given the plaintiff lost that issue before

the Rotterdam court. The Southern District of New York noted its disagreement with the

following analysis:

Although the final determination was not what Rapture was hoping it would be, the reality is that the argument was successful to the extent it was adopted by the Rotterdam Court as an underlying premise of its decision.

. . .

Although this case might otherwise present a close call as to whether the doctrine of judicial estoppel should be applied, when considered in combination with the strong presumption in favor of extending comity to foreign courts in matters involving international commerce the Court is convinced that the opinion of the Rotterdam Court should be respected. Not only would upsetting the Rotterdam Court’s decision risk injecting inconsistency into the judicial process, it would risk injecting the type of inconsistency into international commerce that comity is designed to avoid.

Id. at 374–75.

Thus, the Rapture Shipping court applied the doctrine of judicial estoppel as it otherwise

would have in a purely (U.S.) domestic dispute, except it paid special attention to how its

decision would impact comity in the arena of international business. Plainly this factor would


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not be appropriate in a purely domestic dispute.

Similarly, in Levin v. Ligon, 140 Cal. App. 4th 1456 (Cal. App. Ct. June 30, 2006), a

court of the state of California applied the doctrine of judicial estoppel in a cross-border context.

Levin sued his former wife and Levi Strauss & Co. for civil partition of financial assets held in

the former wife’s name. Levin asserted that the marital dissolution in England did not resolve

his community property interest in certain pension and savings plans and accounts held in the

former wife’s name. The California trial court found that Levin’s prior legal malpractice action

in England, which he settled after asserting that he had lost his right to any interest in the

financial assets held by his former wife and accumulated during their marriage, estopped him

from claiming a community property interest in these same assets. The appeals court upheld the

trial court’s ruling.

Although this is not a case related to international commerce, the policy favoring extending comity to an English court in a family law matter is also strong . . . . In the present case, there is no dispute that England had jurisdiction as both parties were domiciled there . . . . Consequently, the record contains no evidence that Levin was prejudiced by an unfair tribunal or proceeding. We therefore see no reason for refusing to apply judicial estoppel on the basis that the prior proceeding was in an English court.

Id. at 1475.

Although the court in Fox v. Bank of Mandiri (In re Perry H. Koplik & Sons, Inc.), 357

B.R. 231 (Bankr. S.D.N.Y. 2006) (Gerber, J.) reached an opposition conclusion—both on the

issue of judicial estoppel and on the issue of comity—it applied a similar standard. Prior to filing

for protection under the Bankruptcy Code, Perry H. Koplik & Sons, Inc. (“Koplik”) had sued

Bank of Mandiri in the Indonesian District Court of Surabaya seeking payment on a $5.3 million

letter of credit. The various law suits (and their journeys through Indonesian appellate courts)

are simplified for this discussion into two main points: (1) the Indonesian Supreme Court

reversed itself under circumstances the U.S. court found questionable; and (2) in the end, there


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was an Indonesian court decision finding the letter of credit void for fraud.

Years later the chapter 11 trustee appointed in the Koplik bankruptcy estate brought an

adversary proceeding before the bankruptcy court seeking money damages from Bank of

Mandiri for its failure to honor the letter of credit. Bank of Mandiri filed a motion to dismiss

arguing, among other reasons, that comity requires respect for the Indonesian court decision and

that the doctrine of judicial estoppel prevents the trustee from taking the position that the

Indonesian court decision was not properly reached.

First, the Koplik court found the Indonesian court decision was not entitled to comity. As

support, Judge Gerber accepted into evidence a Country Report for Indonesia, issued by the U.S.

Department of State. This report detailed corruption throughout the Indonesian legal system.

Given the report and the lack of clarity on why the Indonesian Supreme Court reversed itself,

Judge Gerber found the procedures and substantive law of Indonesia to be unfair and that it was

therefore appropriate for the court to break from the normal practice of granting comity or

assistance to foreign tribunal (which U.S. courts do even where the procedural or substantive law

differs materially from that of the U.S.).

Next, the Koplik court found that its comity determination impacts whether it applies

equitable doctrines (such as collateral estoppel and judicial estoppel) as it otherwise would.

“[M]ore fundamentally, this Court has determined . . . that the [Indonesian court] decision is not

entitled to comity. For this reason, too, this Court cannot, and will not, apply collateral estoppel

to any [of the Indonesian court’s] findings.” Id. at 245.

With respect to judicial estoppel, the Koplik court did not need to decide whether lack of

comity, alone, would preclude application of the doctrine because it did not apply on its face.

The bank had argued that, essentially, because Koplik litigated in Indonesia and never


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affirmatively challenged, in Indonesia, the fairness of the Indonesian system, the trustee should

be judicially estopped from taking that position now. Judge Gerber rightly noted that

“[d]efending a suit where one has been haled into court . . . [does] not constitute [an assertion]

that the relevant courts are fair and impartial.” Id. (quoting Bridgeway Corp. v. Citibank, 45 F.

Supp. 2d 276 (S.D.N.Y. 1999), aff’d 201 F.3d 134 (2d Cir. 2000)). Accordingly, the trustee may

later challenge the fairness of the Indonesian process without being accused of taking

inconsistent positions or having the suit dismissed under the doctrine of judicial estoppel.

Likewise, other U.S. courts have employed the doctrine of judicial estoppel, as they

would had the prior inconsistent position been taken in a U.S. court, but found that the claim

should not be barred, given the factors as applied to the doctrine.17

Thus, if there is a rule to be synthesized from existing case law it would be that a U.S.

court will apply the doctrine of judicial estoppel in the cross-border context as it would if the

prior position was taken before a court in the U.S., paying particular attention to whether its

judicial estoppel decision would impact comity.

However, as reflected in the varied references to comity in Rapture Shipping, Levin, and

Koplik, U.S. courts may not be consistent in whether and to what degree comity will affect their

decision to apply the doctrine of judicial estoppel. Further, divergence in application may arise

with varied factual scenarios presented to different U.S. courts. As discussed above, U.S. courts

apply a varied and flexible group of factors in assessing the applicability of the doctrine of

judicial estoppel—the same facts before a different court in a different circuit, may yield

different results. And the difference in results may be especially pronounced in the cross-border

context. Factors that influence U.S. courts, such as (a) whether and in what manner allowing the 17 See e.g., In re Nortel Networks, Inc., 469 B.R. 478, 505–07 (Bankr. D. Del. 2012); Fox v. Bank Mandiri (In re Perry H. Koplik & Sons, Inc.), 357 B.R. 231 (Bankr. S.D.N.Y. 2006); A.I. Trade Fin. v. Centro Int’l Handelsbank AG, 926 F. Supp. 378 (S.D.N.Y. 1996).


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inconsistent position will impact the integrity of the judicial system and (b) whether the position

to be estopped is one of law or fact, might become particularly relevant in the cross-border

context. Indeed, Judge Gerber considered the degree of integrity and independence of the

judicial system in Indonesia in assessing whether to apply the doctrine. A litigant with

proceedings in multiple nations may be forced to take inconsistent positions because of the

differences in those nations’ legal systems—specifically, taking inconsistent positions may be

caused by what the litigant is required to prove in each country to prevail on its claims there.

Thus, when deciding whether to request that a U.S. court employ the doctrine of judicial

estoppel, careful consideration should be given to (at a minimum) (a) binding (and non-binding)

case law that may impact the court’s decision, as well as (b) how considerations of comity may

impact the court’s decision.

Equitable Estoppel

Overview of Doctrine

Equitable estoppel is also known as “estoppel by conduct.”18 It can only be employed

defensively and is done so to prevent a claimant from unfairly taking advantage, through false

language or conduct, of an adverse party.19 Put differently, equitable estoppel applies when a

defendant (typically) has detrimentally relied on a false statement or position of the claimant

such that it is unfair to allow the claimant to advance its claim.20 Proving detrimental reliance is

a key element for a litigant advancing an equitable estoppel argument. However, as with judicial

estoppel, there is no uniform test. The following are elements that are most common:

1. The party to be estopped must know the facts;

2. The party to be estopped must either intend that its conduct will be acted upon or act in a 18 Black’s Law Dictionary 630 (9th ed. 2009). 19 Id. 20 See id.


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manner that the party asserting estoppel has a right to believe it so intended;

3. The party asserting estoppel must be ignorant of the true facts; and

4. The party asserting estoppel must rely on the conduct to its injury.21

Noteworthy Nuances

With no concrete test for equitable estoppel, courts in the U.S. may focus on a variety of

factors in deciding when and how to apply the doctrine. For example, most (but not all) courts

find that it is not necessary for the estopped party to have acted with an intent to defraud; for

those courts it is only necessary that the estopped party intended that the adverse party rely on

the statement or position.22 Relatedly, some courts do not require affirmative conduct by the

party to be estopped, so long as it is shown they know the adverse party is relying on their

silence or inaction.23 It appears equitable estoppel is not argued or accepted by courts in the U.S.

as frequently as other equitable doctrines and thus the scope and applicability of the doctrine is

less developed.

Cross-Border Application

Unsurprisingly, given the doctrine’s relative lack of development, a concentrated search

for cases applying equitable estoppel in cross-border contexts came up empty. But the analysis

employed by a U.S. court should not differ significantly from the standards discussed above.

The cross-border aspect of a case should not greatly influence a U.S. court’s application of the

doctrine of equitable estoppel because the focus of the doctrine is on the litigants (the equitable

conduct of one and the detrimental reliance of another). Compare that to the doctrine of judicial

estoppel’s focus on the integrity of the judicial system, how that relates to concerns of comity,

21 Lewis & Lopez, supra note 9 at 527. 22 See In re Toriello, No. 08‐18062(DHS), 2010 WL 3943737, at * 3 (D.N.J. Oct. 5, 2010) (citations omitted). 23 Timberland Bancshares, Inc. v. Garrison (In re Garrison), 462 B.R. 666, 683 (Bankr. W.D. Ark. 2011) (citations omitted); Drake v. Mass. Dep’t of Rev. (In re Drake), 434 B.R. 11, 22 (Bankr. D. Mass. 2010); Willis v. Rice (In re Willis), 345 B.R. 647, 652 (B.A.P. 8th Cir. 2006);


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and it becomes readily apparent why the cross-border nature of a case would impact a court’s

judicial estoppel decision much more than its equitable estoppel decision.

Recognition and Enforcement of Foreign (Non-U.S.) Judgments

Although the law of estoppel in the context of cross-border disputes is not well

developed, the same cannot be said of the law of recognition of foreign judgments. International

recognition issues arise in two contexts: first, the collection of a money judgment from a foreign

court; and second, the application of the principles of issue preclusion. While largely beyond the

scope of this panel presentation, a brief discussion of international recognition of foreign

judgments is appropriate. For complete discussion of the issue of recognition of foreign

judgments, see Ronald A. Brandt, FUNDAMENTALS OF INTERNATIONAL BUSINESS

TRANSACTIONS, (Kluwer Law International 2000); Brandt, Enforcing Foreign Judgments in

the United States and United States Judgments Abroad (ABA Section of International Law and

Practice 1992).

Foreign (non-U.S.) judgments are not entitled to the benefit of the Full Faith and Credit

Clause of Article IV of the U.S. Constitution. See also 28 U.S.C. § 1738. In 1895 the Supreme

Court decided Hilton v. Guyot, 159 U.S. 113 (1895). The Hilton Court established the basic

tenet that U.S. courts should recognize foreign judgments provided the recognizing court is

satisfied that the foreign court applied principles of due process and “there is nothing to show

either prejudice in the court or in the system of laws under which it was sitting, or fraud in the

procuring of the judgment.” Id. at 202. Although less clear than other elements set forth in the

decision, the Supreme Court seemed to add a requirement that the foreign court offer reciprocity

to U.S. judgments, at least on the facts of that case. In Hilton the foreign judgment was issued in

France, which did not recognize U.S. judgments. Since the Hilton decision, many state and


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federal decisions have declined to apply the “reciprocity” requirement. Rather, they have

emphasized the principles of comity and have ignored the issue of reciprocity.

Federal Rule of Civil Procedure 69 requires that the procedure on execution of a foreign

judgment must accord with the procedure in the state in which the federal court sits, unless a

federal statute applies. The procedures for recognition of foreign judgments in the U.S. are

generally found in uniform state law. The 1962 Uniform Foreign-Country Money Judgments

Recognition Act and the 2005 Uniform Foreign-Country Money Judgments Recognition Act

have been adopted in many states (Care should be taken not to confuse these laws with the law

that governs recognition of a sister state’s judgments, the 1964 Revised Uniform Enforcement of

Foreign Judgments Act). Most states have adopted one or both of the uniform acts. Others have

adopted the Restatement (Third) of Foreign Relations Law sections 481–82 as state common

law. Thus, careful analysis of the relevant state law is critical.

Under the Recognition Act and the 2005 Recognition Act, the party seeking recognition

of the foreign (non U.S.) judgment must file a separate action in state or federal court seeking

such recognition. This process is generally true no matter which configuration of recognition

law is adopted in a state. Also, no matter what formulation of the recognition law is adopted, the

foreign judgment must be final, conclusive, and enforceable. The U.S. court will generally stay

execution of the foreign judgment if the matter is still on appeal in the foreign system, but it is

not required to, according to the Recognition Act and the 2005 Recognition Act. Finally, neither

of the uniform acts contains a reciprocity requirement, so it does not matter whether the issuing

court would recognize a U.S. judgment in that country.

Regardless of which formulation of recognition law the court applies, certain non-

discretionary common grounds for non-recognition exist. There must be affirmative evidence


313

that these non-discretionary grounds are not present or the foreign judgment cannot be

recognized. The common grounds include the following:

1. Lack of systematic due process; and 2. Lack of in personam or in rem jurisdiction;

In addition, there are certain discretionary grounds for non-recognition that are

commonly recognized:

1. Fraud; 2. Denial of notice and opportunity to be heard; 3. Public policy; 4. Integrity of the specific issuing court; 5. Inconsistent judgments from two foreign courts; and 6. Due process problems in the specific action.

Recognition of U.S. judgments in courts abroad is very dependent on the particular

jurisdiction. The U.S. has not entered any treaty with the principal focus of recognition and

enforcement of foreign judgments. The 2005 Hague Convention on Choice of Court Agreements

is under active consideration in the U.S.. Some countries will simply not recognize a judgment

from any country that is not a signatory to a treaty that addresses recognition of foreign

judgments. Of course, it would be remiss to fail to mention the New York Convention, which

allows for the recognition and enforcement of arbitration settlements, agreements, and awards

from over 130 signatory nations.

1

The Sword and the Shield: Litigating the Realm of Standing for Chapter 7 Trustees and Federally Appointed Receivers

Megan Canning

Georgia State University College of Law J.D. Candidate, 2016

I. The Realm’s Boundaries: An Overview Standing

Simply stated, standing requires plaintiffs assert their own legal interests. If a claim is brought without proper standing, the bankruptcy proceeding should promptly be dismissed. A trustee may commence a law suit on a debtor’s estate’s behalf acting either under 11 U.S.C. § 541 successor in interest power or under the trustee’s avoidance powers. Additionally, courts have found “ receiver may commence law suits, but ‘stands in the shoes of the corporation and can assert only those claims which the corporation could have asserted.’”1 A. Debtors Causes of Action Under 11 U.S.C. § 541 all of the debtor’s claims are classified as part of the debtor’s bankruptcy estate. The bankruptcy trustee stands in the debtor’s shoes and can assert the debtor’s claims but “can take no greater rights than the debtor himself had.”2As such, the trustee has standing to bring the estate’s claims and is subject to the same defenses that the debtor would have under the Bankruptcy Code.3 However, if the trustee attempts to assert a claim or defense on behalf of the debtor beyond those, which would be available to the debtor, the trustee has over stepped his bounds. B. Avoidance Actions Pursuant to the Bankruptcy Code, § 544, a trustee may bring particular avoidance actions that would otherwise belong to the creditor and not the debtor.4 The Third Circuit described § 544 as “the trustee’s power over rival creditors.”5 Additionally these particular avoidance actions may include those brought under § 548. Fraudulent transfer claims brought under § 548 essentially allow a trustee to stand in the creditors’ position and negate a debtor’s transaction where property was transferred or obligation was incurred by the debtor, with the purpose of intent to hinder, delay or defraud the creditors or was made while the debtor was insolvent or another uncertain financial situation and the transfer did not provide the debtor with a reasonably equivalent value in exchange.

1 Land v. N.Y. Stock Exch., 548 F.2d 61, 67 (2d Cir. 1977). 2 Sender v. Simon, 84 f.3d 1299, 1395 (10th Cir. 1996). 3 Id. 4 11 U.S.C.S. § 544(b) (Lexis, through P.L. 113-234). Authorizing the avoidance of “any transfer of an interest of the debtor in property . . . that is voidable under applicable law by a creditor holding an unsecured claim.” Id. 5 In re Bridge 18 F.3d 195, 198 (3d Cir. 1994).

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C. Creditors Cause of Action Many courts have allowed trustees standing when pursuing a creditor’s claim that is considered a general claim common to all creditors of the bankruptcy estate. The Seventh Circuit defined a claim as “general” where “liability is to all creditors of the corporation without regard to the personal dealings between such officers and such creditors.”6 The Koch court also defined a ‘personal’ cause of action as one where “the claimant himself is harmed and no other claimant or creditor has an interest in the cause.”7 Therefore as long as the claim is general amongst all creditors, the trustee has standing to bring the claim.8 II. King of the Hill: Caplin and Trustee Standing Since the Supreme Court’s decision in 1972, the courts have adhered to the established principal that a bankruptcy trustee’s standing is limited. In Caplin v. Marine Midland Grace Trust Co. of New York, the Court held bankruptcy trustees lacked standing to assert claims on behalf of the holders of the debtor’s debentures against a third party’s transgression.9 First, the Court reasoned that the statutory language did not provide the trustee power to collect money not owed to the estate and because the statute did not authorize it, the trustee could not assume that power.10 Additionally, the Court identified practical policy concerns reflected in the statutory limitation.11 The Bankruptcy Code was adopted in 1978, six years after Caplin, and Congress rejected a proposal authorizing trustees to bring certain claims on creditor’s behalves.12 Courts generally have interpreted this Congressional decision as intent to limit trustees’ standing to Caplin’s articulation.13 III. Questionable Lineage: Receiver Standing In recent years the Supreme Court has not addressed the limits of federally appointed receivers standing, likely because there has yet to be a disagreement amongst the circuits. In

6 Koch Refining v. Farmers Union Century Exchange, Inc., 831 F.2d 1339, 1349 (7th Cir. 1987). 7 Id. at 1348-49. 8 Some courts have disagreed that a trustee has any standing under the Code to ever assert creditors claims. See In re Ozark Restaurant Equip. Co., 816 F.2d 1222 (8th Cir. 1987). 9 Caplin v. Marine Midland Grace Trust Co., 406 U.S. 416, 434 (1972) (holding the trustee lacked standing to sue for the debenture holders, although, the debenture holders could sue the bank directly). 10 Id. at 428. The Bankruptcy Act (11 U.S.C. § 110 (repealed 1978)) was the Bankruptcy Code’s predecessor. The relevant portion of the Act became Code § 544. 11 The Court noted that at most the trustee’s claim arose from a situation between the debtor and indenture trustee were in pari delicto and any claim the trustee might bring may “be inconsistent with any independent actions that they might bring themselves.” Caplin 406 U.S. at 430-32. 12 Andrew J. Morris, Clarifying the Authority of Litigation Trusts: Why Post-Confirmaiton Trustees Cannot Assert Creditors’ Claims against Third Parties, 20 Am. Bankr. Inst. L. Rev. 589, 599 (2012). 13 Id.; See E.F. Hutton & Co. v. Hadley 901 F.2d 979 (11th Cir. 1990) (finding the trustee did not have standing to bring claims of customer creditors because the Caplin concerns were valid).

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1935 the Court in McCandless v. Furland agreed with defendants that the SEC receiver lacked standing to bring claims against them.14 The lower courts, though not always cited, have continued to use reasoning consistent with McCandless and Calpin when determining federal receiver’s standing to bring claims.15

In Scholes v. Lehmann16 the Seventh Circuit clearly articulated that federally appointed receivers only have standing to assert claims of the entities over which they are appointed.17 Moreover, two years later Judge Posner affirmed the Lehmann ruling and articulated the inverse, a federally appointed receiver lacks standing to assert claims of entities or individuals over which the receiver is not appointed.18

The majority of the Circuits have reached similar or equal conclusions to the Seventh regarding a federal receiver’s standing to assert claims.19 Recently the Eleventh Circuit affirmed its support of the Scholes reasoning in Waind v. Lee.20 The court found that the receiver did in fact have standing to sue on behalf of the receivership entities because those entities were harmed directly by the ponzi scheme.21 Applying the Lehman precedent and state law the

14 McCandless v. Furland, 296 U.S. 140 (1935). 15 See Fleming v. Lind-Waldock & Co., 922 F.2d 20, 25 (1st Cir. 1990) (the court rejected the receivers attempt “to distinguish McCandless from Caplin and to deny its paternity of a long line of cases limiting the powers of equity receivers”); see also Boston Trading Group, Inc. v. Buranzos, 835 F.2d 1504 (1st Cir. 1987) (the court denied the receiver standing because no relevant distinction fro Caplin existed). 16 Scholes v. Lehman, 56 F.3d 750 (7th Cir. 1995). 17 Id. The Court found that the “Scholes,” an SEC reciver, had standing to assert claims against entities Scholes was appointed and entities used in the Ponzi scheme that transferred to insiders and charitable organizations out of corporations. See also Knauer v. Jonathan Roberts Fin. Grp., Inc., 348 F.3d 230 (7th Cir. 2003). 18 Troelstrup v. Index Futures Grp., Inc., 130 F.3d 1274 (7th Cir. 1997) (holding that Troelstrup, the CFTC receiver, appointed over Tobin, and individual, lacked standing to bring a claim on Phoenix Pharynol’s behalf because Troelstrup was not appointed its receiver). 19 See Fleming v. Lind-Waldock & Co., 922 F.2d 20, 25 (1st Cir. 1990) (limiting the receiver’s rights or powers to that which the corporation itself would have); see Eberhard v. Marcu, 530 F.3d 122 (2 Cir. 2008) (finding no standing for the federal receiver); See Marian v. TDI Inc., 591 F.3d 137, 147 (3d Cir. 2010) See Janvey v. Democratic Senatorial Campaign Committee, Inc. (DSCCII), 712 F.3d 185, 190 (5th Cir. 2013) (“a federal equity receiver has standing to assert only the claims of the entities in receivership, and not the claims of entities’ investor-creditors”); See Wuliger v. Mfrs. Life Ins., Co., 567 F.3d 787 (6th Cir. 2009) (finding receiver had standing because at least one of the entities over which the receiver was appointed had standing to bring a claim); see Donell v. Kowell 533 F.3d 762, 777 (9th Cir. 2008) (holding receive had standing to assert fraudulent-transfer actions on behalf of the entities); see Commodity Fut. Trading Com’n v. Chilcott Portfolio Mgmt., 713 F.2d 1477, 1481-83 (10th Cir. 1983); See Goodman v. FCC, 182 F.3d 987, 991092 (D.C. Cir. 1999) (holding receiver had no standing to assert personal claims of the entity’s licensees against the FCC, reasoning “that a receiver has authority to bring a suit only if the entity could itself properly have brought the same action”) (citing Caplin)). 20 Wiand v. Lee, 753 F.3d 1194, 1202 (11th Cir. 2014). 21 Id.

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receiver had a proper cause of action.22 Thus, federal receivers have standing to assert claims of the entities over which they are appointed but this standing does not extend to claims of the investors in or creditors of said entities, and such receivers lack standing to assert claims of entities over which they are not appointed.

IV. Uncertain Alliances: Where the Boundaries of Standing Frequently Cross Within the realm of adversary Bankruptcy proceedings there are many causes of action that implicate the aforementioned trustee standing issues. A few frequently asserted claims include: alter-ego claims, breach of fiduciary duty claims, and deepening insolvency claims.23

A. Alter-ego Claims Generally alter-ego claims may be either causes of action held by the debtor entity under

state law or a creditor claim. To determine whether the trustee has standing to bring the claim, the courts must examine what form of alter ego claim is being asserted. Whether an alter ego claim is an action of the debtor’s estate depends on state law. If applicable state law allows the corporation to pierce its own corporate veil then under Code § 541 the claim is property of the estate.24

When an alter ego claim is equivalent to a general creditor claim, some courts have found trustees have standing where allowed by state law.25 Other courts, however, have reasoned that even if the alter ego claim alleges general injury to a corporation, the Code does not provide standing for the trustee to assert claims on behalf of the creditors.26 If the alter ego claim is particularized creditor claim many courts have followed the Seventh Circuit’s precedent, and denied trustees standing.27 Further, some courts have simply found that the Code does not allow a trustee to bring creditor claims and therefore whether the claim is general or individual is inconsequential.28

22 Id. 23 Deepening insolvency is a murky area of bankruptcy law, which is still unsettled as to whether it is a separate cause of action or merely a measure of damages. Therefore, this article will focus on a trustee’s standing to bring alter-ego and breach of fiduciary duty claims. 24 See Trs. of the Bricklayers Local 7 Pension Trust v. stileitaliano Int’l, 2004 U.S. Dist. Lexis 15928 (N.D. Cal. Aug 6, 2004) (finding the trustee had standing to bring the alter ego claim because the claims are property of the estate within § 541). 25 See In re Icarus Holding, LLC, 391 F.3d 1315, 1321 (11th Cir. 2004) (allowing the trustee to bring a general claim common to all creditors based on precedent, stating, “ in order to bring an exclusive alter ego action under § 541, a bankruptcy trustee’s claim should (1) be a general claim that is common to all creditors and (2) be allowed by state law” (citing Kosh refining v. farmer Union cent. Exch. Inc., 831 F.2d 1339 (7th Cir. 1987))). 26 In re Ozark Restaurant Equp. Co., 816 F.2d 1222, (8th Cir. 1987) (the court denied the trustee standing to bring an alter ego claim against the debtor corporation’s principals because trustees lack the power under the Code, specifically § 544, to bring claims against the estate’s creditors). 27 See Board of Trustees of Teamsters Local 863 Pension Fund v. Foodtown, Inc., 296 F.3d 164 171 (3d Cir. 2002); Williams v. California first Bank 859 F.2d 644 (9th Cir. 1988). 28 In re Green Balley Seeds, Inc., 27 B.R. 34 (Bankr. D. Or. 1982); In re Morgan Staley Lumber Co., Inc., 70 B.R. 186 (Bankr. D. Or. 1986).

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B. Breach Of Fiduciary Duty Claims Courts have interpreted trustee standing regarding breach of fiduciary duty in multiple ways. Typically, breach of fiduciary duty causes of action are brought against the debtor company’s former officers and directors. Because under state law these officers and directors owe fiduciary duties to the company, and frequently the shareholders, once in bankruptcy, Code § 541 vests the debtor’s trustee with standing. Courts have held that § 541 endows the trustee proper standing to bring a breach of fiduciary duty claim where the trustee seeks recovery for the corporation itself rather than an individual or class of creditors.29 Other courts have not seen standing to assert breach of fiduciary duty as clearly assigned to debtor’s estate and thus to the trustee. Rather, these courts have seen breach of fiduciary duty as a creditor claim that can only be brought by a trustee if there is general harm to the creditors.30 Reasoning that the fiduciary duty shifts to the creditors once a debtor enters the “zone of insolvency” or at minimum extends to the creditors, courts have denied trustee standing to bring such claims. Even where the breach of fiduciary duty claims are considered creditors’ claims, some courts have found the trustee still had standing to bring the claims under § 544.31 V. Expanding the Realm: Creating Standing Even where the Bankruptcy Code does not award the trustee standing, standing may be created through assignment of creditors claims or joining a creditor as a co-plaintiff. Some courts have allowed all creditors with proper standing to jointly assign their existing claims to the trustee, ultimately creating standing for the trustee that would not otherwise exist.32 The Fourth Circuit reasoned in In re Bogdan that because the trustee was an assignee, whom stands in the shoes of the creditors, the trustee assumed all rights and interests that the creditors had included causes of action and became subject to all defenses that could have been asserted against the creditors not the debtor.33 Other bankruptcy courts have briefly addressed similar assignments, and have reached similar conclusions.34 However, the Ninth Circuit held that mere assignment by a creditor to a trustee does not create standing.35 Reasoning that the Court’s concerns from Caplin were still present because through this assignment, the trustee was attempting to assert claims that were beyond those, which the estate would have been able to assert.36 Alternatively, by joining a party who does have standing to bring the claim a trustee could attempt to create standing. Some courts have found that despite joining plaintiffs that have standing, a trustee who lacks standing on their own will still lack standing to assert claims

29 See In re Scott Acquisition Corp., 344 B.R. 283, 291 (Bankr. D. Del 2006) (reasoning in part, that the claim belongs to the estate and therefore the trustee’s standing is proper). 30 See Robert H. McKirgan et al., Standing Issues for Liquidating Trusts Brining Causes of Action on Behalf of the Estate, Am. Bankr. Institute, 26th Annual Meeting Spring 2008, at 17. 31 In re Supermarkets, 325 B.R. 417, 426 32 See In re Bogdan, 414 F.3d 507 (4th Cir.. 2005) (the Fourth Circuit stated, “[T]he unconditional assignemnts acquired by Bogdan’s trustee from the mortgage lenders after commencement of this bankruptcy case constitute ‘property of the estate’ that the trustee is authorized to ‘collect and reduce to money’ on behalf of the estate”). 33 Id. at 514. 34 See Southwest Supermarkets 325 B.R. at 424. 35 See Williams v. California 1st Bank 859 F.2d 664. 36 Id.

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against defendants.37 Logically it follows that where a trustee, who lacks standing to bring certain causes of actions, joins a co-plaintiff who also lacks standing for the same claims, proper standing is not created.38 VI. Conclusion Standing of both a Chapter 7 trustee and a federally appointed receiver is limited as to those entities and individuals, which they have been appointed to represent. Therefore, allowing a trustee or a receiver to expand their realm beyond simply standing in the shoes of the entity or individual they represent, by asserting claims that the estate or entity would not have standing itself to assert, violates principles of justice. Where a trustee or receiver brings a cause of action that is outside their standing realm, the adversarial proceeding should promptly be dismissed.

37 See In re R.H.N. Realty Corp., 84 B.R. 356 (Bankr. S.D.N.Y. 1988); In re Resorts Int’l, Inc., 128 B.R. 78 (Bankr. N.J. 1990); 38 In re Haynie Grain Services, Inc., 126 B.R. 208, 212 (Bankr. D. Md. 1991).

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