When do the creditors' shoes fit? A bankruptcy estate's power to assert the rights of a hypothetical judgment creditor.
The plain language of [section] 544(a) affords broader authority to an estate representative to step into the shoes of a hypothetical judgment creditor than most courts have been willing to recognize. Indeed, few courts take its language literally. In a relatively rare departure from the usual rules of statutory construction, some courts and commentators, believing they understand what Congress must have intended, afford closer attention to the language Congress declined to incorporate into the section than the language actually adopted. The result has been a patchwork of inconsistent and unnecessarily ambiguous decisions. Courts find authority to sue or recover in some situations, but none in other, often similar, circumstances. Quite simply, they fail to adequately consider the scope of a judgment creditor's rights under applicable non-bankruptcy law and to recognize that the Code affords the estate representative those same rights.
This article advocates a framework for delineating the boundaries of estate representative authority or standing that does not shy away from the plain language of [section] 544(a). From a policy perspective, the liquidation and distribution features of bankruptcy law are designed to suspend the scramble by creditors to seize a debtor's assets in favor of a collective proceeding for recovering and distributing equitably among the creditors all of the assets and remedies that would have been available to satisfy their judgments outside of bankruptcy. The strong arm provision is an important tool for facilitating that process. Specifically, a literal reading of [section] 544(a) of the Bankruptcy Code affords the estate, in addition to the avoidance powers uniformly recognized by the courts, all other *rights and powers of ... a creditor that extends credit to the debtor at the time of the commencement of the case" and that obtains at that time a "judicial lien on all property on which a creditor on a single contract could have obtained such a judicial lien" (hereinafter Lien Creditor) and "an execution against the debtor that is returned unsatisfied" (hereinafter, Execution Creditor and, with Lien Creditors, Judgment Lien Creditors). (3) While [section] 544(a) affords the estate no right to usurp a claim that belongs uniquely to any specific creditor or subset of creditors, its plain language grants the estate the right to use any measure or remedy, and to bring any action, that would be available to Judgment Lien Creditors under whichever non-bankruptcy laws are applicable.
Contrary to the views of some commentators and courts that have considered and rejected this approach from time to time, (4) adopting a bright-line, literal reading of the Code would simplify and lend clarity to estate authority questions, provide for more uniform application of the law and facilitate the administration of bankruptcy cases. This article recognizes the thoughtful counterarguments and concerns that have been raised over the years. (5) Those views have not led to consistent application of the Code, however. The approach advocated here would do so and would give better effect to the Supreme Court's view that, absent a clearly expressed contrary federal policy, a bankruptcy court should ensure that the same legal rights and protections apply in bankruptcy as apply outside of bankruptcy. (6) Applying [section] 544(a) as written would also ensure that defenses available to parties sued by an estate offer the same shield in a bankruptcy case as outside of bankruptcy.
This article is divided into two parts. The first part traces the statutory history of the estate's authority to assert creditor's rights, and the second part reviews how a literal reading of [section] 544(a) might better inform or affect the analysis in the types of situations where standing is often challenged.
I. HISTORICAL BACKGROUND OF TRUSTEE/ESTATE POWERS
A. Overview of Sources of Estate Property, Rights, and Powers Under the Code
There are generally three categories into which estate property, rights, and powers fall under the current Bankruptcy Code. First, [section] 541 describes in general terms of inclusion and exclusion what property becomes property of the bankruptcy estate and what does not. It starts with the broad premise that property of the estate includes "all legal or equitable interests of the debtor in property as of the commencement of the case." (7) If this were the full extent of property and powers of the estate, the limits of the estate representative's authority to sue third parties would be relatively simple to determine, as it would depend simply upon whether the debtor held the claim or legal right in question. Section 541(a)(1) thus generally affords the estate the authority to assert affirmative claims against third parties only if the pre-bankruptcy debtor could have asserted the claims under applicable non-bankruptcy law, and it subjects the estate to the same defenses the debtor would have faced. Second, [section] 541 provides that the estate representative also may bring claims that arise from or during the administration process itself. (8)
Finally, and most importantly for purposes of this article, the estate representative is also afforded a category of rights or powers derived from or designed to vindicate creditors' rights. (9)
B. The Various Versions of the Bankruptcy Act
Prior to enactment of the Bankruptcy Code in 1978, Congress passed four different bankruptcy statutes. The first three statutes were intentionally short-lived and were designed to meet specific urgencies. (10) Those statutes focused on administration of the debtor's real and personal property interests, afforded the debtor certain specified exemptions, (11) and typically included provisions authorizing the recovery of certain categories of transfers. (12)
The first comprehensive attempt at a generally applicable bankruptcy law was the immediate predecessor to the Bankruptcy Code--the Bankruptcy Act of 1898 (Bankruptcy Act). Prior to adoption of the Bankruptcy Act, proceedings related to an insolvent debtor were governed by state law. The Bankruptcy Act included the concepts described above with respect to the predecessor statutes, but it expanded upon and developed those concepts. The following discussion describes various provisions (not necessarily in chronological order) that developed over the lifetime of the Bankruptcy Act from 1898 until it was replaced by the Bankruptcy Code in 1978. The concepts and much of the language of the Bankruptcy Act were carried forward in, and are relevant to a sound construction of, the current Bankruptcy Code.
Under the Bankruptcy Act, the trustee in bankruptcy was vested with broad title and rights to property of the debtor. (13) With certain exemptions and exceptions, those property rights generally included the debtor's title to property, including rights of action, which, prior to the filing of the petition "[the bankrupt] could ... have transferred or which might have been levied upon and sold under judicial process against him." (14) With the exception of the clearly creditor-based language relating to the right to levy upon and sell property under judicial process, these early provisions describing rights derived from the debtor's interests were the precursor of what is now Code [section] 541 (and are referred to hereinafter as the Debtor's Property Rights). (15)
The Bankruptcy Act was also the forerunner of the Code's avoidance action provisions. For example, Bankruptcy Act [section] 60 (codified at 11 U.S.C. [section] 96 (1976)) made certain preferential payments voidable by the trustee in bankruptcy. Bankruptcy Act [section] 67a (once codified at 11 U.S.C. [section] 107(a)(1934)) made certain creditor liens unenforceable, but Bankruptcy Act [section] 67b (once codified at 11 U.S.C. [section] 707(b) (1934)) subrogated the trustee to the creditor's rights for the estate's benefit, and Bankruptcy Act [section][section] 67c and 67e authorized the trustee to nullify liens and fraudulent transfers for the benefit of the creditors. (These avoidance powers are sometimes referred to herein, collectively, as the trustee's General Avoidance Powers.) In addition, Bankruptcy Act [section] 70e (codified at 11 U.S.C. [section] 110(e)(1976)) authorized the trustee to avoid a transfer by the debtor that is fraudulent against or voidable by any creditor of the debtor. (This creditor-based authority to avoid a transfer is referred to herein as "Creditor-Mirroring Avoidance Powers"). The General Avoidance Powers can be thought of as the precursor of Code [section][section] 547 and 548, while the Creditor-Mirroring Avoidance Powers can be thought of, generally, as precursors of Code [section] 544(b).
Most notably, Bankruptcy Act [section] 47a(2), as modified by certain amendments adopted in 1910 (codified at 11 U.S.C. [section] 75 (1910)), afforded the bankruptcy trustee "the rights, remedies and powers of a creditor holding a lien by legal or equitable proceedings" and as to the debtor's property "not in the custody of the bankruptcy court, ... all the rights, remedies and powers of a judgment creditor holding an execution duly returned unsatisfied." (The grant of hypothetical judgment lien creditor rights to the trustee is hereinafter referred to as Creditor-Mirroring Rights and Powers.) The section appears to have been the initial predecessor to the strong arm provision. (16)
The early grant of Creditor-Mirroring Rights and Powers was moved to another section of the Bankruptcy Act and further modified over the years, sometimes significantly. (17) In 1966, key subsections were added (or restored), specifically making the trustee the equivalent of a judgment creditor and a creditor with an execution returned unsatisfied. (18) By 1976, before repeal of the Bankruptcy Act, the most pertinent provision ([section] 70c of the Bankruptcy Act, codified at 11 U.S.C. [section] 110(c)) read as follows:
The trustee shall have as of the date of bankruptcy the rights and powers of: (1) a creditor who obtained a judgment against the bankrupt upon the date of bankruptcy, whether or not such a creditor exists, (2) a creditor who upon the date of bankruptcy obtained an execution returned unsatisfied against the bankrupt, whether or not such a creditor exists, and (3) a creditor who upon the date of bankruptcy obtained a lien by legal or equitable proceedings upon all property, whether or not coming into possession or control of the court, upon which a creditor of the bankrupt upon a simple contract could have obtained such a lien, whether or not such a creditor exists. (19)
Thus, under the Bankruptcy Act as it existed prior to enactment of the Bankruptcy Code, the trustee in bankruptcy held: Debtor's Property Rights and General Avoidance Powers, but also Creditor-Mirroring Avoidance Powers, and the distinct and more general Creditor-Mirroring Rights and Powers (collectively Historical Rights and Powers).
C. Putting the History in Context: Common Law Creditor Powers Informing the Predecessor Bankruptcy Statutes
The Historical Rights and Powers can be better understood by reviewing the common state law rights and powers of creditors. At common law, a creditor who had progressed so far in its collection efforts as to have obtained a money judgment could proceed to enforce or execute the judgment through a writ of execution or levy, which effectively commanded the sheriff or other government official to satisfy the judgment out of the debtor's goods and chattels through seizure and sale. (20) However, under early common law, writs of execution did not afford creditors the right to reach a judgment debtor's equitable interests or intangible assets, such as choses in action or interests in stock or debt. When a creditor's writ of execution on a judgment failed to provide satisfaction on the debt, the execution was said to have been returned unsatisfied. The creditor whose execution was returned unsatisfied could file in a court of equity for what was known as a creditor's bill in order to reach the debtor's equitable interests in property. (21) The creditor's bill could also be used to reach property that had been fraudulently transferred and, in many states, to employ the alter ego remedy. (22) State statutes (providing for supplementary proceedings or proceedings in aid of execution) also typically afforded the creditors the right to obtain judicial liens and judgment liens, of which attachment liens, garnishment liens, and execution liens are obvious examples. (23) It is all of those state law rights and remedies that are now held under [section] 544(a) by, as we have defined the term, Judgment Lien Creditors.
Turning back to the Bankruptcy Act, initially, the trustee "merely stood in the shoes of the bankrupt." (24) To the extent the trustee had rights akin to those of a creditor, moreover, they were merely the rights of a general creditor, significantly limiting the authority of the trustee. The 1910 amendments, discussed above, were contemporaneously recognized as a clear expansion of the trustee's rights, vesting him with more clearly defined dual rights--one set derived from the debtor's title to property and another derived expressly from the rights of creditors. (25) According to Landers, (26) Congress deliberately expanded the trustee's powers (beyond those of a general creditor) to the more forceful rights of a judgment creditor, in response to a 1906 Supreme Court decision. (27) Even after the 1910 amendments, however, the trustee was limited to the extent he was required to identify the specific property at issue in order to avoid the interests of third parties in that property. (28) This left an "undistributed middle" of rights that a judgment creditor held but that an estate representative did not, consisting of "rights of action belonging only to creditors but not relating to specific property." (29)
Although the legislative history from the relevant time periods is not revealing of any specific congressional intent on the subject, the "undistributed middle" or gap of rights identified by Landers apparently was closed by the language ultimately adopted over the years after 1910, including key changes in 1966, culminating in Bankruptcy Act [section] 70c. (30) Specifically, the eventual inclusion of Creditor-Mirroring Rights and Powers in the Bankruptcy Act, when read plainly, expanded the estate representative's reach to the same remedies that by then were generally available to Judgment Lien Creditors.
Not all creditor remedies were evenly enforced by the state courts, however. For example, a line of early state cases, developed when insolvency proceedings were governed by state law, held that a receiver appointed for an insolvent corporation could not enforce certain personal rights enforceable by other creditors of the debtor corporation. Under some of those cases, the personal rights of creditors included compelling a shareholder of the corporation to satisfy its capital funding commitments and recovering from shareholders or directors dividends paid from impaired capital. (31) The cases were not uniform, but, almost invariably, if the court characterized a recovery right as personal to the creditors, the rights could not be enforced by a general receiver. (32)
Federal courts applying the earliest versions of the Bankruptcy Act applied state court receiver cases by analogy, and adopted the concept of personal creditor claims--claims that a receiver, and therefore a trustee, could not assert. (33) By the time the language of the Bankruptcy Act was liberalized to grant broader Judgment Lien Creditor rights to estate representatives, and to remove the gap described above, the case law precluding exercise of personal creditor rights was so well-entrenched that the courts simply did not or could not re-evaluate the "old learning." (34) As will be seen in the discussion that follows, it appears that the "old learning" has persisted, revived, in part, by judicial misinterpretations of a Supreme Court decision decided under the Bankruptcy Act--Caplin v. Marine Midland Grace Trust Co. of New York (Caplin (35))--which has led to innumerable non-literal constructions of the Bankruptcy Code's strong-arm provision. Abandonment of the "old learning" is long overdue.
II. THE CASE FOR A PLAIN READING OF CODE [section]544(A)
A. Preservation of Historical Rights and Powers in the Bankruptcy Code
The drafters included in the Bankruptcy Code virtually all of the Historical Rights and Powers that had been included in the Bankruptcy Act, including the expansive Creditor-Mirroring Rights and Powers that, literally read, afforded the estate representatives the rights of Judgment Lien Creditors under applicable non-bankruptcy law. The drafters, however, organized those Historical Rights and Powers in the Code somewhat differently than they had been organized under the Bankruptcy Act. They placed rights similar to the Bankruptcy Act Debtor's Property Rights in Code [section] 541, including there, among other, more specific items, "all legal or equitable interests of the debtor as of the commencement of the case." (36) One notable exception, however, was the exclusion of any reference in [section] 541 to property which a creditor could levy upon, which had been included in [section] 70a of the Bankruptcy Act. The most likely explanation for the omission is that it was deemed unnecessary in light of the broad Creditor-Mirroring Rights and Powers provided in [section] 544(a), which, read literally, certainly include any state law rights to levy upon the debtor's property.
The Bankruptcy Act's General Avoidance Powers all were included in the Bankruptcy Code in one form or another, including its grants of authority to the estate representative to avoid preferences, succeed to certain creditor's lien rights and avoid liens and fraudulent transfers. (37)
Most importantly for purposes of this article, [section] 544(a) of the Bankruptcy Code generally incorporated the broad Creditor-Mirroring Rights and Powers providing, in relevant part:
(a) The trustee shall have, as of the commencement of the case, and without regard to any knowledge of the trustee or of any creditor, the rights and powers of, or may avoid any transfer of property of the debtor or any obligation incurred by the debtor that is voidable by--
a creditor that extends credit to the debtor at the time of the commencement of the case, and that obtains ... a judicial lien on all property on which a creditor on a simple contract could have obtained such a judicial lien, whether or not such a creditor exists;
a creditor that extends credit to the debtor at the time of the commencement of the case, and obtains ... an execution against the debtor that is returned unsatisfied ..., whether or not such a creditor exists; (38)
In addition, [section] 544(b) incorporated the Creditor-Mirroring Avoidance Powers and extended to the estate representative the right to avoid any transfer of an interest of the debtor that an unsecured creditor of the estate could avoid under applicable non-bankruptcy law. (39)
Because both subsections of [section] 544 mention avoidance of transfers, Bankruptcy Code [section] 544(a) may have appeared to some courts to be purely a supplemental avoidance power rather than a provision granting an array of real Judgment Lien Creditor powers. (40) Nevertheless, the same "rights and powers" that were contained in [section] 70(c) of the Bankruptcy Act (11 U.S.C. [section]110(c) (1976)), were included in the new [section] 544(a) and thus retained in the transition from the Bankruptcy Act to the Bankruptcy Code 41 Importantly, as discussed more fully below, the "old learning" has continued to impact the courts' reading of [section] 544(a), as has what the authors contend has been widespread misconstruction of the Supreme Court decision in Caplin.
B. Plain Construction of the Language Fosters the Collective Proceeding Goals of Bankruptcy
The most important factor for the construction advocated here is that the language of [section] 544(a) is broad, clear and uncompromising. This "strong arm" provision of the Code grants to the estate representative both "the rights and powers of" and the ability to avoid transfers or obligations that are "voidable by" a hypothetical Lien Creditor that obtains its lien at the commencement of the case ([section] 544(a)(1)), and a hypothetical Execution Creditor obtaining, at the commencement of the case, an unsatisfied execution against the debtor ([section] 544(a)(2)). Best read, the section thus encompasses any right or power to recover any property or bring any action that could be recovered or brought under applicable state law by any such Judgment Lien Creditor of the debtor.
There is some indirect textual support for the view that [section] 544(a) is an avoidance section that does not give the bankruptcy estate any additional substantive rights. Specifically, the components of property of the estate described in [section] 541(a)(3) includes "an[y] interest in property that the trustee recovers under ... section 550[.]" Thus, one might argue that the estate is limited to recoveries obtained pursuant to the estate's power to avoid liens, claims, or adverse interests in the estate's property. (42) This view, however, is contradicted not only by the broad, contrary language of [section] 544(a), but also by the fact that property of the estate also includes "an[y] interest in property that the estate acquires after the commencement of the case." (43) And, although there is nothing in [section] 550 that refers to the equitable remedy of marshalling, courts have frequently found that [section] 544(a) enables the estate to marshal or to block marshalling against creditors with liens on estate assets. (44) Finally, reading [section] 544(a) as written would assure that the collective proceeding afforded by the Code will give bankruptcy estate creditors collectively, through the estate representative, access to the same property and scope of remedies available to them outside of bankruptcy. (45) As the Supreme Court acknowledged in Butner v. United States, decided under the Bankruptcy Act:
Property interests are created and defined by state law. Unless some federal interest requires a different result, there is no reason why such interests should be analyzed differently simply because an interested party is involved in a bankruptcy proceeding. Uniform treatment of property interests by both state and federal courts within a State serves to reduce uncertainty, to discourage forum shopping, and to prevent a party from receiving a windfall merely by reason of the happenstance of bankruptcy. (46)
It is hard to imagine a federal interest that would deprive a bankruptcy estate of the authority to pursue a claim available outside of bankruptcy to a non-specific judgment creditor or would promote competition among creditors.
Section 544(a) should therefore be applied as written--broadly. Whenever applicable non-bankruptcy law affords a right of action or a collection remedy that would be generally available to Judgment Lien Creditors, [section] 544(a) should be construed to afford the estate representative standing to assert the claim and take advantage of the remedy. The availability of such claims and remedies should not be lost to creditors as a group simply because a bankruptcy has been filed.
The construction of [section] 544(a) urged by this Article acknowledges the limits of the Creditor-Mirroring Rights and Powers. Under [section] 544(a)(1) and (2), the trustee acquires the rights of a Judgment Lien Creditor whose lien, judgment, and execution were obtained only at the moment of bankruptcy. That temporal limitation should be read to preclude a trustee from asserting claims that existed only at an earlier date. Similarly, the strong-arm provision does not authorize a trustee to assert claims based upon the individual pre-bankruptcy dealings between the debtor and a creditor, such as claims arising from the debtor's misrepresentations to a particular creditor or class of creditors, regardless of whether that creditor or class make up most of the creditor body. Instead, the estate or trustee acquires only rights that, basically, any and every Judgment Lien Creditor could assert under the laws of the applicable state. Thus, under a literal construction of [section] 544(a), the answer to the question "Does the estate representative have authority to assert that claim?,"' should turn on whether or not applicable state law allows Judgment Lien Creditors, merely because they are Judgment Lien Creditors, the right to assert the claim. (47) If the answer is yes, the trustee in bankruptcy is authorized to bring the claim for the benefit of creditors as a group. If the answer is no, however, [section] 544(a) likewise does not authorize the estate representative to assert the claim.
Moreover, the same state law defenses that would impair a claim in the hands of a Judgment Lien Creditor, would likewise apply against an estate representative. Because the trustee is asserting creditor rights, however, there should be no imputation to him of the debtor's bad acts unless state law would impute those bad acts to a Judgment Lien Creditor.
One example of this straightforward approach is Rupp v. Duffin (In re Duffin). (48) The Tenth Circuit Bankruptcy Appellate Panel (BAP) there held that, although [section] 544(a) is "most typically understood to give a trustee 'avoidance powers,'" it "specifically include[s] broader 'rights and powers.'" (49) The Court concluded that those broader powers permitted the trustee to assert the same right afforded judgment creditors generally to access payments made by a judgment debtor on a life insurance policy during the year prior to execution on judgment, which were excluded expressly under Utah law from the exemption granted debtors in life insurance policies. (50) Though rare, there are other cases that afford a similarly broad scope to the strong-arm provision. (51) Giving [section] 544(a) its most logical and most sensible and literal construction by applying its language as written, therefore, serves the goal of maintaining uniformity of rights inside and outside of bankruptcy. The literal construction also vastly simplifies the analysis of trustee authority and lends certainty to an area fraught with uncertainty and inconsistency.
III. THE COURTS' RELUCTANCE TO APPLY [section]544(a) AS DRAFTED
This simple construction of [section] 544(a) has not been widely adopted, and the impact of the "old learning" continues to be felt. Indeed, many courts and other noteworthy authorities have concluded that [section] 544 is "limited to avoidance actions." (52) The most frequently cited authority for this decidedly nonliteral construction of the Code is, not the early case law described by Landers, which might, if expressly relied upon, be dismissed as arcane, but the Supreme Court's largely misapplied decision in Caplin and on Congress' subsequent decision not to include a broad expansion of trustee rights when enacting the Bankruptcy Code.
In Caplin, which was decided under a late version of the Bankruptcy Act, the Supreme Court held that a trustee m reorganization (appointed under Chapter X of the old Bankruptcy Act) could not sue a third party indenture trustee on behalf of a subset of creditors--the debenture holders, who, alone, would receive the direct proceeds of the suit--for what amounted to negligence or misconduct in supervising the debtors indenture conditions. (53) The Court concluded that "nowhere in the statutory scheme is there any suggestion that the trustee ... is to assume the responsibility of suing third parties on behalf of debenture holders." (54) The Court further held that there is nothing "in 11 U.S.C. [section] 110, set forth in relevant part in footnote 14" that gives the trustee authority to collect money not owed to the estate. (55) The Court pointedly noted, however, that Congress could grant bankruptcy trustees broader authority to bring a variety of additional claims, if it chose to do so. (56)
After Caplin was decided, Congress considered doing just that, discussing, but never adopting, a proposed [section] 544(c) of the Code, which would have expanded trustee authority in some of the very ways the Caplin Court had suggested. (57) The Bankruptcy Code went into effect in 1979, and the final version of [section] 544, as adopted, omitted without explanation the proposed sub-section (c). (58) The conclusion drawn by some courts, starting with In re Ozark, a key Eighth Circuit decision, (59) was that Congress's decision not to expand bankruptcy trustee authority in the way the Caplin Court had suggested, militates a narrow construction of trustee authority, as limited to bringing only avoidable transfer actions and actions that the debtor itself could have brought.
In Ozark, the Court concluded that alter ego actions were personal to the debtor corporation's creditors under applicable state law (here Arkansas law) and therefore not accessible to the trustee under [section] 541, and that, by not adopting the proposed subsection, Congress had sent courts a clear message that "no trustee ... has power under Section 544 ... to assert general causes of action, such as the alter ego claim, on behalf of the bankrupt estate's creditors." (60) Many decisions since Ozark have adopted its rationale in rejecting [section] 544(a) as a source for trustee authority to bring an alter ego action. (61)
The Caplin Court merely found that the trustee lacked authority to bring a claim held solely by one subset of creditors. Consequently, even the Creditor-Mirroring Rights and Powers of the Bankruptcy Act (had the Court focused upon them) would not have authorized the action the Caplin bankruptcy trustee sought to bring. And, as noted above, notwithstanding a general reference to 11 U.S.C. [section] 110, the Caplin Court made clear that, in its view, the relevant part of that statute was [section] 110(a). (62) It never discussed the trustee's Creditor-Mirroring Rights and Powers then codified at 11 U.S.C. [section] 110(c). (63) Nor did it talk expressly about personal creditor rights. The Caplin Court did, however, distinguish between a proper effort to preserve the debtors assets for all creditors and the trustee's overreaching attempt to increase the debtor's assets to benefit "a specific class of creditors, the debenture holders." (64) Moreover, the proposed but never adopted subsection 544(c) would have expanded trustee authority far beyond any literal construction of the Creditor-Mirroring Rights and Powers of [section] 544(a), and would, instead, have authorized trustees to bring claims belonging, uniquely, to individual creditors or sub-groups of creditors. The Congressional decision to omit proposed [section] 544(c) thus is not relevant to the analysis of the language actually adopted. Section 544(a) should be construed in accordance with its language, and not based on (misguided) inferences drawn from language Congress did not adopt. (65)
The remainder of this article examines some of the recurring fact patterns courts have considered and demonstrates how a literal construction of [section] 544(a)'s grant of Creditor-Mirroring Rights and Powers would streamline the analysis.
IV. PRACTICAL APPLICATION OF SECTION 544(a)'S CREDITOR-DERIVED RIGHTS AND POWERS
A. "Veil Piercing" and "Alter Ego" Cases
Among the causes of action that appear to have presented the most difficulty are the broadly recognized common law claims often asserted by frustrated judgment creditors to "pierce" the debtor's "corporate veil" in order to recover against its shareholders, or to hold a shareholder, affiliate or other person liable as the debtor's "alter ego." In either case, the creditor plaintiffs goal is the same, to hold another or additional party (often one with a deeper pocket) liable for the debt or judgment. The Ozark decision of the Eighth Circuit involved an alter ego claim. (66)
The Second, Fifth and Seventh Circuits all found that trustees could bring alter ego cases, rejecting the Ozark result, but not entirely rejecting its analysis, uniformly declining to adopt a literal reading of [section] 544(a) and instead focusing on [section] 541. (67) To this day, the courts in all of those Circuits struggle to apply the ambiguous approaches the Circuit courts adopted.
In S.I. Acquisition, the Fifth Circuit held, without reference to Caplin and Ozark, that the automatic stay precluded a creditor from pursuing an alter ego claim, because the claim was property of the bankruptcy estate. In an apparent throwback to the old cases described by Landers, the court noted that, under applicable (Texas) law, the alter ego doctrine was not personal to the creditor in question, but is available to all creditors of the corporation and would benefit them all, if successful. (68) It also noted that Texas law would permit a corporate debtor to pierce its own veil, thus arguably finding the requisite bankruptcy representative authority only under [section] 541. (69)
The Seventh Circuit in Koch came closest to endorsing a broad reading of [section] 544. It squarely addressed Caplin and mostly rejected Ozark, concluding that enactment of [section] 544 without the once-proposed subsection (c) meant only that the estate representative gained no right to bring the claims of particular creditors; it concluded that "[t]he omission [of proposed subsection (c)] does not affect a trustee's right to bring a general action on behalf of all creditors rather than a personal one on behalf of only some.'" (70) The court then held that the bankruptcy trustee had standing to maintain an alter ego action against the member-owners of the debtor oil refinery, apparently on behalf of the creditors as a group. (71) Specifically, the court held:
[A]llegations that could be asserted by any creditor could be brought by the trustee as a representative of all creditors. If the liability is to all creditors of the corporation without regard to the personal dealings between such officers and such creditors, it is a general claim.... A trustee may maintain only a general claim. (72)
The court added unnecessary ambiguity to its holding, however, by describing the general action as one in which "the injury for which relief is sought ... is ... general and common to the corporation and creditors." (73) While the Court recognized that a bankruptcy trustee has "creditor status under section 544 to bring suits for the benefit of the estate and ultimately of the creditors," (74) it said in a footnote that its decision did not require determination of the "capacity" in which the trustee might assert an alter ego action: "[w]e have held only that a bankruptcy trustee is not precluded from maintaining an alter ego action under Indiana and Illinois law." (75)
Two years after S.I. Acquisitions and Koch, the Second Circuit decided St. Paul. After canvasing decisions that addressed trustee standing in alter ego cases, including S.I. Acquisition, Ozark and Koch, the Second Circuit concluded that a bankruptcy trustee has standing to assert an alter ego claim against the parent of a corporate debtor, and that a separate alter ego claim could not be maintained by one of the debtor's creditors while the bankruptcy was pending. (76) The Court concluded that the debtor, itself, could assert an alter ego claim against its parent under applicable (Ohio) law, and that the claim, therefore, was property of the bankruptcy estate. But the Court also found Caplin not controlling, and spoke broadly of the trustee's authority to bring a "general" claim that could be brought by any of the debtor's creditors:
If a claim is a general one, with no particularized injury arising from it, and if that claim could be brought by any creditor of the debtor, the trustee is the proper person to assert the claim, and the creditors are bound by the outcome of the trustee's action. (77)
The Court also noted that the creditor, who sought to separately pursue an alter ego claim, had not demonstrated any injury separate from that suffered by all other creditors of the debtor. (78) Like the Koch Court, however, the St. Paul Court did not squarely reach the issue of whether its ruling was based on any Code provision other than [section] 541, instead cautioning that:
Our decision today goes no further than to say that causes of action that could be asserted by the debtor are property of the estate and should be asserted by the trustee, as should causes of action such as those that fall under 11 U.S.C. [section][section] 544, 547, and 548. (79)
All of these decisions could and should have been decided through a straightforward invocation of the plain language of [section] 544(a). The Koch Court, for example, found that under applicable (Indiana and Illinois) law, alter ego is an equitable doctrine "that may be asserted by any creditor with' out regard to the specific nature of his relationship with the corporation and its alleged alter ego." (80) The S.I. Acquisition Court reached the same conclusion under Texas law. (81) In both cases, therefore, the alter ego remedy was available to any judgment creditor. Consequently, a bankruptcy trustee or estate representative is necessarily authorized under [section] 544(a) to assert such a claim as among the rights and powers of a judgment creditor. (82)
The Circuit Courts instead appeared to struggle with the concept of personal creditor claims, which may derive from the old state court cases described above. The terminology might be appropriate under the approach we suggest here, if, by personal, the Courts mean a cause of action that depends upon a creditors particular dealings with the debtor or upon a creditors particular reliance on representations made to it by the debtor. Any such personal actions would not be actions an estate representative could assert under a plain-language reading of [section] 544(a). But, because the Circuit Courts left their rationales for trustee authority to bring general claims ambiguous, courts in those Circuits have struggled to make sense of and apply the holdings.
In the Seventh Circuit, for example, in Steinberg v. Buczynski (In re Ted's Plumbing, Inc.) (Steinberg), (83) a different Seventh Circuit panel appeared to call the Koch analysis into question, rejecting a trustee's piercing the veil claim as one that was personal to a particular creditor rather than a general claim, but then appearing to disavow those terms entirely as "not an illuminating usage," concluding that "the trustee is confined to enforcing entitlements of the corporation. He has no right to enforce entitlements of a creditor." (84) This last assertion by the Court appears to ignore [section] 544(a) entirely! The Steinberg Court did not expressly overrule Koch, however.
The confusion is further illustrated by a bankruptcy court case, decided ten years after Steinberg, in which the judge cited the Koch Court's discussion of [section] 544(a) in finding that an estate representative (a debtor in possession) has standing to bring an alter ego claim even if the debtor could not have brought it. (85) Five years later, in Levey v. Systems Division, Inc. (In re Teknek, LLC), the Seventh Circuit again said that the trustee "has the sole right and responsibility to bring claims on behalf of the estate and on behalf of creditors as a class--so-called 'general' claims." (86) The court even hinted again at reliance on [section] 544(a), noting that, in addition to the trustee's right to bring actions held by the debtor, "the trustee has creditor status under 11 U.S.C. [section] 544" (87) A literal reading approach to [section] 544(a) would resolve these inconsistent analyses and bring much-needed clarity to the area.
B. Fraud and Other Tort Claims and the In Pari Delicto Problem
1. Fraud and Tort Claims Generally Cannot Be Brought Under [section] 544(a)
A literal construction of [section] 544(a) would usually leave undisturbed the courts' frequent rejection of bankruptcy estate standing to sue third parties on fraud and common law tort claims that the debtor could not have brought. (88) Literal construction of the section would give the courts a strong analytical basis for rejecting such claims, without requiring them to disregard [section] 544(a) and hold that estate representatives are permitted to bring only claims that belonged to the debtor. Trustee authority to assert fraud or tort-based claims would fail under even the broadest literal construction of [section] 544(a), if the claims were not available under applicable non-bankruptcy law to Judgment Lien Creditors 89 However, if controlling non-bankruptcy law did permit Judgment Creditors to bring such claims, the result might be different.
2. Preserving In Pari Delicto and Similar Defenses
This distinction is also important from the standpoint of fairly preserving available defenses, such as in pari delicto and unclean hands. Concisely, the in pari delicto doctrine is "a state law equitable defense analogous to unclean hands 'rooted in the common-law notion that a plaintiffs recovery may be barred by his own wrongful conduct.'" (90) Recognition of the defense is driven, at least in part, on the theory that "courts should not mediate disputes between wrongdoers." (91) State (or other applicable non-bankruptcy) law should be the guide. (92)
Because in pari delicto and similar defenses generally serve as defenses only to actions brought by an equally culpable party, they may not apply under state law when the estate representative stands in the shoes of and sues as a hypothetical Judgment Lien Creditor. (93) Such defenses are generally available, however, and would certainly be preserved against an estate representative in the typical fraud or breach of duty action, where an action would be based on specific misrepresentations, omissions or breaches of duty by the defendant, affecting only those to whom such misrepresentations were made or duties owed. Consequently, the estate representative could not rely merely upon his Judgment Lien Creditor standing under [section] 544(a). Instead, the estate could bring the claim, if at all, only under [section] 541, asserting the debtors rights, and subject to the defendant's defenses against the debtor. Some examples help to illustrate.
Several years after St. Paul, the Second Circuit issued a seminal opinion in Shearson Lehman Hutton, Inc. v. Wagoner (Wagoner) that rejected trustee standing in a common law tort case reminiscent of Caplin. (94) In Wagoner, the court found that a bankruptcy trustee lacked standing to sue a brokerage firm for, in effect, aiding and abetting the debtor's principal in making unsuitable investments that harmed the debtor's note holders. In sweeping language that seemingly ignored [section] 544(a), the court said: "[i]t is well settled that a bankruptcy trustee has no standing generally to sue third parties on behalf of the estate's creditors, but may only assert claims held by the bankrupt corporation itself." (95) The court then held that, to the extent the trustee was alleging injuries to the debtor, the active participation of the debtor's principal--its management--was necessarily imputed to the corporation and precluded the claim; the claim thus accrued only to the investors, not the "guilty corporation." (96) The Wagoner court did not mention the doctrine of in pari delicto by name, but the decision has been widely recognized as invoking the concept. (97) The Wagoner decision is a key precedent in the Second Circuit, and the apparent contradiction between its broad language and that in the St. Paul decision continues to lead to unnecessary confusion. A fair reading of [section] 544(a) would resolve the ambiguity because, where, as in Wagoner, the trustee is attempting to assert a claim not available to any and every Judgment Lien Creditor simply by virtue of their position as such, [section] 544(a) standing is not available. In such situations, the estate representative must sue under [section] 541, in which case the in pari delicto defense typically comes into play under state law. But that does not mean that there will never be claims that any and every Judgment Lien Creditor could assert. Consequently, the Wagoner court's sweeping dismissal of [section] 544(a) is misguided.
Most recently, in Picard v. J.P. Morgan Chase & Co. (In re Bernard L. Madoff Investment Securities, LLC) ("Picard"), (98) the Second Circuit issued a decision that squarely preserves the in pari delicto defense, but also serves to perpetuate the confusion over [section] 544(a). (99) The court there rejected a SIPA trustee's common law claims against financial institutions for aiding and abetting a Ponzi scheme and breaches of fiduciary duty, citing Wagoner finding, among other things, that in pari delicto principles applied. (100) The court added unnecessary ambiguity to its decision, however, by using far broader language than the facts merited, and appeared to disavow much of the St. Paul holding in the process. Specifically, the court focused on Caplin and appeared to reprise the theory that Congress somehow limited trustee authority by declining to adopt proposed [section] 544(c) when enacting the Bankruptcy Code. (101) The court described St. Paul's discussion of a trustee's authority to bring "general" claims as simply "voic[ing] the maxim that only a trustee, not creditors, may assert claims that belong to the bankrupt estate." (102) While the Picard court's finding that the trustee could not assert the claims under [section] 544(a) was reasonable given, first, that only some subset of creditors could have been injured by each defendant's alleged conduct and, further, that a hypothetical Judgment Lien Creditor could not have brought the claim, the court did nothing to clear the continuing confusion over the scope of [section] 544(a).
If a jurisdiction makes a policy choice to exempt all judgment creditors or independent third-party liquidators acting outside of bankruptcy from in pari delicto, bankruptcy estates, exercising their rights and powers under [section] 544(a), should be treated in a similar way. (103)
3. Estate Representative Authority to Pursue Assigned Tort Claims
If fraud or tort actions cannot be brought within the scope of a fair reading of [section] 544(a), a logical next inquiry is whether an estate representative might bring such claims if they were assigned to the estate by creditors. Most courts appear to allow estate representatives to assert such assigned claims. (104) One notable exception, however, is Williams v. California 1st Bank (Williams). (105) In Williams, a district court had held that a bankruptcy trustee had standing to pursue the securities fraud claims that were assigned to her by the creditors and, because they were creditor claims, it further held that the defendant bank could not rely upon the in pari delicto defense. The Ninth Circuit reversed, citing Caplin and Congress's rejection of proposed [section] 544(c). (106) Viewing the creditors as the real parties in interest for whom the trustee was attempting to collect money not owed to the bankruptcy estate, the Court concluded that the same problems identified in Caplin were present in the actions the trustee in Williams sought to pursue. (107)
Williams remains good law in the Ninth Circuit, but has been rejected by at least two other courts. In a 2010 Seventh Circuit decision, for example, the court concluded that none of the rationales raised in Caplin applied to a suit brought by a trustee on claims assigned to him. (108) Instead, the court sided with the trustee, who had argued that there was no reason he, alone, out of the world's 6.8 billion people, should be disqualified from pursuing claims assigned to him. (109)
C. Aiding and Abetting Fraudulent Transfers
There is no general agreement among the states on whether there is a cause of action for aiding and abetting (or conspiring to make) a fraudulent transfer. (110) In jurisdictions where the action is recognized, some bankruptcy courts dismiss an estate representative's claim on the grounds that it can be brought only by creditors, (111) while others entertain the claim, appearing to assume (without detailed analysis) that it belongs to the estate. (112) A debtor, however, could not sue on an aiding and abetting theory even in most jurisdictions that recognize the claim, because the doctrine of in pari delicto would defeat the debtor's claim. Consequently, if an estate representative seeks to bring such a claim, [section] 541 will not serve as the source of authority to do so. Under the plain reading approach, however, [section] 544(a) arguably affords an estate representative authority to bring such a claim, provided that it is a recognized cause of action under applicable non-bankruptcy law and would be available under that applicable law to every Judgment Lien Creditor of the debtor.
Recently, the Ninth Circuit Bankruptcy Appellate Panel signaled a willingness, in a trustee's aiding and abetting claim, to read [section] 544(a) literally, at least in part, noting that it affords powers that "go beyond mere avoidance powers." (113) In that case, the bankruptcy trustee argued that [section] 544(a)(2) afforded her "all the substantive rights of [a] hypothetical execution lien creditor, which in California include claims for aiding and abetting fraudulent transfers against a third party." (114) While the Court appeared to recognize the standing of creditors to bring such claims, it found the trustee's effort to do so "futile in light of' the similarities between her claim and those rejected in Williams v. California 1st Bank. (115) "In the Ninth Circuit, 'it is well settled that a bankruptcy trustee has no standing generally to sue third parties on behalf of the estate's creditors, but may only assert claims held by the [debtor] itself.'" (116)
By failing to invoke and recognize the applicability of [section] 544(a) as a source of bankruptcy estate authority in cases where applicable non-bankruptcy law recognizes an aiding and abetting claim, courts deprive the estate of a valuable remedy, leaving it to be pursued by creditors, (117) and giving those creditors a strong incentive to race to sue and obtain the first judgment against the alleged aiders and abettors. But that is just the sort of scramble to the courthouse that bankruptcy is designed to avoid and make unnecessary. In such a race, the bankruptcy estate, which all courts recognize has standing to bring the underlying fraudulent transfer action, would have to compete with the creditors for overlapping, if not identical, damages against the aiders and abettors. That result is an unfavorable one for the creditors looking to the bankruptcy process for a fair recovery on and equitable treatment of their claims. Section 544(a), if read literally, would provide a critical tool for assigning standing to the estate representative and avoiding tension between the creditors and the estate.
V. ADDITIONAL ADVANTAGES TO BROAD CONSTRUCTION
A. The Availability of a Substantive Consolidation Remedy When One Debtor Is the Alter Ego of Another
Among the benefits that might be garnered from giving a fair, literal reading and full force to [section] 544(a) would be a long-sought and more persuasive statutory ground for the highly practical remedy of substantive consolidation. Substantive consolidation could arguably be applied as an available remedy under [section] 544(a) when an estate representative successfully prevails on an alter ego claim under applicable nonbankruptcy law.
Under substantive consolidation, a bankruptcy court orders the pooling of assets of two or more entities, and the liabilities of all of these entities are then paid from the pool. Substantive consolidation is usually applied to two or more bankruptcy estates but, less frequently, may combine the assets of an estate with those of a non-debtor entity. Courts ordering substantive consolidation generally have not looked to [section] 544, but have looked instead to other (less satisfactory) statutory provisions and court-developed tests to deter mine when it is appropriate. (118)
Some courts find that substantive consolidation is supported by general concepts of equity, sometimes looking to dicta found in the 1941 Supreme Court decision in Sampsell v. Imperial Paper & Color Corp (Sampsell). (119) The weakness in that rationale, however, is that Sampsell's dicta seems to be contradicted by the Supreme Court's subsequent statements in Butner that "undefined considerations of equity" should not control over established principles of applicable non-bankruptcy law. (120)
Other courts have teased authority for substantive consolidation out of the broad language found in 11 U.S.C. [section] 105 or [section] 542. Neither statutory rationale is convincing. The Supreme Court has indicated that [section] 105 is limited and that "whatever equitable powers remain in the bankruptcy courts must and can only be exercised within the confines of the Bankruptcy Code[.]" (121) Similarly, the "turn over" authority of [section] 542 is not substantive enough to address the issue and merely begs the question of what may be turned over. (122)
In contrast to general (or clearly inapplicable) statutes, rules or subjective concepts of equity, [section] 544(a) provides an easily identifiable statutory provision and governing standard for combining related entities. If a Judgment Lien Creditor of a debtor could seek satisfaction of its claim from another entity related to the debtor under applicable non-bankruptcy law, such as under "alter ego" principles, then, arguably, [section] 544(a) should permit an estate representative to seek satisfaction on behalf of all creditors from that same entity, such that substantive consolidation could be ordered and implemented. (123)
B. Other Possible Applications
Viewing a bankruptcy estate with all the rights and powers of a judgment lien creditor may have other appropriate applications that streamline the administrative process. For example, state statutes may provide certain rights of forced dissolution of a limited liability company to a judgment creditor of a member. (124) Under a narrow view of standing, that remedy may not be available to a bankruptcy estate representative.
Section 544(a) has been too long ignored as an express source of bankruptcy estate authority to reach, for the benefit of creditors, collectively, all assets and remedies, in bankruptcy, that would have been available to them if they had extended credit and obtained a judgment at the instant of bankruptcy. It is time to put the provision to full use and to put an end to the artificial and arbitrary limits read into it based on historical rationales that find no support in the current statutory language. If, as we believe, one of the principal purposes of bankruptcy is to provide an efficient mechanism for creditors to share equitably the proceeds of their competing rights, there is no sense in depriving the collective proceeding of rights and remedies available to every Judgment Lien Creditor of the debtor if no estate were created. The "old learning"' should be finally put to rest and the broad language of [section] 544(a) should be construed literally and logically.
Richard J. Mason
Patricia K. Smoots *
* Richard J. Mason is a partner in the Chicago office of McGuire Woods LLP. Mr. Mason has taught courses on bankruptcy, Chapter 11 reorganization and cross-border insolvency law as an adjunct professor at Chicago-Kent College of Law since 1983. He has been an active member of the American College of Bankruptcy and the International Insolvency Institute for many years. Patricia K. Smoots is a Chicago-based attorney, formerly with McGuireWoods LLP. She has devoted her practice to bankruptcy litigation since 2001. The views expressed in this article are those of the authors, alone, and do not necessarily reflect the views of McGuireWoods LLP or any of its members.
(1) References to the rights of the bankruptcy estate or the estate representative include the rights of a bankruptcy trustee, the debtor in possession or any party acting for the estate, such as a committee or other third-party authorized by a court or confirmed plan to bring actions for the estate.
(2) See, for example, Bankruptcy Code [section][section] 544(b), 545, 547 and 548 (2016). References herein to the Bankruptcy Code or, simply, the Code are to Title 11 of the United States Code (11 U.S.C. [section] 101, et seq.).
(3) 11 U.S.C. [section][section] 544(a)(1), (2) (2016) (emphasis added).
(4) See, e.g., M. Prager and J. Backman, Pursuing Alter-Ego Liability Against Non-Bankrupt Third Parties: Structuring a Comprehensive Conceptual Framework, 35 St. Louis U.L.J. 657 (Spring, 1991) (hereinafter Prager & Backman) (arguing against a broad construction of the strong arm clause).
(5) Id. The authors recognize that there are numerous articles and cases discussing the strong arm clause, its origins and its proper construction. This article does not attempt to collect and discuss them.
(6) See Butner v. United States, 440 U.S. 48, 55-56 (1979).
(7) 11 U.S.C. [section] 541(a)(1) (2016).
(8) See, for example, 11 U.S.C. [section] 541(a)(7) (2016) (after acquired property), 11 U.S.C. [section] 541(a)(6) (2016) (proceeds of property), 11 U.S.C. [section] 541 (a)(5) (2016) (certain assets acquired by the debtor within 180 days of bankruptcy). This category includes claims to punish certain violations of the automatic stay provisions of Code [section] 362. 11 U.S.C. [section] 362 (2016).
(9) See, e.g., 11 U.S.C. [section][section] 544, 547, 548 (2016).
(10) The Bankruptcy Act of 1800 (Act of 1800) (2 Stat. 19) was in effect from 1800 to 1803; the Bankruptcy Act of 1841 (Act of 1841) (5 Stat. 440) was in effect from 1841 to 1843; and the Bankruptcy Act of 1867 (Act of 1867) (14 Stat. 517) was in effect from 1867 to 1878.
(11) See [section] 5, Act of 1800; [section] 3, Act of 1841; and [section] 14, Act of 1898.
(12) See [section] 17 of the Act of 1800; [section] 2 of the Act of 1841; and [section] 35 of the Act of 1867.
(13) See, e.g., Bankruptcy Act [section] 70a, entitled Title to Property, codified at 11 U.S.C. [section] 110(a) (1976).
(14) Compare 11 U.S.C. [section] 110(a) (1940) with 11 U.S.C. [section] 110(a) (1976).
(15) The Bankruptcy Code preserves the bankruptcy estate's right to execute a creditor's right to levy upon debtor's property, but not in [section] 541; rather, those rights apparently are preserved only through [section] 544(a).
(16) See e.g., Jonathan M. Landers, A Unified Approach to Parent, Affiliate and Subsidiary Questions in Bankruptcy. 42 U. Chi. L. Rev. 589, 611 (1974-75) (hereinafter Landers); Steven E. Boyce, Koch Refining and In re Ozark: The Chapter 7 Trustee's Standing to Assert an Alter Ego Cause of Action. 64 Am. Bankr. L.J. 315 (Summer 1990) (hereinafter Boyce). According to Boyce, "it is quite apparent that the trustee was granted [in [section] 47a(2)] all the rights and powers that creditors could have asserted at state law." Boyce, 64 Am. Bankr. L.J. 315, 320.
(17) See e.g., 11 U.S.C. [section] 110(c) (1940).
(18) See Landers, supra note 16, at 614-615 (describing the 1966 amendment); and see Boyce, supra note 16, at 321-22, noting that language found in 11 U.S.C. [section] 544(a) was eliminated in 1950 and restored in 1966.
(19) 11 U.S.C. [section] 110(c) (1976).
(20) See, e.g, Stefan A. Riesenfeld, Collection of Money Judgments in American Law--A Historical Inventory and a Prospectus, 42 Iowa L. Rev. 155, 157 (1956-57) (hereinafter Riesenfeld). Over time, virtually all states adopted judgment enforcement proceedings through statutes called supplementary proceedings or proceedings in aid of execution. See Ralph Ewing Clark, A Treatise on the Law and Practice of Receivers (3d Ed.) Vol. I, Ch. VI, [section] 204 (1959) (hereinafter Clark); Riesenfeld, at 169-72.
(21) Clark, [section] 204.
(22) See, e.g., Boyce, supra note 16, at 322, and authorities cited therein.
(23) The Bankruptcy Code defines judicial lien to mean a "lien obtained by judgment, levy, sequestration or other legal or equitable process." 11 U.S.C. [section] 101(36) (2016).
(24) In re Seward Dredging Co, 242 F. 225, 227 (2d Cir. 1917).
(25) Specifically, the Court in Seward Dredging recognized that:
Since 1910, a Trustee has two rights as to property in his custody; i.e., that of the bankrupt and that of such a creditor as described. They are different rights, sometimes antagonistic; the Trustee can take his choice. In re Seward Dredging Co., 242 F. at 228.
(26) Landers, supra note 16, at 611-612, n. 65.
(27) York Mfg. Co. v. Cassell, 201 U.S. 344 (1906). An equipment seller sought to recover the equipment it had sold to the debtor prior to the bankruptcy, but it had failed to record its contract, as Ohio law required for perfection of its interest. The Supreme Court held that the limited general creditor rights afforded to a trustee, under the then-current form of the Bankruptcy Act, did not include the powers of a judgment creditor, who could have defeated the equipment seller's unperfected claim to the equipment. York Mfg. Co. v. Cassell, 201 U.S. at 352-53.
(28) Landers, supra note 16, at 612.
(29) Id. at 612.
(30) Id. at 614-15.
(31) Id. at 609-10 and 613-14.
(32) Id. at 610-611. Landers concluded that some of the cases were based upon the theory that only a creditor who had relied upon a representation that the corporation would be adequately capitalized could bring an action for failure to meet capital contribution requirements, and a receiver could not have so relied. Id at 613-14. In other cases, where the court's ruling could not be explained by a reliance requirement, Landers theorized that the courts may simply have been attempting to protect the shareholders' expectation of limited liability; allowing a receiver to look to shareholders to satisfy all of the corporation's debts would have fully nullified that protection--a harsh result. Id. at 613-14.
(33) Id. at 610-11.
(34) Id. at 613-14.
(35) 406 U.S. 416 (1972).
(36) 11 U.S.C. [section] 541 (2016).
(37) See 11 U.S.C. [section] 547 (2016) (preferences); 11 U.S.C. [section] 548 (2016) ("fraudulent transfers and obligations"); see also, e.g., 11 U.S.C. [section] 545 (2016) (avoidance of statutory liens); and 11 U.S.C. [section] 550 (2016) (providing for recovery by the estate upon avoidance of transfers).
(38) 11 U.S.C. [section] 544(a) (2016) (emphasis added).
(39) 11 U.S.C. [section] 544(b) (2016).
(40) See, Richard L. Epling, Trustee's Standing to Sue in Alter Ego or Other Damage Remedy Actions, 6 Bankr. Dev. J. 191 (1989) (describing arguments in favor of and against trustee standing) (hereinafter Epling).
(41) There is no indication in the legislative history of the Bankruptcy Code that Congress intended to narrow the estate's powers from those that trustees in bankruptcy were afforded under the Bankruptcy Act. Conversely, as often noted by courts construing the provision narrowly, there is also no indication that Congress intended to expand those rights.
(42) Some argue that a broad reading of the strong arm provision might expand the controversial holding in Moore v. Bay, 284 U.S. 4 (1931), which permitted a trustee to avoid an entire transaction if it is avoidable by any one creditor under state law. Epling, supra note 40, at 198. This argument is misplaced, however, where, as here, the authors do not contend that [section] 544(a) allows a bankruptcy estate to assert any single creditor's claim, or the claims of classes of creditors, but, instead, to assert only claims that any and every Judgment Lien Creditor could have asserted absent the bankruptcy.
(43) 11 U.S.C. [section] 541(a)(7) (2016).
(44) See 5 Collier on Bankruptcy [paragraph] 544.02[b] (Alan N. Resnick & Henry J. Sommer eds., 16th ed. 2016) and cases referenced therein.
(45) See Epling, supra note 40, at 200 ("The bankruptcy trustee is the party best situated to bring a collective action on behalf of all creditors....").
(46) Butner v. United States, 440 U.S. 48, 55 (1979) (emphasis added) (internal quotations and citations omitted).
(47) Choice of law questions as to what state or other nonbankruptcy law applies is beyond the scope of this article. For a discussion of choice of law issues under the strong arm clause, see 5 Collier on Bankruptcy [paragraph] 544.02 (Alan N. Resnick & Henry J. Sommer eds., 15th ed. 2014).
(48) 457 B.R. 820 (10th Cir. B.A.P. 2011).
(49) Id., 457 B.R. at 827-28.
(50) In re Duffin, 457 B.R. at 829. In an interesting, more recent decision, however, the Tenth Circuit BAP held that the Duffin rationale does not extend to allowing trustees to use [section]544(a) to challenge a debtor's exemption of tax refunds attributable to earned income tax credits claimed under a Kansas bankruptcy-only exemption statute. See Williamson v. Murray (In re Murray), 506 B.R. 129, 136-38 (10th Cir. B.A.P. 2014).
(51) See, e.g., Zilkha Energy Co. v. Leighton, 920 F.2d 1520, 1524 (10th Cir. 1990) (citing [section]544(a) and holding that, under "the guise of a creditor with a judgment against the debtor ... the trustee may invoke whatever remedies provided by state law to judgment lien creditors to satisfy judgments against the debt or") (emphasis added); and see also Hill v. Gibson Dunn & Crutcher, LLP (In re MS55, Inc.), 2007 WL 2669150 (D. Colo. Sept. 6, 2007) at **15-16 (in an unusually expansive analysis, the court held that a trustee could bring a tort action under Colorado law against the debtor corporation's former legal counsel for aiding and abetting the directors' breaches of duty in making certain preferential transfers). But see In re MS55, Inc., 420 B.R. 806 (Bankr. D. Colo. 2009) (on remand the bankruptcy court ruled in favor of the defendants because it found that Delaware law, not Colorado law, applied), aff'd, In re MS55, Inc., 2011 WL, 1084967 (D. Colo. March 21, 2011).
(52) See e.g., 5 Collier on Bankruptcy [paragraph] 544.01 (Alan N. Resnick & Henry J. Sommer eds, 15th ed. 2014).
(53) Caplin, supra note 35, at 417-20. The benefit to the bankruptcy estate from the trustee's suit would have been, at best, the indirect benefit of having the debenture holders' claims satisfied, reducing the pool of claims to be satisfied. Id. at 430. Even that benefit might be illusory, however, if the defendant were held to be subrogated to the debenture holders' claims. Id.
(54) Caplin, 406 U.S. at 428.
(55) Caplin, 406 U.S. at 428 (emphasis added). The referenced footnote cited 11 U.S.C. [section] 110, but the "relevant" quoted provision was only subsection (a), thus making clear that the Court was focused on what we have here called the Debtor's Property Rights (then codified at 11 U.S.C. [section] 110(a)). Caplin, at 424-25 and n.14. Although another provision of 11 U.S.C. [section] 110 then included what we have called Creditor-Mirroring Rights and Powers, then codified at 11 U.S.C. [section] 110(c), the Court never discussed that subsection, and nothing in its discussion suggests that the Court considered it or that the trustee even argued that his claim could be supported under it. See, e.g. Boyce, 64 Am. Bankr. L.J. at 324 (although the Caplin Court cited a Bankruptcy Act section that included the precursor language to [section] 544(a), it quoted only the [section] 541 precursor language).
(56) Caplin, 406 U.S. at 434-35 (noting that Congress could choose among "any number of alternatives," including making the trustee the exclusive party to bring suits against indenture trustees, authorizing trustees to act as class representative, or permitting the debenture holders to decide whether the trustee should sue on their behalf).
(57) "The proposed, but never adopted subsection (c) of [section] 544 would have granted greatly expanded authority to a bankruptcy trustee, including the power to bring "any cause of action that a creditor, [or] a class of creditors ... has against any person[.]" The draft subparagraph read as follows:
(c)(1) The trustee may enforce any cause of action that a creditor, a class of creditors, an equity security holder, or a class of equity security holders has against any person, if--(A) the trustee could not recover against such person on such cause of action other than under this subsection; (B) recovery by the trustee for the benefit of such creditor or equity security holder or the members of such class will reduce the claim or interest of such creditor or equity security holder or of such members, as the case may be, against or in the estate; (C) there is a reasonable likelihood that recovery against such person will not create an allowable claim in favor of such person against the estate; and (D) enforcement of such cause of action is in the best interest of the estate....
H.R. 8200, 95th Cong, 1st Sess. 416-17 (1977); H.R. Rep. No. 95-595, 95th Cong. 1st Sess. 370-71.
(58) A House amendment deleted [section] 544(c) of the House bill. 124 Cong. Rec. H 11097 (Sept. 28,1978); S 17,413 (Oct. 6, 1978). The draft provision also included procedural steps, including notice to all creditors or equity security holders that could have brought the action, and provided that the benefits of any recovery was to go to those persons. Id.
(59) Mixon v. Anderson (In re Ozark Restaurant Equipment Co.), 816 F.2d 1222, 1227-28 (8th Cir. 1987) (Ozark).
(60) Interestingly, the Ozark Court noted that [section] 544(a) and (b) are "admittedly broader than their predecessors," but concluded that they are nevertheless "flavored with" the "power to avoid 'transfers' of the debtor, as were [their] predecessors, Sections 70(c) and (e) of the [Bankruptcy] Act." Ozark, 816 F.2d at 1229. See Sigmon v. Miller-Sharpe, Inc. (In re Miller), 197 B.R. 810, 813-815 (W.D. N.C. 1996) (concluding that [section] 544(a) confers on a trustee only creditor status for the purpose of voiding transfers of the debtor's property and discussing the Ozark rationale and the competing, common-sense concerns driving contrary decisions such as Koch Refining v. Farmers Union Central Exchange, Inc., 831 F.2d 1339 (7th Cir. 1987) and St. Paul Fire and Marine Insurance Co. v. PepsiCo, Inc., 884 F.2d 688 (2d Cir. 1989)).
(61) See, e.g., Baillie Lumber Co. v. Thompson (In re Icarus Holding, LLC), 391 F.3d 1315 and n. 4 (11th Cir. 2004) (citing Ozark with approval, and holding that bankruptcy trustees may bring alter ego claims only if applicable state law permits a corporation to pierce its own veil; i.e., only if the claim would qualify as estate property under [section] 541.) See also Gordon v. Harman (In re Harman), 520 B.R. 906, 911-912 (Bankr. N.D. Ga. 2014) (citing Ozark noting Congress' failure to adopt proposed [section] 544(c), and relying on the fact that at the time Caplin was decided, Bankruptcy Act [section] 70c had language substantially similar to Code [section] 544(a)); Ahcom, Ltd. v. Smeding, 623 F.3d 1248 (9th Cir. 2010) (concluding that California precedent "teaches that a trustee 'is not an appropriate general representative of creditors'" and that a trustee cannot sue simply because all creditors are affected).
(62) Caplin, 406 U.S. at 428.
(63) For that reason, Courts engage in a flawed analysis to the extent they find trustee standing to be lacking because Creditor-Mirroring Rights and Powers were included in the Bankruptcy Act when Caplin was decided.
(64) Caplin, 406 U.S. at 421, n.12; and see Boyce, supra note 16, at 325-26 (describing this as a distinction between general and personal creditor claims).
(65) See, e.g., United States v. Ron Pair Enters., Inc., 489 U.S. 235, 241 (1989) (holding that all inquiries concerning the meaning of a statute must begin with its language and "where ... the statute's language is plain, 'the sole function of the Courts is to enforce it according to its terms.'").
(66) Ozark, 816 F.2d 1222.
(67) S.I. Acquisition, Inc. v. Eastway Delivery Service, Inc. (In re S.I. Acquisition, Inc.), 817 F.2d 1142 (5th Cir. 1987) (S.I Acquisition); Koch Refining v. Farmers Union Central Exchange, Inc., 831 F.2d 1339 (7th Cir. 1987) (Koch); and St. Paul Fire and Marine Insurance Co. v. Pepsico, Inc., 884 F.2d 688 (2d Cir. 1989) (St. Paul).
(68) S.I. Acquisition, 817 F.2d at 1152-53.
(69) Id. at 1152-53. Similarly, the Fourth Circuit, in Steyr-Daimler-Puch of America Corp. v. Pappas, 852 F.2d 132, 136 (4th Cir. 1988) (Pappas), found it unnecessary to address the issue of whether a bankruptcy trustee could bring an alter ego action as a representative of creditors under [section] 544 because under applicable state (Virginia) law, an alter ego action may be brought by a corporation, and thus is property of the estate under [section] 541. Also see, In re Schimmelpenninck, 183 F.3d 347, 360 (5th Cir. 1999) (holding that a creditor's alter ego and "single business enterprise" claims were subject to the automatic stay).
(70) Koch, 831 F.2d at 1347, n.11 (7th Cir. 1987) (emphasis added).
(71) Id. at 1349, 1351-54. In Koch, the dispute over standing was between the debtor's bankruptcy trustee and a group of creditors that had been sued by the trustee in actions to avoid and recover preferential payments. The creditors, recognizing their vulnerability on the avoidance actions, hoped to recoup from the debtor's owners through alter ego actions any sums they might ultimately be compelled to return to the estate. Id. at 1351-54. The tension thus was over whether the alter ego claims belonged to the individual creditors or to the trustee as the representative of the creditors as a group.
(72) Id. at 1348-49.
(73) Id. at 1349 (emphasis added).
(74) Id. at 1348 (emphasis added).
(75) Id. at 1346, n. 7; and see Boyce, supra note 16, at 317-18, (arguing that the Koch decision was based substantially on bankruptcy policy.)
(76) St. Paul, 884 F.2d at 697-98. In St. Paul, the trustee filed an alter ego action against the debtor's parent in an Ohio bankruptcy court, while the creditor sued the debtor's parent in a third party complaint in a suit in a New York district court. The New York court dismissed the third party claim, giving rise to the creditor's appeal to the Second Circuit. Id. at 694-95.
(77) Id. at 701 (emphasis added).
(78) Id. at 704.
(79) Id at 702, n. 3. (emphasis supplied).
(80) Koch, 831 F.2d at 1345 (emphasis added). Ironically, an Illinois state court subsequently rejected the Koch Court's conclusion that a corporation may bring an action to pierce its own corporate veil under Illinois law. Sharon Leasing, Inc. v. Phil Terese Transportation, Ltd, 701 N.E.2d 1150, 1155 (111. App. 1998) ("a corporation may not assert an alter ego action against its own shareholders").
(81) S.I. Acquisition, 817 F.2d at 1152 (alter ego is a remedy "available to all creditors of the corporation" and "does not rest upon a particular creditor's dealings with" the corporation or on a showing of fraud).
(82) In St. Paul, the Court's discussion of Ohio law left unclear whether a creditor invoking the alter ego remedy under it must demonstrate some special injury. St. Paul, 884 F.2d at 702-03. If so, under the analysis we propose here, the bankruptcy trustee could not assert the claim under his Creditor-Mirroring Rights and Powers under [section] 544(a), and could only bring the action if it was one the debtor itself could have brought, and the action thus constituted property of the estate, as the Court ultimately concluded.
(83) 40 F.3d 890 (7th Cir. 1994).
(84) Steinberg, 40 F.3d at 893 (emphasis added).
(85) In re Doctor's Hospital of Hyde Park, Inc., 308 B.R. 311, 318-19 (Bankr. N.D. 111. 2004). And, see, In re Del-Met Corp., 322 B.R. 781, 834 (Bankr. M.D. Tenn. 2005) (noting that the Koch court found, as an "alternative holding" that a trustee has standing to bring an alter ego claim under [section] 544(a), but declining to follow that holding). Some commentators, too, view the Koch case as one decided under [section] 544(a). See, e.g., Bryan D. Hull, A Void in Avoidance Powers? The Bankruptcy Trustee's Inability to Assert Damages Claims on Behalf of Creditors Against Third Parties, 46 U. Miami L. Rev. 263, 285 (November 1991).
(86) In re Teknek, 563 F.3d 639, 645-46 (7th Cir. 2009) (emphasis added). The facts in Teknek were unusual. Teknek's bankruptcy trustee brought an adversary proceeding against the debtor's principals both to recover fraudulent transfers and to assert alter ego liability. Teknek, 563 F.3d at 641. A judgment creditor (who was also a judgment creditor of non-debtor affiliates of the debtor), had also sued the principals. At the trustee's request, the bankruptcy court enjoined the creditor's collection activity, but the district court reversed. The Seventh Circuit affirmed the district court, concluding that the trustee and the creditor were both attempting to enforce the creditor's judgment and that the creditor alone had the right to do so. Id. 643-44, 652.
(87) Id. at 646 (emphasis added). See also Fisher v. Apostolou, 155 F.3d 876, 879 (7th Cir. 1998) (quoting Koch and concluding that "the trustee is ... the only party who can sue to represent the interests of the creditors as a class") Fisher involved a fraud action, however, not a veil-piercing or alter ego action. The Fisher court held that certain creditors' fraud claims against third party non-debtors were personal to the creditors, but it held that the creditor's claims were nevertheless so similar to the debtor corporation's own claim that a temporary injunction of the creditor's claims was warranted. Fisher v. Apostolou, 155 F.3d at 881-82 (citing and relying upon the approach adopted in Bankers Trust Co. v. Rhoades, 859 F.2d 1096 (2d Cir. 1988)).
(88) See, e.g., State Bank and Trust Co. v. Spaeth (In re Motorwerks, Inc.), 371 B.R. 281 (Bankr. S.D. Ohio, 2007) (finding no authority under 11 U.S.C. [section] 544(a) to bring a claim for aiding and abetting fraud and aiding and abetting breach of fiduciary duty); Sigmon v. Esposito (In re Rehab Trust & Management Co.), 2002 Bankr. LEXIS 1877, at '16-17 (W.D. N.C. March 4, 2002) (a trustee cannot use [section] 544 to assert fraud, civil conspiracy or unfair trade practices claims on behalf of creditors).
(89) See, e.g, Stanziale v. McGladrey & Pullen, LLP (In re Student Finance Corp.), 335 B.R. 539, 549 (D. Del. 2005) ("the Court can find no support for the Trustee's contention that [section] 544 provides him with standing to bring [general] tort claims on behalf of [debtor's] creditors").
(90) In re Food Management Group, LLC, 380 B.R. 677, 693 (Bankr. S.D.N.Y. 2008) (quoting Pinter v. Dahl, 486 U.S. 622, 632 (1988)).
(91) In re Food Management Group, LLC, 380 B.R. at 694.
(92) Pennsylvania, for example, will not apply the in pari delicto defense mechanically, but rather permits courts to use their discretion in determining the fairness of its application, including whether application would come at innocent creditors' expense. Adelphia Communications Corp. v. Bank of America, N.A. (In re Adelphia Communications Corp.), 365 B.R. 24, 48-49 (Bankr. S.D.N.Y. 2007). Similarly, Illinois law has recognized exceptions to the in pari delicto defense in cases involving insurance liquidators and bank receivers. See Peterson v. McGladrey & Pullen, LLP, 676 F.3d 594, 597-98 (7th Cir. 2012).
(93) See, e.g., Peterson v. McGladrey & Pullen, LLP, 676 F.3d 594, 596 (noting that in pari delicto does not apply in avoiding actions in which a bankruptcy trustee can take the part of any hypothetical lien claimant).
(94) 944 F.2d 114 (2d Cir. 1991).
(95) Id. at 118 (emphasis added).
(96) Id. at 120. Ultimately, the Court allowed only the Trustee's claim against the brokerage for "churning" the debtor's brokerage account to stand. Id. at 119.
(97) See, In re Adelphia Communications Corp., 365 B.R. 24, 45, n. 66 (noting that Wagoner has been criticized for improperly conflating standing with the affirmative defense of in pari delicto).
(98) 721 F.3d 54 (2d Cir. 2013).
(99) The trustee in Picard was appointed after the arrest of Bernard Madoff and the Securities Investor Protection Corporation filed for protection of his investment firm pursuant to the Securities Investor Protection Act (15 U.S.C. [section][section] 78aaa, et. seq. ("SIPA")). The trustee who, pursuant to SIPA, is vested with the same powers as a bankruptcy trustee, brought action against certain financial and investment firms for, among other things, aiding and abetting Madoff's fraud.
(100) Picard, 721 F.3d at 64-65.
(101) Id. at 70-71, 75-77 and n. 27. The entire discussion was unnecessary, because, by the time the dispute reached the Second Circuit, the trustee had abandoned an earlier argument premised on [section] 544(a). Id. at 66, n. 16. The court appeared to consider and reject the argument anyway.
(102) Picard, 721 F.3d at 70.
(103) It would appear that under Illinois law, a receiver for a bank or insurance company can bring claims free of in pari delicto. See, e.g., McRaith v. BDO Seidman, 391 Ill. App. 3d 565, 594 (2009) (insurance receiver) and Albers v. Continental Illinois Bank & Trust Co, 296 Ill. App. 596, 599 (1938) (bank receiver). Yet the Seventh Circuit, applying Illinois law, has held that bankruptcy estates apparently do not exercise the same freedom. See Peterson v. McGladrey & Pullen, LLP, 676 F.3d at 598. To the authors, it makes little sense to eliminate the defense of in pari delicto for a receiver but not for a bankruptcy estate unless a receiver is granted broader statutory powers only because of a distinguishing nature of the receivership.
(104) In a case in which some creditors assigned their claims pursuant to a confirmed plan of liquidation, the Seventh Circuit held that the litigation trustee could properly pursue the claims. See Grede v. Bank of New York Mellon, 598 F.3d 899 (7th Cir. 2010) (reversing a district court's dismissal of the litigation trustee's action based on the assigned claims).
(105) 859 F.2d 664, 665 (9th Cir. 1988).
(106) Id. at 666.
(107) Id. at 666-67.
(108) Grede, 598 F.3d at 901.
(109) W. at 901; and see, e.g., Semi-Tech Litigation, LLC v. Bankers Trust Co., 272 F.Supp.2d 319 (S.D.N.Y. 2003) (rejecting the Williams Court's rationale); In re Bankers Trust Co., 450 F.3d 121, 123 (2d Cir. 2006).
(110) See In re Parker, 399 B.R. 577, 580 (Bankr. E.D.N.Y. 2009) (finding no action under New York law); In re Restaurant Development Group, Inc., 397 B.R. 891, 897-98 (Bankr. N.D. Ill. 2008) (finding Illinois law recognizes actions for conspiracy and aiding and abetting fraudulent transfer); Banco Popular North America v. Gandi, 876 A. 2d 253, 263 (N.J. 2005) (finding action exists under New Jersey law for conspiring with another to execute a fraudulent transfer); Freemen v. First Union Nat. Bank, 865 So. 2d 1272, 1277 (Fla. 2004) (finding no action under Florida law); and Summers v. Hagen, 852 P. 2d 1165, 1169 (Alaska 1993) (finding Alaska recognizes action for conspiracy to fraudulently transfer property).
(111) In re Kohner, 2014 WL 4639920 (Bankr. D.Ariz. 2014) (trustee lacks standing to bring a conspiracy to commit a fraudulent transfer claim); Mann v. GTCR Golder Rauner, LLC, 483 F. Supp. 2d 864, 879 (D. Ariz. 2007) (trustee lacks standing to bring aiding and abetting fraudulent transfer claim); Sigmon v. Miller-Sharpe, Inc. (In re Miller), 197 B.R. 810 (W.D. N.C. 1996) (same principle); and Wyle v. Howard, Weil, Labovisse, Fredrichs, Inc. (In re Hamilton Taft & Co.), 176 B.R. 895, 902 (Bankr. N.D. Cal. 1995) (same principle).
(112) In re Restaurant Development Group, Inc., 397 B.R. at 897 (applying Illinois law) and In re B.L. Jennings, Inc., 373 B.R. 742, 768 (Bankr. M.D. Fla. 2007) (applying California law). And, see, generally, In re Educators Group Health Trust, 25 F.3d 1281, 1285-86 (5th Cir. 1994) (not relying on [section] 544, but finding that certain claims brought by creditors against former managers of the debtor belonged to the estate, including an action for conspiracy to commit fraudulent transfers).
(113) Hoskins v. Citigroup, Inc. (In re Viola), 469 B.R. 1, 7 (9th Cir. B.A.P. 2012) (Hoskins).
(114) Id. at 7 (emphasis added). Direct fraudulent transfer claims were dismissed because the defendants were held not to be transferees and, in the case of an alleged stock transfer, because avoidance was held prohibited by the safe harbor provisions of 11 U.S.C. [section]546(e). Id. at 9-10.
(115) Hoskins, 469 B.R. at 8-9 (citing Williams, 859 F.2d 664 (9th Cir. 1988). In an interesting concurring opinion in Hoskins, Bankruptcy Judge Hollowell noted the difference between a Trustee's powers under [section]544(a) and under [section]544(b) and concluded that, "depending on the facts of a particular case, that difference may significantly impact a trustee's ability to recover assets." Hoskins, 469 B.R. at 11, J. Hollowell, concurring. She concurred in the result, however, apparently viewing the creditors' standing to be derivative of the debtor's standing and thus subject to the same defenses. Hoskins, 469 B. R. at 10. ("The rights of a hypothetical lien creditor are dependent on the rights of its debtor.")
(116) Id. at 9 (quoting Smith v. Arthur Andersen 11 p, 421 F.3d 989, 1002 (9th Cir. 2005)). In Smith, however, the Court allowed portions of the trustee's complaint to stand, including claims apparently brought under [section] 541 for breaches of the defendants' fiduciary duties to the debtor and wrongful expenditure of corporate assets by postponing bankruptcy. Smith v. Arthur Andersen LLP, 421 F.3d at 1003.
(117) Under the Uniform Fraudulent Transfer Act ("UFTA"), judgment creditors may under certain circumstances avoid future or prior transfers. See [section] 4(a) of the UFTA.
(118) For broad discussions of substantive consolidation principles, see Eastgroup Properties v. Southern Motel Assn., Ltd., 935 F.2d 245, 248 (11th Cir. 1991); In re Auto-Train Corp., 810 F.2d 270, 276 (D.C. Cir. 1987); In re Augie/Restivo Baking Co., 860 F.2d 515 (2d Cir. 1988); In re Bonham, 229 F.3d 750 (9th Cir. 2000); In re Owens Corning, 419 F.3d 195 (3d Cir. 2005). For discussion of the sources of power sometimes relied upon for orders of nondebtor substantive consolidation, see Kurt A. Mayr, Back to Butner's Basic Rule--The Fundamental Flaw of Nondebtor Substantive Consolidation, 16 Norton J. Bankr. L & Prac. 77 (February 2007).
(119) 313 U.S. 215 (1941).
(120) Butner v. United States, 440 U.S. at 56.
(121) Law v. Siegel, 134 S. Ct. 1188, 1194-94 (2014) (quoting Norwest Bank Worthington v. Ahlers, 485 U.S. 197, 206 (1988)).
(122) Still less persuasive is reliance on Bankruptcy Rule 1015, which governs consolidation of cases pending with respect to the same debtor and joint administration of cases involving related debtors. The rule is sometimes mentioned as a legal basis for substantive consolidation, but the weakness of that theory lies in the relief going well beyond the scope of the rule.
(123) See Mayr, 16 Norton J. Bankr. L & Prac. 77 (February 2007). Mayr adopts the view that, under Butner, state "alter ego" or "constructive trust" law should control whether substantive consolidation is appropriate. However, he fails to explore the link between [section] 544(a) of the Bankruptcy Code and this result.
(124) Although a member of a limited liability company might not have the power to dissolve it, under certain circumstances, a judgment creditor might acquire that power. See Uniform Limited Liability Company Act [section][section] 504(b), 503(e)(3), and 801(5) (1996). But see. In re Talbut, 2016 WL 937373 ** 2-4 (Bankr. n.d. Ohio, March 10, 2016)(acknowledging that the estate acquires the rights of a judgment lien creditor under [section] 544(a)(1) and that the relevant limited liability company statute gives judgment creditors the rights to a charging order and, consequently, to distributions, but finding that the right of foreclosure on the debtor's membership interest is not among the rights granted).
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|Author:||Mason, Richard J.; Smoots, Patricia K.|
|Publication:||American Bankruptcy Law Journal|
|Date:||Jun 22, 2017|
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