In In re Racing Services, Inc., 363 B.R. 911, 47 Bankr. Ct. Dec. 246 (8th Cir. BAP, March 9, 2007) (No. 06-6058), the Eighth Circuit Bankrptcy Appellate Panal addressed the issue of who may have derivative standing to act on behalf of a Bankruptcy estate. Thanks to Split Circuits Blog for the tip.
The Court left some wiggle room by holding that a party other than the trustee requires court approval to pursue the §548 claims on behalf of the estate, and that was not done in this case. However, it was clear that the BAP did generally approve of derivative standing.
Every circuit, including the Eighth Circuit, which has addressed the issue has recognized the possibility of derivative standing to pursue avoidance actions on behalf of a bankruptcy estate under certain circumstances. Nangle v. Lauer (In re Lauer), 98 F.3d 378, 388 (8th Cir. 1996); Scott v. Nat’l Century Fin. Enter. Inc. (In re Baltimore Emergency Services II Corp.), 432 F.3d 557 (4th Cir. 2005); Official Comm. of Unsecured Creditors of Cybergenics Corp. v. Chinery, 330 F.3d 548 (3rd Cir. 2003); Commodore Int’l Ltd v. Gould (In re Commodore Int’l Ltd.), 262 F.3d 96 (2nd Cir. 2001); Fogel v. Zell, 221 F.3d 995 (7th Cir. 2000); Avalanche Maritime, Ltd. v. Parekh (In re Parmetex, Inc.), 199 F.3d 1029 (9th Cir. 1999); Canadian Pac. Forest Prod. Ltd. v. J.D. Irving, Ltd. (In re Gibson Group, Inc.), 66 F.3d 1436 (6th Cir. 1995); Louisiana World Exposition v. Fed. Ins. Co., 858 F.2d 233 (5th Cir. 1988); Unsecured Creditors Committee v. Noyes (In re STN Enter.), 779 F.2d 901 (2nd Cir. 1985).
The Eighth Circuit Court of Appeals concluded that creditors cannot bring avoidance actions under Section 548 of the Bankruptcy Code absent evidence that the trustee cannot be relied upon to assert such claims. Nangle v. Lauer (In re Lauer), 98 F.3d 378, 388 (8th Cir. 1996). In order for a creditor to assert standing under Section 548, the creditor must establish that the trustee was unable or unwilling to pursue the claims on behalf of the bankruptcy estate. Id.
The Court continued –
Every circuit court which has addressed this issue since the Hartford Underwriters opinion was decided has recognized the possibility of derivative standing to pursue avoidance actions on behalf of a bankruptcy estate. Scott v. Nat’l Century Fin. Enter. Inc. (In re Baltimore Emergency Services II Corp.), 432 F.3d 557 (4th Cir. 2005); Official Comm. of Unsecured Creditors of Cybergenics Corp. v. Chinery, 330 F.3d 548 (3rd Cir. 2003); Commodore Int’l Ltd v. Gould (In re Commodore Int’l Ltd.), 262 F.3d 96 (2nd Cir. 2001); Fogel v. Zell, 221 F.3d 995 (7th Cir. 2000). None has gone so far as to say a bankruptcy court cannot authorize derivative standing.
The bankruptcy court thoroughly analyzed Eighth Circuit law on the subject of derivative standing and concluded that under the circumstances of this case the Plaintiff should not be granted standing to pursue the avoidance claims against the Defendants. We need not address the various factors relied upon by the bankruptcy court in reaching its well reasoned decision because one factor alone is sufficient to deny the request for standing: lack of prior court permission. At a minimum, prior court approval is required for a creditor to assert an avoidance action.
SR Notes – There is a 2004 BAP decision that disallows derivative standing: In re Fox, 305 B.R. 912 (BAP 10th Cir. 2004) (derivative standing was not appropriate in that case because such standing is not expressly provided for in § 548. Id.
Cybergenics discusses many reasons why it would be good policy for parties other than the trustee to bring derivative complaints, and it is hard to disagree with the reasons set forth by the majority. We, however, believe this reasoning is best considered by Congress, and it is not up to us to create a remedy for creditors it has not granted to them, especially when that right is given exclusively to the trustee. Here, the statute is absolute and allows us no discretion to vary from what it says. See In re Horwitz, 167 B.R. 237 (Bankr. W.D. Okla. 1994).
Furthermore, granting the trustee the exclusive right to bring avoidance complaints is not “absurd.” Lamie v. United States Trustee, 124 S.Ct. 1023, 1030 (2004). See also United States v. Ron Pair Enters., Inc., 489 U.S. 235, 241 (1989). And the Supreme Court has admonished us repeatedly that it is only when the result is absurd or demonstrably at odds with Congressional intent that the courts can disobey the statute’s literal language. See also Union Bank v. Wolas, 502 U.S. 151, 158 (1991) (“The fact that Congress may not have foreseen all of the consequences of a statutory enactment is not a sufficient reason for refusing to give effect to its plain meaning.”); Surf N Sun Apts., Inc. v. Dempsey, 253 B.R. 490, 494-95 (M.D. Fla. 1999) (“The bankruptcy court may not, however, unilaterally confer standing upon the creditor to pursue the claim itself. If such authority is to be granted, it must come from Congress and not the courts.”). Here, the enactment is not at odds with a demonstrated Congressional intent, and consequently we must apply it as written.