Opinion
Case No. 99 C 7898
September 29, 2000
MEMORANDUM OPINION AND ORDER
Plaintiff-appellant National Therapeutic Associates d/b/a RehabVisions appeals from the bankruptcy court's dismissal of its two-count adversary complaint seeking to challenge the validity of defendant-appellee Concept Rehab, Inc.'s security interest in assets of the debtor, Aurora Home Services, Inc., and seeking an equitable marshaling of the debtor's assets. This court will not recount the facts and procedural background of this case, which are set forth in the bankruptcy court's opinion. The bankruptcy court dismissed the complaint on the ground that RehabVisions lacks standing to assert claims that belong to the estate. Because the bankruptcy court ruled, as a matter of law, that RehabVisions lacks standing to bring its complaint, this court reviews the dismissal order de novo. See In re Rovell, 194 F.3d 867, 870 (7th Cir. 1999).
As a preliminary matter, Concept Rehab urges the court to find that RehabVisions has waived certain arguments not raised before the bankruptcy court. In response, RehabVisions contends that the question of standing is not subject to waiver. RehabVisions is correct to the extent that the question of standing arises under the Constitution. See, e.g., Gora v. Costa, 971 F.2d 1325, 1328 (7th Cir. 1992) (noting that "[b]ecause these constitutional standing requirements bear on the court's power to entertain a party's claim . . . an argument that a party lacks standing can be raised at any stage of the proceedings"). However, where — as here — the standing issue arises under a statute, the issue is subject to waiver. See, e.g., In re Gribben, 158 B.R. 920, 922 (Bankr. S.D.N.Y. 1993) (holding that argument about standing under the Bankruptcy Code "does not go to the court's constitutional jurisdiction over the case," and thus was waived). In any event, the court concludes that none of the arguments — whether raised below or not — are meritorious.
In bankruptcy proceedings, "[t]he trustee represents not only the rights of the debtor but also the interests of the creditors of the debtor," Koch Refining v. Farmers Union Central Exch., Inc., 831 F.2d 1339, 1342 (7th Cir. 1987), and accordingly is "the only party who can sue to represent the interests of the creditors as a class." Fisher v. Apostolou, 155 F.3d 876, 879 (7th Cir. 1998). Under 11 U.S.C. § 544, the trustee, in her capacity as creditor, may bring suit to reach property belonging to the estate that will then be distributed to all creditors. Koch Refining, 831 F.2d at 1342. "The trustee's single effort eliminates the many wasteful and competitive suits of individual creditors." Id at 1342-43. The trustee "has the duty to marshal the debtor's property for the benefit of the estate, and thus the right to sue parties for recovery of all property available under state law." Id. at 1343.
An individual creditor may bring an action belonging to the estate only after the trustee and debtor decline to do so. Id. at 1347 n. 9. The creditor must first ask the trustee to abandon the suit, then seek leave from the court to prosecute the action for and in the name of the trustee. Id. Alternatively, the creditor may petition the court to compel the trustee to either bring suit or abandon the claim. Id.; see also Matter of Boerne Hills Leasing Corp., 15 F.3d 57, 60 (5th Cir. 1994) (recognizing that creditor may initiate avoidance only after moving the bankruptcy court for authorization to act on behalf of the trustee or debtor-in-possession).
While the trustee may "bring suits for the benefit of the estate and ultimately of the creditors," she "has no standing to bring personal claims of creditors." Koch Refining, 831 F.2d at 1348. RehabVisions argues that Count I of its complaint — a claim challenging the validity of Concept Rehab's security interest in the debtor's assets — is personal because "should Concept Rehab's lien be invalidated or subordinated, only RehabVisions can assert a first priority claim for distribution of the Debtor's assets." (Br. at 7) Because "only RehabVisions has a secured claim in the estate assets alleged to be subject to Concept Rehab's lien," the "unsecured creditors will not receive a single dollar from these assets unless and until RehabVisions is paid in full." ( Id.) RehabVisions' argument is based on the unsupported presumption that a claim is personal if, once the merits of the claim are adjudicated, the party bringing the claim will be the primary beneficiary. That is not the standard recognized by the Seventh Circuit, which has held that "[a] cause of action is `personal' if the claimant himself is harmed and no other claimant or creditor has an interest in the cause." Koch Refining, 831 F.2d at 1348.
Every creditor of the debtor has an interest in the invalidation of Concept Rehab's lien, for it would open up the possibility that their claims could be satisfied. Whether or not they ultimately would be is beside the point. RehabVisions may be entitled to all of the assets subject to the lien, but that would not be established until after the lien is invalidated. Even RehabVisions seems to acknowledge the possibility that other creditors may benefit, stating that the unsecured creditors would not receive any portions of the assets "unless and until" RehabVisions is paid in full. (Br. at 7) If the estate has truly been made subject to an invalid lien, the estate is injured. There is no injury caused by Concept Rehab's lien that is unique to RehabVisions. An injury does not cease to be general merely because one creditor is more likely than other creditors to benefit from its redress.
It is also well within the trustee's authority to bring the claim set forth in Count II of RehabVisions' complaint — a request that the court equitably marshal the debtor's assets — as the claim belongs to the estate, not to RehabVisions personally. As the bankruptcy court recognized, all of the debtor's creditors have an interest in "requiring Concept to satisfy' its senior interest first against the assets of the related entities." (Order at 5)
The court rejects RehabVisions' attempt to limit the personal/general distinction to avoidance actions. In defining personal causes of action in Koch Refining, the Seventh Circuit did not limit its analysis to avoidance actions brought under 28 U.S.C. § 157(b)(2)(F) and (H). Rather, the court addressed "any action in which the debtor has an interest, including actions against the debtor's officers and directors for breach of duty or misconduct." 831 F.2d at 1348. There is no express or implicit indication that the Koch Refining court meant to exclude actions to determine the validity of a lien under § 157(b)(2)(K). The breakdown of jurisdictional subject matter provided in § 157(b)(2) does not suggest that each separately listed category entails a unique standing analysis. The court believes that the Koch Refining standard applies to RehabVisions' complaint; pursuant to that standard, RehabVisions lacks standing.
RehabVisions' reliance on Matter of Xonics, Inc., 813 F.2d 127 (7th Cir. 1987), does not alter the court's conclusion. In Matter of Xonics, the Seventh Circuit sensibly recognized that, under § 157(b)(2)(K) and (O), the bankruptcy court has jurisdiction over disputes about which creditor "has a security interest in which payments." Id. at 131. That the bankruptcy court has subject-matter jurisdiction over such matters cannot be disputed, given the language of § 157(b)(2); what is disputed is whether an individual creditor has standing to challenge a lien without first asking the trustee to bring the challenge or seeking leave from the bankruptcy court in the event that the trustee declines to pursue the matter. The Matter of Xonics court did not speak to this issue. The language cited by RehabVisions was not the court's actual holding, but merely an observation made in the course of its analysis. In addressing two creditors' dispute over assets abandoned by the debtor, the court simply held that the bankruptcy court would have jurisdiction if the "identification of ownership interests" in the disputed fund "would affect the recoveries of other creditors under the plan of reorganization." Id. at 132. The Matter of Xonics court did not hold that the bankruptcy court actually had jurisdiction, and thus had no reason to address standing — even assuming that the issue was raised by the parties.
In the few cases where the court appears to have entertained a motion brought by a creditor seeking a declaration of a lien's validity, see In re Cutty's-Gurnee, Inc., 133 B.R. 929, 930 (Bankr. N.D. Ill. 1991). there has been no discussion of standing-related concerns surrounding such motions. Even assuming that the Koch Refining court did not intend for the personal/general distinction to govern actions seeking a declaration of a lien's validity, RehabVisions' complaint is broader than that — despite its attempt to portray the action as arising solely under § 157(b)(2)(K). Although RehabVisions styled its complaint as one for the "determination of validity, priority, and extent of lien. . . and related relief," it is the "related relief' that appears to be the crux of the action. The complaint itself portrays the action as a core proceeding not only under § 157(b)(2)(K) ("determinations of the validity, extent, or priority of liens"), but also under § 157(b)(2)(A) ("matters concerning the administration of the estate"), (B) ("allowance or disallowance of claims against the estate"), and (O) ("other proceedings affecting the liquidation of the assets of the estate"). Besides seeking a declaration that Concept Rehab's security interest is invalid, Count I asks the court "to remit to RehabVisions any adequate protection payments made by the Debtor" to Concept Rehab. (Compl. at 8-9) The fact that Count I seeks to recover those payments by challenging Concept Rehab's lien does not mean that the trustee's avoidance powers are not brought into play. See, e.g., Matter of Boerne Hills Leasing Corp., 15 F.3d at 59-60 (holding that liens were avoidable by trustee or debtor-in-possession, but not creditor). As for Count II. the equitable marshaling claim has nothing to do with the validity of Concept Rehab's lien; the claim clearly belongs to the estate and is assertable by the trustee.
The Seventh Circuit's subsequent refinement of the Koch Refining standard supports this court's conclusion that RehabVisions lacks standing to bring its complaint. In Steinberg v. Buczynski, 40 F.3d 890, 893 (7th Cir. 1994), the court found the "personal" versus "general" distinction to be "not an illuminating usage." Instead, the court observed that "[t]he point is simply that the trustee is confined to enforcing entitlements of the corporation," as opposed to "entitlements of a creditor." Id Significantly, the Steinberg court did not limit its language to avoidance actions, or to any adversarial actions other than disputes over a lien's validity. In challenging the validity of Concept Rehab's lien, RehabVisions is pursuing an entitlement of the corporation, not its own entitlement. This action should have been brought by the trustee; if the trustee unjustifiably refused to bring it, RehabVisions should have sought leave to proceed from the bankruptcy court.
RehabVisions' argument that the bankruptcy court's "Final Cash Collateral Order" somehow gives it standing is unconvincing. The fact that the bankruptcy court provided a deadline for challenges to Concept Rehab's claim does not mean that existing procedural requirements for such challenges were lifted. RehabVisions was required to ask the debtor to pursue the challenge, or to seek leave from the court. Because it failed to do so, RehabVisions lacks standing to contest the claim — regardless of whether a proper challenge was contemplated by the scheduling order.
The court also rejects RehabVisions' after-the-fact reliance on the Declaratory Judgment Act, 28 U.S.C. § 2201, 2202, as a basis for its cause of action. The complaint was not brought under the DJA (containing not a single reference to the DJA), but under the Bankruptcy Code, where the Koch Refining standard governs.
Finally, RehabVisions argues that even if its claim should be viewed as belonging to the estate, it should be afforded derivative standing to bring its complaint because, essentially, there was nothing else it could do. There are two fatal flaws to this argument. First, there is no indication that RehabVisions asked the trustee to press its claim. Second, even if asking the trustee would have been futile, RehabVisions failed to request leave from the court to bring the claim in place of the trustee. See Matter of Xonics Photochemical, Inc., 841 F.2d 198, 203 (7th Cir. 1988) (rejecting possibility of derivative suit where creditor never convinced the court "that the debtor was shirking his statutory responsibilities").
Conclusion
For the above reasons, the bankruptcy court's dismissal of RehabVisions' complaint is affirmed.