Summary
relating workarounds such as debtors offering a retainer to the trustee to pursue the avoidance claim, or trustees hiring debtor's counsel as special counsel to pursue the claims
Summary of this case from Wright v. Trystone Capital Assets, LLC (In re Wright)Opinion
Case No. 8:16-bk-02521-RCT
02-27-2017
In re Daniel F. Rothenbush, Debtor.
Chapter 13 MEMORANDUM DECISION AND ORDER SETTING CONTINUED HEARING ON DEBTOR'S MOTION FOR AUTHORITY TO BRING AN ADVERSARY PROCEEDING TO AVOID A PREFERENTIAL TRANSFER
Daniel Rothenbush is in pinch. Just before filing his chapter 13 bankruptcy, he withdrew $12,000 from his IRA and paid it to Suncoast Credit Union ("Suncoast"). Arguably, the transfer is recoverable as a preference under section 547. But the chapter 13 trustee, who has standing to pursue the preference, will not commit to do so. Instead, the trustee insists that Mr. Rothenbush come up with another $12,000 to satisfy section 1325(a)(4) and confirm his chapter 13 plan. He does not have the money; so his only recourse is to ask permission to file the preference action himself.
Sectional references are to the United States Bankruptcy Code, title 11 unless otherwise indicated.
To confirm a chapter 13 plan, a debtor must show that the plan pays at least as much to creditors as would a chapter 7 liquidation. This is known generally as the "best interest of creditors" or "liquidation" test, and is incorporated in section 1325(a)(4). At oral argument, the trustee and the debtor spoke as if the full $12,000 would have to be contributed to meet this test. But in fact, a liquidation analysis must also account for administrative expenses and should therefore reflect only net recoveries. In another words, the $12,000 would be reduced by a chapter 7 trustee's commission, the attorneys' fees and costs associated with bringing the preference, and any other foreseeable administrative expenses. See generally In re Engle, 496 B.R. 456, 461-62 (Bankr. S.D. Ohio 2013).
The issue here is whether Mr. Rothenbush should be granted derivative standing to pursue the preference when the chapter 13 trustee will not. Having considered Mr. Rothenbush's Motion for Authority to Bring an Adversary Proceeding to Avoid a Preferential Transfer (the "Motion") (Doc. 23), the Response filed by Suncoast (Doc. 25), and decisions going both ways, the court finds that the better reasoned approach supports Mr. Rothenbush's derivative standing to bring this preference claim.
The analysis and the logic of the decisions recognizing derivative standing for chapter 13 debtors are compelling. That said, the court does not agree with those that suggest that chapter 13 trustees and debtors have a concurrent right to pursue avoidance claims. The Bankruptcy Code is clear that chapter 13 trustees are granted avoidance powers in the first instance. Only when the trustee is unwilling to bring the action is it appropriate to consider granting derivative standing.
E.g., U.S. Bank Nat'l Ass'n v. Barbee (In re Barbee), 461 B.R. 711, 714-15 (B.A.P. 6th Cir. 2011); Countrywide Home Loans v. Dickson (In re Dickson), 427 B.R. 399, 404-08 (B.A.P. 6th Cir. 2010), aff'd on other grounds, 655 F.3d 585 (6th Cir. 2011); Houston v. Eiler (In re Cohen), 305 B.R. 886 (B.A.P. 9th Cir. 2004); Smith v. U.S. Bank Nat'l Ass'n (In re Smith), Adversary No. 13-4009, 2014 WL 1404722 (Bankr. W.D. Ky. April 10, 2014); see also In re Engle, 496 B.R. at 461-62.
E.g., In re Bonner, 206 B.R. 387, 388 (Bankr. E.D. Va. 1997).
Courts that do not recognize derivative standing for chapter 13 debtors focus on the plain meaning of the statute, as they should. They also rely on the Supreme Court's ruling in Hartford Underwriters Ins. Co. v. Union Planters Bank, N.A., 530 U.S. 1 (2000), which held that a creditor does not have independent standing to assert a surcharge claim under section 506(c) because the statute states that such claims are to be brought by a trustee. Their statutory analysis is simple and correct. The Bankruptcy Code grants avoidance powers to chapter 13 trustees (except as provided in section 522(h)), to chapter 7 trustees and to chapter 11 debtors-in-possession.
E.g., In re Lee, 432 B.R. 212, 215 (D.S.C. 2010).
Section 103(a) incorporates the avoidance powers of chapter 5 into chapter 13. And section 547 provides that "the trustee" may avoid a preference. In chapter 13, this and other avoidance powers remain with the chapter 13 trustee, except to the extent authorized in section 522(h).
But Hartford Underwriters does not rule out derivative standing. The Supreme Court simply held that the Bankruptcy Code failed to provide independent standing to a creditor seeking a surcharge claim under section 506(c). As a result, since Hartford Underwriters, limited derivative standing has been recognized for avoidance actions when the party charged with standing will not act, particularly if the avoidance claim potentially will benefit the entire estate. For example, in chapter 11, creditors' committees may petition the court for derivative standing to recover avoidable transfers when the debtor-in-possession will not act to pursue such claims. Chapter 7 creditors are also granted derivative standing to pursue avoidance actions when a chapter 7 trustee will not or cannot act. And recently, even a creditor in chapter 13 has been granted derivative standing.
530 U.S. at 13 n.5 ("We do not address whether a bankruptcy court can allow other interested parties to act in the trustee's stead in pursuing recovery . . . .").
Id. at 14.
See, e.g., Smart World Techs., LLC v. Juno Online Servs., Inc. (In re Smart World Techs., LLC), 423 F.3d 166, 176-78 (2d Cir. 2005) (recognizing that "creditors have an implied, qualified right to bring suit on behalf of the estate" when the debtor-in-possession refuses to pursue a claim); Official Comm. of Unsecured Creditors of Cybergenics Corp. v. Chinery, 330 F.3d 548, 566, 580 (3d Cir. 2003) (en banc) (creditors' committee has derivative standing, notwithstanding Hartford Underwriters).
See Hyundai Translead, Inc. v. Jackson Truck & Trailer Repair, Inc. (In re Trailer Source, Inc.), 555 F.3d 231, 245 (6th Cir. 2009) (holding that derivative standing for a creditor in chapter 7 continues, notwithstanding Hartford Underwriters); PW Enters., Inc. v. N.D. Racing Comm'n (In re Racing Servs., Inc.), 540 F.3d 892, 898-900 (8th Cir. 2008) (holding that "derivative standing is available to a creditor to pursue avoidance actions when it shows that a Chapter 7 trustee (or debtor-in-possession in the case of Chapter 11) is 'unable or unwilling' to do so," notwithstanding Hartford Underwriters); In re Dzierzawski, 518 B.R. 415, 424-25 (Bankr. E.D. Mich. 2014).
See In re Rosenblum, 545 B.R. 846, 873 (Bankr. E.D. Pa. 2016).
So if a creditor may obtain permission to assert derivative standing in chapter 13, why not a debtor, particularly if recovery of the avoided transfer will benefit the entire estate?
Courts answering this question best acknowledge the statutory primacy of the trustee's standing but also recognize the longstanding law supporting derivative standing. This approach makes good sense because chapter 13 trustees have no obligation to bring avoidance actions. They also have no resources to finance such litigation.
E.g., Countrywide Home Loans v. Dickson (In re Dickson), 427 B.R. 399, 405-06 (B.A.P. 6th Cir. 2010).
In re Cecil, 488 B.R. 200, 201-04 (Bankr. M.D. Fla. 2013).
Unlike a chapter 7 trustee who can liquidate assets and create a litigation fund to pursue avoidance claims, a chapter 13 debtor retains control of his or her assets and the exclusive right to sell, lease or use the assets. § 1303 and 1306(b). See generally In re Engle, 496 B.R. 456, 462 (Bankr. S.D. Ohio 2013).
To avoid the need for derivative standing, clever chapter 13 trustees and debtors' counsel have adopted workarounds. For example, debtors may offer a retainer to chapter 13 trustees to pursue the avoidance claims. Or trustees may hire a debtor's counsel to serve as special counsel for purposes of pursuing the claims. These methods may work, but such machinations should not be necessary. Derivative standing is simple and it can be limited by the court to appropriate cases so as to achieve the purposes and goals of the Bankruptcy Code and the interests of creditors.
E.g., In re Cecil, 488 B.R. at 203.
See Ryker v. Current (In re Ryker), 315 B.R. 664, 670 (Bankr. D.N.J. 2004).
Because of its limited nature, derivative standing requires permission from the bankruptcy court. And derivative standing is appropriate only when: (i) the movant alleges a colorable claim that would benefit the estate; and (ii) the trustee has unreasonably refused to pursue the claim.
PW Enters., Inc. v. N.D. Racing Comm'n (In re Racing Servs., Inc.), 540 F.3d 892, 905 (8th Cir. 2008) ("[U]nder no circumstances may a creditor prosecute its derivative complaint without the bankruptcy court's permission."); accord Smith v. U.S. Bank Nat'l Ass'n (In re Smith), Adversary No. 13-4009, 2014 WL 1404722 (Bankr. W.D. Ky. April 10, 2014).
In re Rosenblum, 545 B.R. 846, 863 (Bankr. E.D. Pa. 2016) (citing Stewart v. Chase Bank (In re Stewart), 473 B.R 612, 637 (Bankr. W.D. Pa. 2012) (citing Official Comm. of Unsecured Creditors of Nat'l Forge Co. v. Clark (In re Nat'l Forge Co.), 326 B.R. 532, 543 (W.D. Pa. 2005), aff'd, Civ. A. No. 12-1243, 2013 WL 4041963 (W.D. Pa. Aug. 8, 2013))). --------
Here, Suncoast acknowledges receipt of the alleged preference within 90 days of the bankruptcy petition. Although Suncoast may raise defenses, the claim is colorable. The trustee certainly views the claim as colorable and insists that it be included in the liquidation analysis for Mr. Rothenbush's chapter 13 plan. Indeed, this alleged preference seems to be the sole issue preventing Mr. Rothenbush from confirming his chapter 13 plan. Arguably, if he can state in his plan that he will pursue the preference claim and contribute any net recovery to his creditors under the plan, he can satisfy the "best interest of creditors" or "liquidation" test requirement of section 1325(a)(4).
The only material fact not clear from the record is the trustee's willingness to pursue the claim. At oral argument on the Motion, the trustee was equivocal.
Accordingly, the court will hold a continued hearing on the Motion, at which time the trustee will be required to make a final decision so that confirmation can move forward. If the trustee is unwilling to pursue the claim, Mr. Rothenbush will be granted derivative standing to bring the claim. If the trustee intends to bring the claim, derivative standing will be denied.
It is therefore ORDERED that a continued hearing on the Motion will be held April 3, 2017, at 2:15 p.m. in Courtroom 9A, Sam M. Gibbons United States Courthouse, 801 N. Florida Avenue, Tampa, FL 33602.
ORDERED.
Dated: February 27, 2017
/s/_________
Roberta A. Colton
United States Bankruptcy Judge Attorney Donald Golden is directed to serve a copy of this order on interested parties and file a proof of service within 3 days of entry of the order.