In re Rosenblum, 545 B.R. 846

Background

Kerwin and Xtreme Caged Combat (Plaintiffs) obtained a $76,800 judgment against Debtor Rosenblum in federal court and later (while collection efforts were underway) filed a state-court fraudulent-transfer suit alleging Debtor shifted gym assets to insiders to avoid creditors.
Debtor filed Chapter 13 bankruptcy on the eve of a contempt hearing for failure to comply with discovery in the federal case; Trustee is appointed but asserts insufficient funds to pursue avoidance litigation.
Plaintiffs did not file a formal proof of claim by the bar date, but filed a Motion to Dismiss the bankruptcy (pro se Kerwin) and other filings the court treated as an informal proof of claim.
The bankruptcy court raised standing sua sponte and solicited briefing on whether Plaintiffs may have derivative standing under 11 U.S.C. § 544(b) to pursue the state PUFTA claims on behalf of the estate.
The court concluded it has original but not exclusive jurisdiction over § 544(b) avoidance claims (state courts retain concurrent jurisdiction) and that the Chapter 13 Trustee has exclusive standing unless the court, in equity, confers derivative standing.
Applying Third Circuit precedent, the court granted retroactive derivative standing to Plaintiffs under § 544(b) because the PUFTA claims were colorable, the Trustee unjustifiably declined to pursue them due to lack of resources, and retroactive approval was equitable; the court stayed (held in abeyance) the bankruptcy pending resolution of the state litigation.

Issues

Issue	Plaintiff's Argument	Defendant's Argument	Held
Subject-matter jurisdiction over PUFTA avoidance claims	PUFTA claims belong in state court; bankruptcy lacks public-rights basis	Bankruptcy court has related-to jurisdiction and should adjudicate matters affecting the estate	Bankruptcy court has original but not exclusive jurisdiction; state court has concurrent jurisdiction
Who may bring § 544(b) avoidance actions	Plaintiffs effectively can pursue avoidance in state court	Trustee has exclusive standing to bring § 544(b) claims after case commences	Trustee has exclusive standing generally; creditors cannot unilaterally prosecute § 544(b) claims while trustee’s exclusivity subsists
Whether derivative standing can be conferred in Chapter 13	Court can use equitable power to confer derivative standing when Trustee declines due to lack of resources and action benefits estate	Debtor argued Third Circuit hasn’t authorized derivative standing in Chapter 13 and Plaintiffs lack right	Court may, under § 105(a) and Cybergenics framework, confer derivative standing in Chapter 13 when consistent with Chapter 13 purposes
Whether Plaintiffs met elements for derivative standing and whether retroactive approval is permitted	Plaintiffs: claims are colorable, Trustee unjustifiably declined (lack of funds), Trustee was aware, and retroactive relief is equitable	Debtor: claims won’t benefit estate; Plaintiffs failed to obtain prior court approval and didn’t formally petition Trustee	Court held Plaintiffs’ PUFTA claims are colorable, Trustee unjustifiably declined, failure to seek prior approval excused; retroactive derivative standing granted and bankruptcy stayed pending state litigation

Key Cases Cited

Official Comm. of Unsecured Creditors of Cybergenics Corp. ex rel. Cybergenics Corp. v. Chinery, 330 F.3d 548 (3d Cir. 2003) (authorizes bankruptcy courts to confer derivative standing in equitable circumstances to pursue avoidance actions)
In re Mystic Tank Lines Corp., 544 F.3d 524 (3d Cir. 2008) (district and bankruptcy courts may proceed concurrently with state courts on related matters)
Pacor, Inc. v. Higgins, 743 F.2d 984 (3d Cir. 1984) (defines the “related to” test for bankruptcy jurisdiction)
Landis v. North American Co., 299 U.S. 248 (U.S. 1936) (district court has discretion to stay proceedings pending resolution of related litigation)
In re Combustion Eng’g, Inc., 391 F.3d 190 (3d Cir. 2004) (explains scope of "cases under title 11" and related jurisdiction)