In re USA Baby, Inc.
424 F. App'x 558
7th Cir.2011Background
- USA Baby, a closely held corporation, was placed in Chapter 11 bankruptcy and a trustee was appointed.
- Trustee Chatz pursued limited administration and abandoned unliquidated, speculative claims after determining no funding to prosecute them.
- Wallis, USA Baby's president and 5% stockholder, sought to stand in for the trustee and pursue those claims pro se, separate from his corporate role.
- Commerce Capital, the secured creditor, obtained relief from the automatic stay and ultimately acquired USA Baby’s assets; franchisees and others became involved in resulting disputes.
- The bankruptcy court denied Wallis’s motion to substitute for the trustee, a decision the district court upheld, and Wallis appealed.
- The court affirmed, holding that the trustee’s discretionary decision not to pursue the claims was not unjustified and Wallis had no standing to replace the trustee.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| May Wallis stand in for the trustee to pursue estate assets? | Wallis | Chatz/Bankruptcy court | No; court did not abuse discretion in denying standing. |
| Did Chatz breach fiduciary duties by not pursuing the claims? | Wallis | Chatz acted with sound business judgment | No; records show prudent decision given funding limits and likelihood of recovery. |
| Is Wallis’s appeal moot after abandonment orders? | Wallis | Claims were abandoned to Wallis, rendering appeal moot | No; relief possible though limited; not moot. |
Key Cases Cited
- In re McKinney, 610 F.3d 399 (7th Cir. 2010) (finality test for bankruptcy appeal)
- In re Kizzee-Jordan, 626 F.3d 239 (5th Cir. 2010) (discrete dispute is required for finality)
- In re Resource Tech. Corp., 528 F.3d 467 (7th Cir. 2008) (divestiture and damages as relief in bankruptcy)
- In re Northwood Properties, LLC, 509 F.3d 15 (1st Cir. 2007) (standing to pursue estate claims; trustee duties)
- In re AroChem Corp., 176 F.3d 610 (2d Cir. 1999) (trustee duties and avoidance of conflicts)
- In re First Cent. Fin. Corp., 377 F.3d 209 (2d Cir. 2004) (trustee duty to preserve estate property)
- Fogel v. Zell, 221 F.3d 955 (7th Cir. 2000) (creditor standing to bring action where trustee refuses)
- Kovacs v. United States, 614 F.3d 666 (7th Cir. 2010) (standard of review in bankruptcy matters)