Merritt v. Cheshire Land Preservation Trust (In Re Merritt)
711 F. App'x 83
| 3rd Cir. | 2017Background
- Merritt and R&R Capital formed several LLCs; Merritt was managing member. Relationship soured and R&R sued to remove her and recover assets.
- Delaware Chancery Court removed Merritt as manager, appointed receiver Kurt Heyman, and later held Merritt in contempt, stripping her of any distribution rights from the LLCs. Appeals failed.
- The receiver auctioned a 90-acre Apple Grove property; Cheshire purchased it post-auction for $1.25 million. The receiver also transferred other LLC assets to R&R.
- Merritt filed Chapter 13 bankruptcy and proposed adversary complaints (seeking to avoid the Apple Grove sale and transfers to R&R under 11 U.S.C. § 548). The Chapter 13 Trustee declined to pursue them.
- Merritt filed the adversary actions herself and moved to compel the Trustee to join, substitute, or ratify the suits or to grant her derivative standing. The Bankruptcy Court dismissed both complaints for lack of derivative standing (and alternatively for failure to state a § 548 claim); the District Court affirmed.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether debtor may obtain derivative standing to pursue § 548 avoidance actions in Chapter 13 | Merritt: courts should authorize derivative standing here because Trustee refused to pursue claims | Cheshire/R&R: Trustee properly declined; Merritt lacks standing | Denied — Merritt lacked derivative standing; dismissal proper |
| Whether Trustee abused discretion in declining to sue | Merritt: Trustee’s refusal was wrongful and harmed the estate | Defs/Bankr Ct: Trustee had insufficient time, potential defenses, and factual/legal bases to decline | Held Trustee did not abuse discretion; no breakdown of Code's scheme |
| Whether debtor waived defendants’ standing challenges by mentioning suits in confirmed plan | Merritt: inclusion in Chapter 13 plan waived objections | Defs: plan statement is factual, does not confer derivative standing | Held no waiver; plan did not confer standing |
| Alternative: Whether complaint stated a viable § 548 avoidance claim | Merritt: transfers were fraudulent or for less than reasonably equivalent value | Defs: contempt order extinguished Merritt’s interest; sale provided reasonably equivalent value; procedural defects | Court did not reach merits because of standing; Bankruptcy Court also found failure to state claim as alternative ground |
Key Cases Cited
- In re Knapper, 407 F.3d 573 (3d Cir. 2005) (avoidance powers belong to trustee)
- Official Comm. of Unsecured Creditors of Cybergenics Corp. v. Chinery, 330 F.3d 548 (3d Cir. 2003) (bankruptcy court may grant derivative standing in limited circumstances)
- In re Weyandt, [citation="544 F. App'x 107"] (3d Cir. 2013) (discussing derivative standing in Chapter 13 context)
- In re Gibson Grp., Inc., 66 F.3d 1436 (6th Cir. 1995) (abuse of discretion by trustee is key prerequisite for derivative standing)
- In re Balt. Emergency Servs. II, Corp., 432 F.3d 557 (4th Cir. 2005) (derivative standing is the exception, not the rule)
- In re Trans World Airlines, Inc., 145 F.3d 124 (3d Cir. 1998) (standards of appellate review for bankruptcy rulings)
- R&R Capital, LLC v. Merritt, 632 F. Supp. 2d 462 (E.D. Pa. 2009) (earlier district court litigation between the parties)