531 B.R. 126
Bankr. E.D. Va.2015Background
- CHN Construction filed chapter 11 on Dec. 21, 2011; SunTrust held secured notes with liens on substantially all assets.
- Court-approved orders required Debtor to deposit receipts into a DIP account and limited use of SunTrust’s cash collateral; a Cash Collateral Order authorized payment of "reasonable, necessary costs…including ... suppliers and subcontractors" and allowed termination for breach.
- During a June 2013–May 2014 "Blackout Period," the Debtor failed to provide required reports and did not deposit certain receipts into the DIP account; subcontract-related joint-checks totaling $666,229.92 were negotiated by third-party Joint Payees. SunTrust learned post-conversion that the Debtor retained about $284,541.68 of its cash collateral.
- Case converted to chapter 7 on May 28, 2014; the chapter 7 Trustee reviewed SunTrust’s request to pursue avoidance actions under 11 U.S.C. §§ 549 and 550 and declined, concluding the Cash Collateral Order likely authorized the transfers.
- SunTrust sought derivative standing to pursue avoidance claims on behalf of the estate; the Trustee objected. The bankruptcy court denied SunTrust’s motion, finding derivative standing inappropriate and the Trustee’s refusal reasonable.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether a secured creditor (SunTrust) may obtain derivative standing to pursue estate avoidance claims in chapter 7 | SunTrust: Trustee refused to sue; creditor may be granted derivative standing to avoid and recover postpetition transfers under §§549/550 | Trustee: Only trustee/debtor-in-possession may bring avoidance claims; in chapter 7 derivative standing is inappropriate and trustee reasonably declined to sue | Denied — creditor cannot obtain derivative standing in this chapter 7 case; Trustee’s refusal was reasonable |
| Whether the Post-petition Transfers are avoidable under §549 | SunTrust: Joint-payee negotiation of joint checks was not authorized by the Code or Cash Collateral Order, so transfers are avoidable | Trustee: Cash Collateral Order authorized payment of reasonable suppliers/subcontractors; §549(a)(2)(B) claim likely fails | Court accepted Trustee’s view that the Cash Collateral Order likely authorized the payments; claim not colorable |
| Standard for reviewing a chapter 7 trustee’s decision not to sue | SunTrust: (implicitly) court should permit derivative suit when trustee declines | Trustee: Trustee has fiduciary discretion; court should apply business-judgment review and defer | Held that trustee’s business judgment governs; court will not substitute its judgment for trustee’s decision |
| Whether chapter 11 derivative-standing exceptions apply in chapter 7 | SunTrust: relies on cases allowing creditor standing where trustee unreasonably refuses or consents | Trustee: Chapter 7 context differs; exceptions from chapter 11 do not translate into chapter 7 | Held that chapter 11 exceptions are inapplicable; derivative standing not appropriate in chapter 7 |
Key Cases Cited
- In re JKJ Chevrolet, 26 F.3d 481 (4th Cir.) (only trustees, not creditors, may seek certain postpetition recoveries)
- Scott v. Nat’l Century Fin. Enters. (In re Baltimore Emergency Servs. II, Corp.), 432 F.3d 557 (4th Cir.) (discussing circuits’ allowance of derivative standing in limited chapter 11 circumstances)
- Smart World Techs., LLC v. Juno Online Servs., Inc., 423 F.3d 166 (2d Cir.) (creditor/committee derivative standing where trustee consents or unreasonably refuses to sue)
- Official Comm. of Unsecured Creditors v. Chinery (In re Cybergenics Corp.), 330 F.3d 548 (3d Cir.) (recognizing creditor derivative standing when trustee unreasonably refuses)
- Fogel v. Zell, 221 F.3d 955 (7th Cir.) (discussing creditor standing where trustee refuses to pursue claims)
- Canadian Pac. Forest Prods. v. J.D. Irving, Ltd. (In re Gibson Group, Inc.), 66 F.3d 1436 (6th Cir.) (acknowledging limited derivative-standing doctrine)
- La. World Exposition v. Fed. Ins. Co., 858 F.2d 233 (5th Cir.) (early recognition of creditor-derivative exceptions)
- In re Commodore Int’l, Ltd., 262 F.3d 96 (2d Cir.) (strict test for creditor/committee acquiring standing via debtor-in-possession consent)