Larson v. Foster (In re Foster)Larson v. Foster (In re Foster)
John A. Larson, III, appeals the November 1, 2013 orders entered by the Bankruptcy Court
FACTUAL AND PROCEDURAL BACKGROUND
Cindy M. Foster (“Debtor”) was an agent for Allstate Insurance Company and a number of associated entities. According to a purchase agreement dated April 26, 2010, John A. Larson, III acquired Debtor’s insurance business and a covenant not to compete for $425,000 to be paid over approximately two years in equal monthly installments. In August, 2011, Larson informed the Debtor that he believed she had violated the non-competе covenant. Larson paid only $245,000 of the total sale price.
In a separate transaction, Bruce L. Stephens loaned money to the Debtor. He obtained a judgment against her on October 21, 2011 in the amount of $174,547.42 for breach of the promissory note. On January 24, 2012, the Debtor executed a Partial Assignment to Stephens. The terms of the Partial Assignment required the Debtor to perform her obligations under the sale contract with Larson and represented that there was no breach under the sale contract. It permitted Stephens to enforce the Debtor’s remedies to collect the outstanding balance owing to her from Larson for the sale of hеr insurance business. The following month, based upon the Partial Assignment, Stephens filed suit against Larson to enforce payment of the outstanding balance owing to the Debtor to collect on his judgment. Larson filed a third party complaint alleging fraud, intentional misrepresentation and breach of contract for which he sought damages.
The Debtor filed bankruptcy on September 6, 2012. Charles Riske was appointed chapter 7 trustee (“Trustee”). Debtor’s listing of assets on Schedule B did not include any reference to any amounts owing to her from Larson. Schedule F filed by the Debtor identified the obligation owing to Stephens. The Debtor’s Statement of Financial Affairs did not disclose the Partial Assignment to Stephens nor did it reflect any payments received from Larson within the two years prior to her bankruptcy filing. Determining that there were no assets available to pay creditor claims, the Trustee filed a Report of No Distribution on November 19, 2012. This report was withdrawn on December 10, 2012. Both the Trustee and Larson filed rеquests to extend the December 12, 2012 deadline to object to the Debtor’s discharge which were granted by the Court.
Answers were filed, discovery was conducted and trial was scheduled for August 27, 2013. On August 18, 2018 Larson requested a continuance of the trial date for 90 days. A flurry of filings by all parties then ensued. Of importance to this case are: Debtor’s Motion to Dismiss the comрlaint due to Larson’s lack of standing and Larson’s Motion for Retroactive Approval to Prosecute Derivative Action Complaint and objections thereto.
After simultaneous hearings on the parties’ motions, the Bankruptcy Court denied Larson’s Motion for derivative standing. Because he lacked standing to pursue the adversаry proceeding, the Bankruptcy Court dismissed the complaint. Larson appeals these orders and raises essentially three issues on appeal: (1) the Bankruptcy Court erred in finding that the Trustee was justified in his decision not to pursue the fraudulent transfer claim; (2) the Trustee consented to Larson’s derivative standing; and (3) equitable estoрpel prevents the denial of Larson’s derivative standing.
STANDARD OF REVIEW
A bankruptcy court’s findings of fact are reviewed for clear error and its conclusions of law are reviewed de novo. First Nat’l Bank v. Pontow,
DISCUSSION
1. Derivative Standing
The Bankruptcy Code provides that a trustee may avoid, as fraudulent, transfers of property that ocсur within certain time frames and when specific circumstances are met. See 11 U.S.C. § 548(a)(1) (2014). As a general proposition it is well settled that such transfers may only be avoided by a trustee. Hartford Underwriters Ins. Co. v. Union Planters Bank, N.A.,
[T]he powеr to grant derivative standing to a creditor to pursue estate causes of action ... should not be exercised in a relaxed manner by bankruptcy courts. Otherwise, a creditor could “hijack” a Chapter 7 bankruptcy case in a manner Congress did not envision. If a creditor does not agree with a Chapter 7 trustee’s exercisе of its fiduciary duties, it can file a motion to compel the trustee to act or file a motion to have the trustee removed. But, it would seem to be, generally, an unwise idea to allow a creditor to usurp the trustee’s role as a representative of the estate — including being a gatekeeper for what actionsmakе sense and the evaluator of the potential benefits of litigation.
Reed v. Cooper (In re Cooper),
The Eighth Circuit permits derivative standing to bring an avoidance action when it can be shown that the trustee is unable or unwilling to do so. In re Racing Servs., Inc.,
The second and third factors are not central to the outcome of this appeal and are essentially undisputed based upon the record and the parties’ briefs. A creditor’s сlaim is colorable if it would survive a motion to dismiss. “[R]e-citals of the elements of a cause of action, supported by mere conclusory statements, do not suffice.” Ashcroft v. Iqbal,
Two factors remain to establish derivative standing. One is that the trustee refused to bring an avoidance action. On this point, Larson contends that he informed the Trustee of the fraudulent transfer involving the Partial Assignment and asked if the Trustee would be pursuing the action on behalf of the estate. His Affidavit in Opposition to thе Debtor’s Motion to Dismiss states that: “[t]o avoid the entry of the Discharge, which would have terminated the right to pursue the fraudulent conveyance, I filed the instant Complaint on behalf of the Creditor as a derivative action, in the absence of the action of the Trustee to do so.” Larson appears to believe that the entry of discharge does not automatically result in the closing of the case or preclude the Trustee from pursuing the action to avoid the fraudulent transfer. It does not. In fact, a trustee has the later of two years from the date a bankruptcy petition is filed, or the time the case is closed, to file such an action. See 11 U.S.C. § 546(a)(1) (2014). Thеre is no evidence that the Trustee refused to undertake avoidance of the transfer, rather, he merely responded that he would need more information.
Acknowledging that derivative standing is the exception rather than the rule, the final factor requires specific reasons, supported by competent evidence, that show that a trustee has unjustifiably refused to pursue the avoidance action. See In re Racing Servs., Inc., 540 F.3d at
Larson correctly identifies a benefit to the estate in his willingness to fund the fraudulent transfer litigation. However, this represents only one of the items to be considered in determining whether derivative standing is appropriate and on its own does not represent a clear benefit to the estate. Larson also argues that he has filed a proof of claim in the bankruptcy proceeding which on its face indicates that he is the Debtor’s largest creditor.
2. Consent
In In re Racing Services, Inc., the Eighth Circuit adopted the Second Circuit’s position “that a creditor may proceed derivatively when the trustee (or debtor-in-possession) consents (or does not formally oppose) the creditor’s suit.”
Larson also contends that the Trustee did not formally oppоse his deriva
Even if consent or no formal opposition exists, a bankruptcy court must also find that the suit is necessary, beneficial and in the best interests of the estate. Commodore Int’l Ltd. v. Gould (In re Commodore Int’l Ltd.),
3. Equitable Estoppel
Larson complains that the Debtor did not raise the lack of standing issue until the date originally scheduled for trial. The filed documents indicate that this statement is not exactly correct. On February 14, 2012 the Debtor filed an answer to the adversary proceeding in which she asserted that Larson lacked standing to bring the avoidance action. Although the issue of standing had been raised, Larson took no action to establish his derivative standing for seven months and then only after the Debtor filed her Motion to Dismiss. In any case, when Larson filed his motion, the trustee formally opposed the derivative action based upon a number of justificatiоns. Similar to the positions raised in his other arguments, Larson states that because the Debtor’s Motion to Dismiss and standing issues were not raised until the eve of trial, they are too late and that equitable estoppel should preclude any objection to his standing. Larson appears to propose that equitable estoppel should somehow cure his failure to appropriately seek derivative standing, and therefore, granting the Debtor’s Motion to Dismiss was improper. This position simply serves as yet another attempt to shift the burden to establish derivative standing away from Larson. Based upon the law, the filed documents and the timing of events in this ease, thesе arguments are without merit.
Standing is a component of subject matter jurisdiction that may be challenged at any time during the proceeding. Warth v. Seldin,
Based upon the record and applicable legal standards, the Bankruptcy Court did not abuse its discretion in denying derivativе standing. It follows that dismissal of the complaint was not only appropriate, but required. Accordingly, the Bankruptcy Court’s Orders are affirmed.
Notes
. The Honorable Kathy A. Surratt-States, Chief Judge, United States Bankruptcy Court for the Eastern District of Missouri.
. No complaints objecting to discharge were filed within the extended time frame and the Debtor’s discharge was entered on February 12, 2012.
. A transcript of the Bankruptcy Court's hearings was not included as part of the record on appeal. It is with this limitation that these issues are addressed.
. Proof of Claim No. 1 was filed by Larson in the amount of $465,000.00. The claim description states that the claim arises from breach of contract and fraud and attaches the purchase agreement for Debtor's insurance business.