Recently, in Artesanias Hacienda Real S.A. De C.V. v. North Mill Capital, LLC; Leisawitz Heller, the Third Circuit held that creditors can pursue claims of the bankruptcy estate that have been abandoned by the trustee. Although the plaintiff, Artesanias, had Article III standing to pursue certain claims, because these claims were derivative of harm to a debtor in bankruptcy, they were property of the bankruptcy estate, and only the bankruptcy trustee had “bankruptcy standing” to pursue them. However, the Third Circuit also held that, if the trustee abandoned the claims, Artesanias could again prosecute them.
Background
Artesanias Hacienda Real S.A. de C.V., a judgment creditor of Wilton Armetale, Inc., filed a lawsuit in federal district court against certain parties alleging that they had received fraudulent transfers of Wilton’s assets and otherwise colluded with Wilton to loot Wilton’s assets in frustration of Artesanias’ judgment collection efforts (the “asset-plundering claims”). The parties sued by Artesanias included a law firm that had represented Wilton and a creditor of Wilton that was the beneficiary of allegedly collusive transactions with Wilton.
When Wilton commenced a Chapter 7 bankruptcy case, the asset-plundering claims became property of Wilton’s bankruptcy estate, and Artesanias’ prosecution of the claims became stayed pursuant to ections 362 and 541 of the Bankruptcy Code. However, the Chapter 7 trustee in Wilton’s case ultimately elected to abandon the asset-plundering claims, and Artesanias resumed its prosecution of those claims.
In the meantime, the district court defendants moved to dismiss Artesanias’s asset-plundering claims. However, instead of ruling on the motions to dismiss, the district court referred the suit to the bankruptcy court, finding that the bankruptcy court had “related to” jurisdiction over the matter. The bankruptcy court found that Artesanias lacked standing to prosecute the suit, reasoning that Artesanias’ claims were part of Wilton’s bankruptcy estate, and as such, only the trustee had standing to bring those claims. The court also found that the trustee’s abandonment of the claims did not confer standing on Artesanias to prosecute the claims. On appeal, the district court affirmed the bankruptcy court’s ruling and dismissed the case.
Analysis
“Bankruptcy Standing” Is Distinct from Article III Standing
The Third Circuit noted that, upon the debtor’s filing for bankruptcy, most of the debtor’s assets become property of the debtor’s bankruptcy estate under section 541 of the Bankruptcy Code. A trustee, or a debtor in possession, acts as a representative of the estate under section 323, and in such capacity has the authority to “sue and be sued” on the estate’s behalf. As such, the trustee is the sole party with statutory authority under the Bankruptcy Code to prosecute lawsuits on behalf of the debtor’s bankruptcy estate.
The Third Circuit highlighted that, in the past, it and other circuits had called this statutory authority the trustee’s exclusive “standing” to prosecute claims. However, such “bankruptcy standing” is different from jurisdictional, Article III standing. Adopting the Seventh Circuit’s explanation in , the Third Circuit “recharacterized bankruptcy ‘standing’ as the trustee’s ‘authority’ to act on behalf of the estate.”
Emphasizing this distinction, the Third Circuit held that “a litigant’s ‘standing’ to pursue causes of action that become the estate’s property means its statutory authority under the Bankruptcy Code, not its constitutional standing to invoke the federal judicial power.” Unlike bankruptcy standing, Article III constitutional standing has three elements: “(1) a concrete and particularized injury in fact, (2) that is fairly traceable to the defendant’s conduct, and (3) that a favorable judicial decision would likely redress.” Because the requirements of bankruptcy standing go beyond those three elements, bankruptcy standing does not affect a court’s constitutional jurisdiction.
In light of this conclusion, the Third Circuit held that Artesanias had constitutional, Article III standing to prosecute the asset-plundering claims after Wilton filed for bankruptcy. This was, however, not the end of the Third Circuit’s analysis because, in order to pursue the claims, Artesanias had to also meet the higher bankruptcy standing requirements.
A Bankruptcy Trustee Can Abandon His Bankruptcy Standing over Claims That Are Property of the Estate to a Creditor
Artesanias’ asset-plundering claims were property of Wilton’s bankruptcy estate because they existed at the time Wilton filed for bankruptcy. Additionally, according to the Third Circuit, they were claims Wilton could have brought on its own. At this point, even though Artesanias had Article III standing to bring the claims, only the bankruptcy trustee had “bankruptcy standing” (i.e., authority under the Bankruptcy Code) to pursue them. Only if Artesanias could somehow obtain bankruptcy standing from the trustee could he then prosecute the asset-plundering claims.
Significantly, the Third Circuit noted that a bankruptcy trustee can abandon his statutory authority over claims that are property of the estate. When this occurs, the authority to pursue such claims reverts to the original holder, in this case Artesanias. Holding that “Chapter 7 trustees can abandon asset-plundering claims back to the creditors who had them before the bankruptcy,” the Third Circuit recognized that Artesanias enjoyed authority to again pursue the claims.
Takeaway
Even if a creditor would otherwise have constitutional, Article III standing to bring a claim, if that claim is property of a bankruptcy estate, only the bankruptcy trustee enjoys “bankruptcy standing” (i.e., statutory authority) to pursue it. However, all is not lost for a creditor because a bankruptcy trustee can relinquish his authority back to the creditor to bring such a claim. In that circumstance, as long as the creditor fulfills the elements for Article III standing, the creditor will have jurisdictional authority to prosecute the claim.