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In re: H. KEITH HENSON, Debtor; RELIGIOUS TECHNOLOGY CENTER, Plaintiff, vs. V. AREL LUCAS, an individual, as wife of the Debtor; CAROL WU, as Chapter 7 Trustee, Defendants.
Case No. 98-51326-ASW, Chapter 7, Adversary Proceeding No. 03-5131
UNITED STATES BANKRUPTCY COURT FOR THE NORTHERN DISTRICT OF CALIFORNIA
2006 Bankr. LEXIS 3722
April 21, 2006, Decided
April 21, 2006, Filed
PRIOR HISTORY: In re Henson, 289 B.R. 741, 2003 Bankr. LEXIS 167 (Bankr. N.D. Cal., 2003)
Available Briefs and Other Documents Related to this Case:
U.S. Bankruptcy Court Motion(s)
COUNSEL: [*1] For Religious Technology Center, Plaintiff: Elaine M. Seid, LEAD ATTORNEY, McPharlin, Sprinkles and Thomas, San Jose, CA.
For Carol Wu, Plaintiff: Judith S. Suelzle, LEAD ATTORNEY, Law Offices of Judith S. Suelzle, Los Altos, CA; Susan B. Luce, Law Offices of Charles E. Logan, San Jose, CA.
For V. Arel Lucas, Defendant: Wayne A. Silver, LEAD ATTORNEY, Law Offices of Wayne A. Silver, Sunnyvale, CA.
For Howard Keith Henson, Debtor: Stanley A. Zlotoff, Law Offices of Stanley A. Zlotoff, San Jose, CA.
For Carol Wu, Trustee: Charles E. Logan, Susan B. Luce, Law Offices of Charles E. Logan, San Jose, CA; Judith S. Suelzle, Law Offices of Judith S. Suelzle, Los Altos, CA.
William T. Neary, U.S. Trustee.
JUDGES: ARTHUR S. WEISSBRODT, UNITED STATES BANKRUPTCY JUDGE.
OPINION BY: ARTHUR S. WEISSBRODT
OPINION: MEMORANDUM DECISION REGARDING STANDING OF RELIGIOUS TECHNOLOGY CENTER TO FILE THIS ADVERSARY PROCEEDING
Before the Court is a motion by V. Arel Lucas ("Lucas") for summary judgment against Religious Technology Center ("Creditor"), a creditor of H. Keith Henson, the debtor in this Chapter 7 n1 case ("Debtor").
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n1 Unless otherwise noted, all statutory references are to the Bankruptcy Code, Title 11 United States Code, as it provided with respect to cases filed on February 23, 1998.
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Creditor is represented by Elaine M. Seid, Esq. of McPharlin, Sprinkles & Thomas LLP; Samuel D. Rosen, Esq.; and Helena K. Kobrin, Esq. of Moxon & Kobrin. Lucas is represented by Wayne A. Silver, Esq. The Chapter 7 Trustee ("Trustee"), Carol Wu, is represented by Susan B. Luce, Esq. of the Law Offices of Charles E. Logan. Debtor appeared in propria persona.
During the hearings on the summary judgment motion, Lucas objected to Creditor's standing to bring this adversary proceeding ("Action"). The Court continued the matter to permit the parties to brief the issue. The matter was briefed, argued and submitted for decision.
Lucas thereafter filed a request that the Court take judicial notice of the Ninth Circuit case of Smith v. Arthur Andersen LLP, 421 F.3d 989 (9th Cir. 2005). The Court issued an order requesting further briefing regarding the impact of that case on this submitted matter. Additional briefs were filed by the parties and considered by the Court.
This Memorandum Decision constitutes the Court's findings of fact and conclusions of law, pursuant to Rule 7052 of the Federal Rules of Bankruptcy Procedure.
I.
BACKGROUND [*3]
A. Procedural History of the Bankruptcy Case
Debtor filed a Chapter 13 bankruptcy petition on February 23, 1998. Debtor's bankruptcy case was dismissed on April 28, 1998. The dismissal was vacated on July 20, 1998 on a prospective basis only.
Debtor's Chapter 13 case was converted to a Chapter 7 case on February 7, 2003 and the Trustee was then appointed. n2
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n2 This is an unusual bankruptcy case -- Creditor has filed more than 60 motions, has commenced at least 3 adversary proceedings, has made a motion to disqualify this Court, has filed 3 separate motions to withdraw the reference, has filed at least 6 motions regarding its objection to the sale of this Property, and has filed numerous appeals from this Court's orders. Creditor has also sought to have the case dismissed from its inception.
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B. Factual Background
Debtor and Lucas are married and have been married since 1982. Debtor and Lucas entered into a prenuptial agreement on or about August 21, 1982. The prenuptial agreement provides, [*4] inter alia, that both income and property acquired during marriage is their separate property.
In July 1996, Debtor and Lucas purchased real property located at 302 College Avenue, Palo Alto, California ("Property") and took title to the Property in joint tenancy.
On May 14, 1998, Creditor obtained a judgment against Debtor in the amount of $ 75,000 and on June 9, 1998, recorded an abstract of the judgment ("Abstract") in the real property records in Santa Clara County. The Abstract was recorded during the period when Debtor's Chapter 13 bankruptcy case had been dismissed and before the dismissal had been vacated.
Recordation of the Abstract created a lien on the Property in the amount stated in the Abstract and Creditor has a secured claim in that amount ("Secured Claim"). Even though its Secured Claim is in the amount of $ 75,000, Creditor states in a Declaration filed in the Action and argues in its briefs that its Secured Claim arising from the Abstract is in the amount of $ 271,820 rather than $ 75,000. (See Declaration of Helena Kobrin filed July 13, 2005.)
The Trustee obtained permission from this Court to sell both the Debtor's interest and co-owner Lucas' interest [*5] in the Property pursuant to Bankruptcy Code ?363(h). The Trustee sold the Property in November 2003 and currently holds approximately $ 290,000 in sale proceeds (the "Sale Proceeds").
Pursuant to the terms of the Order approving the sale, the Trustee is holding the Sale Proceeds pending resolution of disputes relating to (i) Creditor's Secured Claim; (ii) Debtor's homestead exemption; and (iii) the nature of Lucas' ownership interest.
C. The Adversary Proceeding
Creditor commenced the Action in April 2003. On July 31, 2003, Creditor filed its Amended Complaint to Determine the Interest of a Putative Co-Owner Under Bankruptcy Rule 7001(2) (the "Complaint"). The Complaint names the Trustee and Lucas as defendants. (Creditor alleges that this Action is not a core proceeding under 28 U.S.C. § 157(b) and says it does not consent to entry of final orders by this Court.)
In a total of nine paragraphs, the Complaint alleges, inter alia, that (i) Creditor is informed and believes that the Trustee may have an interest in and to the Property by virtue of the interests of the Debtor and Lucas in the Property; (ii) Creditor's Abstract encumbers the [*6] entirety of the Property because the Property was community property; (iii) Lucas asserts that her interest in and to the Property is her separate property held in joint tenancy and is free and clear of the lien arising from the Abstract.
The Complaint asks for a declaration that (i) the entirety of the Property is community property; (ii) the Abstract encumbers the entirety of the Property; (iii) Creditor's lien is to be paid from the total proceeds of the sale of the Property; (iv) the interest of Lucas is junior and subordinate to the interest of Creditor; and (v) Creditor's interest is senior to Lucas' interest.
While the Complaint acknowledges that the Trustee may have an interest in the Property, it does not seek any relief on behalf of the estate. The prayer in the Complaint indicates that Creditor is suing only on its own behalf, on the theory that Creditor is entitled to receive the entire Sale Proceeds.
Both the Trustee and Lucas have answered the Complaint. Lucas raises standing as one of six affirmative defenses in her Answer. The Trustee has also argued that Creditor lacks standing and that the appropriate remedy is to substitute the Trustee in as plaintiff in the [*7] Action.
II.
THE PARTIES' POSITIONS
A. Applicable State Law
All parties agree that state law determines the nature and extent of a debtor's interest in the Property. Abele v. Mod. Fin. Plans Svcs. (In re Cohen), 300 F.3d 1097, 1104 (9th Cir. 2002). There is a general presumption that property acquired during marriage is community property. If the written instrument by which property is acquired states it is separate property, the community property presumption is rebutted and each spouse is presumed to own an undivided one-half interest. Hanf v. Summers (In re Summers), 332 F.3d 1240, 1243 (9th Cir. 2003).
In opposition to Lucas' summary judgment motion, Creditor argues that this separate property presumption is rebuttable and there are triable issues of fact regarding whether Lucas and Debtor actually intended to hold the Property as community property.
B. Lucas' Position Regarding Standing
Lucas asserts that the Action is one to determine an ownership interest in property of a bankruptcy estate. Under Bankruptcy Code § 541 and § 704, Lucas argues, only the Trustee [*8] has standing to pursue such an action. Lucas claims that the Ninth Circuit's recent decision in Smith v. Arthur Andersen LLP, 421 F.3d 989 (9th Cir. 2005) supports this argument. Lucas also relies on Honigman v. Comerica Bank (In re Van Dresser Corp.), 128 F.3d 945 (6th Cir. 1997); Schertz-Cibolo-Universal City, Indep. Sch. Dist. v. Wright (In the Matter of Educators Group Health Trust), 25 F.3d 1281 (5th Cir. 1994); e-Realbiz.com, LLC v. Protocol Communications, Inc. (In re Real Marketing Services, LLC), 309 B.R. 783 (S.D. Cal. 2004).
Lucas points out that standing must be determined as of the date the Action was filed and cannot be cured by later developments. Lucas cites People ex rel. Younger v. Andrus, 608 F.2d 1247 (9th Cir. 1979) for this proposition. As of that date, i.e., April 2, 2003, the Property had not been sold and Debtor and Lucas held title to the Property in joint tenancy.
Lucas contends that Creditor is asking this Court to reform the deed by which Lucas and Debtor held title, from joint tenancy to community property, since that is the only remedy that could have been asserted [*9] when the Action was commenced.
Lucas argues that, as a general rule, only parties to an instrument (or those in privity with them) have standing to seek its reformation and that Creditor lacks standing for this additional reason. n3
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n3 The Court does not make a determination on this issue in light of its conclusion regarding Creditor's standing reached on other grounds.
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C. Creditor's Position Regarding Standing
Creditor denies that the Action asks for reformation of a deed. However, Creditor acknowledges that what it seeks is a determination of Lucas' interest in the Sale Proceeds and that this determination must be made before the Trustee can distribute them.
Creditor sees itself as the proper party to sue because it alleges that it has the greatest economic interest in the Action and claims that the Trustee has, until recently, "acquiesced" in
Creditor's taking the leading role in this determination. Although Creditor in fact presently only has a Secured Claim for $ 75,000, it argues that [*10] the unavoided lien arising from its Abstract secures a claim of $ 271,820. n4 From this, Creditor argues that it is the real party in interest with standing because the Trustee has only a nominal or potential interest and no real stake in the outcome.
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n4 The status and amount of Creditor's claims has not yet been determined. Under § 502(a), claims are deemed allowed unless objected to. Creditor has filed the following claims: Claim no. 4 is an unsecured claim in the amount of $ 1,060,636; Claim no. 7 is an unsecured claim in the amount of $ 222,651.83 and states that it amends claim no. 4; Claim no. 8 states the total amount owed is $ 222,651.83, states that it amends the two prior claims, and that it is a secured claim "at least to the extent of" $ 75,000 based on Creditor's Abstract. Creditor has not filed a secured claim for any amount above this $ 75,000. Nor has the District Court amended the judgment which forms the basis of Creditor's Secured Claim. The estate's interest in the Sale Proceeds may not be distributed until the issues regarding the status and amount of Creditor's claims are resolved.
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Creditor also argues that it has standing because the Trustee does not have standing to bring an action that will benefit only a single, particular creditor.
D. Trustee's Position Regarding Standing
The Trustee asserts an interest in the Sale Proceeds on behalf of the estate. The Trustee sees the issue as whether Creditor "has standing to commence an adversary proceeding against a non-debtor party in Bankruptcy Court to bring property into the bankruptcy estate." (Trustee's Brief re Standing filed July 14, 2005.)
Trustee correctly points out that standing is a jurisdictional question that cannot be waived and can be raised at any time.
Trustee's argument is premised on these sections of the Bankruptcy Code: Bankruptcy Code § 323(a) makes the Trustee the representative of the estate and § 323(b) gives the Trustee the capacity to sue and be sued. Bankruptcy Code § 541 defines property of the estate as all legal or equitable interests of the debtor in property. Bankruptcy Code § 704 requires a chapter 7 trustee to collect and reduce to money the property of the estate. Under Bankruptcy Code § 704 [*12] , only a trustee is authorized to take possession of property of the chapter 7 estate, liquidate it, and distribute it to creditors.
Trustee says the Action seeks to bring Lucas's purported separate property interest in the co-owned Property into Debtor's bankruptcy estate. Thus, the Trustee is the real party in interest and the Trustee should be substituted in as the plaintiff pursuant to Rule 7017 of the Federal Rules of Bankruptcy Procedure.
III.
ANALYSIS
A. Introduction
In this Action, Creditor seeks a determination that the Sale Proceeds are community property rather than Debtor and Lucas' separate property. Creditor's transparent purpose in bringing the Action is to obtain a greater recovery for itself.
Resolution of the standing question raised by Lucas and the Trustee requires an analysis of the cause of action stated in the Complaint and applicable sections of the Bankruptcy Code. It also requires an analysis of Creditor's claims in this case and the Bankruptcy Code's treatment of those claims.
After a careful review of the statutory scheme regarding chapter 7 trustees' duties, the definition of property of the [*13] estate under Bankruptcy Code § 541, and an analysis of the relief sought by Creditor, the Court concludes that Creditor does not have standing because the cause of action stated in the Complaint belongs exclusively to the estate.
Creditor has usurped the Trustee's role in bringing this Action. Creditor's theory regarding standing would introduce chaos into the orderly process set out in the Bankruptcy Code for bringing property into an estate, for distributing it from an estate, and for settling disputes regarding the ownership of property. The Creditor suing Lucas and the Trustee in the fashion done here is no different than a creditor taking steps to sell any estate property-real or personal -- based on the creditor's self-serving claim that it will ultimately be entitled to a significant portion of the sale proceeds.
B. The Role of the Chapter 7 Trustee
Bankruptcy Code § 323(a) provides that the trustee in a case under title 11 is the "representative of the estate." Bankruptcy Code § 323(b) provides that a trustee has the "capacity to sue and be sued."
Bankruptcy Code § 704 [*14] sets out the duties of a chapter 7 trustee. A trustee must "collect and reduce to money the property of the estate for which trustee serves and close such estate as expeditiously as is compatible with the best interests of parties in interest."
Bankruptcy Code § 541(a) provides that:
The commencement of a case under section 301, 302, or 303 of this title creates an estate. Such estate is comprised of all the following property, wherever located and by whomever held:
(1) . . . all legal or equitable interests of the debtor in property as of the commencement of the case.
(2) all interests of the debtor and the debtor's spouse in community property as of the commencement of the case that is-
(A) under the sole, equal, or joint management and control of the debtor; or
(B) liable for an allowable claim against the debtor, or for both an allowable claim against the debtor and an allowable claim against the debtor's spouse, to the extent that such interest is so liable.
Within this framework, a chapter 7 trustee acts on behalf of all creditors to collect property of the estate and distribute the funds of the estate to its creditors in [*15] the manner set out in the Bankruptcy Code.
C. The Trustee's Causes of Action
"Property of the estate" as defined in Bankruptcy Code § 541 is a very broad concept and it includes causes of action. Sierra Switchboard Co. v. Westinghouse Electric Corp., 789 F.2d 705, 707 (9th Cir. 1986). Because a chapter 7 trustee's role is to maximize the estate, a trustee will necessarily prosecute those causes of action available to the trustee that will accomplish that goal.
If a debtor could raise a claim at the commencement of the bankruptcy case, the claim becomes the exclusive property of the bankruptcy estate and cannot be asserted by a creditor. While this issue arises in many different contexts, the analysis involves a careful look at the relief sought in a complaint and the harm it seeks to redress.
For example, in In re Real Marketing Services, LLC, 309 B.R. at 788, the district court affirmed the bankruptcy court's decision that breach of contract and related causes of action belonged exclusively to the estate of the limited liability company debtor rather than its managing member because the harm was to [*16] the debtor not the managing member. In In re Van Dresser Corp., 128 F.3d at 947, the Sixth Circuit found that tort claims were the exclusive property of the bankruptcy estate because the claims implicitly or explicitly alleged harm to the debtor. See also, CBS, Inc. v. Folks (In re Folks), 211 B.R. 378 (B.A.P. 9th Cir. 1997) (alter ego claim against principal of corporate debtor belonged to estate and trustee had standing to bring it because harm was to the debtor).
In Estate of Spirtos v. One San Bernardino County Superior Court Case Numbered SPR 02211, 443 F.3d 1172, 2006 WL 933405 (9th Cir. Apr. 12, 2006) the Ninth Circuit faced the issue of whether a creditor of a bankruptcy estate has standing to bring a claim on behalf of the estate. In line with the authority from other circuits and lower court decisions, the Ninth Circuit held that Bankruptcy Code § 323 and § 704 vest the trustee with the exclusive right to sue on behalf of the estate.
In Estate of Spirtos, plaintiff -- ex-wife of chapter 7 debtor -- sued in district court alleging RICO claims against the chapter 7 [*17] trustee and other parties involved in the bankruptcy case and the probate case of her deceased ex-husband. The district court dismissed her complaint on standing grounds and the Ninth Circuit affirmed. The Ninth Circuit explained:
To date, we have not squarely addressed the question of whether the creditor of a bankruptcy estate also has standing to assert claims on behalf of the estate. However, we have stated in dicta that, in general, trustees are the exclusive parties possessing the right to sue on behalf of the estate [citations omitted]. We have held that in some circumstances, the trustee may authorize others to bring suit, but we implicitly held that the right to bring suit -- or choose not to do so -- belongs to the trustee in the first instance. Estate of Spirtos, 443 F.3d 1172, 2006 WL 933405, at *2.
After reviewing authority from other circuits, the Ninth Circuit went on to state:
We therefore reaffirm our previous reasoning and that of our sister circuits and hold that the bankruptcy code endows the bankruptcy trustee with the exclusive right to sue on behalf of the estate. Accordingly, [plaintiff], as a creditor of the estate who did not [*18] receive authorization to sue from the trustee, lacks standing to assert a RICO claim on behalf of the estate." 443 F.3d 1172, 1176, Id. at *3 (emphasis added).
Based on Estate of Spirtos and the earlier decisions in this Circuit, it is clear that Creditor does not have standing to bring this Action. n6 If a cause of action seeks to redress harm to the debtor, it is property of the estate, and the trustee has the exclusive authority to deal with it.
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n6 Creditor argues that the holding in Chase Manhattan Bank, N.A. v. Jacobs (In re Jacobs), 48 B.R. 570 (Bankr. S.D. Cal. 1985) supports the conclusion that Creditor has standing. Jacobs does not hold anything regarding standing; the issue of standing apparently was neither raised nor discussed. In Jacobs, the debtor and his non-debtor spouse held title to the family residence as joint tenants. A lien creditor argued that the property was community property. The bankruptcy court ruled in debtor's favor on his motion for summary judgment. The creditor failed to submit sufficient evidence to rebut the separate property presumption arising from the fact that the title was held in joint tenancy. Jacobs is a bankruptcy court decision and, as such, is not binding on this Court. In any event, after Estate of Spirtos, it seems entirely irrelevant to this decision.
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[*19]
D. The Cause of Action Brought by Creditor Belonged to the Trustee.
Debtor could have sued Lucas before bankruptcy to obtain a ruling that the joint tenancy designation on the deed by which they held title to the Property did not reflect their true ownership. The Trustee inherits that cause of action and acts on behalf of the estate in bringing it. (See In re Summers, 332 F.3d 1240, summarizing California law relevant to this Action in a case where the chapter 7 trustee of the wife's estate sued the chapter 13 trustee of the husband's estate on the grounds that joint tenancy property was in fact community property, the same argument made by Creditor.)
E. The Estate Has a Significant Interest in the Action.
Creditor argues that its unavoided lien entitles it to recover the "entirety" of the Sale Proceeds which "imbues" it with standing. Creditor states that "because of the Trustee's potential, possible interest in a small portion of the sale proceeds . . . [Creditor] included the Trustee as a defendant." (Creditor's Supplemental Memorandum on Standing dated June 15, 2005.)
An analysis of Creditor's claims filed in this [*20] case and the hypothetical distribution of the Sale Proceeds illustrates that Creditor's premise is fallacious. Contrary to the assertion in the Kobrin Declaration and the argument in its briefs, Creditor appears to concede in its last proof of claim that its Secured Claim arising from its Abstract is limited to the principal amount of $ 75,000 and an unsecured claim for an additional amount. n7
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n7 The Court notes that the increase in the amount claimed by Creditor beyond the $ 75,000 in the Abstract is primarily attorneys fees and sanctions incurred in litigation with Debtor in District Court that took place after July 20, 1998, when this bankruptcy case was reinstated. Creditor obtained relief from stay to proceed with that litigation. The judgment has not been amended to increase the $ 75,000 based on these alleged attorneys fees and sanctions.
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If the Property was Debtor and Lucas' separate property, in accordance with the presumption that follows from the joint tenancy-title, one-half the Sale Proceeds, or [*21] $ 145,000, belongs to the Trustee as property of the estate and the other half will be distributed to Lucas. Conversely, if the presumption that follows from the joint tenancy title is rebutted, the entire $ 290,000 is property of the estate. Whatever the final determination is, the funds of the estate will be distributed in accordance with the priorities established in the Bankruptcy Code.
At this juncture, Creditor's Secured Claim is only $ 75,000. After administrative claims are paid, Debtor's disputed homestead exemption is resolved, and Creditor's Secured Claim is resolved, Creditor will share the rest of the net Sale Proceeds along with other unsecured creditors whose claims have been allowed. The estate thus has a significant interest in the Action and the estate's interest is more than a "small portion" of the Sale Proceeds.
Accordingly, no matter how the title issue is resolved, the estate presently has a significant financial stake in the outcome of this litigation.
F. A Creditor's Views Are Considered in Approval of Settlements.
As discussed above, under the Bankruptcy Code, this cause of action is property of the estate and belongs exclusively to the Trustee. [*22] Creditor argues that it has the greatest stake in the outcome so it is the real party in interest. Creditor is mistaken on this point. However, Creditor's concern that its views be considered is protected by the Bankruptcy Code provisions regarding compromise or settlement of the litigation.
For example, although the Trustee (not Creditor) is the only party who can settle the title dispute with Lucas, Creditor's rights are protected. Rule 9019(a) of the Federal Rules of Bankruptcy Procedure provides, "[o]n motion by the trustee and after notice and a hearing, the court may approve a compromise or settlement. Notice shall be given to creditors, the United States trustee, the debtor, . . . and to any other entity as the court may direct."
No settlement or compromise may be approved without careful consideration of the views of an estate's creditors. See Martin v. Robinson (In re A&C Properties), 784 F.2d 1377 (9th Cir. 1986), cert. denied, sub nom. Martin v. Robinson, 479 U.S. 854, 107 S. Ct. 189, 93 L. Ed. 2d 122 (1986). To approve a settlement, a bankruptcy court must find that the proposed settlement has been negotiated in good faith and is [*23] reasonable, fair and equitable. A&C Properties, 784 F.2d at 1381; In re Pacific Gas and Elec. Co., 304 B.R. 395, 417 (Bankr. N.D. Cal. 2004).
To determine fairness, a court must consider four factors: the probability of success on the merits in the litigation; the difficulties, if any, to be encountered in the collection of any judgment; the complexity of the litigation and the expense, inconvenience and delay attending it; the paramount interests of the creditors giving a proper deference to their views. A&C Properties, 784 F.2d at 1381.
So that this settlement approval process is a meaningful undertaking, a trustee must explain the risks of proceeding with the litigation and the benefits of a proposed settlement. All creditors' views are welcome and are considered carefully before a settlement is approved by a bankruptcy court. The process is not a mere formality.
Here, both the Creditor's interests and the Trustee's interests are aligned in that both of them seek to maximize the estate. Their interests may diverge after this threshold determination, if, for example, the Trustee sought to avoid Creditor's lien or objected [*24] to Creditor's claims. The Court highlights this obvious fact to further demonstrate why the Bankruptcy Code gives the Trustee control over this litigation and its settlement. n8
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n8 It also highlights the fact that although Creditor sued Lucas and the Trustee in bankruptcy court, Creditor may have violated the automatic stay of § 362 (a) (3), (4), and/or (5) when it filed the Action. The Court leaves this determination for another day as well as a determination of the remedies that may be available for violation of the automatic stay.
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Consideration of this essential aspect of the Bankruptcy Code and bankruptcy litigation buttresses the Court's conclusion that Creditor does not have standing and that Creditor has usurped the Trustee's role by bringing the Action in the first place. The Trustee acts on behalf of all creditors and owes a fiduciary duty to them. Creditor acts on its own behalf and owes no fiduciary duty to the other creditors of this estate or the Debtor. Creditor acts for its own selfish motives. [*25] If Creditor is allowed to control the litigation, the Trustee's role is dangerously eroded and one creditor with no fiduciary duty to others in the case takes over the Trustee's role. This is not what the Bankruptcy Code contemplates. There would be a complete breakdown of the orderly process provided by the Bankruptcy Code if creditors could unilaterally take this sort of role in bankruptcy cases.
G. A Creditor May Acquire Standing from a Trustee.
While the Bankruptcy Code gives a trustee exclusive authority to sue in the first instance and provides a mechanism for a trustee to settle litigation with creditor participation, a creditor is not without options under the Bankruptcy Code if a trustee declines to act. A creditor can ask a trustee for permission to pursue litigation on behalf of the estate as special counsel to a trustee or as an assignee of a cause of action from a trustee. Since a cause of action is property of the estate, with court approval, a trustee may also sell a cause of action to a creditor.
There are certain well established circumstances in which a trustee may authorize another party to pursue the matters over which the Bankruptcy Code gives [*26] a trustee exclusive authority. In Duckor Spradling & Metzger v. Baum Trust (In re P.R.T.C., Inc.), 177 F.3d 774 (9th Cir. 1999), the Ninth Circuit approved a chapter 7 trustee's assignment to the estate's largest creditor of the estate's rights to avoid various transactions and to sue certain individuals when the estate lacked the resources to fund the litigation and the creditor was pursuing interests common to all creditors. Under the terms of the assignment, the creditor and the trustee agreed to split any net proceeds recovered. In Avalanche Maritime, Ltd. v. Parekh (In re Parmetex, Inc.), 199 F.3d 1029 (9th Cir. 1999), the Ninth Circuit held that creditors had standing to pursue avoidance actions on behalf of the estate where the trustee stipulated that the creditors could sue on his behalf and the bankruptcy court approved the stipulation. See also, Liberty Mutual Ins. Co. v. Unsec. Creds. Comm. (In re Spaulding Composites Co., Inc.), 207 B.R. 899 (B.A.P. 9th Cir. 1997) (a creditors' committee in a chapter 11 case had standing to sue on behalf of the estate for violation of the automatic stay); In re Smith Bros. Motors, Inc., 286 B.R. 905 (Bankr. N.D. Cal. 2002) [*27] (creditor had no standing to sue under Bankruptcy Code § 506 (c) because any recovery under that section would pass directly to the creditor with no benefit to the estate, unlike recovery under an avoidance action under § 547, § 548 or § 549).
Here, Creditor could have sought the Trustee's permission to pursue the Action but apparently did not even approach the Trustee with the suggestion. Creditor could also have asked the Court for permission to proceed on the estate's behalf if the Trustee failed to act. Instead, Creditor filed suit, usurping the Trustee's role.
H. A Creditor May Ask a Trustee to Abandon a Cause of Action.
The mission of a chapter 7 trustee is to enhance the estate for the benefit of the estate's unsecured creditors. McRoberts v. S.I.V.I. (In re Bequette), 184 B.R. 327, 333 (Bankr. S.D. Ill. 1995); In re Tobin, 202 B.R. 339 (Bankr. D. R.I. 1996). As a practical matter, not all property that comes into a trustee's hands will benefit the estate's unsecured creditors. To address this issue, Bankruptcy Code § 554 gives a trustee a means to dispose of property that is [*28] of "inconsequential value" to the estate or that is "burdensome" to the estate by allowing the trustee to abandon it. See Catalano v. C.I.R. (In re Catalano), 279 F.3d 682, 685 (9th Cir. 2002) ("Abandonment" is a term of art with special meaning in the bankruptcy context; it is the formal relinquishment of the property from the bankruptcy estate).
Under Bankruptcy Code § 554(a), after notice and a hearing, a chapter 7 trustee may abandon property of the estate, including a trustee's causes of action when the property is "burdensome to the estate or is of inconsequential value and benefit to the estate." Under Bankruptcy Code § 554(b), after notice and a hearing, a party in interest may request that the court order a trustee to abandon property of the estate for the same reasons.
If a trustee abandons a cause of action, another party may pursue it in another court. In re Van Dresser, 128 F.3d at 949; Sierra Switch Board Co., 789 F.2d 705; In re Catalano, 279 F.3d 682.
If the Trustee had abandoned this cause of action under § 554 (a) or (b), Creditor could then have [*29] sued Debtor or Lucas in state court. Creditor did neither of these things but continues to argue that the Trustee has no real interest in the Action and that it has standing because all Sales Proceeds allegedly will be paid to it. Creditor ignores the provisions of the Bankruptcy Code available to address this issue and instead has usurped the Trustee's exclusive powers in bringing this Action.
IV.
CONCLUSION
For the reasons stated above, the Sale Proceeds are valuable to the estate and Creditor lacks standing to pursue the Action. Creditor is dismissed as plaintiff. Trustee will be substituted in as the real party in interest as provided in Rule 7017(a). Counsel for the Trustee shall prepare and submit a form of order in accordance with this Memorandum Decision, after review as to form by counsel for Creditor and counsel for Lucas. n9
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n9 Creditor shall also serve Debtor with a copy of the proposed order by mail -- and file a proof of service to that effect -- and the Court will lodge the order for at least 15 days.
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[*30]
Dated: April 21, 2006
ARTHUR S. WEISSBRODT
UNITED STATES BANKRUPTCY JUDGE
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