Source: http://www.bankruptcylitigationblog.com/archives/12593-print.html
Timestamp: 2016-06-29 16:17:16
Document Index: 101553170

Matched Legal Cases: ['§ 544', '§ 544', '§ 544', '§ 544', '§ 544', '§ 544']

Home > Litigation Lore > DC Bankruptcy Court Rejects Deepening Insolvency Claims as Duplicative, But Allows Other Related Counts in Trustee's Serpentine Complaint Against Debtors' Former D&O's and Lawyers > 11 | 21 | 2005Posted By Steve Jakubowski DC Bankruptcy Court Rejects Deepening Insolvency Claims as Duplicative, But Allows Other Related Counts in Trustee's Serpentine Complaint Against Debtors' Former D&O's and Lawyers The Bankruptcy Court for the District of Columbia has released about 16 opinions for publication this year, and five of them have related to the litigation spawned by the Greater Southwest Community Hospital Corp. ("GSCH") bankruptcy. GSCH's bankruptcy case commenced in November 2002, and its reorganization plan was confirmed in April, 2004. Under the plan, the debtor's operations vested in the "Reorganized Debtors," and the debtor's litigation assets vested for the benefit of pre-confirmation creditors in the "DCHC Liquidating Trust" (the "Trust"). Sam J. Alberts was named Trustee, and the Trust was funded with $1 million to cover some of the litigation expense.
Excerpts from the Court's opinion on the Court's dismissal of the "deepening insolvency" and section 544 claims follow:1. "Deepening Insolvency" claims
However, recognizing that a condition is harmful and calling it a tort are two different things. The District of Columbia courts have not yet recognized a cause of action for deepening insolvency, and this court sees no reason why they should. As District Judge Kaplan recently noted in a similar situation, "[i]f officers and directors can be shown to have breached their fiduciary duties by deepening a corporation's insolvency, and the resulting injury to the corporation is cognizable, ... that injury is compensable on a claim for breach of fiduciary duty." Bondi v. Bank of America Corp. (In re Parmalat), 2005 WL 1923839 (S.D.N.Y. Aug.5, 2005) (dismissing deepening insolvency claim as duplicative where breach of fiduciary duty was also alleged).
The Trust's allegations bear out Judge Kaplan's thesis. The Trust already alleges that the D & O Defendants breached their fiduciary duties to the Debtors by allowing them to fall deeper into debt for the benefit of the Defendants and NCFE. Its claim for "deepening insolvency" against those same defendants alleges the exact same wrong. Similarly, the Trust's deepening insolvency claim against the Law Firm Defendants is really just a re-packaging of its separate malpractice claim. And the Trust's claim for "aiding and abetting deepening insolvency" is almost a word-for-word recapitulation of its claim for aiding and abetting breach of fiduciary duty. There is no point in recognizing and adjudicating "new" causes of action when established ones cover the same ground. The Trust's duplicative claims will be dismissed.
2. Claims under 11 U.S.C. § 544(a)
Count XV of the Complaint is also largely duplicative of other counts (specifically, Counts I-XIV), but this is by the Trust's design. The "claim" alleges that the Trust stands in the shoes of a hypothetical judgment creditor with a judicial lien or creditors' bill under § 544(a) of the Bankruptcy Code, which, according to the Trust, permits it to (1) pursue claims that such creditors would hold for breach of fiduciary duty, and (2) garnish or "seize" the Trust's own claims and prosecute those claims as a creditor rather than as a representative of the estate. (Compl. �� 318-320). The Defendants argue that § 544(a) cannot be used in this manner under Caplin v. Marine Midland Grace Trust Co., 406 U.S. 416, 92 S.Ct. 1678, 32 L.Ed.2d 195 (1972). The Trust points to a series of cases applying § 544(a) notwithstanding that decision....
The key question is whether whether the phrase "rights and powers" encompasses the ability to file any claim that a creditor with a judicial lien or creditors' bill against the property of the estate might possess as opposed to only those rights that are attained by virtue of the hypothetical status of a judicial lien creditor or an execution creditor. A handful of courts have held that it does....
In Caplin, the Supreme Court held that a chapter X trustee under the old Bankruptcy Act could not assert creditors' claims of misconduct against an indenture trust on behalf of the holders of debentures issued pursuant to an indenture. The Court held that the Bankruptcy Act did not confer upon the trustee standing to represent the interests of these creditors for three reasons. First, nothing in the Act suggested that the trustee should "assume the responsibility of suing third parties on behalf of debenture holders [i.e., creditors]." Second, the bankrupt corporation had no claim against the indenture trustee, and the claims brought by the chapter X trustee might be subject to subrogation by other creditors because the bankrupt corporation might be subject to the doctrine of in pari delicto. Finally, a suit by the trustee would not preempt suits by other creditors, and would raise concerns as to the binding effect of the actions taken by the trustee on those creditors. Although Caplin was decided before the enactment of the Bankruptcy Code, numerous courts, including this one, have recognized its continuing vitality. See In re Latin Investment Corp., 168 B.R. at 4. Generally speaking, these courts have continued to honor the decision because (1) nothing in the text or legislative history of the Code contradicts directly the Caplin opinion; and (2) many of the concerns that informed the Supreme Court's opinion still exist.... (Citations omitted).
[T]here is nothing in the language of § 544(a) that compels this court to disregard the well-reasoned holding in Caplin. As the district court noted in In re Miller, the "clear import of the statutory language" is to "confer the status " of a creditor with a judicial lien or creditors' bill on the trustee, not to make the trustee "an agent of the creditors." In other words, the statute vests the trustee with the ability of a judgment lien creditor to attach or seize both tangible and intangible property transferred by the debtor to a third party prior to filing for bankruptcy, but it does not transform the trustee into a "super creditor" with the ability to raise causes of action separate from those possessed by the estate.... (Citations omitted). In sum, the Trust cannot use § 544(a) to bring claims separate from those of the estate or to constructively "seize" the estate's claim in the guise of a creditor, and even if it could, such action would not benefit it in the slightest. Count XV will be dismissed.
Thanks to Ryan Zeller for his contributions to this post. Written By:Rosa Harrison On June 18, 2009 8:59 AMAre citizens in DC only allowed to file certain chapters of bankruptcy due to income.