Opinion ID: 200721
Heading Depth: 2
Heading Rank: 1

Heading: Creditors Trustees as Plaintiffs

Text: 18 The district court construed the question of the validity and enforceability of the Release as an issue of law. It first determined that the Release had been executed by the corporation, even though no signature qua corporation was designated. 8 It also determined that the broad scope of the Release would cover the unjust enrichment claims, if the Release was deemed valid and enforceable. 19 The district court then explained that the corporation's shareholders could have brought a derivative action if the unjustly enriched participants had acted to the detriment of the corporation in executing the Release. However, the court held that the plaintiffs here were creditors and could not bring an action challenging the Release unless its execution contributed to the corporation's insolvency or took place while the corporation was insolvent. Because the corporation was not insolvent at the time of the Release and there was no evidence suggesting that the Release contributed to its subsequent insolvency, the court ruled: 20 While shareholders may have been able to object to the Release, in fact, every shareholder signed it. The fact that Mi-Lor is presently insolvent does not mean that the Release suddenly becomes invalid as a result of duties owed to creditors or to the corporation on behalf of the creditors. Invalidating the Release years after its execution because of its adverse effects on creditors' interests would create fiduciary duties to creditors where they simply do not exist. 21 Accordingly, the court did not reach the questions raised about the validity and enforceability of the Release. 22 On appeal, the plaintiffs argue that the court applied the wrong analytical principles in choosing to deny creditors the ability to pursue claims as substitute plaintiffs for the corporation. They argue that the company, as debtor-in-possession, properly filed an adversary proceeding against the defendants pursuant to the rules of the federal bankruptcy system. This position is correct. A corporation may bring an action against its directors, current or former, for self-dealing. See Boston Children's Heart Foundation, Inc. v. Nadal-Ginard, 73 F.3d 429 (1st Cir. 1996) (applying Massachusetts law). And a debtor-in-possession may commence an action without court approval. Collier on Bankruptcy ¶ 323.01 (15th ed. rev.). 23 The Creditors Trustees then argue that, by order of the bankruptcy court, they properly stepped into the shoes of the corporation as plaintiffs. In those shoes, they are asserting the corporation's right to recover to the estate the amount of the unjust enrichment. That they, as creditors, would be the real beneficiaries of any recovery is, they say, happenstance and does not alter the fact that they sue in the shoes of the company. The defendants do not contest this proposition; indeed, no objection was made to the bankruptcy court when it permitted the creditors to sue, and the case was characterized to the jury as just explained. 24 While the district court's contrary view is a well-reasoned position, 9 it ultimately must give way on the question of standing. The court's intuition does, though, inform the analysis later. 25 The Creditors Trustees may properly stand in the shoes of the corporation and its shareholders for purposes of the suit because they are continuing the corporation's cause of action, not initiating a separate action on behalf of creditors. See Collier on Bankruptcy ¶ 541.08 (15th ed. rev.) (The trustee ... stands in the shoes of the debtor corporation in prosecuting a cause of action belonging to the debtor....); id. ¶ 323.01 (A trustee appointed in a chapter 11 case ... is automatically substituted as a party in any pending action, proceeding or matter and therefore has the same rights and obligations as the ... debtor in possession.). When a corporation sues its fiduciaries or a stockholder brings a derivative suit against corporate fiduciaries to enforce the corporation's rights, any recovery for the fiduciary breach belongs to the corporation. 10 See, e.g., Bessette v. Bessette, 385 Mass. 806, 434 N.E.2d 206, 208 (1982) (It is a basic principle of corporate law that if a majority shareholder receives corporate cash distributions and a salary in excess of the reasonable value of services rendered, the right to recover the overpayments belongs to the corporation.). Sums recovered by a corporation in such suits are paid first to creditors, before any distributions are made to shareholders. 11 See Bagdon v. Bridgestone/Firestone, Inc., 916 F.2d 379, 383 (7th Cir.1990) (Recoveries [in derivative suits] pass through the corporate treasury, a process that both protects creditors (who get first dibs) and avoids questions of apportionment....). As a result, the issues pretermitted by the district court about the validity and enforceability of the release must be reached. 26 In one sense it is quite true that the other shareholders were the victims of the unjust enrichment and of any failure to make adequate disclosure to them in securing the Release, and they are not complaining about either. But to the extent that unjust enrichment occurred, it was through a misuse of the corporation's assets; and the Release, although ratified by the shareholders, was a corporate act surrendering a claim of the corporation. Whatever right the corporation may have to recover for unjust enrichment, through the invalidation of the Release, is an asset of the corporation and now belongs to the creditors. 27