Opinion ID: 767222
Heading Depth: 2
Heading Rank: 1

Heading: Debtor Standing

Text: 13 Both parties marshal some support for the question of whether a Chapter 13 debtor can bring a claim on behalf of the estate. Admittedly, the decisions of the lower courts are not uniform. Brothers contends that Chapter 13 establishes the debtor-in-possession as a proper party to bring legal claims, which facilitates the prompt and efficient payment of creditors. Ivy Tech uses the decisions of some bankruptcy courts to argue that the trustee must act as the sole legal representative of the estate who alone can sue and be sued over its debts. 14 Ivy Tech mistakes a fundamental difference between Chapter 7 and Chapter 13. Chapter 7 establishes a much more radical solution to indebtedness, requiring the liquidation of the debtor's property, to which end Congress granted the trustee broad powers without interference from the debtor. The trustee has sole authority to dispose of property, including managing litigation related to the estate. See 11 U.S.C. sec.sec. 541(a)(1), 704(1). Chapter 13, on the other hand, encourages the debtor to pay his debts over time by establishing a court-approved payment plan but leaving the debtor in possession of the estate. See 11 U.S.C. sec. 1303 (debtor- in-possession has substantially same powers as the trustee in other chapters); sec. 1306(b) (debtor retains possession of estate except as limited by plan). The trustee acts as an adviser and administrator to facilitate the repayment of debts according to the plan. See id. sec. 1302. 15 In liquidation proceedings, only the trustee has standing to prosecute or defend a claim belonging to the estate. See In re New Era, Inc., 135 F.3d 1206, 1209 (7th Cir. 1998) (holding that Chapter 7 trustee has exclusive right to represent debtor in court); see also Lambert v. Fuller Co., 122 B.R. 243, 245 (E.D. Pa. 1990); Gulley v. Winnebago County Forest Preserve Dist., No. 91- C20231, 1992 WL 185938 (N.D. Ill. May 7, 1992); In re Davis, 158 B.R. 1000, 1002 (Bankr. N.D. Ind. 1993). The same cannot be said for trustees under the reorganization chapters. In those regimes, the debtor has express authority to sue and be sued. Bankruptcy Rule 6009, which applies to Chapters 7, 11 and 13, directs that [w]ith or without court approval, the trustee or debtor in possession may prosecute or may enter an appearance and defend any pending action or proceeding by or against the debtor, or commence and prosecute any action or proceeding in behalf of the estate before any tribunal. Fed. R. Bankr. P. 6009 (emphasis added); see also Chapman v. Currie Motors, Inc., 65 F.3d 78, 81 (7th Cir. 1995) (holding that federal courts have jurisdiction to hear state law claims brought by Chapter 13 debtor-in-possession); In re Kutner, 3 B.R. 422, 426 (Bankr. N.D. Tex. 1980) (stating that Chapter 13 debtor has standing to sue and be sued). Furthermore, the Chapter 13 debtor has been considered analogous to Chapter 11, see e.g., Chapman, 65 F.3d at 79, which grants the debtor full authority as representative of the estate typical of a trustee. See 11 U.S.C. sec. 1107; Ford Motor Credit Co. v. Weaver, 680 F.2d 451, 461 (6th Cir. 1982); In re Halux, Inc., 665 F.2d 213, 216 (8th Cir. 1981). 16 Chapter 13 grants the debtor possession of the estate's property, 11 U.S.C. sec. 1306(b), which is defined by sec. 541 to include all legal or equitable interests of the debtor in property as of the commencement of the case. 11 U.S.C. sec. 541(a)(1). The phrase legal or equitable interests . . . in property includes choses in action and other legal claims that could be prosecuted for benefit of the estate. See In re Smith, 640 F.2d 888 (7th Cir. 1981) (All causes of action become property of the estate under section 541.); see also Bauer v. Commerce Union Bank, 859 F.2d 438, 441 (6th Cir. 1988); In re FBN Food Serv., Inc., 185 B.R. 265, 273 (N.D. Ill. 1995); In re U.S. Marketing Concepts, Inc., 113 B.R. 487, 490 (Bankr. N.D. Ind. 1990). The chose in action, here a discrimination case, belongs to the estate and was being prosecuted for the benefit of its creditors. It would frustrate the essential purpose of sec. 1306 to grant the debtor possession of the chose in action yet prohibit him from pursuing it for the benefit the estate. Significantly, the Second and Third Circuits have agreed that Chapter 13 debtors can bring claims in their own name. See Olick v. Parker & Parsley Petroleum Co., 145 F.3d 513, 515 (2d Cir. 1998); Maritime Elec. Co. v. United Jersey Bank, 959 F.2d 1194, 1209 n.2 (3d Cir. 1992); see also Donato v. Metropolitan Life Insurance Co., 230 B.R. 418, 425 (N.D. Cal. 1999); In re Wirmel, 134 B.R. 258, 260 (Bankr. S.D. Ohio 1991). 17 Ivy Tech misreads In re Heath, 115 F.3d 521 (7th Cir. 1997), for the proposition that only a trustee can assert claims on behalf of the estate. Rather, Heath holds that the trustee may bring actions only for the benefit of the estate, rather than for the benefit of the debtor. Id. at 523-24. In Heath, the estate and its creditors would not have benefitted at all if the trustee succeeded in its claim because the creditors were already receiving full satisfaction under the plan. The potential recovery would have benefitted only the debtor. Here, the plan specifically directs that the potential proceeds from Cable's Title VII claim benefit the estate and its creditors. 18 Heath stands for the second proposition that sec. 323 vests the trustee in bankruptcy, as the representative of the estate, with exclusive authority to sue and be sued. Id. at 523 and cases cited therein; 11 U.S.C. sec. 323(a)-(b). We do not question that principle, but only note that Heath and the cases cited therein do not concern the authority of debtors-in-possession under Chapter 11 or 13. The several cases cited in Heath concern the exclusive right of trustees to bring suits under Chapter 7, which, in contrast to Chapters 11 and 13, does not recognize the legal entity debtor-in-possession. See In re Perkins, 902 F.2d 1254 (7th Cir. 1990) (Chapter 7 case); Vega v. Gasper, 36 F.3d 417 (5th Cir. 1994) (Chapter 7); In re Eisen, 31 F.3d 1447 (9th Cir. 1994) (Chapter 7); Bauer, 859 F.2d 438 (Chapter 7). Therefore, those cases cannot mean that a debtor-in-possession under Chapter 13 does not have the power to sue on behalf of the estate. 19 Heath itself deals with Chapter 13, but not specifically with a debtor-in-possession. While this Court stated that the trustee exercises exclusive authority to sue and be sued, see Heath, 115 F.3d at 523, we did not address the situation presented when a debtor-in-possession acts, pursuant to its statutory command, in the role of trustee. Under the reorganization chapters, the debtor-in-possession steps into the role of trustee and exercises concurrent authority to sue and be sued on behalf of the estate. See Fed. R. Bankr. P. 6009. To say that the trustee has exclusive authority does not mean that the debtor-in-possession cannot act as a trustee and therefore enjoy that same authority. Ruling otherwise would conflict with the explicit language of Rule 6009 that the trustee or debtor in possession may . . . prosecute any action or proceeding in behalf of the estate before any tribunal. Id. 20 Similarly, Richardson v. United Parcel Service, 195 B.R. 737 (E.D. Mo. 1996), concerned whether a debtor could bring a claim, not as debtor-in- possession for the benefit of creditors, but in his own name and apparently for his separate benefit. The court held that because the chose in action remained estate property and had not been abandoned pursuant to sec. 554, it had to be pursued for the benefit of the estate. See id. at 739. Richardson did not discuss whether the district court thought a debtor-in-possession could bring the action for the benefit of the estate. See id. 21 Finally, defendant cited In re Gardner, 218 B.R. 338 (Bankr. E.D. Pa. 1998), but that case concerns the trustee's avoidance power under sec. 548(a) of the Bankruptcy Code, 11 U.S.C. sec. 548(a). Section 548 unequivocally limits the avoidance power to the trustee, and for good reason: Its aim is to prevent the debtor from transferring property with the intent to hinder, delay, or defraud creditors. Id. It would invite abuse to allow debtors to avoid transfers that the debtor knew at the time of transfer would work to the detriment of the creditors. Such is not the case here where the debtor is attempting to recover damages in a suit that, under sec. 541, should benefit creditors. 22 The court in Gardner also dismissed the debtor's state law claims, but that dismissal appeared to rest on the claims' insufficient evidentiary basis. Gardner, 218 B.R. at 348-49. To the extent Gardner could be read to prohibit choses in action brought by a debtor-in- possession, it conflicts directly with Rule 6009 and the authority cited above and has not been followed by the only court outside of that district that considered the Gardner reasoning. See Donato, 230 B.R. at 425. The proper practice for creditors and trustees is to allow the debtor-in-possession to exercise the powers assigned by sec.sec. 1306(b) and 541, and sue in his own name for the estate.