Opinion ID: 540143
Heading Depth: 3
Heading Rank: 2

Heading: Standing as to the Bankruptcy Trustee's Pursuing the Claims of GIC Customer Creditors

Text: 27 Although the bankruptcy trustee Hadley has based his standing to pursue the claims of GIC customer creditors on several provisions of the bankruptcy statutes, we find that these provisions dictate a contrary conclusion. In enumerating the duties of the bankruptcy trustee, section 704 of the Bankruptcy Code requires the trustee to collect and reduce to money the property of the estate for which such trustee serves. 11 U.S.C. Sec. 704(1) (1982) (emphasis added). Section 541 defines property of the estate as 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) (emphasis added). The bankruptcy trustee has conceded that this case concerns only those fully paid GIC customer securities sold in July and September, 1985, by Hutton pursuant to its margin agreement with GIC. Furthermore, no certificates have been submitted evidencing GIC's ownership of the subject securities. Hadley, therefore, has failed to show any possessory interest whatsoever in these securities by GIC when this lawsuit was filed. 28 We recognize that there has been divergence among the circuits concerning the ability of a bankruptcy trustee to bring actions against third parties on behalf of creditors of the bankrupt. See, e.g., St. Paul Fire & Marine Ins. Co. v. PepsiCo, Inc., 884 F.2d 688 (2d Cir.1989); Williams v. California 1st Bank, 859 F.2d 664 (9th Cir.1988); Steyr-Daimler-Puch of America Corp. v. Pappas, 852 F.2d 132 (4th Cir.1988); Koch Refining v. Farmers Union Cent. Exch., Inc., 831 F.2d 1339 (7th Cir.1987), cert. denied, 485 U.S. 906, 108 S.Ct. 1077, 99 L.Ed.2d 237 (1988); In re Ozark Restaurant Equip. Co., 816 F.2d 1222 (8th Cir.), cert. denied, 484 U.S. 848, 108 S.Ct. 147, 98 L.Ed.2d 102 (1987); In re MortgageAmerica Corp., 714 F.2d 1266 (5th Cir.1983). On the facts of this case, however, we approve the reasoning of the Ninth Circuit in Williams, an analogous case factually and procedurally, and the Eighth Circuit in Ozark Equip. Co., where those respective circuit courts determined that the bankruptcy trustee does not have standing to assert claims of creditors of the bankrupt. We emphasize that our holding is restricted to the specific facts in this case. 29 In Caplin v. Marine Midland Grace Trust Co., 406 U.S. 416, 92 S.Ct. 1678, 32 L.Ed.2d 195 (1972), the Supreme Court held that a reorganization trustee, acting under Chapter X of the former Bankruptcy Act, had no standing to assert claims of misconduct against a third party, the trustee for the debenture holders under the indenture agreement, on behalf of the holders of the debtor's debentures. The Court explained that Congress has not yet indicated even a scintilla of an intention to confer such standing on trustees, and that such a policy decision must be left to Congress and not to the judiciary. Caplin, 406 U.S. at 434, 92 S.Ct. at 1688. In rewriting the bankruptcy laws in 1978, Congress considered and rejected a provision that expressly would have overruled Caplin. Williams, 859 F.2d at 666; see Ozark Equip. Co., 816 F.2d at 1227-28 & nn. 9-10. Therefore, Caplin has been held to remain the law under the revised bankruptcy statutes. Williams, 859 F.2d at 666; Ozark Equip. Co., 816 F.2d at 1228; Koch Refining, 831 F.2d at 1347-48 n. 11. 30 The Court in Caplin identified three factors militating against standing of a bankruptcy trustee to assert the claims of the debtor's creditors. First, the Court found no provision in the bankruptcy statutes that the trustee is to assume the responsibility of suing third parties on behalf of debenture holders or that he is to collect money not owed to the estate. Caplin, 406 U.S. at 428, 92 S.Ct. at 1685; Williams, 859 F.2d at 666; Ozark Equip. Co., 816 F.2d at 1227. Analogizing its case under the revised bankruptcy laws with that of the Caplin trustee, who was attempting to collect funds not owed the estate under the former bankruptcy statutes, the Eighth Circuit stated: [J]ust as there was nothing in the statutory reorganization scheme of the old Bankruptcy Act authorizing the trustee to collect money not owed to the estate, similarly, there is nothing in Section 544 or the liquidation framework of the Code authorizing a Chapter 7 trustee to collect money not owed to the estate. Ozark Equip. Co., 816 F.2d at 1228 (citation omitted); see also Williams, 859 F.2d at 666-67 (Even though the debtor's creditors had assigned their claims to the bankruptcy trustee, the Ninth Circuit found them to be the real parties in interest and that they had assigned their claims only for the purposes of bringing suit.). Second, the Court observed that the bankrupt corporation had no claim against the indenture trustee, and at most, the trustee's claims of misconduct arose from a situation where the debtor and the indenture trustee were in pari delicto. Caplin, 406 U.S. at 430, 92 S.Ct. at 1686; Williams, 859 F.2d at 666; Ozark Equip. Co., 816 F.2d at 1227. The Court envisioned no advantage in according the trustee standing to sue, since the indenture trustee apparently would be subrogated to the claims of the creditors. Caplin, 406 U.S. at 430, 92 S.Ct. at 1686; Williams, 859 F.2d at 666; Ozark Equip. Co., 816 F.2d at 1227. Third, the Court noted that the trustee's suit on behalf of the debenture holders may be inconsistent with any independent actions that they might bring themselves. Caplin, 406 U.S. at 431-32, 92 S.Ct. at 1687; Williams, 859 F.2d at 666; Ozark Equip. Co., 816 F.2d at 1227. Based upon its concerns that the trustee's action would not preempt suits by individual creditors, that the trustee and the creditors might not agree on the amount of damages or on the theory of the suit, and that any settlement obtained by the trustee might not bind all parties, the Court concluded that there is no showing whatever that by giving petitioner standing to sue on behalf of the debenture holders we would reduce litigation. Caplin, 406 U.S. at 431-34, 92 S.Ct. at 1687-88; Williams, 859 F.2d at 666; Ozark Equip. Co., 816 F.2d at 1227. 31 We conclude that the Caplin concerns are valid in this case. The bankruptcy trustee Hadley admittedly is asserting claims of a specific group of GIC customer creditors, who have paid in full for securities purchased by GIC through its margin account with Hutton, which securities subsequently were sold by Hutton pursuant to its margin agreement with GIC. See Koch Refining, 831 F.2d at 1347-48 n. 11 (Although the Seventh Circuit has not precluded a bankruptcy trustee from asserting claims of creditors of the bankrupt, it has distinguished between general and specific creditor causes of action by stating that the failure of Congress to enact the bill overruling Caplin does not affect a trustee's right to bring a general action on behalf of all creditors rather than a personal one on behalf of only some.). Without proof of ownership, Hutton's listing the subject securities in GIC's name in its account records is irrelevant. See T & B Scottdale Contractors, Inc. v. United States, 866 F.2d 1372, 1376 (11th Cir.), cert. denied, --- U.S. ----, 110 S.Ct. 139, 107 L.Ed.2d 98 (1989). Moreover, ownership of these securities for which GIC customers had paid was transferred when Hutton sold the securities in July and September, 1985. See United States v. Whiting Pools, Inc., 462 U.S. 198, 210-11, 103 S.Ct. 2309, 2316-17, 76 L.Ed.2d 515 (1983); Sly v. United States, 836 F.2d 1310, 1312 (11th Cir.1988) (In a tax lien situation, ownership of property is not transferred from the debtor pursuant to levy and seizure prior to filing bankruptcy, but only when the property is sold to a bona fide purchaser at a tax sale.). Therefore, these causes of action and any potential recovery belong to the GIC customer creditors and not to the bankrupt GIC, represented by the bankruptcy trustee. 32 As in Caplin and Williams, the facts of this case reveal a situation of in pari delicto between the debtor GIC and Hutton. GIC has no claim for itself against Hutton. The claims asserted are those of GIC customer creditors. The potential exists that Hutton could be subrogated to the position of the customer creditors against GIC. 33 Based upon the representation of counsel at oral argument, the Caplin concern for duplicative litigation already has occurred, with aspects of this litigation currently pending in three separate courts. Additional lawsuits by the individual GIC customer creditors, to whom the claims belong, are possible. The facts of this case do not present us with any reason to differ from the conclusion of the Caplin, Williams and Ozark Equip. Co. courts that the bankruptcy trustee does not have standing to assert these specific claims of these creditors of the bankrupt.