Opinion ID: 2500198
Heading Depth: 2
Heading Rank: 1

Heading: The Disputed Claims.

Text: City argues that the claims against Allied are proceeds of the collateral that it acquired from FFC (through Todesca) and that, therefore, it has standing to pursue those claims. Allied asserts that the disputed claims are commercial tort claims, not proceeds, and as such, are not covered by FFC's security interest. We look to state law to resolve this issue. Creditors' entitlements in bankruptcy arise in the first instance from the underlying substantive law creating the debtor's obligation. Shamus Holdings, LLC v. LBM Fin., LLC ( In re Shamus Holdings, LLC ), 642 F.3d 263, 267 (1st Cir.2011) (quoting Raleigh v. Ill. Dep't of Rev., 530 U.S. 15, 20, 120 S.Ct. 1951, 147 L.Ed.2d 13 (2000)). Here, the underlying substantive law is the law of Massachusetts, a jurisdiction in which secured transactions are governed by a state-specific iteration of Article 9 of the Uniform Commercial Code (UCC). See Mass. Gen. Laws ch. 106, §§ 9-101 to 9-709. It is uncontradicted that, in this case, the debtor gave FFC a security interest in many of its assets. The question, then, is whether the claims asserted against Allied were caught up within the sweep of this security interest. By its terms, Article 9 applies to transactions that create[] a security interest in personal property or fixtures by contract and to sales of accounts, chattel paper, payment intangibles, or promissory notes. Id. § 9-109(a)(1), (3). But this article does not apply to an assignment of a claim arising in tort, other than a commercial tort claim. Id. § 9-109(d)(12). A commercial tort claim is defined in relevant part as a claim arising in tort with respect to which[] the claimant is an organization. Id. § 9-102(a)(13). Since all of the potential claimants  the debtor, FFC, Todesca, and City  are organizations, we will not dwell upon that aspect of the definition. See 4 James J. White & Robert S. Summers, Uniform Commercial Code § 30-10, at 81 (6th ed. 2010). Here, the asserted claims are claims for conversion, interference with contractual relations, breach of fiduciary duty, and civil conspiracy. Each of them sounds in tort. See, e.g., City Sanit. LLC v. Beck, 79 Mass.App.Ct. 1121, 947 N.E.2d 1152 (Mass.App.Ct.2011) (table) (conversion); Cachopa v. Town of Stoughton, 72 Mass. App.Ct. 657, 893 N.E.2d 407, 409 n. 3 (2008) (interference with contractual relations); Doe v. Harbor Sch., Inc., 446 Mass. 245, 843 N.E.2d 1058, 1065-66 (2006) (breach of fiduciary duty); Kyte v. Philip Morris Inc., 408 Mass. 162, 556 N.E.2d 1025, 1027 (1990) (civil conspiracy); see also Restatement (Second) of Torts §§ 222A, 766, 874, 876. Thus, the claims fall squarely within the UCC's definition of commercial tort claims. Under Massachusetts law, commercial tort claims must be described with specificity in a security agreement in order to be considered part of that agreement. Mass. Gen. Laws ch. 106, § 9-108(e)(1). This requirement places commercial tort claims in stark contrast to other kinds of collateral, which may be defined broadly by type as long as the description, even if not specific, reasonably identifies what is described. Id. § 9-108(a). Furthermore, an after-acquired property clause in a security agreement cannot create a security interest in a commercial tort claim. Id. § 9-204(b)(2). The claim must already exist when the parties enter into the security agreement. See id. cmt. 4; see also id. § 9-108 cmt. 5. The security agreement here did not specifically mention any claims against Allied. Moreover, no such claims existed when the security agreement was signed (indeed, Allied had not then appeared on the scene). It is, therefore, plain that these commercial tort claims were not transferred by foreclosing pursuant to the security agreement. Rather, those claims remain the property of the estate, and the trustee is the proper party to prosecute them. See 11 U.S.C. § 323(b); see, e.g., In re Kane, 628 F.3d 631, 637 (3d Cir.2010); Moses v. Howard Univ. Hosp., 606 F.3d 789, 795 (D.C.Cir.2010). City tries to avoid the force of this reasoning by characterizing the claims as proceeds of collateral. This argument presents an issue of first impression in this circuit. The question is whether the right to pursue a commercial tort claim can be passed to a secured creditor as proceeds of original collateral. We conclude that it cannot. Proceeds are defined in relevant part as rights arising out of collateral [and,] to the extent of the value of collateral, claims arising out of the loss, nonconformity, or interference with the use of, defects or infringement of rights in, or damage to, the collateral. Mass. Gen. Laws ch. 106, § 9-102(a)(64)(C)-(D). City argues that FFC's security interest (to which it has succeeded) confers upon it the right to prosecute claims arising from interference with the collateral. But we interpret the UCC and the case law to mean that the term proceeds refers to the secured creditor's right to value derived from the collateral, not to the mere act of attempting to recover that value. Of course, the UCC states that [a] security interest in a tort claim ... may exist under this Article if the claim is proceeds of other collateral. U.C.C. § 9-102 cmt. 5(g). But this comment must be read in light of the UCC's statement that it is a right to payment from the resolution of a tort claim, and not the claim itself, that may constitute proceeds of collateral. [Article 9] ... applies to assignments of `commercial tort claims' ... as well as to security interests in tort claims that constitute proceeds of other collateral (e.g., a right to payment for negligent destruction of the debtor's inventory). Id. § 9-109 cmt. 15 (emphasis added). Viewed as a whole, Article 9 teaches that when a party has an interest in a commercial tort claim as proceeds, what the secured party has is a right to the recovery, not a right to the claim itself. An action for conversion is not proceeds; only the end product of that action  the settlement amount or award  constitutes proceeds. The case law cited by City is unpersuasive. Those cases stand only for the proposition that money received from the settlement of, or judgment on, a tort claim can be proceeds of the collateral harmed. Thus, [t]he usual proceeds of collateral are the money obtained from selling it [or] money obtained in compensation for a diminution in [its] value. Helms v. Certified Packaging Corp., 551 F.3d 675, 678 (7th Cir.2008); see McGonigle v. Combs, 968 F.2d 810, 828 (9th Cir.1992) (stating that proceeds arise out of [t]he classic situation... of a tort recovery obtained by a debtor for damage to secured property). These cases speak of claims that already have been brought to fruition and resulted in recoveries. Contrary to City's importunings, these cases do not support the notion that a secured party acquires the right to prosecute the debtor's commercial tort claims as proceeds, as opposed to acquiring the right to a payment compensating for harm to its collateral. To cinch matters, treating commercial tort claims themselves as proceeds would blur any meaningful distinction between the two categories. We do not believe that either the Massachusetts legislature or the drafters of the UCC had such an obscuration in mind. Cf. Local 589, Amalg'd Transit Union v. MBTA, 397 Mass. 426, 491 N.E.2d 1053, 1057 (1986) (explaining that the adoption of such a definition would creat[e] an exception capable of swallowing the rule (citation omitted)). Unliquidated claims of an organization alleging tortiously inflicted harm are properly classified as commercial tort claims. The claims asserted against Allied are commercial tort claims, not proceeds. City has a laundry list of related arguments. We can dispose summarily of the first item on this list: City's suggestion that the trustee's agreement to provide FFC with relief from the automatic stay and the bankruptcy court's ensuing order gave FFC a security interest in the claims against Allied. The replacement liens never specifically described any claims against Allied, so they could not have transferred an interest in such claims to FFC. See Mass. Gen. Laws ch. 106 § 9-108(e)(1). City's allusion to the form of order prepared by FFC in connection with the lifting of the automatic stay gains it no traction. This order, entered by the bankruptcy court, listed among other items of collateral trade names, service names, service marks, telephone numbers, choses in action [and] vehicles. City posits that the inclusion of choses in action somehow transferred any claims that the debtor might have had notwithstanding the fact that the debtor never granted a security interest in choses in action to FFC. This premise is hopeless. Massachusetts law holds that in the absence of statutory restrictions, the rights of the parties to secured transactions are controlled by the agreement between them, Mechs. Nat'l Bank of Worcester v. Killeen, 377 Mass. 100, 384 N.E.2d 1231, 1236 (1979), and as the security agreement here did not include an interest in choses in action, we will not expand the parties' rights under that agreement to include such an interest. City's next argument requires more discussion. It says that Allied harmed its collateral as opposed to harming the assets of the bankruptcy estate, so that it has standing to pursue the disputed claims. This argument puts the cart before the horse. It is common ground that when a cause of action belongs to the bankruptcy estate, the trustee has the exclusive right to assert it. Honigman v. Comerica Bank ( In re Van Dresser Corp. ), 128 F.3d 945, 947 (6th Cir.1997); Koch Ref. v. Farmers Union Cent. Exch., Inc., 831 F.2d 1339, 1342 (7th Cir.1987). Conversely, the trustee lacks standing to pursue claims that belong personally to the creditors. Stevenson v. J.C. Bradford & Co. ( In re Cannon ), 277 F.3d 838, 853 (6th Cir.2002); Koch Ref., 831 F.2d at 1348-49. A court tasked with determining who can pursue a particular claim must look to the kind of harm alleged. If the claim is a general one, it is property of the estate. See Koch Ref., 831 F.2d at 1348-49 (claim is general if the liability is to all creditors of the corporation). Put another way, when the alleged injury to a creditor is indirect or derives solely from an injury to the debtor, the claim is general. Schertz-Cibolo-Univl. City, Indep. Sch. Dist. v. Wright ( In re Educators Grp. Health Trust ), 25 F.3d 1281, 1284 (5th Cir.1994). Claims are deemed personal, rather than general, when a creditor himself is harmed and no other claimant or creditor has an interest in the cause. Koch Ref., 831 F.2d at 1348. A trustee in bankruptcy has no standing to prosecute such a personal claim. In re Cannon, 277 F.3d at 853-54. In this instance, the claimed wrongdoing supposedly occurred while Zoll was still in the debtor's employ. His acts (if they occurred at all) took place well before FFC gained possession of its collateral. Any wrong committed would, therefore, have been directly adverse to the debtor's interests and would have diminished its estate generally. See Highland Capital Mgmt., L.P. v. Welsh, Carson, Anderson & Stowe, VI, L.P. ( In re Bridge Info. Sys., Inc. ), 344 B.R. 587, 594-95 (E.D.Mo.2006); In re Eagle Enters., Inc., 265 B.R. 671, 678 (E.D.Pa.2001). Consequently, the harm was to the debtor, and these claims must be considered part of the debtor's estate. This point is reinforced by an examination of the state court complaint, which only describes harm inflicted upon the debtor, its customers, and its assets. As to City, the harm alleged is derivative and indirect. The short of it is that FFC (in whose shoes City stands) is no different from any other creditor of the debtor with respect to the asserted claims. If Allied, with Zoll's connivance, misappropriated the debtor's assets, the trustee is the proper party to assert those claims. See Koch Ref., 831 F.2d at 1342-43. In an effort to change the trajectory of the debate, City falls back on the venerable tenet that any property not administered when a bankruptcy case is closed is deemed abandoned. See 11 U.S.C. § 554(c). Based on that tenet, it posits that it owns the claims against Allied because the trustee abandoned them. The district court did not reach the merits of this argument, nor do we. Bankruptcy Rule 8006 requires that a first-tier appeal include a statement of the issues to be presented. Several courts have held that a party's failure to include a particular issue in such a statement means  at least in the absence of exceptional circumstances  that the issue is waived. See, e.g., Zimmermann v. Jenkins ( In re GGM, P.C. ), 165 F.3d 1026, 1032 (5th Cir.1999); Snap-On Tools, Inc. v. Freeman ( In re Freeman ), 956 F.2d 252, 255 (11th Cir.1992). We have heretofore avoided ruling on this point. See Yacovi v. Rubin and Rudman, L.L.P. ( In re Yacovi ), 411 Fed.Appx. 342, 348 (1st Cir.2011). This case presents the question head-on. While we are aware of the existence of some authority to the contrary, see, e.g., Office of the U.S. Tr. v. Hayes ( In re Bishop, Baldwin, Rewald, Dillingham & Wong, Inc. ), 104 F.3d 1147, 1148 (9th Cir.1997) (per curiam), we believe that the rationale behind the waiver rule is sound. Cf. Sunview Condo. Ass'n v. Flexel Int'l, Ltd., 116 F.3d 962, 964-65 (1st Cir.1997) (concluding that plaintiff who did not seek district court review of magistrate judge's ruling waived the right to challenge that ruling on appeal). Rules are essential for the orderly processing of litigation, and a party's disregard of a rule, without good cause, ought not to be condoned. We therefore hold that at least where, as here, there are no exceptional circumstances, failure to comply with Rule 8006 waives the omitted issue on appeal. This does not mean, of course, that the list of issues must be precise to the point of pedantry. An issue that is not specifically enumerated may be deemed preserved if the substance of the issue reasonably can be inferred from an issue or issues that are listed. See In re Freeman, 956 F.2d at 255. Here, however, the abandonment issue is both legally and factually distinct from the issues that City articulated in its Rule 8006 statement. We need not tarry. The district court carefully examined City's Rule 8006 statement and cogently explained why the omitted argument could not be inferred from any argument identified therein. See City Sanit., 438 B.R. at 8-10. It would serve no useful purpose to rehearse that exercise here. The bottom line is that, in the circumstances of this case, City's noncompliance with Rule 8006 resulted in a waiver of its afterthought abandonment argument. That ends this aspect of the appeal. For the reasons stated, we conclude that the claims against Allied were commercial tort claims; that those claims remained property of the debtor's estate; and that the trustee had exclusive standing to assert them.