Court Opinion

ID: 769789
Source: CourtListenerOpinion
Date Created: 2012-04-18 10:15:57+00
Date Added: 2024-06-11T17:55:45.720028
License: Public Domain

221 F.3d 955 (7th Cir. 2000)
Richard M. Fogel, as Trustee for the Estate of Madison Management Group, Inc., Plaintiff-Appellee,v.Samuel Zell, et al., Defendants-Appellees.Appeal of City and County of Denver.
No. 00-1743
In the  United States Court of Appeals  For the Seventh Circuit
Argued June 9, 2000Decided July 19, 2000

[Copyrighted Material Omitted][Copyrighted Material Omitted]
Before Posner, Chief Judge, and Bauer and Rovner,  Circuit Judges.
Posner, Chief Judge.

1
A trustee in bankruptcy  settled an adversary proceeding that he had  brought against Samuel Zell and various  individuals and corporations associated with him,  claiming that they had looted the debtor's  estate. As a condition of the settlement, the  district court, having taken over the adversary  proceeding from the bankruptcy court because the  defendants had requested a jury trial, see 28  U.S.C. sec.sec. 157(d), (e), enjoined Denver from  suing Zell and the other adversary defendants.  Denver's appeal asks us to consider whether the  potential legal claim of a potential tort victim  is a "claim" within the meaning of the Bankruptcy  Code; if it is, what kind of notice such a  "claimant" is entitled to from the trustee; and  the extent to which a bankruptcy court can enjoin  the prosecution of claims against the defendants  in an adversary proceeding in order to facilitate  the settlement of the proceeding.

2
The story begins with Interpace Corporation, a  manufacturer, now defunct, of prestressed  concrete pipe used in sewer and sanitation  systems. During the 1970s, the pipe that  Interpace sold to some 10,000 purchasers was  defective, though this was not realized at first.  Meanwhile, in the mid-1980s, through a complex  system of transactions unnecessary to describe,  Interpace was acquired by Madison Management.  Then the pipes began to burst, and Madison's  owners--Zell and the other adversary defendants--  removed Madison's assets, lest Madison be held  liable for its predecessor's torts. The removal  left Madison a shell that declared bankruptcy  under Chapter 11 of the Bankruptcy Code in 1991.  Later, as so often happens, the Chapter 11  proceeding (reorganization) was converted to a  Chapter 7 proceeding (liquidation).

3
By the time Madison declared bankruptcy, eight  purchasers of Interpace pipe, not including  Denver however, had sued Madison, seeking damages  in excess of $300 million, for harms caused by  the bursting of the defective pipe. Madison's  trustee in bankruptcy, seeking to obtain assets  for distribution to the creditors, brought this  adversary proceeding, charging that Zell and  others had fraudulently conveyed Madison's assets  to themselves in order to avoid having to make  good on the tort claims arising from the burst  pipes.

4
The bankruptcy court set a deadline of April 5,  1993, for the filing of proofs of claim with the  trustee. A brief notice to that effect was  published in USA Today and Waterworld Review. The  deadline came and went without Denver filing a  claim. But its pipes hadn't burst yet. That  didn't happen until May 23, 1997. On the  following January 9, having confirmed that the  pipe had been manufactured by Interpace,  Madison's predecessor, Denver filed a proof of  claim with the trustee. The claim was for more  than $17 million in damages for the harm caused  by the burst pipes and for the expense of  replacing the rest of the Interpace pipe that  Denver had bought, before it burst too. It  appears that Denver and the eight pipe claimants  that filed timely proofs of claim in the  bankruptcy proceeding are the only purchasers of  Interpace pipe who have as yet sustained damages  because of the defective pipe.

5
The fraudulent-conveyance action brought by the  trustee against Zell and his fellow alleged  looters was settled a few months after Denver  filed its claim. In exchange for the trustee's  agreeing to release his claim against them, the  adversary defendants agreed to pay him whatever  amount, estimated to be between $35 and $45  million, would enable creditors of Madison whose  claims had been filed by the April 5, 1993,  deadline to receive 70 cents on the dollar.  Claims such as Denver's, however, that had been  filed later would receive nothing. The eight  timely pipe claimants are not among the creditors  benefited by the settlement either, but that is  because one of the adversary defendants in effect  bought their claims, paying $24 million, which  was less than 10 percent of what those claimants  had originally sought.

6
The settlement between the adversary defendants  and the trustee was made expressly contingent on  the district court's enjoining all of Madison's  creditors, including pipe claimants, from suing  the adversary defendants. Denver had already  filed suit against those defendants in a state  court in Colorado. Its suit was closely modeled  on the trustee's fraudulent-conveyance suit.  Because Zell and the other adversary defendants  were not the manufacturer of the defective pipe  or even the successor of the manufacturer  (Interpace), but rather the alleged looters of  the successor's assets, Denver's claim against  them, as distinct from the claim that it had  filed against Madison in the bankruptcy  proceeding, could not be, and was not, a  products-liability claim.

7
The district judge found that Denver knew by  October of 1990 that the pipe it had bought from  Interpace might be defective, and so should have  filed a proof of claim with Madison's trustee in  bankruptcy before the bar date two and a half  years later. Other Interpace pipe, bought at the  same time, had already burst; and Denver had even  played host to a conference at which  representatives of a number of municipalities  that had bought such pipe discussed the  likelihood that it would burst. The judge's  finding that Denver knew about the defect in its  pipe before Madison went into bankruptcy is  contested, but for purposes of this appeal we can  assume that it's correct. The judge ruled that by  failing to file a proof of claim by the bar date,  Denver had forfeited any right it might have had  to object to a settlement that gave it nothing.  And so the judge proceeded to consider whether  the settlement was in the best interests of the  debtor's estate, Denver's interest  notwithstanding. She concluded that it was,  because it would avoid costly and protracted  litigation and add sufficient assets to the  estate to enable a handsome recovery, by normal  bankruptcy standards, by those creditors (other  than the timely pipe claimants, who had settled  separately) that had filed timely proofs of  claim. Since the settlement was contingent on  enjoining suits by all pipe claimants against the  adversary defendants, the judge, to make sure  that the settlement would go through, granted the  injunction sought by the trustee and the  adversary defendants against Denver's state court  suit against the latter. The consequence of the  judge's rulings was to block Denver from  recovering any of the losses that it has  sustained as a result of the bursting of the  defective pipe, since Interpace no longer exists,  the Madison bankruptcy yielded nothing for  Denver, and Denver's state-court suit against the  alleged looters is enjoined.

8
Judges naturally prefer to settle complex  litigation than to see it litigated to the hilt,  especially when it is litigation in a bankruptcy  proceeding--the expenses of administering the  bankruptcy often consume most or even all of the  bankrupt's assets. The trustee's adversary  proceeding against Zell and the other alleged  looters promised to be hard-fought; the parties  had already been at each other's throats for six  years. Much of the property of the debtor's  estate might be eaten up in that litigation,  which in the end might fail to recover a penny  for the estate. It was natural for the judge to  prefer a $45 million bird in the hand to birds of  unknown number and value in dense thickets. But  this is on the assumption that Denver, whose  claim exceeds $17 million, and any other  purchaser from Interpace whose pipes burst after  April 5, 1993, deserved to receive zero cents on  the dollar because they should have filed claims  before that deadline. If the judge was wrong to  fault Denver for filing later, an essential  premise of her decision to approve the settlement  and issue the injunction collapses.

9
On whether Denver filed its proof of claim too  late, it is uncertain, to begin with, whether it  could have filed a claim before its pipes burst,  which didn't happen until 1997, long after the  bar date for filing proofs of claim. A "creditor"  in bankruptcy is anyone who has a "claim" against  the bankrupt estate that arose (so far as bears  on this case) no later than the filing of the  voluntary petition in bankruptcy. 11 U.S.C.  sec.sec. 101(10), 301; In re Chicago Pacific  Corp., 773 F.2d 909, 916 (7th Cir. 1985); In re  Gucci, 126 F.3d 380, 388-89 (2d Cir. 1997).  "Claim" is broadly defined to include equitable  as well as legal rights to payment, and even  "contingent" such rights. 11 U.S.C. sec.  101(5)(A); McClellan v. Cantrell, 217 F.3d 890, 895 (7th Cir.2000). A  claim implies a legal right, however, and before  a tort occurs the potential victim has no legal  right, "contingent" or otherwise, with an  exception, irrelevant to this case, noted in the  next paragraph, for the case in which the  potential tort victim incurs reasonable costs to  prevent the tort from occurring or to mitigate  its severity. A right that can be made the basis  of a claim in bankruptcy may be contingent on  something happening, such as the signing of a  contract, e.g., In re Remington Rand Corp., 836  F.2d 825, 827 (3d Cir. 1988); In re M. Frenville  Co., 744 F.2d 332, 336-37 (3d Cir. 1984), but if  the contingency can be the tort itself, this  spells trouble, both practical and conceptual.  Suppose a manufacturer goes bankrupt after a rash  of products-liability suits. And suppose that ten  million people own automobiles manufactured by it  that may have the same defect that gave rise to  those suits but, so far, only a thousand have had  an accident caused by the defect. Would it make  any sense to hold that all ten million are tort  creditors of the manufacturer and are therefore  required, on pain of having their claims  subordinated to early filers, to file a claim in  the bankruptcy proceeding? Does a pedestrian have  a contingent claim against the driver of every  automobile that might hit him? We are not alone  in thinking that the answer to these questions is  "no." See In re Chateaugay Corp., 944 F.2d 997,  1003 (2d Cir. 1991). Driving carelessly is not a  tort and neither is the sale of a defective  product. The products-liability tort occurs when  the defect in the design or manufacture of the  product causes a harm, and this didn't happen to  Denver until the defective pipes burst. It is a  fundamental principle of tort law that there is  no tort without a harm, e.g., Blue Cross & Blue  Shield United of Wisconsin v. Marshfield Clinic,  152 F.3d 588, 592 (7th Cir. 1998); Janmark, Inc.  v. Reidy, 132 F.3d 1200, 1202 (7th Cir. 1997);  Jones v. Searle Laboratories, 444 N.E.2d 157, 162  (Ill. 1982); W. Page Keeton et al., Prosser and  Keeton on the Law of Torts sec. 30, p. 165 (5th  ed. 1984), and so until the harm occurs, the tort  hasn't occurred.

10
It is true that when Denver learned it had  installed defective pipe, it would have been  entitled by the doctrine of mitigation of damages  to remove the pipe or take other prophylactic or  reparative measures, and to seek restitution of  the expense of doing so from Madison, provided  the expense was prudent in the circumstances.  Adams v. U.S. Homecrafters, Inc., 744 So. 2d 736,  739 (Miss. 1999); Restatement (Second) of Torts  sec. 919(1) (1979). Had Denver incurred such an  expense before April 5, 1993, it would have had  to file a proof of claim for reimbursement by  then, provided it had received reasonable notice  of the bankruptcy proceeding, a question to which  we'll return. But it did not incur any such  expense, and so until the pipes burst it had not  suffered a legal wrong at the hands of Madison.  No argument is made that it should have filed a  claim for breach of contract against Madison.

11
There has been, however, understandable pressure  to expand the concept of a "claim" in bankruptcy  in order to enable a nonarbitrary allocation of  limited assets to be made between present and  future claimants. Consider the asbestos  bankruptcy cases. Many people who inhaled  asbestos in the workplace in the 1940s developed  serious diseases as a delayed consequence of this  inhalation. Some developed the diseases earlier  than others. It seemed arbitrary to devote the  entirety of the estates of the bankrupt asbestos  manufacturers to compensating those sufferers  whose diseases had happened to manifest  themselves before rather than after (perhaps  shortly after) the bar dates set in the various  bankruptcy proceedings. Since the inhalation had  occurred before the bar dates, there was a sense  in which the inhalers' tort claims could be  thought to have accrued at that time even if they  couldn't have sued to enforce the claims until  symptoms of disease, or at least discernible  changes in lung or other tissues (which might be  enough to constitute harm within the meaning of  the rule that there is no tort without a harm),  manifested themselves. To recognize a  "contingent" tort claim in these circumstances  would complicate bankruptcy proceedings some, and  perhaps a good deal, by requiring that provision  be made in the allocation of the assets of the  debtor's estate for future claims that might be  difficult to value, but it might be a price worth  paying to eliminate an arbitrary difference in  treatment. In re UNR Industries, Inc., 725 F.2d  1111, 1118-20 (7th Cir. 1984). An analogy could  be drawn--we drew a similar analogy in an  insurance case involving defective pipes, Eljer  Mfg., Inc. v. Liberty Mutual Ins. Co., 972 F.2d  805 (7th Cir. 1992)--between inhaling a  potentially dangerous substance and installing  potentially defective pipe in the body politic;  each is a ticking-time-bomb kind of case.

12
We did not need to resolve the "contingent" tort  claim issue in the UNR case. Several courts found  in 11 U.S.C. sec. 1109(b), which allows any  "party in interest" to raise and be heard on  issues relating to the bankruptcy proceeding, the  authority to appoint representatives for future  asbestos claimants. E.g., In re Amatex Corp., 755  F.2d 1034, 1041-43 (3d Cir. 1985); In re Johns-  Manville Corp., 52 B.R. 940, 943 (S.D.N.Y. 1985);  In re Forty-Eight Insulations, Inc., 58 B.R. 476,  478 (Bankr. N.D. Ill. 1986). Eventually Congress  stepped in and, in effect, ratified the  settlement terms that the representatives of  these future claimants had negotiated. 11 U.S.C.  sec. 524(g)(1)(B). In other cases, too, in which  mass tort claims had precipitated sellers into  bankruptcy, courts, including our own, began  allowing products-liability and nuisance claims  to be filed in bankruptcy as long as the conduct  giving rise to the claim (the manufacture or sale  of the defective product, in the case of products  liability) had occurred before the petition in  bankruptcy had been filed. E.g., In re UNR  Industries, Inc., 20 F.3d 766, 770-71 (7th Cir.  1994); In re Chicago, Milwaukee, St. Paul &  Pacific R.R., 974 F.2d 775, 782-86 (7th Cir.  1992); Epstein v. Official Comm. of Unsecured  Creditors of Estate of Piper Aircraft Corp., 58  F.3d 1573 (11th Cir. 1995); Lemelle v. Universal  Mfg. Corp., 18 F.3d 1268, 1274-78 (5th Cir.  1994); In re Jensen, 995 F.2d 925, 930-31 (9th  Cir. 1993) (per curiam); In re Chateaugay Corp.,  supra, 944 F.2d at 1005; Grady v. A.H. Robins  Co., 839 F.2d 198 (4th Cir. 1988); contra, Jones  v. Chemetron Corp., 212 F.3d 199, 205-06 (3d Cir.2000); In re M. Frenville Co.,  supra, 744 F.2d at 336-37. However, mindful of  the problem flagged by our automobile  hypotheticals, the courts in these cases have  suggested various limiting principles. We needn't  go through them, for a reason that will appear in  a moment; and anyway we greatly doubt that the  issue is one that lends itself to governance by  formula. It may not be possible to say anything  more precise than that if it is reasonable to do  so, bearing in mind the cost and efficacy of  notice to potential future claimants and the  feasibility of estimating the value of their  claims before, perhaps long before, any harm  giving rise to a matured tort claim has occurred,  the bankruptcy court can bring those claimants  into the bankruptcy proceeding and make provision  for them in the final decree. This "test," if it  can be dignified by such a term, would exclude  the automobile hypotheticals; given that so far  only one out of every thousand pipes sold by  Interpace have burst, this case may be closer to  them than to asbestos and Dalkon Shield.

13
This we need not decide and anyway could not  without knowing how serious the defect in the  pipe is; maybe all the pipe that Interpace sold  to these 10,000 purchasers is defective and must  be replaced long before the end of the normal  useful life of such a product. But that, as we  say, does not have to be decided. For even if  Denver was eligible to file a claim in the  Madison bankruptcy before it suffered any harm  from the defective pipe, it could not lawfully be  penalized for its failure to do so. The notice of  the bar date was culpably deficient. A trustee in  bankruptcy cannot subordinate late-filed claims,  as he did here, if the late filers "did not have  notice or actual knowledge of the case in time  for timely filing," 11 U.S.C. sec.  726(a)(2)(C)(i), and their claims were filed  before the estate had been distributed. sec.  726(a)(2)(C)(ii). If both conditions are met, the  late filer is entitled to parity with the other  unsecured creditors. E.g., Cooper v. Internal  Revenue, 167 F.3d 857, 858 (4th Cir. 1999); In re  Savage Industries, 43 F.3d 714, 721 (1st Cir.  1994).

14
The statute says notice or actual knowledge, and  let us begin with the former. All the statute  says is that the notice must be "appropriate in  the particular circumstances," 11 U.S.C. sec.  102(1)(A), but the bankruptcy rules, a little  more helpfully, provide that "the court may order  notice by publication if it finds that notice by  mail is impracticable." Bankr. R. 2002(l). The  cases sensibly assume that the general norms of  fair notice, as set forth in Mullane v. Central  Hanover Bank & Trust Co., 339 U.S. 306 (1950);  Tulsa Professional Collection Services, Inc. v.  Pope, 485 U.S. 478, 489-91 (1988); Mennonite Bd.  of Missions v. Adams, 462 U.S. 791, 797-800  (1983), and other such cases, apply to bankruptcy  as to other settings in which a person's legal  right is extinguished if he fails to respond to a  pleading. In re Savage Industries, supra, 43 F.3d  at 721; In re Auto-Train Corp., 810 F.2d 270, 278  (D.C. Cir. 1987). So even if--which, for the  reasons explained in Creek v. Village of  Westhaven, 80 F.3d 186, 193 (7th Cir. 1996), we  doubt--municipalities (such as Denver) cannot  complain about a denial of due process even when  it isn't their own state they're complaining  about (which they can't do, City of Newark v. New  Jersey, 262 U.S. 192, 196 (1923); City of East  St. Louis v. Circuit Court for Twentieth Judicial  Circuit, 986 F.2d 1142, 1144 (7th Cir. 1993)),  they are entitled to the equivalent protections  under the notice provisions of the Bankruptcy  Code. In re Hairopoulos, 118 F.3d 1240, 1244 n. 3  (8th Cir. 1997); see City of New York v. New  York, New Haven & Hartford R.R., 344 U.S. 293,  296-97 (1953).

15
Fair or adequate notice has two basic elements content and delivery. If the notice is unclear,  the fact that it was received will not make it  adequate. Mullane v. Central Hanover Bank & Trust Co., supra, 339 U.S. at 314, 318; Folger Adam  Security, Inc. v. DeMatteis/MacGregor, JV, 209  F.3d 252, 265 (3d Cir. 2000); In re Barton  Industries, Inc., 104 F.3d 1241, 1245-46 (10th  Cir. 1997); In re Linkous, 990 F.2d 160, 162-63  (4th Cir. 1993); In re Auto-Train Corp., supra,  810 F.2d at 279. That is not a problem here,  because the notice did identify Madison as  successor to Interpace. But unless received, the  notice was inadequate unless the means chosen to  deliver it was reasonable. Mullane v. Central  Hanover Bank & Trust Co., supra, 339 U.S. at 314,  319; Towers v. City of Chicago, 173 F.3d 619, 628  (7th Cir. 1999); Schluga v. City of Milwaukee,  101 F.3d 60, 62 (7th Cir. 1996).

16
There are two basic means--the transmission of  the notice to the intended recipient and the  publication of the notice in a newspaper or  magazine or other medium likely (or at least as  likely as it is feasible to arrange) to come to  the attention of the person entitled to notice.  If his name and address are reasonably  ascertainable, he is entitled to have that  information sent directly to him, but, if not,  then publication of the information in the  newspaper or other periodical that he's most  likely to see is permitted. In re Chicago,  Milwaukee, St. Paul & Pacific R.R., supra, 974  F.2d at 788; In re Crystal Oil Co., 158 F.3d 291,  297 (5th Cir. 1998); Chemetron Corp. v. Jones, 72  F.3d 341, 345-47 (3d Cir. 1995); In re Savage  Industries, supra, 43 F.3d at 721-22.

17
The cases refer to creditors in the first class  as "known creditors" and creditors in the second  class as "unknown creditors," but this is  imprecise. The issue is not whether the creditor  is known to the trustee but whether the  creditor's name and address can be readily  ascertained by the trustee, making it feasible to  send the creditor the notice directly and not  force him to read the fine print in the Wall  Street Journal. Apart from the cost of finding  the creditor's name and address, the sheer number  of potential creditors in relation to the size of  their claims may make it excessively costly to  provide direct notice to all of them. In re GAC  Corp., 681 F.2d 1295, 1300 (11th Cir. 1982). The  cost of direct notice in such a case might eat up  the debtor's estate, especially when the claims  are discounted to reflect their actual value. If  the assets of the estate are obviously  insufficient to pay more than 10 cents on the  dollar, an unsecured claim for $1 million is not  worth $1 million, but only $100,000. And if it is  a tort claim, a reasonable estimate of its value  may be much smaller than the amount claimed,  since tort damages, not being liquidated or  readily computable in most cases, are typically  exaggerated in the complaint.

18
Notice by publication may thus be entirely  appropriate when potential claimants are  numerous, unknown, or have small claims (whether  nominally or, as we have just pointed out,  realistically)--all circumstances that singly or  in combination may make the cost of ascertaining  the claimants' names and addresses and mailing  each one a notice of the bar date and processing  the responses consume a disproportionate share of  the assets of the debtor's estate. E.g., Mullane  v. Central Hanover Bank & Trust Co., supra, 339  U.S. at 317-18; City of New York v. New York, New  Haven & Hartford R.R., supra, 344 U.S. at 296; In  re Chicago, Milwaukee, St. Paul & Pacific R.R.,  supra, 974 F.2d at 788; In re GAC Corp., supra,  681 F.2d at 1300. That isn't this case. This is a  multimillion dollar bankruptcy, the potential  claimants were all purchasers of a product  manufactured by the debtor's predecessor, and  Denver in particular was a large purchaser. (We  don't know what it paid, but we know that it  bought and installed at least five miles of  Interpace pipe.) Other pipe claimants had filed  multimillion dollar claims. The suggestion that  the trustee could not have discovered that Denver  had purchased a large quantity of the defective  pipe strikes us as risible.

19
Although Denver did not receive fair notice of  the bankruptcy proceeding, may it have had actual  knowledge of the proceeding? After all, the  proceeding had been pending for years before the  bar date. The general rule, moreover, is that the  only knowledge required is knowledge of a  critical stage of the proceeding from which the  bar date can be computed, see, e.g., In re Maya  Construction Co., 78 F.3d 1395, 1399 (9th Cir.  1996); In re Medaglia, 52 F.3d 451, 455 (2d Cir.  1995); cf. In re Sam, 894 F.2d 778, 781 (5th Cir.  1990), not of the bar date itself. Normally all  that is required in a Chapter 7 proceeding is  knowledge of when the petition for bankruptcy was  filed, because the statute requires that the bar  date be set at 90 days after the first creditors'  meeting, which must be held between 20 and 40  days after the petition for bankruptcy is filed.  Bankr. R. 2003(a), 3002(c). The cautious creditor  who knows only the date of the petition will  therefore file his proof of claim within 110 days  after that date.

20
Here, however, the bar date was set at almost 18  months after Madison filed its petition for  bankruptcy. The reason is that the initial  petition was under Chapter 11, which doesn't have  the 90-day rule. Bankr. R. 3003(c)(3); Pioneer  Investor Services Co. v. Brunswick Associates  Limited Partnership, 507 U.S. 380, 382 (1993).  After being converted to a Chapter 7 proceeding  on July 17, 1992, a "Notice of Commencement of  Case Under Chapter 7" was filed, fixing the bar  date 90 days later. Denver was not served with  that notice, and there is no indication that it  knew about it, which means that Denver would not  have known how to compute the bar date--and so  was entitled to notice of that date. Cf. In re  Chicago, Rock Island & Pacific R.R., 788 F.2d  1280, 1283 (7th Cir. 1986); In re Trans World  Airlines, Inc., 96 F.3d 687, 690 (3d Cir. 1996);  In re Maya Construction Co., supra, 78 F.3d at  1399; In re Spring Valley Farms, Inc., 863 F.2d  832, 834-35 (11th Cir. 1989); see also In re  Unioil, 948 F.2d 678, 683 (10th Cir. 1991); In re  Walker, 927 F.2d 1138, 1145 and n. 11 (10th Cir.  1991); but see In re Christopher, 28 F.3d 512,  517-18 (5th Cir. 1994). It received no notice.  Nor is there any reason to believe that it knew  Madison had acquired Interpace and therefore was  aware that it might have an interest in a Madison  bankruptcy. Nor, given the uncertainty whether  Denver even had a claim that it could file in a  bankruptcy proceeding before the pipes burst,  long after the bar date, can Denver be faulted in  the absence of notice for not having filed a  proof of claim before then.

21
Had Denver never become a party to the Madison  bankruptcy proceeding, the injunction against its  prosecuting its own suit against Zell and the  others could not have been issued. Enjoining  nonparties is not completely out of the question  for a bankruptcy court, but it is a stretch. If A  has a claim against B, it is easy to see why B  would like to have a settlement that resolved not  only its dispute with A but its dispute with C as  well, and it is easy to see why A would be  delighted to agree to such a provision since by  making the settlement more valuable to B the  provision would enable A to get a larger  settlement--this is the reason the district judge  gave for approving the settlement. But two  parties cannot agree to extinguish the claim of a  third party not in privity with either of them--  let alone the potential claims of 10,000 third  parties. E.g., Martin v. Wilks, 490 U.S. 755,  761-62 (1989); Local No. 93, Int'l Ass'n of  Firefighters v. City of Cleveland, 478 U.S. 501,  529 (1986); United States v. Board of Education,  11 F.3d 668, 672-73 (7th Cir. 1993); Lindsey v.  Prive Corp., 161 F.3d 886, 891 (5th Cir. 1998).

22
Like most legal generalizations, this one  requires qualification. If C is required to file  its claim against A in the litigation between A  and B, and fails to do so, the settlement of that  litigation can extinguish C's rights. Martin v.  Wilks, supra, 490 U.S. at 762 n. 2. That is  paradigmatic of bankruptcy--and the defendants'  first argument, which we've rejected, for binding  Denver to the settlement. In addition, the court  can enjoin a third party from interfering with  the disposition of the property in the debtor's  estate, Fisher v. Apostolou, 155 F.3d 876, 882  (7th Cir. 1998); Zerand-Bernal Group, Inc. v.  Cox, 23 F.3d 159, 161-62 (7th Cir. 1994), just as  an ordinary injunction can be made to run against  third parties who have notice of it, in order to  prevent interference with it. And thus when an  asset of the estate is sold by the trustee in  bankruptcy free and clear of any liens, the court  can enjoin a creditor from suing to enforce a  preexisting lien in the asset. 11 U.S.C. sec.  363(f); In re Penrod, 50 F.3d 459, 461 (7th Cir.  1995); Zerand-Bernal Group, Inc. v. Cox, supra, 23 F.3d at 163; Gotkin v. Korn, 182 F.2d 380, 382  (D.C. Cir. 1950); In re WBQ Partnership, 189 B.R.  97, 110 (Bankr. E.D. Va. 1995). Madison's trustee  and the adversary defendants argue that the  trustee "owns" the fraudulent-conveyance claim  against those defendants--that it is an asset of  the debtor's estate--and that he has "sold" it  (by releasing the claim) free and clear to them  for whatever amount is necessary to give the  timely unsecured creditors 70 cents on the  dollar, and that the suit Denver has brought in a  state court against them is an interference with  that asset. Let us see.

23
It is true that the trustee "owns" Madison's  claim in the loose sense that it's part of the  debtor's estate, which the trustee controls. 11  U.S.C. sec. 541(a); Pepper v. Litton, 308 U.S.  295, 307 (1939); Koch Refining v. Farmers Union  Central Exchange, Inc., 831 F.2d 1339, 1343-44  (7th Cir. 1987); In re Ionosphere Clubs, Inc., 17  F.3d 600, 604 (2d Cir. 1994). But the issue is  Denver's claim, the claim that the adversary  defendants looted Madison so that it wouldn't  have any assets out of which to pay tort claims  arising from the eventual bursting of the  defective pipe. Denver's is thus a derivative  claim, the primary victim of the fraudulent  conveyance being Madison. It was Madison's assets  that were conveyed away; Denver suffered only in  its capacity as a potential claimant to those  assets, assuming Madison was liable for  Interpace's torts as Interpace's successor--  though whether Madison would actually have been  liable for the torts of its predecessor,  Interpace, has not been determined; successor  liability is a confused area of the law.  Upholsterers' Int'l Union Pension Fund v.  Artistic Furniture of Pontiac, 920 F.2d 1323,  1325 (7th Cir. 1990), quoting EEOC v. Vucitech,  842 F.2d 936, 944 (7th Cir. 1988).  The right to bring a derivative claim, of which  the most common type is the shareholder  derivative suit, depends on showing that the  primary claimant has unjustifiably failed to  pursue the claim. E.g., Kamen v. Kemper Financial  Services, Inc., 500 U.S. 90, 95-96 (1991); Ross  v. Bernhard, 396 U.S. 531, 534 (1970); Stepak v.  Addison, 20 F.3d 398, 402 (11th Cir. 1994);  Spiegel v. Buntrock, 571 A.2d 767, 777-78 (Del.  1990). But that is this case. The trustee did  press the primary claim to settlement, but he did  so under the mistaken impression that the  settlement would give all deserving creditors 70  cents on the dollar. Had he realized that Denver  could not rightly be penalized for having failed  to file by the bar date--he was not likely to  realize this, of course, since he was responsible  for the defective notice--he would no doubt have  pressed Zell and the other defendants to make  provision in the settlement for Denver. He did  not do so, and therefore was not an adequate  representative of Denver's legitimate interests,  Denver being as entitled as any of the other pipe  claimants to a share of any settlement.

24
If a trustee unjustifiably refuses a demand to  bring an action to enforce a colorable claim of a  creditor, the creditor may obtain the permission  of the bankruptcy court to bring the action in  place of, and in the name of, the trustee. In re  Perkins, 902 F.2d 1254, 1258 (7th Cir. 1990); In  re Gibson Group, Inc., 66 F.3d 1436, 1445-46 (6th  Cir. 1995); Louisiana World Exposition v. Federal  Ins. Co., 858 F.2d 233, 247 (5th Cir. 1988); In  re STN Enterprises, 779 F.2d 901, 904 (2d Cir.  1985); In re Automated Business Systems, Inc.,  642 F.2d 200, 201 (6th Cir. 1981). In such a  suit, the creditor corresponds to the  shareholder, and the trustee to management, in a  shareholder derivative action. Cf. Parnes v.  Bally Entertainment Corp., 722 A.2d 1243, 1245  (Del. 1999); Kramer v. Western Pacific  Industries, Inc., 546 A.2d 348, 351 (Del. 1988).

25
It makes no difference that the trustee probably  owned Denver's derivative claim as well as the  direct claim (Madison's claim as the immediate  victim of the looting of its assets by the  adversary defendants). Murray v. Miner, 876 F.  Supp. 512, 516-17 (S.D.N.Y. 1995), aff'd, 74 F.3d  402 (2d Cir. 1996), points out that Delaware  permits a subsidiary to sue its parent (the  subsidiary's controlling shareholder) on the  complaint of the subsidiary's minority  shareholder that the parent is looting the  subsidiary, and Madison corresponds to that  subsidiary and Denver to the shareholder. Madison  is a Delaware corporation, and under standard  choice of law rules that we may assume applicable  here despite persisting uncertainty as to whether  state or federal law supplies the choice of law  rules in a bankruptcy case, see In re Morris, 30  F.3d 1578, 1581-82 (7th Cir. 1994); In re  Stoecker, 5 F.3d 1022, 1028-29 (7th Cir. 1993),  the law of the state of incorporation determines  who can bring a derivative suit, Stromberg Metal  Works, Inc. v. Press Mechanical, Inc., 77 F.3d  928, 933 (7th Cir. 1996); Restatement (Second) of  Conflict of Laws sec. 307 (1971), and so implies  that the trustee owns Denver's claim after all.

26
No matter. The trustee "owns" the claims of the  unsecured creditors only in the sense that he  controls their prosecution. He is not the  beneficial owner, but rather is the fiduciary of  the creditors, including Denver. CFTC v.  Weintraub, 471 U.S. 343, 354-55 (1985); In re  Salzer, 52 F.3d 708, 712 (7th Cir. 1995); In re  Martin, 91 F.3d 389, 394 (3d Cir. 1996). One of  his fiduciary duties is to honor the relative  priorities of the unsecured creditors. Protective  Committee for Independent Stockholders of TMT  Trailer Ferry, Inc. v. Anderson, 390 U.S. 414,  441 (1968); In re American Reserve Corp., 841  F.2d 159, 162 (7th Cir. 1987); In re Cajun  Electric Power Co-op., Inc., 119 F.3d 349, 355  (5th Cir. 1997). If he fails to do so, the  creditor can proceed in his place and in his  name. Not having received the notice to which it  was entitled, Denver had the right to file a late  claim and participate in the estate equally with  the other unsecured creditors. 11 U.S.C. sec.  726(a)(2). Approving a settlement that  subordinated Denver's claim was therefore an  abuse of the district court's discretion and so  cannot stand. E.g., Depoister v. Mary M. Holloway  Foundation, 36 F.3d 582, 586-87 (7th Cir. 1994);  Jeffrey v. Desmond, 70 F.3d 183, 185 (1st Cir.  1995). Nor can the injunction, which is premised  on the settlement.

27
What next? This bankruptcy proceeding is almost  a decade old, and we hope that on remand it can  be moved to an early conclusion. If the adversary  defendants are willing to sweeten the pot to the  extent necessary to induce Denver to drop its  claims (including its state-court suit), and to  take their chances with regard to any other  nonparty pipe claimants who may crop up later and  want to sue them, the case can still be resolved  by settlement--and the state-court suit enjoined.  The vice of the present injunction is not that it  was entered against a nonparty but that it was  premised on an invalid settlement. Denver became  a party to the bankruptcy proceeding when it  filed its proof of claim in 1998, and though we  cannot find a case on point, we think it a  sensible extension of cases like Zerand-Bernal  Group, Inc. v. Cox, supra, that as a party to the  bankruptcy proceeding Denver could be enjoined  from prosecuting in any other forum the claim  that it had filed in that proceeding. It was  stymied from prosecuting its claim in the  bankruptcy proceeding by the settlement that must  now be vacated. With the settlement out of the  way, it is free to proceed by demanding that the  trustee prosecute its claim. If he unreasonably  refuses, Denver can prosecute the claim itself,  in conformity with the procedure set forth in In  re Perkins, supra. If the trustee agrees to  prosecute the claim and negotiates a new  settlement that makes provision for Denver, then  Denver can if dissatisfied ask the district court  to reject the new settlement in the exercise of  the court's discretion to reject an unreasonable  settlement. E.g., Depoister v. Mary M. Holloway  Foundation, supra, 36 F.3d at 585-86; Jeremiah v.  Richardson, 148 F.3d 17, 23 (1st Cir. 1998).

28
Reversed.