Jeffrey Klobucar, Bassford Remele, P.A.
Contributing Editor: Kesha Tanabe, Tanabe Law
Cedar_Rapids_Lodge_v_Seibert_SRN_544b.pdf
Cedar Rapids Lodge & Suites LLC et al. vs. John F. Seibert et al., No. 14-CV-04839 (D. Minn. Feb. 7, 2018).
Plaintiffs sued the debtor for fraud related to a Cedar Rapids hotel development in 2009; they obtained a judgement in 2012. While the litigation was pending in Iowa state court, however, the debtor’s net worth decreased by over $5.4 million and plaintiffs were unsuccessful in collecting the judgment. They responded by commencing a fraudulent transfer action in the U.S. District Court for the District of Minnesota against the debtor’s wife, daughter and son-in-law (the “Fraudulent Transfer Litigation”).
Faced with contempt proceedings in the Fraudulent Transfer Litigation, the debtor filed a chapter 7 bankruptcy petition. The bankruptcy trustee was substituted for the plaintiffs in the Fraudulent Transfer Litigation pursuant to § 544(b). Plaintiffs and the trustee entered into a stipulation pursuant to which the debtor’s daughter and son-in-law paid $200,000 to the estate in exchange for releases. Plaintiffs received $100k, and the estate retained $100k of the proceeds. Under the stipulation, plaintiffs gave up any right to receive a distribution from the estate and the trustee assigned all remaining causes of action in the Fraudulent Transfer Litigation back to plaintiffs. No objections were filed and the stipulation was approved by the bankruptcy court in 2017.
In accordance with the stipulation, Plaintiffs were substituted back into the Fraudulent Transfer Litigation, the claims against the debtor’s daughter and son-in-law were dismissed but the claims against his wife went forward. Plaintiffs amended the complaint to name the debtor and several companies controlled by him as additional defendants. The complaint, as amended, alleges defendants engaged in an extensive pattern of actual and constructive fraudulent transfers. Defendants moved to dismiss on several grounds, including without limitation, that plaintiffs lacked standing because the trustee’s assignment was invalid. More specifically, defendants argued: (1) a bankruptcy trustee cannot assign its “avoidance powers” under the Code; and (2) the claims set forth in the complaint were not property of the estate (and therefore cannot be assigned by the bankruptcy trustee). The district court considered and rejected both of defendants’ theories.
In connection with defendants’ first argument, the district court noted the distinction between avoidance powers created by the Code (e.g., § 547 or § 548), versus the trustee’s power under § 544(b) “to step into the shoes of a creditor and bring claims under state law.” Because the Fraudulent Transfer Litigation here is predicated on § 544(b) claims, and not powers of the trustee under the Code, the district court rejected defendants’ theory that the stipulation was an impermissible assignment of the trustee’s powers under the Code.
Second, the district court considered and rejected defendants’ theory that the fraudulent transfer claims in this case were not property of the estate. The district court acknowledged the existence of a circuit split, but ultimately adopted the majority view that § 544(b) claims are property of the estate. The district court also noted that courts are divided as to whether a trustee may transfer avoidance claims. The court was persuaded by the fact that this case involved a transfer of pre-existing § 544b claims from the trustee back to creditors. The district court also noted that the Eighth Circuit has permitted creditors to pursue claims created by the Code upon a showing that the trustee cannot be relied upon to assert them, or that creditors can be granted derivative standing to pursue such claims when it is “necessary and beneficial to the fair and equitable resolution” of a bankruptcy case. Because an assignment “confers greater rights,” however, the district court indicated that any assignment of § 544(b) claims must also be “necessary and beneficial” to the estate. The court reviewed the record below, including the trustee’s statements in the motion to approve the stipulation, and decided that such standard was satisfied in this case because the stipulation reduced fees and burden to the estate, reduced the claims pool, and streamlined overall resolution of the case.