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In North Dakota v. Bala (In re Racing Services, Inc.), 20-6002, 2020 WL 5541382 (BAP 8th Cir. Sep. 16, 2020), the BAP (1) sustained the bankruptcy court’s holding that the state lacked standing under the doctrine of parens patriae to file a proof of claim, (2) reversed the holding that the claim could be disallowed under the doctrine of laches, and (3) remanded for a determination of whether the state had standing to file the claim based upon an assignment.

Ten years into the bankruptcy proceedings, the district court ruled the state was not authorized to collect taxes on account of wagering. The state settled the matter by paying the estate $15 million.  After the claims bar date passed, the state filed a claim on behalf of various charities.  The state filed its claim under the doctrine of parens patriae and received an assignment from a charity. The bankruptcy court ruled that (1) the state lacked standing and, (2) even if the state did have standing due to the assignment, the claim was barred by laches.

Standing under parens patriae requires a state to prove (1) there is a “quasi-sovereign interest distinct from that of a particular party, and [(2)] injury to a substantial segment of the state’s population.”  The Court found the state lacked a distinct interest from that of the charity, and thus failed to satisfy the first prong.  The second prong also failed because the state could not provide satisfactory evidence that a substantial segment of the population was injured, even indirectly.  While a significant segment of the population is not explicitly defined, it must be “more...than injury to an identifiable group of Individual residents.” Here, the only identifiable group was the charity, so the state failed to establish standing on this basis.

The BAP also held that laches is not a valid objection to claims that are filed after the bar date, but before a distribution under 11 U.S.C. §726(a). Laches requires the defense to prove three elements: “1) a delay in asserting a right or claim; 2) that the delay was inexcusable; and 3) undue prejudice to the party against whom the claim is asserted.”  The BAP reasoned that § 726(a)(3) specifically allows for distribution to tardily filed claims. “Because the statutory scheme for allowance and priority in Chapter 7 cases is expressly set forth in the Bankruptcy Code[,] it would be improper for a court to employ the doctrine of laches to modify that scheme.”  Therefore, the BAP remanded for consideration of whether the claim should be allowed based on the assignment from the charity to the state.

Co-Editors in Chief
Alexander J. Beeby, Larkin Hoffman Daly & Lindgren Ltd.
Kesha Tanabe, Tanabe Law