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District Court Held Derivative Claims Belong Solely to Bankruptcy Trustee

By David Tanabe posted 04-26-2022 08:27



In Kamal v. Baker Tilly US, LLP, No. CV 21-1549 (MJD/DTS), 2022 WL 1050053 (D. Minn. Apr. 7, 2022), the court granted a motion to dismiss aiding and abetting claims as derivative claims belonging exclusively to the bankruptcy trustee.

In this case, a holding company issued notes. The holding company was part of a complex web of entities. A retail energy company (the “Company”) assumed the notes in a restructuring. The Company structured the borrowed funds under another entity thereby allegedly giving unfettered access to a principal owner (“Principal”) without any personal guarantees and collateral requirements. It was further alleged that the Principal made a fraudulent loan to artificially inflate valuations, the Company’s accounting firms aided and abetted the fraud, and the Principal withdrew millions in funds and stopped paying on the notes. As a result, the Company financially collapsed and entered bankruptcy. The bankruptcy trustee sued the Principal for fraud, breach of fiduciary duty, and other claims. A settlement was reached on the claims.

In the present case, the plaintiffs are among 800 noteholders who lost their investments when the Company entered bankruptcy. The plaintiffs filed a putative class action against the accounting firms for (1) negligent misrepresentation, (2) aiding and abetting fraud; and (3) aiding and abetting breach of fiduciary duty. The accounting firms filed a motion to dismiss the claims.

The court addressed whether the plaintiffs had standing to pursue the aiding and abetting claims. In doing so, the court noted that the plaintiffs did not allege that the Principal stole money directly from the noteholders. Rather, the plaintiffs maintained that the Principal misappropriated funds from the Company, and the plaintiffs’ suffered losses when the theft left the Company unable to pay on the notes. Further, the plaintiffs’ injuries were derivative to the Company’s injuries, the entire bankruptcy estate and all of its creditors were victims of the alleged torts, the plaintiffs’ injuries were the same as the Company’s other creditors, and the bankruptcy trustee already had settled claims with the Principal for the alleged conduct. As such, the court held that the plaintiffs lacked standing because the aiding and abetting claims are derivative claims belonging exclusively to the bankruptcy trustee.

The court also held that the plaintiffs failed to allege sufficient facts to survive a motion to dismiss for the aiding and abetting claims.

The court denied the motion to dismiss for a negligent misrepresentation claim against one of the accounting firms. All other claims were dismissed.


Co-Editors in Chief
Karl J. JohnsonTaft Stettinius & Hollister LLP
David M. TanabeWinthrop & Weinstine, P.A.