The mere existence of a creditors’ committee will prevent a later trustee from invoking the doctrine of adverse domination to toll the statute of limitations, according to the Seventh Circuit.
A committee must seek and be denied the right to sue in the name of the debtor before a statute of limitations will be tolled, Circuit Judge Michael S. Kanne said in his Aug. 11 opinion.
A casino began reorganizing in 2001 when the state was in the process of revoking its gaming license. The case converted to chapter 7 in 2007, and a trustee was appointed, when revocation of the license became final. The trustee then sued officers and directors for breach of fiduciary duty and breach of contract for alleged misconduct that prompted the state to terminate the gaming license.
Relying on the state’s five-year statute of limitations, the district court dismissed the fiduciary duty claims. The trustee appealed, unsuccessfully.
The trustee argued that the Illinois doctrine of adverse domination tolled the statute of limitations because the debtor in possession was not motivated to sue its own officers and directors. The existence of the chapter 11 creditors’ committee doomed the argument.
The trustee noted that the committee could not sue without permission from the bankruptcy court. Judge Kanne rejected the notion that the committee was unable to sue. Although the ability to sue was “circumscribed by several requirements” such as court approval, he said “those limitations didn’t render the Creditors’ Committee unable to sue.” In other words, “the mere existence of a potential barrier to suing did not negate the Creditors’ Committee’s ability ‘to enforce a corporate cause of action against officers, directors, and third parties.’”
Judge Kanne said the committee would be seen as “unable to bring the claim” only “[i]f the Creditors’ Committee had petitioned the bankruptcy court, and if the court had denied leave.”
In a last attempt at invoking adverse domination, the trustee contended that the committee was not motivated to sue because the prospect of reorganizing in chapter 11 was more promising than suing officers and directors. Judge Kanne responded by saying that the committee “made a strategic decision not to sue.” Potential plaintiffs, he said, “must live with their choice. A plaintiff did not lack motivation to sue just because its chosen course of action proved to be unsuccessful in the end.”
However, the trustee did not emerge empty-handed from the Seventh Circuit. The appeals court not only upheld a $272 million breach of contract claim against the officers and directors, but the court also ruled that the defendants should have been jointly and severally liable, not merely severally liable. In addition, the trustee had already settled with a pair of defendants for $45 million.