Third Circuit Judge Stephanos Bibas used a bankruptcy case to author a peroration on the distinction between standing and statutory authority to pursue a claim.
Surprisingly, Judge Bibas teaches in his August 4 opinion that a creditor ordinarily will have standing to pursue a claim belonging to a bankruptcy estate. However, the creditor may lack statutory authority to assert the claim unless the trustee has abandoned the claim or the creditor has suffered a direct, particularized injury.
Judge Bibas gave us a lesson on the proper use of language and labels based on a case where a creditor had sued two third parties before bankruptcy, alleging they helped the debtor plunder and conceal assets.
Following the advent of bankruptcy, the chapter 7 trustee pursued some of the claims originally brought by the creditor. Ultimately, the trustee obtained court orders abandoning claims that were not liquidated. Affirmed in district court, the bankruptcy judge held that the creditor did not have standing to pursue claims against the defendant because they were not abandoned.
Caplin Led the World Astray
Judge Bibas said the Supreme Court led the world astray in Caplin v. Marine Midland Grace Trust Co., 406 U.S. 416 (1972), where the Court spoke about the standing of creditors to prosecute claims belonging to the estate.
For example, the liquidation of Bernard Madoff’s Ponzi scheme has made reams of law about the inability of individual creditors to sue deep pockets who were in cahoots with the fraudster. See, e.g., Marshall v. Picard (In re Bernard L. Madoff Inv. Sec. LLC), 740 F.3d 81 (2d Cir. 2014)). In effect, Judge Bibas tells us that the Second Circuit used the wrong word in saying that an individual creditor lacked standing to sue someone who assisted Madoff.
Judge Bibas admitted that his circuit, along with the Fourth and Fifth Circuits, had followed Caplin by referring to the standing of a trustee to assert claims.
Judge Easterbrook Had Set Things Right
Judge Bibas lauded Seventh Circuit Judge Frank Easterbrook for correcting the nomenclature in Grede v. Bank of N.Y. Mellon, 598 F.3d 899 (7th Cir. 2010). Judge Easterbrook in substance said that bankruptcy standing is more properly the trustee’s “authority” to act for the estate.
The Supreme Court Corrects Its Own Mistake
The Supreme Court evidently learned a lesson from Judge Easterbrook as well. In Lexmark Int’l Inc. v. Static Control Components, Inc., 572 U.S. 118 (2014), the Supreme Court proclaimed that constitutional standing is established by “only three elements: (1) ‘a concrete and particularized injury in fact,’ (2) that is ‘fairly traceable’ to the defendant’s conduct, and (3) that a favorable judicial decision would likely ‘redress[].’” Id. at 125.
“Once a plaintiff satisfies those elements,” the Supreme Court said, “the action ‘presents a case or controversy that is properly within federal courts’ Article III jurisdiction.’” Id.
In light of Lexmark, Judge Bibas said it was incorrect for the lower courts to proclaim that the creditor lacked standing to sue third parties for denuding the estate. The creditor had sustained particularized injury traceable to the defendants’ conduct that could be redressed in court. The creditor therefore possessed standing, he said.
Standing, Yes; Authority, No
Having established standing, Judge Bibas turned to the merits and analyzed whether the creditor had statutory authority to pursue the claims.
Of course, the creditor lost statutory authority to sue third parties on the advent of bankruptcy. As Judge Bibas said, “The Bankruptcy Code thus gives the statutory authority to pursue those claims to the trustee.”
What the creditor lost in bankruptcy, however, the creditor regained when the trustee abandoned the claims. Quoting the Collier treatise, Judge Bibas said that abandoned property “can flow back ‘to any party with a possessory interest in it.’” When a cause of action is abandoned, he said, it reverts to the prior holder.
In a final helping of scholarship, Judge Bibas clarified the holding in the Third Circuit’s opinion in Official Comm. of Unsecured Creditors of Cybergenics Corp. ex rel. Cybergenics Corp. v. Chinery (In re Cybergenics Corp.), 226 F.3d 237 (3d Cir. 2000). The case holds, he said, that “Chapter 7 trustees can abandon asset-plundering claims back to the creditors who had them be-fore the bankruptcy.”
The lower courts erred in interpreting the bankruptcy court’s abandonment order, Judge Bibas said. Taking a fresh look, he concluded that the trustee indeed had abandoned the claims, thus allowing the creditor to pursue claims against third parties.
Before his appointment to the circuit bench, Judge Bibas was a law professor at the University of Pennsylvania. He also clerked on the Fifth Circuit and for Supreme Court Justice Anthony M. Kennedy.
Third Circuit Judge Stephanos Bibas used a bankruptcy case to author a peroration on the distinction between standing and statutory authority to pursue a claim.
Surprisingly, Judge Bibas teaches in his August 4 opinion that a creditor ordinarily will have standing to pursue a claim belonging to a bankruptcy estate. However, the creditor may lack statutory authority to assert the claim unless the trustee has abandoned the claim or the creditor has suffered a direct, particularized injury.
Judge Bibas gave us a lesson on the proper use of language and labels based on a case where a creditor had sued two third parties before bankruptcy, alleging they helped the debtor plunder and conceal assets.
Following the advent of bankruptcy, the chapter 7 trustee pursued some of the claims originally brought by the creditor. Ultimately, the trustee obtained court orders abandoning claims that were not liquidated. Affirmed in district court, the bankruptcy judge held that the creditor did not have standing to pursue claims against the defendant because they were not abandoned.