The bankruptcy court is the only court with subject matter jurisdiction to decide whether a claim is estate property, according to the Tenth Circuit Bankruptcy Appellate Panel. Consequently, the panel ruled that it was an abuse of discretion when the bankruptcy court allowed the state court to determine whether creditors had “standing” to sue third-party recipients of fraudulent transfers.
The debtor operated a Ponzi scheme that defrauded investors. He nonetheless received a chapter 7 discharge in 2004.
In his bankruptcy papers, the debtor disclosed $11,500 in assets and listed $5 million in claims. He scheduled the investors as creditors.
Alleging that the debtor had concealed assets, several investors filed a motion 14 years after discharge to reopen the bankruptcy case and appoint a trustee.
At the same time, and without authorization from the bankruptcy court, the investors filed suit in state court against the debtor, his wife, and several related entitles. The complaint sought to recover fraudulent transfers and undisclosed property.
The debtor responded by filing a motion in bankruptcy court to sanction the investors for violation of the discharge injunction under Section 524(a). At the hearing, the debtor and the investors agreed that the state court could decide whether the investors had standing to sue. The chapter 7 trustee did not participate in proceedings on the sanctions motion.
The bankruptcy court denied the motion for sanctions, saying that the standing issue could be decided in state court.
The debtor appealed and won a reversal and remand in a July 30 opinion for the BAP by Bankruptcy Judge Terrence L. Michael.
The case turned on the BAP’s interpretation of 28 U.S.C. § 1334(e)(1), which gives the district court “exclusive jurisdiction . . . of all the property, wherever located, of the debtor as of the commencement of such case, and of property of the estate.” Property that was concealed remains property of the estate under Section 554(c) even after discharge.
In view of Section 1334, Judge Michael held that “jurisdiction to determine what is property of the estate lies exclusively in the bankruptcy court.” In turn, he said that the investors’ standing “to pursue fraudulent transfer claims arising from prepetition transfers is totally dependent upon . . . the issue of whether such claims contained in the Complaint constitute property of the bankruptcy estate, an issue over which the Bankruptcy Court has exclusive jurisdiction.”
If the fraudulent transfer claims were property of the estate, Judge Michael said that “only the chapter 7 trustee” would have standing to pursue the claims. As a result, he held that the bankruptcy court did not have discretion to allow the state court to resolve the standing question.
Similarly, Judge Michael said that standing to pursue undisclosed property would turn on whether the claims belonged to the estate. In that respect also, the bankruptcy court did not have discretion to deflect standing questions to the state court.
In denying the motion for sanctions, the bankruptcy court found no violation of the discharge injunction because the investors were attempting to establish the liability of the debtor so they could recover from third parties. As authority, the investors relied on Section 524(e), which provides that a discharge of the debtor “does not affect the liability of any other entity, or the property of any other entity, for such debt.”
Judge Michael reversed again. If the claims were property of the estate, and if the investors therefore lacked standing, the safe harbor in Section 524(e) would not apply.
Because the record did not establish whether the claims were estate property, Judge Michael said he could not review the decision to invoke Section 524(e). He therefore reversed and remanded for the bankruptcy court to determine whether the claims were property of the estate, “and, after making that determination, determine whether the Investors had standing to bring those claims.”
Bankruptcy Judge Dale L. Somers concurred in the remand but would have the bankruptcy court rule on standing with regard to each count in the complaint, not on the complaint as a whole.
Observations
In an opinion this month, the Third Circuit ruled that the ability of a creditor to sue is not a question of standing, but rather an issue of statutory authority. See Artesanias Hacienda Real S.A. de C.V. v. North Mill Capital LLC (In re Wilton Armetale Inc.), 19-2907, 2020 BL 291772 (3d Cir. Aug. 4, 2020). To read ABI’s report, click here.
The Third Circuit held 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.
The Third Circuit therefore would have analyzed the BAP case in terms of statutory authority, not standing. However, the result would be the same, if one assumes that the bankruptcy court has sole jurisdiction to decide whether claims belong to the estate.
The bankruptcy court is the only court with subject matter jurisdiction to decide whether a claim is estate property, according to the Tenth Circuit Bankruptcy Appellate Panel. Consequently, the panel ruled that it was an abuse of discretion when the bankruptcy court allowed the state court to determine whether creditors had “standing” to sue third-party recipients of fraudulent transfers.
The debtor operated a Ponzi scheme that defrauded investors. He nonetheless received a chapter 7 discharge in 2004.
In his bankruptcy papers, the debtor disclosed $11,500 in assets and listed $5 million in claims. He scheduled the investors as creditors.
Alleging that the debtor had concealed assets, several investors filed a motion 14 years after discharge to reopen the bankruptcy case and appoint a trustee.
At the same time, and without authorization from the bankruptcy court, the investors filed suit in state court against the debtor, his wife, and several related entitles. The complaint sought to recover fraudulent transfers and undisclosed property.
The debtor responded by filing a motion in bankruptcy court to sanction the investors for violation of the discharge injunction under Section 524(a). At the hearing, the debtor and the investors agreed that the state court could decide whether the investors had standing to sue. The chapter 7 trustee did not participate in proceedings on the sanctions motion.
The bankruptcy court denied the motion for sanctions, saying that the standing issue could be decided in state court.
The debtor appealed and won a reversal and remand in a July 30 opinion for the BAP by Bankruptcy Judge Terrence L. Michael.