A Creditor Lacks Standing to Pursue Claims Against Another Creditor of a Mutual Bankrupt Debtor Unless the Claims are Particular to that Creditor

By: Anthony J. Norris

St. John’s University School of Law

American Bankruptcy Institute Law Review Staff Member

            A trustee in bankruptcy will generally have the exclusive right to pursue certain claims on behalf of a debtor or its creditors.[i] Nevertheless, a creditor can pursue a claim against a debtor or another interested party if the claim is particularized to that creditor.[ii]  In Artesanias Hacienda Real S.A. de C.V. v. North Mill Capital LLC, a district court in Pennsylvania affirmed the bankruptcy court’s holding that a creditor did not have standing to assert claims against another creditor because the claims belonged to the debtor’s estate.[iii] Artesanias Hacienda Real S.A. de C.V. (“AHR”) sold certain goods to Wilton Armetale, Inc. (“Wilton”).[iv] However, Wilton did not pay for the goods.[v] Consequently, AHR obtained a judgment in the District Court for the Eastern District of Pennsylvania against Wilton and its sole shareholder, Ivan Jeffery.[vi] In order to satisfy the judgment, Jeffery delivered his shares in Wilton to AHR’s affiliate.[vii] Before delivery of the shares, Jeffery, however, sold Wilton’s non-real estate assets and caused the payment to be made to North Mill Capital LLC—another creditor of Wilton.[viii] By virtue of this sale, Wilton was deprived of the assets necessary to satisfy the judgment.[ix] Sometime thereafter, Wilton filed a voluntary petition for relief under Chapter 7 of title 11 of the United States Code (the “Bankruptcy Code”) with the United States Bankruptcy Court for the Eastern District of Pennsylvania.[x] AHR then sued North Mill Capital LLC and Leisawitz Heller—counsel for Jeffery and Wilton prior to delivery of the Wilton shares—in the District Court for the Eastern District of Pennsylvania alleging that the defendants participated in a scheme to loot the indebted company, so that Wilton would be unable to satisfy its debts to AHR.[xi] The case was transferred to the bankruptcy court, which determined AHR lacked standing because “[a]ll of the Debtor’s creditors were affected by the alleged collusion” between Jeffery and North Mill Capital LLC.[xii] On appeal, the District Court, after reviewing the bankruptcy court’s findings and noting that the bankruptcy court only had “related to” jurisdiction, ultimately agreed with the bankruptcy court and dismissed the case.[xiii]

            When a company is in bankruptcy, “creditors lack standing to assert claims that are property of the estate [,which] . . . includes all legal or equitable interests of the debtor in property as of the commencement of the case.”[xiv] Specifically, if the “claim could be brought by any creditor of the debtor, the trustee is the proper person to assert the claim.”[xv] Therefore, a creditor must show injury that is unique from other creditors.[xvi] Whether the claim is distinct to an individual creditor can be determined by the cause of action.[xvii] Here, the claims brought by the plaintiff were not distinct from other creditors, could be brought by other creditors, and thus belonged to the estate.[xviii]

            A bankruptcy filing will likely have several implications on an entity that has a relationship with or engaged in transactions with a debtor. As highlighted by the court in Artesanias Hacienda Real S.A. de C.V. v. North Mill Capital LLC, one of the implications may be the loss of standing to bring certain claims against a non-debtor. As noted by that court, a creditor of a debtor may not be able to pursue generalized litigation claims against a non-debtor that could be brought by any of the creditors of a debtor. Instead, a trustee would be the proper person to pursue such claims on behalf of the debtor’s estate.

[i] Artesanias Hacienda Real S.A. de C.V. v. North Mill Capital LLC, No 18-5553 at 9-10 (E.D. Pa. Aug. 8, 2019).

[ii] Id.

[iii] Id. at 1. In this action, AHR asserts six claims against North Mill Capital: “(1) aiding and abetting breach of fiduciary duties owed AHR as a creditor of insolvent corporation Wilton against North Mill; (2) the same claim against Leisawitz Heller; (3) conspiracy to breach fiduciary duties owed insolvent corporation Wilton and its creditor AHR against both defendants; (4) fraudulent transfer against both defendants; (5) conspiracy for fraudulent transfer against both defendants; (6) conspiracy to engage in the commercially unreasonable disposition of the Debtor's assets against both defendants.” Id. at 4.

[iv] See id. at 1.

[v] See id.

[vi] See id.

[vii] See id. at 1–2.

[viii]  See id. at 2.

[ix] See id. at 2. (AHR also claimed that Jeffery would receive a bribe in exchange for approving the sale to North Mill Capital LLC.)

[x] See In Re Wilton Armetale Inc., No. 4:16-BK-16779 (Bankr. E.D. Pa. 2016).

[xi] See Artesanias, No 18-5553 at 1.

[xii] Id. at 3.

[xiii] See id. (“A plaintiff’s claims need not necessarily be against the debtor or against the debtor’s property to be “related to” the bankruptcy, so long as they “could alter the debtor’s rights, liabilities, options or freedom of action . . . [or could] in any way impact[] upon the handling and administration of the bankrupt estate.) See id. at 4. Since this court decided that the bankruptcy court had only “related to” jurisdiction, this court treated the bankruptcy court’s findings as recommendations, and non-binding. See id. at 9.

[xiv] In re Emoral, Inc. 740 F.3d at 879 (3d Cir. 2014). The court in In re Emoral held that a third party’s personal injury cause of actions under successor liability are generalized claims which belong to the estate. Id. at 882.

[xv] Id. at 879.

[xvi] See id.

[xvii] See id.

[xviii] See id. at 11–12.