Third Circuit Holds Creditor Has Standing to Bring Post-Bankruptcy Claims

In a precedential decision, the United States Court of Appeals for the Third Circuit held this week that a creditor had the ability to bring post-bankruptcy claims against a debtor if the bankruptcy trustee abandoned those claims. See In re Wilton Armetale, Inc., 2020 WL 4460000 (3d Cir. Aug. 4, 2020). Artesanias was a creditor of Wilton, and obtained a judgment of around $900,000 against it. Artesanias eventually learned that another creditor, North Mill, had plotted with Wilton and a law firm, Leisawitz Heller, to plunder Wilton’s assets. Among other actions, Wilton had conveyed certain assets to North Mill for significantly less than the amounts offered by other bidders, and Wilton and Leisawitz Heller allowed North Mill to record an “inflated judgment” against it, in exchange for payments to Wilton’s owner. Artesanias then sued the other parties for fraudulent transfers, and Wilton declared bankruptcy two months later. In the bankruptcy action, the trustee sold some of the assets and split proceeds between Artesanias and North Mill pursuant to settlements entered within that action. In the settlements, the parties agreed that “nothing” in the settlements would “affect [Artesanias’s] litigation.” The trustee eventually abandoned most of the remaining claims in the bankruptcy action via an Abandonment Order, and Artesanias continued its claims before the District Court. After North Mill and Leisawitz Heller moved to dismiss, the District Court referred the matter back to the Bankruptcy Court because the claims were “related to” the bankruptcy. The Bankruptcy Court then dismissed the matter, finding that Artesanias lacked standing to sue because all of its claims became property of the bankruptcy estate and could only be brought by the trustee. Artesanias challenged those conclusions before the District Court, but the District Court agreed and dismissed the case for lack of standing, finding that only the bankruptcy trustee had the standing to pursue the claims.

On appeal, the Third Circuit reversed. The Court found that, in the bankruptcy context, “a litigant’s ‘standing’ to pursue causes of action that become the estate’s property means its statutory authority under the Bankruptcy Code, not its constitutional standing to invoke the federal judicial power.” (Emphases in original). “A contrary rule would deprive all creditors of constitutional standing to bring fraudulent-transfer claims against corporate plunderers because those claims always flow from harm to a debtor corporation.” Thus, the Court found that Artesanias had constitutional standing to bring these claims, and the Court confirmed its jurisdiction to hear the matter.

With regard to the merits, the Court found that Artesanias’s claims were property of the bankruptcy estate because claims alleging the diversion of assets are general claims that any creditor could have brought, and are not specific to Artesanias. “That [Artesanias’s] harm might be worse in degree than that suffered by other creditors does not change the fact that all the creditors’ injuries from the plundering are the same in kind.” Nonetheless, the Court also found that a trustee can relinquish the claims, so long as he or she does so overtly. Here, the Court found that the Abandonment Order, when read as a whole, allowed these claims to go back to Artesanias. “Artesanias had constitutional standing to sue North Mill and Leisawitz Heller for plundering Wilton’s assets. The bankruptcy merely deprived Artesanias of the statutory authority to bring those claims, transferring that power to the trustee. But by abandoning those claims, the trustee resurrected Artesanias’s power to prosecute them.” Accordingly, the Third Circuit found that Artesanias had standing to pursue the claims and remanded the matter back to the District Court.

This is a significant decision that all creditors should be cognizant of when seeking to address collection avenues with a debtor who has filed bankruptcy and has conspired with others to hide or secrete assets. 

For a copy of the decision, please contact Michael O’Donnell at modonnell@riker.com, Michael Crowley at mcrowley@riker.com, or Anthony Lombardo at alombardo@riker.com.