Easy Come, Alter Ego Go: Creditors Lose Standing to Pursue Debtor’s Shareholders and Directors

Philadelphia and Wilmington partner Andy Kassner and associate Joe Argentina published an article titled, “Easy Come, Alter Ego Go: Creditors Lose Standing to Pursue Debtor’s Shareholders and Directors,” in The Legal Intelligencer. The article discussed a recent opinion issued by the United States Bankruptcy Court for the Southern District of New York that addressed whether alter-ego and fraudulent transfer claims involving a debtor’s parent or shareholders, or breaches of fiduciary duty claims against a debtor’s directors, become property of the bankruptcy estate and related issues.

The opinion was issued by Bankruptcy Judge Sean Lane in In re Ryan and Jane LTD., Case No. 14-08253 (July 5, 2016). The Court reasoned that claims that are general to all creditors become property of the bankruptcy estate, while claims that pertain to specific creditors do not.  The opinion discusses case law that establishes the trustee is the proper party to bring fraudulent transfer claims on behalf of the estate and that claims for breaches of fiduciary duty also belong to the debtor, and therefore the trustee is the only person with standing to bring such claims.  Ultimately, the Court concluded that the vast majority of claims at issue were general claims, and therefore belonged to the bankruptcy estate, not the individual creditors seeking to proceed against the Debtor’s principals.

Andy and Joe wrote: “Clients can be frustrated when they spend time and money pursuing claims against a distressed company and related parties, and to be advised later that they could lose the right to pursue the claim to a bankruptcy trustee who may settle the claim and then distribute the proceeds – after payment of trustee legal fees and costs – to all creditors.  When this happens, the creditor that filed the first lawsuit must evaluate which claims, if any, will survive, and decide how active a role to take in the bankruptcy case to maximize a recovery.”

Read, “Easy Come, Alter Ego Go: Creditors Lose Standing to Pursue Debtor’s Shareholders and Directors” here.