Chapter III Standing

• Jurisdiction: United States

Chapter III Standing

Given the potential value of fraudulent conveyance claims, an often-litigated issue is who has the standing (or ability) to bring the litigation. Resolution of that issue may dictate whether the claims at issue are pursued vigorously by or on behalf of those who stand to benefit the most from their prosecution, or are bargained away, often to the primary benefit of those who would be the targets of such actions.

A. Trustees and Debtors, Creditors and Creditors' Committees, Liquidating Trusts, Officers and Shareholders of the Debtor

1. Trustees and Debtors

Under the Bankruptcy Code, fraudulent conveyance litigation may be commenced under either § 544(b) or 548. By their terms, §§ 544 and 548 each provide that "[t]he trustee may avoid" specified types of transfers. Under the Bankruptcy Code, the term "trustee" is used in multiple contexts under the Bankruptcy Code, and so requires some unpacking for purposes of understanding who has standing to bring an action under § 544 and/or § 548. The answer will depend on the chapter under which the main case is pending and the circumstances at the time standing is sought.

First, in a chapter 7 case, a trustee may be appointed²⁴⁷ or elected by creditors.²⁴⁸ Once appointed or elected, the chapter 7 trustee will have primary responsibility for the liquidation (including pursuit of estate claims) and distribution of the estate for the benefit of stakeholders. The person or entity so appointed or elected qualifies as the "trustee" for purposes of § 544 or 548, and would have standing to bring a fraudulent conveyance claim thereunder.

In a chapter 9 case, §§ 544 and 548 are made applicable to the proceeding under § 901(a). Further, § 902(5) provides that the term "trustee," when used in a section made applicable to the chapter 9 case, means the "debtor, except as provided in [§ 926]." As such, the chapter 9 debtor initially bears the mantle of the "trustee" for purposes of §§ 544 and 548 and so has standing, in the first instance, to bring fraudulent conveyance claims. But § 926(a) (entitled "Avoiding Powers") provides that "[i]f the debtor refuses to pursue a cause of action under Section 544, 545, 547, 548, 549(a) or 550 of [the Bankruptcy Code], then, on request of a creditor, the court may appoint a trustee to pursue such cause of action."²⁴⁹ Thereafter, the trustee so appointed would be vested with standing to pursue fraudulent conveyance claims. It is unclear whether the appointment of a § 926(a) trustee divests the debtor of standing to pursue the applicable claims. However, absent such appointment (which is discretionary), only the chapter 9 debtor would have standing.

In cases under chapters 11 and 12, a debtor in possession is empowered, initially, to "stand in the shoes" of the trustee, including as to the exercise of the trustee's avoiding powers.²⁵⁰ So long as the chapter 11 or 12 debtor remains in possession, it has the standing of a trustee for purposes of §§ 544 and 548, and may pursue fraudulent conveyance actions. But whether the debtor in possession remains in control is a rebuttable presumption. That presumption may be overcome, and a trustee installed in place of the debtor in possession, with evidence of fraud, dishonesty, incompetence or gross mismanagement of the affairs of the debtor (occurring either before or after commencement of the case)²⁵¹ or, in a chapter 11 case, whether the appointment of a trustee is in the interests of creditors, equity security-holders and other interests of the estate.²⁵² Upon appointment, the trustee obtains standing to pursue fraudulent conveyance claims, and the debtor in possession is thereafter without standing (unless, in the context of a chapter 12 case, the debtor in possession is reinstated).²⁵³

Unlike chapter 7, where the term "trustee" has an obvious meaning, or chapters 9, 11 or 12, where there are statutory provisions addressing when debtors have the ability to stand in the shoes of, or be displaced by, a trustee, chapter 13 does not generally bestow the debtor with standing to pursue avoidance actions.²⁵⁴ The exception to that general statement is found in § 522(h), which allows a "debtor" to employ §§ 544, 545, 547, 548, 549 or 724(a) to avoid a transfer or recover a setoff to the extent the debtor could have exempted the property at issue under § 522(g).²⁵⁵Even this limited right to pursue a fraudulent conveyance claim is circumscribed in that the debtor is granted standing only to the extent that the chapter 13 trustee does not attempt to avoid the same transfer.²⁵⁶

Outside the context of § 522(h), the question of a chapter 13 debtor's standing to bring fraudulent conveyance claims is much less clear. Currently, there is a circuit split on this issue. Appellate courts in the Third, Fifth, Eighth and Tenth Circuits have held that, given Congress's failure to specifically provide for a chapter 13 debtor to pursue avoidance actions (outside the context of § 522(h)), as Congress showed it knew how to do in other chapters, a chapter 13 debtor generally does not have standing to bring fraudulent conveyance actions.²⁵⁷ Other courts, including the Ninth Circuit, have adopted a "holistic" construction of the Bankruptcy Code, with a tip of the hat to practicality, in allowing chapter 13 debtors standing to pursue avoidance actions, noting that the trustee otherwise has little incentive to pursue these potentially valuable claims.²⁵⁸

Under chapter 15, § 1521(a)(7) specifically omits from relief that can be granted upon recognition of a foreign main or non-main proceeding the ability of the foreign representative to pursue claims under §§ 544 and 548.²⁵⁹ Instead, to take advantage of the Bankruptcy Code's avoidance powers, the foreign representative is typically required to commence a plenary case under chapter 7 or 11. But a foreign representative may be able bring an avoidance action based on foreign law, rather than on §§ 544 or 548.²⁶⁰

2. Creditors and Creditors' Committees

As they are often the ultimate beneficiaries (or representatives thereof) of successful fraudulent conveyance actions, creditors and creditors' committees have a significant interest in ensuring that such claims are pursued vigorously. Concern may arise that the debtor (to the extent not displaced by a trustee) either lacks sufficient will (perhaps out of loyalty to the target) or resources to pursue avoidance litigation, or has waived the right to bring such claims under the terms of post-petition financing arrangments. In such cases, individual creditors or creditors' committees, although not specifically authorized under either § 544 or 548, may desire to control the litigation themselves.

In most...