Generalised Creditors and Particularised Creditors: Against a Unified Theory of Standing in Bankruptcy.

• Author: Schroeder, Jeanne L.

A triangle exists between a debtor, a debtor's general creditors, and a third party who has injured the debtor's net worth. When that injury to net worth is so severe that the debtor is rendered insolvent, the general creditors of the debtor are indirectly injured. The question then arises: Who has standing to sue the third party for alleged wrongdoing?

The triangle was on display in the celebrated chapter 11 plan recently confirmed by Judge Robert D. Drain in In re Purdue Pharma L.P. (1) In this case, a debtor corporation caused trillions of dollar in damages (2) through the marketing of OxyContin, a heroin-based pain killer. Over the years, Purdue issued billions in dividends to the Sackler family. These dividends may have been fraudulent transfers. Possibly they augured breach of fiduciary duty or constituted a justification for piercing the corporate veil between Purdue and the Sacklers. In chapter 11, a settlement was negotiated and written into a reorganization plan, which won overwhelming creditor support. (3) The settlement garnered virulent criticism in the press, however, because it included a "?channeling" injunction that protected the Sacklers from law suits by creditors of Purdue in exchange for a payment to the plan of $4,325 billion. This settlement left the Sacklers with about $6 billion in net worth, (4) enough to keep them in tea and crumpets for quite a while.

Since then, Judge Drain's confirmation order has been reversed on appeal. The Sacklers have returned to the negotiation table and have agreed to pay more than they originally agreed. In response, many of the appellants have dropped their opposition to Purdue's appeal, but the United States Department of Justice continues to oppose Purdue's attempt to have confirmation reinstated. Purdue therefore continues to appeal. (5)

We think the plan as written is confirmable. Oddly, Judge Drain's interpretation of the plan is so expansive that, as interpreted, the plan is not confirmable. In passing, we will defend confirmability of the plan as written. (6) But that is not our main task. What we aim to do is to illustrate the triangle we have alluded to. Who had the right to sue the Sacklers? If that right belonged solely to the bankruptcy estate, the confirmation order was lawful. If that right belonged to individual creditors with tort claims against the Sacklers, the confirmation was unlawful. Since the plan as written affects only property of the estate (not property of the tort victims), the plan properly could be confirmed, and the Sacklers continue to be liable for tortious conduct that harmed the victims of OxyContin.

As to our fateful triangle, we illustrate it as follows: suppose the insolvent debtor files for bankruptcy, conjuring a bankruptcy trustee into existence. The bankruptcy trustee would like to sue the third party and recover damages, which then would be distributed pro rata to the unsecured creditors. A given unsecured creditor, however, would like to sue the third party directly, in which case she would receive 100 percent of the recovery (if the third party is solvent), without having to share with her slow-footed fellows. The question arises whether either the bankruptcy trustee, the individual creditor, or both can sue the third party.

Courts have searched for a unified theory of standing to determine this issue. Everyone agrees that if the debtor (whom we shall call D or D Corp.) has a tort or a breach of contract theory against the third party (whom we shall call X), the bankruptcy trustee (T) succeeds to this right. D's creditor (whom we shall call C) has no right to sue X. Outside of bankruptcy, if C has a money judgment against D, C can execute on D's property. C can garnish X's obligation to pay D, because D's "payment intangible" (7) is leviable property. But once D files for bankruptcy, C is enjoined from executing on D's property. Only D's bankruptcy trustee may collect from X.

Sometimes state law endows C with rights directly against X. D's bankruptcy trustee (T) sometimes displaces each general creditor ([C.sub.g]) (8) as the proper plaintiff against X. Sometimes, however, T fails to displace C. C may sue X and T may not.

A theory has emerged to adjudicate when T expropriates rights from the [C.sub.g], and that unified theory is the main focus of our criticism. It is said that when every [C.sub.g] has a right against X, then T displaces the [C.sub.g], and T alone can be the plaintiff against X. (9) These are referred to as generalized or derivative creditor rights. A generalized creditor right is one that is derivative of a right of all the [C.sub.g] against D Corp. (10) If, however, only some of the [C.sub.g] have rights against X, T has no right against X. Rather, the subset of [C.sub.g] can be plaintiffs against X and T cannot be a plaintiff. These are called particularized or non-derivative (11) creditor rights. Particularized creditor rights are not merely derivative of the [C.sub.g]'s right against D Corp. Many courts think that the test of general v. particular (or derivative v. not derivative) determines the proper plaintiff when D is bankrupt and the [C.sub.g] have been injured.

Some courts, however, have questioned the worth of such a test. Generalized v. particularized has been deemed "not an illuminating usage." (12) The terms have been described as conclusory--not a test but rather the enunciation of a result. Thus generalized v. particularized creditor rights "are perhaps best understood as descriptions to be applied after a claim has been analyzed to determine whether it is properly assertable by the debtor or creditor, and not as a substitute for the analysis itself." (13)

We think these criticisms are valid. "General" and "particular" do not succeed in stating in advance whether T or C, is the proper plaintiff. Discrete categories of creditor rights must be examined. The distinction between generalized and particularized creditor rights does no work at all. The distinction is otiose. Or it misleads courts down the dallying path of primrose error, where generalized v. particularized is consulted directly without first performing an analysis of the substructure out of which the controversy arises.

The very paradigm of generalized creditor rights is (wrongly) thought to be the fraudulent transfer. According to the Fifth Circuit Court of Appeals:

A typical fraudulent transfer claim is perhaps the paradigmatic example of a claim that is 'general ' to all the creditors ... It is normally the debtor's creditors, and not the debtor itself, that have the right to assert a fraudulent transfer claim outside of bankruptcy, but in bankruptcy such a claim is usually brought by the trustee, for the benefit of all creditors. This is because the claim is really seeking to recover property of the estate. (14) This passage needs to be unpacked. Suppose D is insolvent and owns a gold brick. The [C.sub.g] so far have no judgments against D and no interest in the brick. D has the fee simple of it. Anticipating the [C.sub.g] lawsuits, D conveys the fee simple of the brick to X. Once she does so, D has no interest in the brick and X has legal title to it. Therefore, says the above-quoted passage, D has no right to retrieve the brick from X. But the [C.sub.g] have the right to execute on the brick. The [C.sub.g] are invited to "set aside" or "avoid" the D-X transfer. Equity is willing to aid the [C.sub.g] in establishing a judicial lien on the brick. Therefore, it is said, X has legal title to the brick, but the [C.sub.g] have equitable title. (15) The above passage says that the [C.sub.g] right is a generalized creditor right. When D is bankrupt, D's bankruptcy trustee expropriates this genera' lized creditor right. T may sue X for the brick and the [C.sub.g] may not. We shall see, however, that particularity rears its head and snarls from the foetid pool of fraudulent transfer law. Fraudulent transfer law cannot be fairly character' ized as a generalized creditor right. In fact, we will show that generalized creditor rights do not exist. Either a creditor has a cause of action (which only in the case of fraudulent transfers passes to T), (16) or D has "property"--some tort theory against X. Accordingly, there is no such thing as a particularized creditor right. There is only a creditor right--or there is no creditor right.

The paradigm of a particularized creditor right is supposed to be supplied by the well-known case of Caplin v. Marine Midland Grace Trust Co. of New York. (17) In Caplin, D Corp. issued a debenture for which an indenture trustee (IT) was appointed to supervise receipt and distribution of debt service. Various investors (the [C.sub.I]) bought these unsecured debentures. IT had duties of due care to the Cf.

D Corp. went bankrupt. T sued IT for fraud or negligence. T claimed to be subrogated to the [C.sub.I] right to sue IT for damages. IT moved to dismiss because T had no "standing" derived from the [C.sub.I]. The Supreme Court upheld the dismissal. (18) It can easily be seen that the [C.sub.I] had particularized creditor rights. D Corp. had about $60 million in debts and the [C.sub.I] claims amounted to under $5 million. Thus, most [C.sub.g] had no claim against IT. In set theory terms, the [C.sub.I] were a proper subset of the [C.sub.g]. ([C.sub.1]?[C.sub.g]). (19) The propriety of the subset guarantees that the rights of the [C.sub.I] are particularized creditor rights, not generalized rights.

This article surveys the generalized v. particularized distinction and finds it wanting. Our suggestion is that the generalized/particularized dichotomy (or the derivative/nonderivative dichotomy) be permanently banished from legal discourse. Instead, we should speak of D's prepetition causes of action (which are property of the bankruptcy estate), fraudulent transfer rights of the [C.sub.g] (to which T is subrogated), and [C.sub.1]'s right to sue X directly because D did not or could not...