Educators Group Health Trust, Matter of

• Decision Date: 30 June 1994
• Docket Number: No. 93-8876,SCHERTZ-CIBOLO-UNIVERSAL,93-8876
• Parties: , 92 Ed. Law Rep. 19, Bankr. L. Rep. P 75,980 In the Matter of EDUCATORS GROUP HEALTH TRUST, Debtor.CITY, INDEPENDENT SCHOOL DISTRICT, et al., Appellants, v. Stanley W. WRIGHT, Trustee, Appellee.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 1281

25 F.3d 1281

25 Bankr.Ct.Dec. 1318, 92 Ed. Law Rep. 19,

Bankr. L. Rep. P 75,980

In the Matter of EDUCATORS GROUP HEALTH TRUST, Debtor.

SCHERTZ-CIBOLO-UNIVERSAL CITY, INDEPENDENT SCHOOL DISTRICT,

et al., Appellants,

v.

Stanley W. WRIGHT, Trustee, Appellee.

No. 93-8876.

United States Court of Appeals, Fifth Circuit.

June 30, 1994.

Susan G. Morrison, C. Daniel Roberts, Austin, TX, for appellants.

Stephen W. Sather, Overstreet, Winn & Edwards, Austin, TX, for appellee.

Appeal from the United States District Court for the Western District of Texas.

Before GARWOOD and EMILIO M. GARZA, Circuit Judges, HEAD, ^* District Judge.

EMILIO M. GARZA, Circuit Judge:

Schertz-Cibolo-Universal City Independent School District, Devine Independent School District, Charlotte Independent School District, Rosebud-Lott Independent School District, Ben Bolt-Palito Blanco Independent School District, Fairfield Independent School District, and Ballinger Independent School District ("plaintiff school districts") appeal from the district court's decision affirming the bankruptcy court's ruling that certain causes of action filed in state court belong to the bankruptcy estate. Finding that the bankruptcy court erred in arriving at a legal standard for determining which causes of action belong to the bankruptcy estate, we reverse and remand for entry of judgment in conformity herewith.

I

In August 1983, Educators Group Health Trust ("EGHT") was established to provide health benefits to, among others, teachers, among others, in small school districts. The plaintiff school districts are seven of the over two hundred school districts which participated in EGHT. CRC Administration ("CRC") was the initial third-party administrator for EGHT. CRC not only collected premiums and paid claims, but also marketed EGHT's plan of benefits to various school districts. The principals of CRC were William Boon, Jerry Cunningham, Henry Labaj, and Elgin Allen ("defendants"). In 1986, American Group Life ("AGL") began marketing EGHT's plan of benefits and took over as third-party administrator for EGHT. The principals of AGL were identical to those for CRC.

In 1988, EGHT filed for Chapter 7 relief under the Bankruptcy Code. Stanley Wright was appointed as trustee of the estate. The school districts participating in EGHT became creditors of the estate. Two years later, the plaintiff school districts initiated a lawsuit in state court against the defendants, seeking to recover damages on various causes of action, including the mismanagement of EGHT and fraud. ¹ The trustee intervened in the state court lawsuit in order to assert those claims allegedly belonging to the bankruptcy estate. For the next two years, both the trustee and the plaintiff school districts participated in the state court lawsuit.

In 1990, the trustee filed a motion with the bankruptcy court to determine which party, the plaintiff school districts or the trustee, has the authority to pursue each particular cause of action asserted in the state court lawsuit. Both parties submitted the matter to the bankruptcy court on stipulated facts. The bankruptcy court entered an order granting the trustee's motion to determine its authority. In effect, the court divided the causes of action into three categories: (1) claims which belong solely to the bankruptcy estate; (2) claims which may belong to the bankruptcy estate depending upon the facts established at trial; and (3) claims which belong to the plaintiff school districts. For the purpose of determining whether a cause of action may belong to the estate, the court concluded that if the act or omission giving rise to the claim was directed generally at the school districts participating in EGHT, then the claim would belong to the estate. The district court affirmed the decision of the bankruptcy court with a minor modification. The school districts then filed a timely notice of appeal from that decision.

II

This case requires that we decide whether the bankruptcy court erred in determining whether certain causes of action are property of the estate. For our purposes, property of the estate includes "all legal or equitable interests of the debtor in property as of the commencement of the case." 11 U.S.C. Sec. 541(a)(1) (1988). The term "all legal or equitable interests" has been defined broadly to include causes of action. See Louisiana World Exposition v. Federal Ins. Co., 858 F.2d 233, 245 (5th Cir.1988) ("Section 541(a)(1)'s reference to 'all legal or equitable Whether a particular state cause of action belongs to the estate depends on whether under applicable state law the debtor could have raised the claim as of the commencement of the case. See S.I. Acquisition, 817 F.2d at 1142 (examining the cause of action premised on alter ego under Texas law); MortgageAmerica, 714 F.2d at 1275-1277 (examining the causes of action based on the Fraudulent Transfers Act and "denuding the corporation" theory under Texas law). As part of this inquiry, we look at the nature of the injury for which relief is sought. See E.F. Hutton, 103 B.R. at 812 ("The injury characterization analysis should be considered as an inseparable component of whether an action belongs to the [estate] or individual [creditor]."). If a cause of action alleges only indirect harm to a creditor (i.e., an injury which derives from harm to the debtor), and the debtor could have raised a claim for its direct injury under the applicable law, then the cause of action belongs to the estate. See, e.g., S.I. Acquisition, 817 F.2d at 1152-53 (concluding that an action based upon alter ego properly belongs to the estate, where (1) the debtor could have pierced its own corporate veil under Texas law; and (2) the debtor was unable to meet its corporate obligations due to the misuse of the corporate form, causing a derivative injury to the individual creditor); MortgageAmerica, 714 F.2d at 1275 (concluding that an action under the Fraudulent Transfers Act properly belongs to the estate, where (1) the debtor could have brought the action to recover its assets; and (2) the debtor is stripped of assets, causing a derivative injury to the individual creditor). Conversely, if the cause of action does not explicitly or implicitly allege harm to the debtor, then the cause of action could not have been asserted by the debtor as of the commencement of the case, and thus is not property of the estate.

interests of the debtor in property' includes causes of action belonging to the debtor at the time the case is commenced."); In re MortgageAmerica Corp., 714 F.2d 1266, 1274 (1983) (noting that the meaning of the term "all legal or equitable interests" includes, at the very least, rights of action). If a cause of action belongs to the estate, then the trustee has exclusive standing to assert the claim. See Matter of S.I. Acquisition, Inc., 817 F.2d 1142, 1153-54 (5th Cir.1987) (observing that the "general bankruptcy policy of ensuring that all similarly-situated creditors are treated fairly" requires that the trustee have the first opportunity to pursue estate actions without interference from individual creditors); see also In re E.F. Hutton Southwest Properties II, Ltd., 103 B.R. 808, 812 (Bankr.N.D.Tex.1989) ("If an action belongs to the estate, the trustee has the power and duty to prosecute the action for the benefit of all creditors and shareholders in the estate."). If, on the other hand, a cause of action belongs solely to the estate's creditors, then the trustee has no standing to bring the cause of action. See Caplin v. Marine Midland Grace Trust Co., 406 U.S. 416, 433-34, 92 S.Ct. 1678, 1688, 32 L.Ed.2d 195 (1972) (holding that a trustee does not have standing to sue a third-party on behalf of debenture holders); In re Rare Coin Galleries of America, Inc., 862 F.2d 896, 900 (1st Cir.1988) ("The trustee, however, has no power to assert any claim on behalf of the creditors when the cause of action belongs solely to them.").

The bankruptcy court concluded as a matter of law that the trustee has the exclusive authority to bring certain causes of action listed in the complaint, based on its conclusion that those causes of action belong to the estate. The plaintiff school districts contest the bankruptcy court's legal conclusions, arguing that (1) the debtor itself was not injured or harmed; and (2) even if the debtor was harmed, the debtor shared responsibility for such harm. We address each of these arguments in turn.

The plaintiff school districts first argue that the causes of action are not property of the estate because the claims do not allege that the debtor suffered any injury or harm. We disagree with this broad assertion. Several of the causes of action allege a direct injury to the debtor, from which an injury to the plaintiff school districts is derived. For example, the plaintiffs school districts allege in paragraph XIII of the complaint that the defendants negligently managed EGHT, causing EGHT to become insolvent We do agree, however, with the plaintiff school districts' contention that some of the causes of action allege a direct injury to themselves, which is not derivative of any harm to the debtor. For example, the plaintiff school districts allege in paragraph XI of the complaint that the defendants intentionally misrepresented to them the financial situation of EGHT, and that they materially relied on such representations to their detriment. To the extent that this cause of action and others allege a direct injury to the plaintiff school districts, they belong to the plaintiff school districts and not the estate.

and thus unable to pay the claims of employees of the plaintiff school districts. To the extent that this cause of action and others allege only a derivative harm to the plaintiff school districts, they belong exclusively to the estate. ²

In determining whether a cause of action may belong to the estate, the bankruptcy court focused on whether ...