Artesanias Hacienda Real S.A. De C.V. v. N. Mill Capital, LLC (In re Wilton Armetale, Inc.)

• Decision Date: 04 August 2020
• Docket Number: No. 19-2907,19-2907
• Citation: 968 F.3d 273
• Parties: IN RE: WILTON ARMETALE, INC., a/k/a Wapita, Inc., Debtor Artesanias Hacienda Real S.A. DE C.V., Appellant v. North Mill Capital, LLC; Leisawitz Heller
• Court: U.S. Court of Appeals — Third Circuit

968 F.3d 273

IN RE: WILTON ARMETALE, INC., a/k/a Wapita, Inc., Debtor

Artesanias Hacienda Real S.A. DE C.V., Appellant

v.North Mill Capital, LLC; Leisawitz Heller

No. 19-2907

United States Court of Appeals, Third Circuit.

Argued: May 19, 2020

Filed: August 4, 2020

Barry L. Goldin [ARGUED], 3744 Barrington Drive, Allentown, PA 18104, Counsel for Appellant

Sam P. Israel, Timothy L. Foster [ARGUED], Sam P. Israel P.C., 180 Maiden Lane, 6th Floor, New York, NY 10038, Counsel for Appellee North Mill Capital LLC

Jeffrey B. McCarron [ARGUED], Kathleen M. Carson, Swartz Campbell, One Liberty Place, 38th Floor, 1650 Market Street, Philadelphia, PA 19103, Counsel for Appellee Leisawitz Heller

Before: McKEE, BIBAS, and COWEN, Circuit Judges

OPINION OF THE COURT

BIBAS, Circuit Judge.

When a company declares bankruptcy, that declaration does not erase a creditor's constitutional standing to sue. As a company nears insolvency, some may plunder the sinking ship. By depleting its remaining assets, they lower the odds that the company will repay its creditors. That risk of loss gives the creditors constitutional standing to sue the plunderers.

If the company declares bankruptcy, though, creditors may lose the statutory authority to pursue those claims. Under the Bankruptcy Code, a trustee manages the company's estate, including those creditors’ asset-plundering claims. The Code thus shifts the statutory authority to pursue those claims from the creditors to the trustee, unless the trustee relinquishes it.

At times, we have said that this transfer of statutory authority takes away a creditor's "standing." But as the Supreme Court recently held, that statutory question has nothing to do with constitutional standing. We now clarify that Bankruptcy Code "standing" is not constitutional standing (and thus is not jurisdictional) and that Chapter 7 trustees can relinquish the statutory authority to pursue a claim back to a creditor.

In this case, we hold that the creditor plaintiff has both constitutional standing and the statutory authority to sue two defendants who allegedly plundered a now-bankrupt company that owed the creditor money. When the trustee formally abandoned the estate's claims against those defendants, he returned the power to pursue those claims to the creditor. So we will vacate and remand the District Court's order to the contrary.

I. BACKGROUND

A. The alleged asset-plundering scheme

On appeal from the District Court's dismissal, we accept the complaint's allegations as true: Several years ago, Artesanias Hacienda Real S.A. de C.V. sold wares to Wilton Armetale, Inc. But Wilton never paid for them. So Artesanias sued Wilton and its then-owner, who had guaranteed the purchase. Artesanias obtained a judgment for around $900,000 and all the owner's shares in Wilton, which he transferred to an affiliate of Artesanias. Soon after, Artesanias recorded its judgment as a lien on a valuable warehouse that Wilton owned.

Once Artesanias took over Wilton, it got access to privileged documents held by Leisawitz Heller, a law firm that had represented Wilton and its previous owner. Those documents showed that Wilton was insolvent and that its previous owner and North Mill Capital, another creditor had plotted with Leisawitz Heller to plunder the company's remaining assets.

Among other things, the previous owner, Leisawitz Heller, and North Mill had engineered a sale of Wilton's non-real-estate assets to an entity that North Mill chose, even though that entity paid hundreds of thousands of dollars less than what other bidders had offered. The previous owner and Leisawitz Heller had also let North Mill file inflated judgments against Wilton on its debts to North Mill, which gave North Mill a competing lien on the warehouse. In exchange, Wilton's owner received a 20% cut of the proceeds from the warehouse sale and Leisawitz Heller got tens of thousands of dollars in outstanding and future legal fees. After striking this deal, North Mill tried to foreclose on the warehouse.

When it discovered this scheme, Artesanias sued North Mill and Leisawitz Heller. It alleged that by "divert[ing]" Wilton's remaining assets, they had "hinder[ed] ... Artesanias’ ability to enforce and collect obligations [owed to it] from Wilton." App. 56. Artesanias sought damages, an order setting aside the purportedly fraudulent asset transfers, and an order stopping the warehouse foreclosure.

B. Wilton declares bankruptcy

Two months after Artesanias sued, the insolvent Wilton filed for Chapter 7 bankruptcy. The Bankruptcy Code's automatic stay stopped the warehouse foreclosure. See 11 U.S.C. § 362(a). The bankruptcy court soon appointed a trustee to liquidate Wilton's remaining assets.

To resolve Artesanias's and North Mill's competing claims to the warehouse, the trustee entered separate settlements with each of them so that he could sell it. The trustee agreed to (1) split the sale proceeds between the two, (2) release the estate's claims against North Mill, and (3) not interfere with Artesanias's pending or potential claims against North Mill and others.

At the hearing on the motions to approve the settlements, the trustee, Artesanias, North Mill, and the bankruptcy court all agreed that "nothing" in the settlements would "affect [Artesanias's] litigation" against North Mill. App. 235–36. Relying on those statements, the bankruptcy court entered both settlements and ordered the trustee to sell the warehouse. The trustee later did.

Afterwards, Wilton's bankruptcy estate had few assets left. Among them were legal claims that the trustee could bring against those who had allegedly plundered the company. If those claims succeeded, the estate could recover money to repay its remaining creditors, including Artesanias.

But to bring those claims would cost money. And any recovery was speculative. Rather than spend the estate's few remaining assets pursuing those claims, the bankruptcy court let the trustee abandon all but a select few of them. App. 468–74 (the Abandonment Order). Those few included negligence, professional-liability, and breach-of-contract claims against Leisawitz Heller. The other, abandoned claims were left for Wilton itself or Artesanias to pursue.

C. Artesanias's claims are dismissed for lack of standing

Meanwhile, Artesanias's claims against North Mill and Leisawitz Heller continued for a time in the District Court. But when the defendants moved to dismiss the amended complaint, the court declined to rule on their motions. Instead, it referred the whole action to the bankruptcy court handling Wilton's liquidation because Artesanias's claims were "related to" the bankruptcy. App. 265–66 (citing 28 U.S.C. § 157(a) ).

On referral, the bankruptcy court reasoned that Artesanias "lack[ed] standing to sue." Artesanias Hacienda Real S.A. de C.V. v. N. Mill Capital LLC (In re Wilton Armetale, Inc.) , No. 16-16779, 2018 WL 6440600, at *1 (Bankr. E.D. Pa. Dec. 6, 2018). Once the company had declared bankruptcy, Artesanias's claims became property of the estate to be managed by the trustee. So only the trustee, it explained, had standing to sue. It also rejected Artesanias's claim that the Abandonment Order gave it standing to bring those claims.

Artesanias challenged those conclusions before the District Court, which agreed with the bankruptcy court and "dismissed [the suit] for lack of standing." Artesanias Hacienda Real S.A. de C.V. v. N. Mill Capital LLC (In re Wilton Armetale, Inc.) , 607 B.R. 189, 211 (E.D. Pa. 2019). It found that Artesanias's claims were derivative of harm that the defendants had inflicted on Wilton. That meant that only the bankruptcy trustee had standing to pursue them. And it held that the trustee could not abandon to Artesanias the power to do so.

Artesanias now appeals. We review the dismissal de novo. St. Pierre v. Retrieval-Masters Creditors Bureau, Inc. , 898 F.3d 351, 356 (3d Cir. 2018).

II. BANKRUPTCY "STANDING" IS NOT AN ELEMENT OF A CREDITOR'S CONSTITUTIONAL STANDING

At the outset, we must clean up some confusing legalese. North Mill and Leisawitz Heller ask us to dismiss this appeal for lack of jurisdiction because Artesanias lacks "standing." They argue that under the Bankruptcy Code, Wilton's bankruptcy took away Artesanias's power to sue. In past decisions, we have called that statutory authority a creditor's "standing" to assert claims in bankruptcy. But since then, the Supreme Court has clarified that a litigant's constitutional standing to bring a suit differs from its statutory authority to maintain one. Because disputes over statutory authority do not affect our jurisdiction, and because Artesanias has constitutional standing to sue, we can hear this appeal.

A. "Standing" has imprecisely referred to a bankruptcy litigant's statutory authority to sue

When a debtor declares bankruptcy, most of its property gets transferred to its estate. 11 U.S.C. § 541. The estate encompasses "all kinds of property, including ... causes of action." Bd. of Trs. of Teamsters Local 863 Pension Fund v. Foodtown, Inc. , 296 F.3d 164, 169 (3d Cir. 2002) (quoting United States v. Whiting Pools, Inc. , 462 U.S. 198, 205 n.9, 103 S.Ct. 2309, 76 L.Ed.2d 515 (1983) ); see 11 U.S.C. § 541(a)(1). "A cause of action [becomes] property of the estate if the claim existed at the commencement of the [bankruptcy] filing and the debtor could have asserted the claim on his own behalf under state law." Foodtown , 296 F.3d at 169 n.5.

A court-appointed bankruptcy trustee manages the estate's property, including those causes of action. The trustee "is the representative of the estate" with the "capacity to sue and be sued" on its behalf. 11 U.S.C. § 323(a), (b). So once a cause of action becomes the estate's property, the Bankruptcy Code gives the trustee, and only the trustee, the statutory authority to pursue it.

At times, we have called that statutory authority the trustee's exclusive "standing" to assert those claims. We have held that "[a]fter a company files for...