In re EF Hutton Southwest Properties II, Ltd., Bankruptcy No. 388-35397-HCA-11.
| Decision Date | 17 July 1989 |
| Docket Number | Bankruptcy No. 388-35397-HCA-11. |
| Citation | 103 BR 808 |
| Parties | In re E.F. HUTTON SOUTHWEST PROPERTIES II, LTD., Debtor. |
| Court | U.S. Bankruptcy Court — Northern District of Texas |
Jack Balzersen, Rochelle & Balzersen, Dallas, Tex., for E.F. Hutton Southwest Properties II, Ltd., debtor.
Robert E. Goodman, Jr., Nancy Atlas Friedman, Sheinfeld, Maley & Kay, Dallas, Tex., for Limited Partners Committee.
Morris D. Weiss, Weil, Gotshal & Manges, Houston, Tex., for Hutton Real Estate Services II, Inc.
This case involves the developing issue of what causes of action a trustee, debtor in possession or committee may assert on behalf of the bankruptcy estate. The official limited partners' committee ("Committee") filed a Motion for Authority to Prosecute Action on Behalf of the Debtor's Estate ("Motion"). The motion requests authority to bring an action against certain entities and individuals, require the Debtor to segregate $125,000 in unencumbered funds as a source to pay professional fees incurred in the action, and approve Sheinfeld, Maley & Kay ("SMK") as counsel to prosecute the action. Hutton Real Estate Services II Inc. ("HRES II"), general partner for the Debtor, as well as a proposed defendant, responded that the claims and allegations outlined in the exhibit to the motion contain both derivative and individual causes of action. HRES II also stated that it was unclear whether SMK could simultaneously prosecute both individual and derivative actions. Finally, HRES II opposed the set aside of unencumbered funds to pursue derivative litigation. The Debtor responded as well, opposing the segregation of funds. Debtor suggests that the funds should be used to pay administrative expenses and unsecured claims in a future plan of reorganization. Following a preliminary hearing on the motion, the court fashioned a procedure requesting that the committee submit a draft complaint to better define the matters discussed, and a memorandum of law concerning state law problems. The court further requested HRES II and the Debtor to file appropriate responsive pleadings. Finally, the court ordered the Debtor to set aside $62,500 as a potential fund to pay for litigation the court deemed appropriate. The parties graciously agreed to the procedure. The court conducted a follow up status conference.
E.F. Hutton Southwest Properties II, LTD. ("Debtor") is a Delaware limited partnership. The Debtor was formed in March 1984 to acquire, own and operate five apartment complexes in Texas. HRES II is currently the sole general partner of the debtor. Debtor filed a voluntary petition under Chapter 11 of the United States Bankruptcy Code on September 2, 1988. The committee was appointed to represent the interests of approximately 339 limited partners. Each limited partnership unit represents a $60,000 investment in the Debtor. On April 11, 1989, the committee formally demanded that the Debtor commence an action on its behalf against its general partner, other entities affiliated with HRES II, former general partners and other entities involved with the creation of the partnership and the transactions whereby the five apartment complexes were acquired. The committee concurrently filed its motion April 11, 1989. The debtor refused to pursue the action1.
Before moving to our discussion of what actions the committee will be authorized to pursue, prudential considerations must be recognized. Our discussion and analysis should be considered only in the context of administration of the estate and not as advisory rulings on the relative merits of the underlying actions. A finding that a proposed action may be asserted by the committee does not restrict any defendant's ability to attack the eventual action in any manner, including argument that the committee is not the proper proponent in the eventual action. However, to ensure that we properly analyze the issues, we nevertheless touch upon issues that would ordinarily be addressed in a true case or controversy2.
As a starting point, the court must determine which of the Committee's proposed claims constitute property of the estate and which do not. It is axiomatic that actions that do not belong to the estate cannot be pursued by the committee. This determination constitutes a core proceeding under 28 U.S.C. § 157(b)(2)(A) and (O) (Supp. IV 1986), and 11 U.S.C. § 541 (1982).
To evaluate the nineteen separate claims in the committee's draft complaint, the Court will formulate a framework for determining which actions belong to the estate. The reason for the framework stems from the committee's position that all of the claims belong to the estate. The committee position rests upon a liberal reading of S.I. Acquisition and a desire to extend its reach to individual actions. The committee suggests that it should be allowed to assert what appear to be individual claims of the limited partners because each suffered the same harm as a group, whether it be securities fraud or RICO. HRES II responds that such a suggestion would result in duplicative litigation and be potentially inconsistent with a direct class action suit by the limited partners. HRES II also suggests that the committee approach would eliminate the economic incentive to assert meritorious claims.
We begin with bankruptcy law's fundamental concept, property of the estate. The filing of a petition in bankruptcy creates a legal estate comprising "all legal or equitable interests of the debtor in property as of the commencement of the case." 11 U.S.C. § 541 (1982). The concept is broad in scope. United States v. Whiting Pools, 462 U.S. 198, 205-06, 103 S.Ct. 2309, 2313-14, 76 L.Ed.2d 515 (1983). Property of the estate includes choses in action3. Whether an action belongs to the estate depends on how the action is characterized under applicable state (or federal) law. If an action under a particular theory belongs to the corporation or partnership under state law, then the action is "property of the estate." S.I. Acquisition, Inc. v. Eastway Delivery Service, Inc., 817 F.2d 1142, 1151 (5th Cir.1987); Pierson & Gaylen v. Creel & Atwood (Matter of Consolidated Bancshares, Inc.), 785 F.2d 1249, 1253-54 (5th Cir.1986) and American National Bank v. MortgageAmerica Corp., 714 F.2d 1266, 1276-77 (5th Cir.1983).
Two Fifth Circuit panels analyzing the scope of the automatic stay to actions against non-debtor entities have discussed whether an action belongs, under Texas law, to the bankruptcy estate. MortgageAmerica, 714 F.2d at 1276-77 and S.I. Acquisition, 817 F.2d at 1149. These decisions rest on the proposition that "a section 362(a)(3) stay applies to a cause of action that under state (or federal) law belongs to the debtor." S.I. Acquisition, 817 F.2d at 1150.
In S.I. Acquisition Judge Hill reasoned that Texas alter ego theory as set forth in Castleberry v. Branscum, 721 S.W.2d 270 (Tex.1986) provided the corporation Debtor a cause of action:
S.I. Acquisition, 817 F.2d at 1152 (citations omitted). The Court concludes that "nothing in Texas law prohibits a corporation from asserting on its own behalf an action based on alter ego" and that Eastway was stayed from pursuing the estate's action "only for its benefit, and without giving notice to other creditors of S.I.A." To justify the stay, the Court noted that permitting the action to proceed would abridge the bankruptcy policy of equal distribution. Id. at 1153-54.
In MortgageAmerica Judge Randall King suggests that "common sense" requires one to look to whether the action is property of the estate under applicable state law. She concludes:
. . . a cause of action under Texas corporate trust fund doctrine (denuding) theory, even though is usually brought by creditors, is an action in the right of the corporation, and which is brought for the benefit of all creditors and shareholders with an interest in the corporation. As such, the action is a "right of action" belonging to the corporation within the meaning of section 70(a)(5) of the old Bankruptcy Act, and thus also within the meaning of section 541(a)(1) of the Code.
MortgageAmerica, 714 F.2d at 1277.
Following the Fifth Circuit analysis, the starting point must be how the action is characterized under state law. 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. Although this statement is fundamental, the analysis has been muddled by the closely related issue of standing.
The courts have considered challenges to a creditor's standing to assert derivative type claims and alter ego claims, as well as challenges by creditors asserting that claims are individual4. An appreciation of the distinction between whether the action is property of the estate and the party who has standing to urge the same, has been muddled in the process.
As discussed above, Fifth Circuit decisions start with the proposition that if the particular action is property of the estate the automatic stay is in effect. The next step in the analysis is the recognition that the trustee or debtor in possession has standing to assert actions that belong to the estate. Likewise, in bankruptcy, the trustee must act under his statutory duty to collect property...
To continue reading
Request your trial