In re Racing Services, Inc.

• Decision Date: 29 August 2008
• Docket Number: No. 07-1821.,07-1821.
• Citation: In re Racing Services, Inc., 540 F.3d 892 (8th Cir. 2008)
• Parties: In re RACING SERVICES, INC., Debtor. PW Enterprises, Inc., a Nevada Corporation, Appellant, v. North Dakota Racing Commission, a regulatory agency; North Dakota Breeders Fund, a special fund; North Dakota Purse Fund, a special fund; North Dakota Promotions Fund, a special fund; State of North Dakota, a governmental entity, Appellees. Kip M. Kaler, Bankruptcy Trustee for Racing Services, Inc.
• Court: U.S. Court of Appeals — Eighth Circuit

540 F.3d 892

In re RACING SERVICES, INC., DebtorPW Enterprises, Inc., a Nevada Corporation, Appellant, v.North Dakota Racing Commission, a regulatory agency; North Dakota Breeders Fund, a special fund; North Dakota Purse Fund, a special fund; North Dakota Promotions Fund, a special fund; State of North Dakota, a governmental entity, Appellees.

Kip M. Kaler, Bankruptcy Trustee for Racing Services, Inc.

No. 07-1821.

United States Court of Appeals, Eighth Circuit.

Submitted: January 18, 2008.

Filed: August 29, 2008.

Christopher E. Prince, argued, Los Angeles, CA, for appellant.

Roger James Minch, Special Assistant Attorney General, argued, Fargo, ND, for appellee.

Before WOLLMAN, BRIGHT, and SMITH, Circuit Judges.

BRIGHT, Circuit Judge.

The Bankruptcy Code expressly authorizes a trustee(or debtor-in-possession) to bring an adversary proceeding to avoid certain transfers as preferential or fraudulent.In some cases, however, courts have allowed creditors to bring such "avoidance claims" if it would benefit the estate.A creditor who brings avoidance claims in place of the trustee is said to possess "derivative standing."In this case, we must decide whether the bankruptcy court erred in holding that, as a matter of law, a creditor may never obtain derivative standing to pursue avoidance claims absent a showing that the trustee was "unable or unwilling" to do so.We have jurisdiction pursuant to 28 U.S.C. § 158(d)(1) and now reverse and remand.

I

When it was a going concern, debtor Racing Services, Inc.("Racing Services") operated a horse race wagering service business.On February 3, 2004, Racing Services filed a voluntary Chapter 11 petition for reorganization in the United States Bankruptcy Court for the District of Delaware.The case was subsequently transferred to North Dakota and converted to a liquidation proceeding under Chapter 7 because reorganization was not possible.AppellantPW Enterprises, Inc.("PW Enterprises") is Racing Services' largest non-governmental creditor and holds an unsecured claim of more than $2 million.PW Enterprises has actively participated in this case, including sitting on the Creditors' Committee when the case was in Chapter 11.AppelleesState of North Dakota and affiliated state entities (collectively the "State")¹ assert a $6 million priority tax claim.PW Enterprises argues because of the size of the State's claim, it (along with the other unsecured creditors) currently stands to recover nothing.

On January 31, 2006, five days before the statute of limitations was to expire, PW Enterprises approached the Chapter 7TrusteeKip Kaler("Trustee")² and requested that he initiate an adversary proceeding against the State to, among other things, avoid certain preferential and fraudulent transfers made to the State by Racing Services that were, in PW Enterprises' view, improperly classified as "taxes."³At the Trustee's request, PW Enterprises prepared a draft complaint for his review.The Trustee declined to bring the specific claims that PW Enterprises wanted him to assert.SeePW Enters., Inc. v. North Dakota(In re Racing Servs., Inc.),363 B.R. 911, 913(8th Cir. BAP2007)(detailing Trustee's reasons for declining to bring an adversarial proceeding against the State).On February 2, 2006, without the bankruptcy court's permission, but within the two-year statute of limitations, PW Enterprises filed the complaint, which included avoidance claims under 11 U.S.C. §§ 547,548.⁴Subsequently, in April 2006, PW Enterprises moved for leave to pursue these claims, i.e., sought derivative standing.

With the exception of the State, no party opposed PW Enterprises' April 2006 motion.The Trustee filed a formal response stating that he"does not resist PW [Enterprises'] motion ... but requests that the [Bankruptcy] Court make clear, that the action pursued is an action of the estate and for the benefit of the estate from which no single creditor shall have a disproportionate gain."In response, PW Enterprises affirmed that it was "not seeking standing to pursue the [avoidance] Claims for its own benefit ... [but] for the benefit of the estate" and "agree[d] to advance the fees and costs attendant to the prosecution of the Complaint."

On July 10, 2006, the bankruptcy court held a telephonic hearing on PW Enterprises' motion and denied it on August 7, 2006.The bankruptcy court concluded that PW Enterprises did not have standing to pursue an adversary action against the State because it failed to establish that the Trustee abused his discretion or acted unjustifiably by failing to pursue the avoidance claims.The bankruptcy court did not address PW Enterprises' contention that a creditor may proceed derivatively if the trustee consents to, or does not oppose, the action.

The Bankruptcy Appellate Panel("BAP") affirmed the bankruptcy court's decision denying PW Enterprises' motion.The BAP declined to resolve the issue of whether derivative standing was appropriate when a trustee consents.Rather, the BAP concluded that the bankruptcy court properly denied PW Enterprises derivative standing because it did not first seek permission with the bankruptcy court to file its complaint.SeeIn re Racing Servs., Inc.,363 B.R. at 916-17.

On appeal, PW Enterprises argues that the bankruptcy court erred by holding that a creditor may proceed derivatively only when the trustee acts improperly or abuses his discretion.While neither defending nor declaiming the bankruptcy court's rationale, the State argues that it properly denied PW Enterprises standing because its motion was untimely, i.e., PW Enterprises sought derivative standing only after filing its complaint.⁵

II

We apply the same standard of review as the BAP.We review the bankruptcy court's findings of fact for clear error and its legal conclusions de novo.SeeBlackwell v. Lurie(In re Popkin & Stern),223 F.3d 764, 765(8th Cir.2000).We review the bankruptcy court's order denying PW Enterprises standing, as a matter of law, de novo.See, e.g., Hartford Underwriters Ins. Co. v. Magna Bank, N.A.(In re Hen House Interstate, Inc.),177 F.3d 719, 721(8th Cir.1999), aff'd sub nom.Hartford Underwriters Ins. Co. v. Union Planters Bank, N.A.,530 U.S. 1, 120 S.Ct. 1942, 147 L.Ed.2d 1(2000).

III

A

We begin by resolving the uncertainty in this Circuit over the availability of derivative standing when a trustee is "unable or unwilling" to pursue avoidance claims under the Bankruptcy Code.As the BAP observed below, bankruptcy courts within the Eighth Circuit have expressed conflicting views on whether our decision in Nangle v. Lauer(In re Lauer),98 F.3d 378(8th Cir.1996), formally endorsed the possibility of derivative standing in this context.SeeIn re Racing Servs., Inc.,363 B.R. at 915-16(noting that some bankruptcy courts recognize the possibility of derivative standing under In re Lauer when a trustee is unwilling to pursue avoidance actions, whereas other bankruptcy courts outright reject derivative standing or seek further guidance from the Court of Appeals).In In re Lauer,we affirmed the denial of standing to creditors who sought to void certain pre-bankruptcy transfers under 11 U.S.C. § 548 because they"alleged no facts to support an inference that the bankruptcy trustee was unable or unwilling to pursue claims on behalf of the estate."98 F.3d at 388.We stated that as a general rule "[a]bsent evidence that the trustee cannot be relied upon to assert [claims under §§ 547,548], claims to avoid preferential transfers may not be brought by creditors."Id.

We now make clear what In re Lauer implicitly recognized: derivative standing is available to a creditor to pursue avoidance actions when it shows that a Chapter 7trustee(or debtor-in-possession in the case of Chapter 11) is "unable or unwilling" to do so.⁶In so holding, we join those circuits that have addressed this issue and uniformly recognized the possibility of derivative standing in this context.SeeSmart World Techs., LLC v. Juno Online Servs., Inc.(In re Smart World Techs., LLC),423 F.3d 166, 176(2d Cir.2005)(citingUnsecured Creditors Comm. of Debtor STN Enters., Inc. v. Noyes(In re STN Enters.),779 F.2d 901(2d Cir.1985));Official Comm. of Unsecured Creditors v. Chinery(In re Cybergenics Corp.),330 F.3d 548, 553(3d Cir.2003)(en banc);Fogel v. Zell,221 F.3d 955, 965(7th Cir.2000);Avalanche Mar., Ltd. v. Parekh(In re Parmetex, Inc.),199 F.3d 1029, 1031(9th Cir.1999);Canadian Pac. Forest Prods. Ltd. v. J.D. Irving, Ltd.(In re Gibson Group, Inc.),66 F.3d 1436, 1440-41(6th Cir.1995);La. World Exposition v. Fed. Ins. Co.,858 F.2d 233, 247-48(5th Cir.1988).⁷

Even those bankruptcy courts that correctly read In re Lauer as permitting derivative standing, however, "disagree[d] as to what constitutes the trustee's inability or unwillingness to bring suit which justifies derivative standing."In re Racing Servs., Inc.,363 B.R. at 915.This discord is hardly surprising because In re Lauer did not detail what a creditor must actually show to establish inability or unwillingness on the part of the trustee.Taken to an extreme, the literal import of its "unable or unwilling" language suggests that a creditor could proceed derivatively by merely showing that the trustee is unable to pursue the creditor's claims because the trustee is `too busy,'`lacks funds,' or `just doesn't want to.'We now make clear that In re Lauer demands more of a creditor who seeks derivative standing.If creditors could obtain derivative standing too readily, they"could usurp the central role that the trustee or debtor-in-possession plays as the representative of the estate."In re Baltimore Emergency Servs. II, Corp.,432 F.3d 557, 562(4th Cir.2005).And so, to prevent derivative adversary proceedings from becoming the norm in bankruptcy, we agree with our sister circuits that the critical inquiry is whether the trustee(or debtor-in-possession)...