In re RCS Engineered Products Co.

• Decision Date: 31 May 1994
• Docket Number: Bankruptcy No. 91-30695. Adv. No. 93-2072,93-2108.
• Citation: 168 BR 598
• Parties: In re R.C.S. ENGINEERED PRODUCTS CO., Debtor. Daniel C. HIMMELSPACH, Chapter 7 Trustee, Plaintiff, v. RAILCAR SPECIALTIES, INC., Defendant. RAILCAR SPECIALTIES, INC., Counter-Claimant, v. Daniel C. HIMMELSPACH, Trustee, and Spartan Tube & Steel, Inc., Counter-Defendants.
• Court: U.S. Bankruptcy Court — Eastern District of Michigan

168 B.R. 598 (1994)

In re R.C.S. ENGINEERED PRODUCTS CO., Debtor.

Daniel C. HIMMELSPACH, Chapter 7 Trustee, Plaintiff, v. RAILCAR SPECIALTIES, INC., Defendant.

RAILCAR SPECIALTIES, INC., Counter-Claimant, v. Daniel C. HIMMELSPACH, Trustee, and Spartan Tube & Steel, Inc., Counter-Defendants.

Bankruptcy No. 91-30695. Adv. Nos. 93-2072, 93-2108.

United States Bankruptcy Court, E.D. Michigan, Northern Division.

May 31, 1994.

Kenneth W. Kable, Saginaw, MI, for trustee.

Charles T. Hewitt, Bay City, MI, for Railcar Specialties.

Michael S. Hohauser, Bloomfield Hills, MI, for Spartan Tube.

OPINION REGARDING STANDING TO BRING ALTER EGO ACTION

ARTHUR J. SPECTOR, Bankruptcy Judge.

On June 26, 1991, an involuntary petition for relief under chapter 7 of the Bankruptcy Code, 11 U.S.C. § 101 et seq., was filed against R.C.S. Engineered Products Company. One of the petitioning creditors was Spartan Tube & Steel, Inc. Rather than responding to the petition as such, the Debtor filed its own petition for relief under chapter 7 on July 22, 1991. The Court deemed this latter petition to be in essence a motion to convert the involuntary proceeding to a voluntary one, and entered an order granting the motion on July 29, 1991. The Debtor identified Spartan in its Schedule A-3 as a vendor holding an unsecured, undisputed claim in the amount of $51,933.68.

The day after filing the involuntary petition, on June 27, 1991, Spartan filed a complaint in Tuscola County Circuit Court against the Debtor and Railcar Specialties, Inc., seeking a judgment in the amount of $52,382.08.¹ Although the Debtor was nominally responsible for payment of this indebtedness, Spartan alleged that Railcar should also be held liable because it had "treated the Debtor, a wholly owned subsidiary of Railcar as its alter ego and had disregarded the Debtor as a separate entity and has treated it as a part of Railcar." Complaint in Tuscola County Circuit Court Case No. 91-010995 at ¶ 9. According to the complaint, the state "Court should disregard any existing separate entity of Railcar." Id. at ¶ 11. After the Debtor's bankruptcy case was converted to a voluntary proceeding, Spartan apparently "resumed prosecuting its alter ego action against Railcar only." Railcar's Complaint for Declaratory and Other Relief at ¶ 6.

On June 18, 1993, Railcar filed a motion to dismiss Spartan's complaint based on its contention "that the bankruptcy trustee retains the exclusive rights to pursue an alter-ego claim that applies equally to all creditors until the Trustee abandons such claim. In this case, the alter-ego claim is a general one that has not been abandoned by the Trustee. Therefore, Spartan has no standing to proceed with this claim." Railcar's Memorandum in Support of Motion to Dismiss at p. 9. In opposing the motion, Spartan asserted "that a bankruptcy trustee has no standing to bring an alter-ego suit," and advised the state court that the bankruptcy trustee "consented to Spartan's action." Spartan's Brief in Response and Opposition to Defendant's Motion to Dismiss at p. 5. To support the latter contention, Spartan attached to its brief an affidavit by the trustee in which he stated that he had "reservations as to whether he has standing to bring an alter-ego theory against Railcar," and that he "consents to Spartan . . . bringing its action to pierce the corporate veil against Railcar." Affidavit of Daniel C. Himmelspach at ¶¶ 6 and 8. Railcar's motion to dismiss was denied by the state court judge.

On June 22, 1993, the trustee initiated adversary proceeding no. 93-2072 against Railcar. The complaint alleged that Railcar "treated the Debtor as a division and not as a separate legal entity," and that "corporate formalities were not observed." Trustee's Complaint at ¶ 51. According to the trustee, Railcar "should be held liable on the contracts of the Debtor because the Debtor served as a mere instrumentality or adjunct of Railcar." Id. at ¶ 59. Accordingly, the trustee maintained, "the corporate entity of the Debtor should be ignored." Id. Railcar's answer generally denied the trustee's allegations and set up various affirmative defenses.

On November 5, 1993, Railcar filed a Motion to Amend Answer to File Counter-Complaint for Declaratory and Other Relief in the bankruptcy proceeding, in which it sought leave to sue the trustee and Spartan to obtain "a binding declaration . . . that one or the other does not have standing to maintain an alter ego action against Railcar." Railcar's Proposed Counterclaim for Declaratory and Other Relief at p. 7 (attached as an exhibit to Railcar's Motion to Amend Answer). The proposed counterclaim also requests "an order declaring that Spartan is automatically stayed from prosecuting the state court action by 11 U.S.C. § 362." Id. Although this Court granted the motion on December 3, 1993, Railcar has not filed the counterclaim.

On November 18, 1993, however, Railcar did file a Complaint for Declaratory and Other Relief in the state court action. In this complaint, filed against Spartan and the trustee, Railcar alleged that "the Trustee changed his position with respect to the standing issue by filing its own alter-ego complaint against Railcar." Railcar's Complaint for Declaratory and Other Relief at ¶ 12. In the complaint, Railcar asserted that "there is no authority for the proposition that an individual creditor and the bankruptcy trustee can simultaneously pursue an alter ego action." Id. at ¶ 20. Railcar therefore asked the state court to "enter a binding declaration of the rights of Spartan and the Trustee that one or the other does not have standing to maintain an alter ego action against Railcar." Id. at p. 7. In response to this complaint, the trustee filed a notice of removal "based upon 28 U.S.C. § 1478(a)" sic—28 U.S.C. § 1452(a), which removed to this Court "the cause of action filed against him on the 18th day of November in 1993 in the Tuscola County, Circuit Court . . . by Railcar . . . seeking injunctive and other relief."² Notice of Removal at p. 1. This removal initiated adversary proceeding no. 93-2108.

On December 20, 1993, Spartan filed a Motion for Remand in adversary proceeding no. 93-2108, asking among other things that this Court "rule that only the Petition for Declaratory Relief filed against the Trustee was removed from Tuscola County Circuit Court and not the cause of action of Spartan which was pending in that court." Spartan's Motion for Remand at pp. 3-4. Failing this relief, Spartan requested a remand of its cause of action against Railcar to state court. See Brief in Support of Motion for Remand at p. 5. Railcar requested "an order finding that the entire State Court action has been removed." Railcar's Response to Motion for Remand at p. 4. For its part, the trustee filed a motion in both adversary proceedings on January 7, 1994, requesting that the proceedings be consolidated. All parties ask that this Court resolve the question of standing. See, e.g., Spartan's Motion for Remand at pp. 3-4; Trustee's Supplemental Brief at p. 4; Railcar's Response to Motion for Remand at p. 4. Since there is unanimity on this latter point, I will first address the standing issue, and then deal with the various other matters before me.

Although not clearly articulated, Spartan took the position that the trustee and Railcar are precluded from raising the standing issue based on principles of equitable estoppel and waiver. The bases for this argument are the trustee's apparent change of heart regarding his right to pursue an alter ego action, and Spartan's claim that Railcar did not question Spartan's standing in state court in a timely or proper manner. See Spartan's Response to Motion to Consolidate at pp. 3-4.

The potential validity of this argument may depend on the nature of the objection to Spartan's standing. As stated in Warth v. Seldin, 422 U.S. 490, 498, 95 S.Ct. 2197, 2205, 45 L.Ed.2d 343 (1975), the issue of standing "involves both constitutional limitations on federal-court jurisdiction and prudential limitations on its exercise." It appears there can be no waiver or estoppel with respect to the question of constitutional standing. See, e.g., In re Weaver, 632 F.2d 461, 462 n. 6 (5th Cir.1980). But courts are divided as to whether a party can waive or be estopped from challenging an opposing party's prudential standing. Compare, e.g., Thompson v. County of Franklin, 15 F.3d 245, 248 (2d Cir.1994) (indicating that prudential standing is jurisdictional and therefore not subject to waiver) with Norman v. Johnson, 739 F.Supp. 1182, 1188 (N.D.Ill. 1990) ("Issues of prudential standing . . . are not jurisdictional and can be waived.").

Assuming arguendo that waiver or estoppel is possible, neither defense can prevail against the trustee. At no point did he renounce his right to bring an alter ego action. Nor is there any indication that the trustee tried to mislead Spartan or that he otherwise engaged in some form of misconduct. I therefore reject Spartan's contention that the trustee waived his right to assert standing or is equitably estopped from doing so. See generally 28 Am.Jur.2d Estoppel & Waiver § 27 (indicating that the doctrine of equitable estoppel requires a deliberate misrepresentation or "culpable negligence" by the party against whom it is invoked); id. at § 160 ("Generally, to make out a case of implied waiver of a legal right, there must be a clear, unequivocal and decisive act of the party showing such a purpose. . . ."). And since the standing issue was properly raised by the trustee, no purpose would be served in addressing the question of whether Railcar waived or is estopped from raising that issue.

Spartan also obliquely suggested, without legal support, that there might be some preclusive effect to the state court's denial of Railcar's motion to dismiss. See, e.g., Response to Motion for Preliminary Injunction, ¶ 6. Spartan sole "argument" for this dubious proposition...