Koch Refining v. Farmers Union Cent. Exchange, Inc.

• Decision Date: 07 October 1987
• Docket Number: No. 86-1102,86-1102
• Citation: 831 F.2d 1339
• Parties: 18 Collier Bankr.Cas.2d 84, Bankr. L. Rep. P 72,009 KOCH REFINING, Koch Fuels, Conoco, Inc., Mobil Oil Corporation, Chevron U.S.A. Inc., Tosco Corporation, Tenneco Oil Company, Moore-McCormick Petroleum, Gulf States Oil & Refining, Texaco, Inc., and Getty Refining and Marketing Company, Plaintiffs-Appellants, v. FARMERS UNION CENTRAL EXCHANGE, INC., Farmers Petroleum Cooperative, Inc., FCX, Inc., Landmark, Inc., Land O'Lakes, Inc., Midland Cooperatives, Incorporated, MFA Oil Company, and Tennessee Farmers Cooperative, Defendants-Appellees.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 1339

831 F.2d 1339

18 Collier Bankr.Cas.2d 84, Bankr. L. Rep. P 72,009

KOCH REFINING, Koch Fuels, Conoco, Inc., Mobil Oil Corporation, Chevron U.S.A. Inc., Tosco Corporation, Tenneco Oil Company, Moore-McCormick Petroleum, Gulf States Oil &amp Refining, Texaco, Inc., and Getty Refining and Marketing Company, Plaintiffs-Appellants, v. FARMERS UNION CENTRAL EXCHANGE, INC., Farmers Petroleum Cooperative, Inc., FCX, Inc., Landmark, Inc., Land O'Lakes Inc., Midland Cooperatives, Incorporated, MFA Oil Company and Tennessee Farmers Cooperative, Defendants-Appellees.

No. 86-1102.

United States Court of Appeals Seventh Circuit.

Argued Sept. 11, 1987.

Decided Oct. 7, 1987.

Richard J. Mason, Levit & Mason, Ltd., Chicago, Ill., for plaintiffs-appellants.

David M. Schiffman, Sidley & Austin, Chicago, Ill., for defendants-appellees.

Before CUDAHY and COFFEY, Circuit Judges, and GRANT, Senior District Judge. ^*

GRANT, Senior District Judge.

This case comes to us on appeal from the district court's dismissal of a declaratory action brought by eleven petroleum corporations (oil companies), 56 B.R. 2420. The oil companies, appellants herein, had regularly exchanged petroleum products with Energy Cooperative, Inc. (ECI), an Indiana oil refinery now in bankruptcy. In their complaint they sought a declaration that, inter alia, the Member-Owners of ECI were the alter ego of ECI. The district court dismissed the oil companies' suit for lack of standing. For the reasons set forth below, we affirm that holding.

I.

The Member-Owners, appellees in this case, are regional agricultural cooperatives that formed ECI in 1976 to insure a steady supply of petroleum products for their agricultural businesses in a period of instability and shortages in the petroleum industry. They own 100% of ECI's stock, comprise 100% of its board of directors, and are ECI's principal customers. The oil companies appealing herein provided ECI with petroleum products for its own use and for delivery to other customers when needed elsewhere.

On May 15, 1981, ECI filed a voluntary petition under Chapter 11 of the Bankruptcy Code. Although neither the debtor nor the trustee in bankruptcy is a party to the present action, this case grew out of the bankruptcy of ECI.

In October 1981, ECI as debtor-in-possession brought separate actions against the oil companies to recover alleged preferences under Section 547 of the Bankruptcy Code. Those adversary proceedings contended that ECI made transfers of products and proceeds within the preferential ninety-day period prior to its filing of the bankruptcy petition, and that the trustee could thus recover nearly $50 million in value allegedly received by the oil companies during that period. ECI also sued the Member-Owners in an attempt to hold them liable for all of ECI's debts. In that litigation ECI alleged, inter alia, that the Member-Owners breached certain contracts with ECI; that they breached their fiduciary duties by preventing ECI from remedying the breaches of contract and by causing ECI to take other actions contrary to its best interests; and that the Member-Owners should be liable for all of ECI's debts as its "alter ego" under a "piercing the corporate veil" theory.

On May 31, 1984, ECI converted its Chapter 11 reorganization case to a Chapter 7 liquidation case. A trustee was appointed; he is pursuing each of these lawsuits in bankruptcy. ¹

On July 29, 1985, the oil companies filed this action in district court, seeking a declaratory judgment that ECI is the alter ego of the Member-Owners; that the Member-Owners are jointly and severally liable for ECI's debts; that ECI was solvent when it filed its bankruptcy petitions; and that the oil companies are entitled to recover from the Member-Owners all amounts that the bankruptcy trustee may recover from the oil companies as preferences. The Member-Owners filed motion to dismiss the complaint.

On December 23, 1985, the district court dismissed the oil companies' complaint against the Member-Owners. Koch Refining, et al. v. Farmers Union Central Exchange, Inc., 56 B.R. 242 (N.D.Ill., 1985). Basing its opinion upon a prudential aspect of standing, the court determined that the oil companies were not the proper proponents of the legal rights they asserted in their complaint. Order at 4 (citing Singleton v. Wulff, 428 U.S. 106, 112, 96 S.Ct. 2868, 2873, 49 L.Ed.2d 826 (1976)). We concur in that determination, and further find that appellants lack standing because they have not shown a substantial controversy between parties in a classically adverse relationship, id. at 113, 96 S.Ct. at 2873, of sufficient reality to warrant declaratory relief. Golden v. Zwickler, 394 U.S. 103, 108, 89 S.Ct. 956, 959, 22 L.Ed.2d 113 (1969).

II.

The district court found that the oil companies had raised essentially the same allegations as those made by the ECI trustee in bankruptcy proceedings. Order at 2. After reviewing the relationship among the oil companies, the debtor corporation and the Member-Owners, the court determined that the oil companies' status as "creditor or potential creditor" was not sufficient for standing. Order at 3. In addition to showing actual or threatened injury, stated the district court, the claimants must be the proper parties to bring a particular action. Order at 3-4.

To determine which party properly could assert this action, the court recognized first the right of a corporation to seek damages from its fiduciaries for mismanagement, misappropriation of assets, or breach of duty, and then the passing of that right to the corporation's trustee in bankruptcy. ² Order at 4. Since the oil companies were not the proper parties to recover damages from the Member-Owners, who are the fiduciaries of ECI, the court held that they lacked standing to obtain declaratory relief. Id.

In this appeal the oil companies assert that they satisfy the constitutional requirements for standing because they are confronted with an actual threat of injury in the trustee's preference litigation against them, an injury that is likely to be redressed by a favorable decision here. They further allege that they, and not the trustee, are the proper parties to bring an alter ego action: Since that cause of action is neither property of the estate under 11 U.S.C. Sec. 541 nor an action encompassed by 11 U.S.C. Sec. 544 that would allow the trustee to act on behalf of creditors, the trustee does not have standing to raise it.

Article III of the United States Constitution requires that the party seeking judicial resolution of a case or controversy have standing to present his claim. The standing requirement focuses on the party bringing the claim. Warth v. Seldin, 422 U.S. 490, 500, 95 S.Ct. 2197, 2205, 45 L.Ed.2d 343 (1975). Central to that requirement as well is the injury of the litigant bringing the action. Diamond v. Charles, 476 U.S. 54, 106 S.Ct. 1697, 1703, 90 L.Ed.2d 48 (1986). At an "irreducible minimum," the plaintiff must show that:

(1) the party "personally has suffered some actual or threatened injury as a result of the putatively illegal conduct of the defendant," (quoting Gladstone, Realtors v. Village of Bellwood, 441 U.S. 91, 99, 99 S.Ct. 1601, 1607, 60 L.Ed.2d 66 (1979)); (2) the injury "fairly can be traced to the challenged action," of the defendants (quoting Simon v. Eastern Kentucky Welfare Rights Organization, 426 U.S. 26, 41, 96 S.Ct. 1917, 1924, 48 L.Ed.2d 450 (1976)); and (3) the injury "is likely to be redressed by a favorable decision," (quoting Simon, 426 U.S. at 38, 96 S.Ct. at 1925).

Northside Sanitary Landfill, Inc. v. Thomas, 804 F.2d 371, 381 (7th Cir.1986) (quoting Valley Forge Christian College v. Americans United for Separation of Church and State, Inc., 454 U.S. 464, 472, 102 S.Ct. 752, 758, 70 L.Ed.2d 700 (1982)).

These requirements are imposed equally upon a party bringing an action for declaratory judgment as upon one seeking damages or coercive relief. As we have recently stated, in order to demonstrate standing for a declaratory judgment, a party must show "that she has sustained, or is in immediate danger of sustaining, a direct injury as a result of the defendants' conduct." Foster v. Center Township of LaPorte County, 798 F.2d 237, 242 (7th Cir.1986).

The district court's holding that the oil companies lack standing is based primarily upon its determination that a bankruptcy trustee is the successor to a corporation's right to assert a cause of action against fiduciaries for neglect of duty to the corporation. The oil companies insist, however, that a trustee is not the proper party to bring an alter ego action. The arguments presented in the briefs and at oral argument centered primarily upon the trustee's lack of standing rather than upon the oil companies' right to standing. In recognition of the integral relationship of the bankruptcy trustee to the parties herein, we must first consider the role of a bankruptcy trustee and his right to assert an alter ego claim.

III.

A.

A person who meets the eligibility requirements of 11 U.S.C. Sec. 321 of the Bankruptcy Code and various related bankruptcy rules may be appointed a bankruptcy trustee by the court. The role of trustee ³ as a representative of the estate, with the capacity to sue and be sued, is defined in section 323 of the Bankruptcy Code. The Code explicitly grants broad responsibilities to the trustee in collecting the debtor's assets and dealing with the bankruptcy estate. See, e.g., 11 U.S.C. Secs. 704, 721, 724, 725, 363, 364, 365. The trustee of a Chapter 7 debtor (to which ECI has converted) has the general duties of marshalling all available property, reducing it to money, distributing it to creditors, and closing up the estate. 11 U.S.C. Sec. 704(1).

The trustee represents not only the rights of the debtor but also the interests of creditors of the debtor. Pursuant to 11 U.S.C. Sec. 544 the trustee, in his capacity as a creditor, may bring suit to...