SGK Ventures, LLC v. Newkey Grp., LLC (In re SGK Ventures, LLC)
| Decision Date | 06 November 2014 |
| Docket Number | Bankruptcy No. 11 B 33413.,Adversary No. 13 A 01411. |
| Parties | In re SGK VENTURES, LLC, Debtor. Official Committee of Unsecured Creditors of SGK Ventures, LLC, Plaintiff, v. NewKey Group, LLC, et al., Defendants. |
| Court | United States Bankruptcy Courts. Seventh Circuit. U.S. Bankruptcy Court — Northern District of Illinois |
Micah E. Marcus, David A. Agay, Joshua A. Gadharf, McDonald Hopkins LLC, Chicago, IL, for Plaintiff.
Marc S. Reiser, Mark L. Radtke, Gordon E. Gouveia, Terence G. Banich, Shaw Fishman Glantz & Towbin LLC, Chicago, IL, for defendant NewKey Group, LLC.
Roger J. Higgins, The Law Offices of Roger Higgins, LLC, Chicago, IL, for defendants Deborah S. Newman, Edward J. Newman, Nicholas F. Cerminaro, Jr.
Steven B. Towbin, Shaw Fishman Glantz & Towbin LLC, Chicago, IL, for defendants Anne Rizzo, Bernard E. Platt, Bernard E. Platt, Jr., David Horing, Deborah S. Newman, Dennis C. Trostle, Edward J. Newman, J. Mark Lozier, Jill L. Hillas, Joel D. Tauber, Joel D. Tauber Trust, John A. Toth Trust, KCL Management Corp., Karen A. Beninato, Ken Kluska, Kluska Family Ltd. Partnership, Laura Tauber, Lawrence Plant, Linda A. Trostle, Loganberry, L.L.C., Louis E. Wagner, Jr., Michael C. Sheffieck, Michael C. Sheffieck Trust, Michael J. Pugliese, Michael Rosenberg, NewKey Group II, LLC, NewKey Group, LLC, Nicholas F. Cerminaro, Jr., Philip Rosenberg, Platt Family Ltd. Partnership, Rosenberg Family, L.L.C., Tamarack L.P., Tauber Enterprises LLC, Tauber–Keywell Family L.L.C., Tauber–Keywell II, LLC, Thomas P. Bertrand, NewKey Group II, LLC.
This adversary proceeding is before the court on two motions, seeking conflicting relief, filed in the Chapter 11 bankruptcy case of SGK Ventures, LLC.1 A motion of the Official Committee of Unsecured Creditors seeks a grant of standing, on behalf of SGK's bankruptcy estate, to pursue this adversary proceeding, which alleges, among other things, that the defendants participated in fraudulent conveyances. The defendants have moved to dismiss the proceeding, arguing alternatively that the Committee lacks standing, that the proceeding is untimely, and that the complaint's allegations are insufficient to state claims on which relief can be granted. As discussed below, the Committee is entitled to a grant of standing, and the defendants' other arguments for dismissal do not preclude a trial on the merits. The Committee's motion will therefore be granted and the defendants' motion granted only in part.
Under 28 U.S.C. § 1334(a), the federal district courts have “original and exclusive jurisdiction” of all cases under the Bankruptcy Code (Title 11, U.S.C.). The district courts may refer these cases to the bankruptcy judges for their districts under 28 U.S.C. § 157(a), and the District Court for the Northern District of Illinois has made such a reference through its Internal Operating Procedure 15(a).
After a case is referred to a bankruptcy judge, the judge is authorized by 28 U.S.C. § 157(b)(1) to hear and determine “core proceedings” arising under the Bankruptcy Code, and § 157(b)(2) gives several examples of core proceedings. For other, “non-core” proceedings, § 157(c)(1) provides that the bankruptcy judge should not enter judgment but rather submit proposed findings of fact and conclusions of law to the district court for its issuance of judgment. These statutory provisions are not completely consonant with constitutional limits on a bankruptcy judge's authority. Under Article III of the Constitution, a bankruptcy judge, lacking the life-tenure and protected compensation that Article III requires for federal judges, may only enter final judgment on matters of “public right,” even though the statute lists as core proceedings matters of “non-public right.” Stern v. Marshall, –––U.S. ––––, 131 S.Ct. 2594, 2611–12, 180 L.Ed.2d 475 (2011).
The present adversary proceeding involves matters that may not be subject to final adjudication by a bankruptcy judge under the Stern decision. However, because the present ruling is interlocutory, there is no need to decide that question. Cf. United States v. Durensky (In re Durensky), 519 F.2d 1024, 1029 (5th Cir.1975) (). This court, then, has the authority to issue a ruling on the pending motions.
The initial question, raised by both motions, is whether the Creditors' Committee should be given standing to pursue this adversary proceeding. The opposing motions on this question both recognize that the causes of action set out in the Committee's complaint are legal interests of SGK's bankruptcy estate, and that control of the estate is within the authority of the bankruptcy trustee or in this Chapter 11 case, SCK itself, as debtor in possession.See §§ 541(a)(1), 704(a), 1106(a), 1107(a), 1108 of the Bankruptcy Code, Title 11 U.S.C. (2012); Koch Refining v. Farmers Union Central Exchange, Inc., 831 F.2d 1339, 1343 (7th Cir.1987). The parties agree as well that, as a result, the trustee or debtor in possession ordinarily has the sole authority to litigate claims of the estate. They disagree, though, on three separate questions involving the Committee's standing in the present adversary proceeding: (1) whether the court has any authority to confer trustee standing on another party; (2) whether, if so, the court has previously conferred such derivative standing on the Committee; and (3) whether, if not, such standing can be conferred now. The answer to these questions is that derivative standing is permissible, was not previously granted, but should be granted now.
(1) The trustee's standing to bring an action on behalf of a bankruptcy estate may be conferred on another party.
The concept of a derivative suit—one brought by someone exercising the standing that would otherwise belong to another—is common in corporate litigation. If the management of a corporation refuses to bring a cause of action, and if various safeguards are met, a shareholder of the corporation may bring the action on the corporation's behalf, with any recovery being for the benefit of the corporation rather than for the shareholder individually. See generally, Ann M. Scarlett, Shareholder Derivative Litigation's Historical and Normative Foundations, 61 Buffalo L.Rev. 837 (2013). Bankruptcy presents a similar situation. The trustee of a bankruptcy estate, like corporate managers, may fail to pursue litigation that is in the estate's best interests, and courts presiding over bankruptcy cases have allowed for such litigation to be brought derivatively, developing principles like those applicable to shareholder derivative suits, long before the enactment of the Bankruptcy Code. See Official Comm. of Unsecured Creditors of Cybergenics Corp. ex rel. Cybergenics Corp. v. Chinery, 330 F.3d 548, 570 (3d Cir.2003) (en banc) (collecting pre-Code authority); 7 Collier on Bankruptcy ¶ 1103.05[6][a] (16th ed. 2014) (“Nearly all courts considering the issue have permitted creditors' committees to bring actions in the name of the debtor in possession....”); Fogel v. Zell, 221 F.3d 955, 965 (7th Cir.2000) ().
Of particular relevance here, the Seventh Circuit has repeatedly recognized the availability of derivative trustee standing. In re Consol. Indus. Corp., 360 F.3d 712, 716 (7th Cir.2004) ; Fogel, 221 F.3d at 965–66 ; In re Perkins, 902 F.2d 1254, 1258 (7th Cir.1990). Nor is this recognition merely dicta. In Fogel, the court directed that if the creditor in that case were unable to procure the trustee's agreement to prosecute a claim on behalf of the estate, the creditor “can prosecute the claim itself, in conformity with the procedure set forth in In re Perkins ....” 221 F.3d at 966.
The defendants' argument, though, is that all of this case law has been overturned by two Supreme Court decisions, Hartford Underwriters Ins. Co. v. Union Planters Bank, 530 U.S. 1, 120 S.Ct. 1942, 147 L.Ed.2d 1 (2000), and Law v. Siegel, ––– U.S. ––––, 134 S.Ct. 1188, 188 L.Ed.2d 146 (2014). Not so. Hartford Underwriters decided that an individual creditor could not pursue—for itself—a claim for compensation that § 506(c) of the Bankruptcy Code authorizes the trustee to pursue. The decision does not address the quite different question of whether a party could be allowed to exercise the trustee's right under § 506(c) derivatively on behalf of the estate. To the contrary, the decision expressly declines to address the question of derivative standing. It notes the practice of granting derivative standing in fraudulent transfer actions and says that this practice is not relevant to its decision. Hartford, 530 U.S. at 13 n. 5, 120 S.Ct. 1942 ( ).
Law v. Siegel is similarly not on point. It holds that § 105(a) of the Bankruptcy Code, though granting courts authority to “issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of this title,” does not allow courts to take action expressly prohibited by the Code. Section 522(k) of the Code expressly prohibits an award of administrative expenses from a debtor's exempt property, and Law held that a...
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