Shifano v. Lendmark Fin. Servs., Inc. (In re Shifano)
| Decision Date | 08 January 2013 |
| Docket Number | Adv. Proc. No. 12-50746 (CSS),Adv. Proc. No. 12-50748 (CSS),Adv. Proc. No. 12-50744 (CSS),Case No. 12-11148(CSS),Adv. Proc. No. 12-50745 (CSS),Adv. Proc. No. 12-50749 (CSS),Adv. Proc. No. 12-50747 (CSS) |
| Parties | In re: Ralph A. Shifano, Debtor. Ralph A. Shifano, Plaintiff, v. Lendmark Financial Services, Inc. Household Bank, Commerce Bank, Credit One Bank, John Deere Finance Company, Merrick Bank. Defendants. |
| Court | U.S. Bankruptcy Court — District of Delaware |
BILLION LAW
Mark M. Billion
Counsel for Debtor
The issue before the Court is under what circumstances, if at all, may an individual Chapter 7 debtor (as opposed to a trustee) pursue avoidance actions for the debtor's own benefit (as opposed to for the benefit of the debtor's estate). The debtor may bring such actions for his or her own benefit in limited circumstances. More specifically, in addition to satisfying the normal pleading standards governing such an action, the debtor must establish standing under section 522(h) of the Bankruptcy Code. Standing only arises if the debtor establishes:
The standing issue arises in this case in connection with a motion to reopen a Chapter 7 case in order for the debtor to pursue on his own behalf previously filed preference actions under section 547 of the Code. The Court will grant the motion to reopen, provided, however, that the debtor must amend its existing complaints within 28 days to aver standing under section 522 and to more fully plead the elements of the actual avoidance actions. Any future avoidance actions filed by the debtor in this case(or any debtor pursuing this avenue) must, in addition to asserting the elements of the underlying action, allege standing under section 522(h).2
On April 2, 2012, Mr. Ralph A. Schifano (the "Debtor") filed a voluntary petition for relief under Chapter 7 of Title 11 of the United States Code. George L. Miller was appointed as trustee of the Debtor's estate. On July 2, 2012, the Debtor was granted a discharge under 11 U.S.C § 727 and the bankruptcy case was closed on September 19, 2012.
Prior to the Debtor's discharge and the closure of the case, on May 25, 2012, the Debtor filed five separate adversary proceedings to avoid and recover preferential transfers pursuant to sections 547 and 550 and disallow claims under section 502(d) and (j) (collectively, the "Preference Actions").3 Thereafter, in consultation with the Court, the Debtor filed notices of voluntary dismissal without prejudice of the Preference Actions.4 Subsequently, the Preference Actions were closed by the Court.
In each of the Preference Actions, the Debtor filed an Amended Complaint with bare-bone allegations in support of three counts: (i) avoidance of preferential payments under section 547(b); (ii) recovery of the preferential payments under section 550; and (iii) disallowance of the transferee's claims under section 502(d) and (j). None of theAmended Complaints references, let alone makes any allegations, relating to section 522.5
In October 2012, the Debtor moved to reopen ("Motion to Reopen") his case for the sole purpose of pursuing various preference actions (presumably including, but not limited to, the Preference Actions). The Court initially heard the Motion to Reopen at a hearing held on November 14, 2012. Subsequently and in response to the Court's request, the Debtor filed a letter brief in support of the Debtor's position and propriety of pursuing the Preference Actions. The Court held another hearing on the Motion to Reopen on December 12, 2012. After discussion with Debtor's counsel regarding the Motion to Reopen, the Court took the motion under advisement.
The issue directly before the Court is whether to grant the Motion to Reopen to allow the Debtor to pursue the Preference Actions. That decision, however, rests on whether the Debtor may, in fact, assert those actions. Nonetheless, we start with the standards governing a motion to reopen a Chapter 7 case.
Under section 350(b) of the Code, "[a] case may be reopened in the court in which such case was closed to administer assets, to accord relief to the debtor, or for other cause."6 "Whether to reopen a closed bankruptcy case is committed to the discretion of the bankruptcy court."7
When a former debtor seeks to reopen a closed bankruptcy case the court "may consider a number of nonexclusive factors."8 These include "(1) the length of time that the case has been closed; (2) whether the debtor [or movant] would be entitled to relief if the case were reopened; and (3) the availability of nonbankruptcy courts, such as state courts, to entertain the claims."9 Courts generally look to whether reopening that case will benefit creditors and may deny the motion "when no clear benefit is shown to creditors."10 Nonetheless, a benefit to creditors is not required. Indeed, "relief to the bankrupt is explicitly recognized as a proper cause for re-opening."11
In Bittel v. Yamato Intern. Corp.,12 the Sixth Circuit Court of Appeals addressed the issue of whether potential recovery solely to a debtor would justify reopening a case, which the court answered in the affirmative.
The Bittels urge us not to put too much weight on the trustee's opinion that a recovery for the general creditors is unlikely, noting that because they did not use all of their allowable exemptions, they would have to recover more than $7,000 before any money would go into the general pool of assets for creditors. Therefore, so long as the recovery is modest, a successful suit could benefit them as the debtors, even if it did not aid the creditors. . . . [T]he estate would suffer disruption only in the event the Bittels recovered significant damages by the bringing of the suit, in which case the estate could redistribute the assets to the creditors.13
The Sixth Circuit also noted that allowing the case to be reopened solely for the benefit of a debtor was consistent with public policy as a monetary recovery for a debtor would assist that "debtor's financial rehabilitation."14 That said, the likelihood of some recovery to debtor and/or creditors is required and courts have denied motions to reopen where the lawsuit to be brought would be frivolous.15
In this case, the question is whether there is some likelihood the Preference Actions will result in a monetary recovery for the Debtor. If the Debtor lacks standing, the Preference Actions would clearly be frivolous and the Motion to Reopen should be denied. Similarly, if the avoidance actions themselves, i.e., the claims under sections 547(b), 550 and 502(d) and (j), are unlikely to result in a monetary recovery for the Debtor, the motion should be denied.
"Avoidance actions" as the term is generally used are causes of action that arise under Chapter 5 of the Code. For example, avoidance actions may allow a trustee to avoid transfers of property under a variety of theories such as preference (§ 547), fraudulent conveyance (§ 548), and unauthorized post-petition transfer (§ 549). Section 550 of the Code, in turn, allows a trustee to recover the property subject to the avoided transfer. In each instance, the applicable statute expressly states that "the trustee may" exercise the right granted under the statute.
In a Chapter 7 case, the "debtor" and the "trustee" are two distinct persons.16 The Code specifies certain rights or obligations are applicable to the debtor and others are applicable to the trustee. The question is whether the designation of the trustee as the person with standing to pursue avoidance actions precludes the Chapter 7 debtor from doing so.
The Supreme Court addressed this precise issue in Hartford Underwriters Ins. Co. v. Union Planters Bank, N.A.17 The specific issue in that case was whether only the trustee could invoke section 506(c) of the Bankruptcy Code, which provides that "the trustee may recover from property securing an allowed secured claim the reasonable, necessary costs and expenses of preserving, or disposing of, such property to the extent of any benefit to the holder of such claim." The Supreme Court noted that while thestatute says the trustee may seek recovery it does not say that others may not. Nonetheless, the Court held that it was the proper inference that the trustee is the only party empowered to invoke the provision.18
As the avoidance actions at issue specifically provide that "the trustee may" invoke the statute's power, the debtor may not. Thus, under the terms of the applicable statute, a Chapter 7 debtor does not have standing to pursue avoidance actions and this Debtor does not appear to have standing to pursue the Preference Actions.
Notwithstanding the foregoing, however, a debtor may bring avoidance actions in limited circumstances.
Section 522 of the Bankruptcy Code governs exemptions. The Supreme Court recently and succinctly summarized the operation of exemptions:
When a debtor files a Chapter 7 bankruptcy petition, all of the debtor's assets become property of the bankruptcy estate, subject to the debtor's right to reclaim certain property as "exempt." The Bankruptcy Code specifies the types of property debtors may exempt as well as the...
To continue reading
Request your trial