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Fox News:  New Mexico Bankruptcy Court Reaffirms Committee Eligibility for Derivative Standing Despite Contrary Tenth Circuit B.A.P. Precedent

In an important affirmation of the rights and duties of a creditors’ committee, Bankruptcy Judge David T. Thuma of the United States Bankruptcy Court for the District of New Mexico has confirmed that a bankruptcy court may confer derivative standing on a committee to assert estate claims if a debtor in possession declines to assert them.[1] 

Prior to filing for bankruptcy in 2018, the Roman Catholic Church of the Archdiocese of Santa Fe reportedly made transfers totaling more than $150 million to certain trusts.  The debtor declined to pursue any claims to recover these transfers because it believes such claims have no merit.  As a result, the official committee of unsecured creditors sought derivative standing to bring fraudulent transfer and turnover claims against the trusts and parishes that it alleges were the recipients of the pre-bankruptcy transfers.

The debtor opposed the request on the grounds that, inter alia, “binding precedent” of the Tenth Circuit Bankruptcy Appellate Panel (“BAP”) has held that only the trustee can bring avoidance claims under Section 548, and derivate actions are prohibited.  In In re Fox, 305 B.R. 912 (10th Cir. BAP 2004), the BAP concluded that the Supreme Court’s decision in Hartford Underwriters Ins. Co. v. Union Planters Bank, 530 U.S. 1 (2000), was dispositive.  In that case, the Supreme Court held that Section 506(c)’s authorization that the “trustee may recover” (emphasis added) limits recovery under that section to the trustee and the trustee alone.  Therefore, since Section 548 contains the exact same “trustee may recover” language, the Fox court concluded that derivative actions under that section must be prohibited, too.[2]   

But Judge Thuma was not persuaded, and he dismissed the suggestion that he was obliged to follow Fox in a footnote.[3]  Calling that decision “a tiny minority,” he explained that “[e]very circuit court that has ruled on the question of derivative standing after Hartford has allowed it. [. . . ] Almost all bankruptcy courts, BAPs, and district courts have ruled the same way.”[4]  He then proceeded to detail the “variety of textual, historical, and practical reasons”[5] that courts have recognized derivative standing:

  • Section 503(b)(3)(B): “After notice and a hearing, there shall be allowed administrative expenses . . . including . . . the actual, necessary expenses . . . incurred by . . . a creditor that recovers, after the court’s approval, for the benefit of the estate any property transferred or concealed by the debtor . . . .”
  • Section 1103(c)(5): “A committee appointed under section 1102 of this title may . . . perform such other services as are in the interest of those represented.”
  • Section 1107(a): “Subject to . . . such limitations or conditions as the court prescribes, a debtor in possession shall have all the rights . . . and powers, and shall perform all the functions and duties . . . of a trustee serving in a case under this chapter.”
  • Section 1109(b): “A party in interest, including the debtor, the trustee, a creditors' committee, an equity security holders' committee, a creditor, an equity security holder, or any indenture trustee, may raise and may appear and be heard on any issue in a case under this chapter.”

He also observed that “[d]erivative standing was allowed under the Bankruptcy Act, [is a] better remedy than appointing a trustee [, and that] debtors in possession often have conflicts of interest . . . that would affect [their] decision to initiate avoidance actions.”[6]  He thus concluded:

The Court agrees with and adopts the majority view. The Fox court interpreted Hartford as resolving an important issue (derivative standing) that the Supreme Court said it did not decide. Such an interpretation is unfounded. Rather, the Supreme Court should be taken at its word that Hartford leaves open the possibility of derivative standing. Seven circuit courts and myriad lower courts have understood the case that way. Examining the question left open by Hartford, they considered the entire Bankruptcy Code and prior bankruptcy law and concluded that “the trustee may” language in §§ 544-548 leaves room for bankruptcy courts to confer derivative standing.[7]

Judge Thuma’s fair-and-balanced analysis and comprehensive survey of the Code and the caselaw reveal the flaws in the Fox court’s decision.  Its continuing relevance in the Tenth Circuit or anywhere else is doubtful. 

[1] In re Roman Catholic Church of the Archdiocese of Santa Fe, No. 18-13027-t11, 2020 Bankr. LEXIS 2835 (Bankr. D.N.M. Oct. 9, 2020) (“Decision”).

[2] Somewhat curiously, the Fox court reached its conclusion despite acknowledging the Hartford court’s clear disclaimer that it was not deciding the § 548 derivative standing question.  See 530 U.S. at 13 n.5 (“We do not address whether a bankruptcy court can allow other interested parties to act in the trustee's stead in pursuing recovery under § 506(c). [Certain amici] draw our attention to the practice of some courts of allowing creditors or creditors' committees a derivative right to bring avoidance actions when the trustee refuses to do so, even though the applicable Code provisions [. . . ] mention only the trustee. Whatever the validity of that practice, it has no analogous application here, since petitioner did not ask the trustee to pursue payment under § 506(c) and did not seek permission from the Bankruptcy Court to take such action in the trustee's stead. Petitioner asserted an independent right to use § 506(c), which is what we reject today.”).

[3] See Decision, at n.8 (“the Court concludes that BAP opinions are persuasive authority but not binding precedent”).

[4] Id. at *10-11.

[5] Decision, * 11.

[6] Id. at *12-13.

[7] Id. at *14-15 (emphasis in original).