In In re Perkins, 902 F.3d 1254, 1258 (7th Cir.2004), the Seventh Circuit set out three elements for derivative trustee standing to pursue a cause of action held by the bankruptcy estate:
- The trustee unjustifiably refuses a demand to pursue the action;
- The creditor establishes a colorable claim or cause of action; and
- The creditor seeks and obtains leave from the bankruptcy court to prosecute the action for and in the name of the trustee.
With respect to the third element, there is a dispute among the courts as to the consequences of the creditor or committee filing an adversary proceeding prior to obtaining court approval. One line of cases holds that this untimeliness is fatal to a request for derivative standing. See, In re Baltimore Emergency Services II, Corp., 432 F.3d 557 (4th Cir.2005).
A second line of cases (described as the majority rule), espoused in In re SGK Ventures, LLC, 521 B.R. 842 (Bankr.N.D.Ill.2014), hold that the court has discretion to grant retroactive derivative standing. In SGK Ventures, the court explained that the reasons for allowing courts this discretion are (1) if the request for leave is otherwise appropriate, dismissing a complaint for failure to seek leave in advance may simply result in a refiling of both the request for leave and the complaint, generating unnecessary expense and delay; and (2) the party that failed to timely obtain derivative standing may have been acting in good faith under an impending deadline for filing its complaint. Courts adopting this “majority” approach include Catwil Corp. v. Derf II (In re Catwil Corp.) 175 B.R. 362, 365 (Bankr.E.D.Cal.1994); Liberty Mutual Ins. Co. v. Official Unsecured Committee Creditors’ Committee of Spaulding Composites Co. (In re Spaulding Composite Co., Inc.), 207 B.R. 899, 905 (9th Cir.BAP 1997); and PW Enter. V. North Dakota Racing Commn (In re Racing Servs., Inc.), 540 F.3d 892, 903-04 (8th Cir.2008).
A similar conclusion was reached in In re Know Weigh, L.L.C., 2017 WL 3835796 (Bankr.C.D.Cal.). Here, the court stated that although the standard and better practice is to obtain court approval before filing bankruptcy avoidance actions that are based on derivative standing, a bankruptcy court may exercise its discretion to grant such approval retroactively, i.e., after the complaint has been filed but before recovery. Id. at *16 (citing In re Hashim, 379 B.R. 912, 922 (9th Cir.BAP 2007)).
Matthew T. Gensburg
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