Section 541 of the Bankruptcy Code establishes that a debtor’s bankruptcy estate includes “all legal and equitable interests of the debtor in property as of the commencement of the case.” This includes causes of action the debtor has against others as of the commencement of the bankruptcy case. If such causes of action are property of the estate under §541(a), similar extraneous lawsuits brought by individual creditors will be subject to the automatic stay provisions of Section 362(a)(3) of the Bankruptcy Code. With respect to alter ego actions, or actions to pierce the corporate veil, courts are divided as to whether such actions are property of the estate.
Some cases hold that alter ego actions against shareholders do not constitute property of a corporate debtor’s estate, because such actions are personal to the corporation’s creditors. This theory is premised on the fact that a corporate entity will be disregarded only if the entity has been abused to the detriment of a third party. Other courts note that in certain jurisdictions, a corporation cannot bring a cause of action under the alter ego theory against itself. However, a contrary line of authority holds that alter ego actions are property of the corporate debtor’s estate even though, outside of bankruptcy, such action are usually asserted by the corporation’s creditors and therefore, the trustee has the exclusive authority to bring the alter ego claim to collect assets for the benefit of all creditors. See, Koch Refining v. Farmers Union Cent. Exchange, Inc., 831 F.2d 1339 (7th Cir.1987) (Under Illinois and Indiana law, trustee of bankrupt corporation was proper party to bring alter ego action against debtor’s shareholders; defendants in trustee’s pending preference action did not have standing to bring such claim in that they would not be creditors unless trustee succeeded in preference action, and shareholders’ liability, if alter ego claims succeeded, would be to debtor’s creditors in general, rather than to particular creditors.)
According to Baillie Lumber Co., LP v. Thompson, 413 F.3d 1293 (11th Cir.2005), in order to determine whether an alter ego action is an action the debtor had against others at the commencement of the estate, the court needs to look to state law to determine whether a debtor could bring an alter ego action against its former principal, therefore making it property of the estate. Baillie Lumber held that in order for an alter ego action to be property of the bankruptcy estate, the claims should: (1) be a general claim that is common to all creditors and (2) be allowed by state law. Id. at 1295. A claim is allowed by state law when equitable principles required courts to recognize that a corporation has the right to pursue an alter ego action. Based on this analysis, several courts have considered whether an alter ego claim is property of the estate and have reached different results due to what is perceived to be variations in state law. In Baille Lumber the court after getting a positive response to the question of whether Georgia law allowed corporations to pursue alter ego actions, from the Supreme Court of Georgia, Baille Lumber Co. v. Thompson, 612 S.E.2d 296 (2005), ruled that alter ego actions are property of the estate.
In Matter of S.I. Acquisition, Inc., 817 F.2d 1142 (5th Cir.1987) a creditor filed an alter ego suit against the principal of the debtor. After the debtor filed a Chapter 11 petition, it claimed that the creditor’s suit violated the automatic stay, even though the debtor had been severed from the case and was not a party to the suit. The court found that under Texas law a corporation could pierce its own corporate veil because “the predominate policy of Texas alter ego law is that the control entity that has misused the corporation form will be held accountable for the corporations’ obligations. Id. at 1152. As a result, the court concluded that the alter ego action was property of the estate, and any such suits by creditors ran afoul of the automatic stay. Id. at 1153.
In re Buildings by Jamie, Inc., 230 B.R. 36 (Bankr.N.J.1998) stands for the proposition that under the New Jersey law, a Chapter 7 trustee of a corporate debtor has standing to assert an alter ego action on behalf of the estate and, thus, could seek to pierce the corporate veil of a debtor and other non-debtor corporations owned by the debtor’s principal so as to hold them, debtor’s principal and debtor’s principal’s wife liable for the debtor’s debts.
In In re Expert South Tulsa, LLC, 506 B.R. 298 (Bankr.D.Kan.2011), the court held that it needed to consult state law to determine property rights and, likewise, it is state law that determines whether the debtor has standing to bring an action under the alter ego theory. With respect to alter ego claims, the relevant state law is the law of the state of incorporation of the debtor. Id. at 303. The court then noted that corporations do not usually seek to disregard their corporate form; rather, corporations seek remedies from its officers and directors for breach of duties or mismanagement. “Whether a creditor’s alter ego remedy also becomes property of the estate depends upon whether the underlying claim redresses a specific injury to a particular creditor or is a general claim which could inure to the benefit of any creditor dealing with the company.” Id. And whether the claim is personal or general depends upon the alleged misconduct and the resulting injury underlying the alter ego claim.
The court focused on Oklahoma law which stated that corporations do have standing to pursue an alter ego claim which benefits its creditors generally. Id. Further, it noted that bankruptcy law favors the trustee’s standing because its ultimate goal is the equitable distribution of assets and the prevention of one creditor recovering a fund rightfully belonging to other creditors similarly situated. Id. at 303-04. In this regard, the court noted the similarity of piercing a corporate debtor’s veil and substantive consolidation. Here, the basis for piercing was the fact that the corporation was allegedly undercapitalized. This was a general claim any creditor transacting business with the debtor could assert. “Accordingly, the claim is property of the estate to be administered or abandoned.” Id. at 304.
In In re Tronox Inc., 855 F.3d 84 (2nd Cir.2017), the court stated that if the claim is a general one, with no particularized injury arising from it, and if that claim could be brought by any creditor of the debtor, the trustee is the proper person to assert the claim, and the creditors are bound by the outcome of the trustee’s action. Whereas a derivative injury “is based upon ‘a secondary effect from harm done to the debtor, an injury is said to be ‘particularized’ when it can be ‘directly traced to the third party’s conduct. Id. at 100. In describing the difference between a derivative and particularized claim, the court cited to its decision in St. Paul Fire & Marine Ins. Co. v. PepsiCo, Inc., 884 F.2d 688 (2nd Cir.1989):
In St. Paul, PepsiCo sued Banner, the corporate parent of the debtor, for claims PepsiCo had against the debtor, claiming that Banner had stripped away the assets of its alter ego subsidiary, the debtor. 884 F.2d at 692. PepsiCo argued that its claim was particularized, emphasizing its individualized harm suffered at the hands of the debtor. We determined that PepsiCo’s harm stemmed from its original relationship to the debtor, not Banner. Id. at 704. But that harm – the failure to honor contractual obligations – was not the harm for which PepsiCo sought redress against Banner. Instead, PepsiCo “alleged a secondary effect from harm done to [the debtor]” by Banner – removing assets from the debtor that would have allowed it to meets its obligations to PepsiCo and other creditors. Id. Thus, we held the proper remedy for any harm caused by Banner to the debtor, and in turn all of its creditors, was “for the trustee to bring an alter ego claim as property of the estate, … or to bring an action alleging preferential or fraudulent transfer of assets to Banner.” Id.
In In re Capriati Construction Corporation, Inc., 2018 WL 1404439 (9th Cir.BAP), the court noted that the alter ego doctrine is used to establish the direct liability of a shareholder when that shareholder improperly uses the corporate entity to commit acts which harm the corporation. Id. at *6. Similar to Baillie Lumber, the court stated that whether an alter ego claim is property of the bankruptcy estate depends on two things: “(1) whether under state law where the corporate debtor is incorporated, the debtor is permitted to pierce its own corporate veil; and (2) whether the claim is a general one, of the type that could be brought by any creditor of the debtor.” Id. If the answer to both of these questions is yes, then the alter ego claim is property of the estate, belongs to the trustee or debtor-in-possession, and cannot belong to any individual creditor.
Under the facts of this particular case, the court noted that the alter ego claim alleged was a general, as opposed to a personal or individualized, claim. It distinguished between the two types of actions noting that an action is personal “if the claimant himself is harmed and no other claimant or creditor has an interest in the cause.” Id. On the other hand, “[a] general claim exists if the liability is to all creditors of the corporation without regard to the personal dealings between such officers and such creditors.” Id. Thus, if the alter ego claim alleges acts that harmed the financial condition of the corporation as a whole and all creditors equally, such claims are general alter ego claims. Here, it found that:
SPER’s alter ego claim alleg[ed] that Rocchio (1) had failed to observe corporate formalities with respect to Capriati, (2) used corporate funds for his own personal use, and (3) had manipulated Capriati’s assets and funds to avoid payment of creditors [which were] general claim[s] because all creditors are affected; no particularized injury to SPER existed that could not be brought by other Capriati creditors harmed by Rocchio’s alleged bad acts.
Id. at *7. The court then noted that the general rule in most (if not all) states is that “alter ego” is not an independent cause of action, but is an equitable remedy – a legal theory or doctrine used to impose liability against the alter ego defendant under another cause of action. It assumed that Rhode Island law, which governed, would follow this general rule. Id. at *7.
In re Ozark Restaurant Equipment Co., Inc., 816 F.2d 1222 (8th Cir.1987) is one of those seemly rare cases that stands for the proposition that the nature of the alter ego theory of piercing the corporate veil is one which is personal to corporate creditors rather than the corporation itself. Therefore, the claim does not become property of the estate nor is it enforceable by a trustee under Section 704(1). A similar conclusion was reached in Mullin v. Dzikowski, 257 B.R. 356 (S.D.Fla.2000), where the court, interpreting Florida law stated that “a bankruptcy trustee lacks standing to assert such a claim because the money sought to be collected is not owed to the estate, but rather is owed to the estate’s creditors. Id. at 363.
Matthew T. Gensburg
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