Ohio Business v. Sun Trust Banks, Inc ( 2007 )

By order of the Bankruptcy Appellate Panel, the precedential effect of this decision is limited to the
case and parties pursuant to 6th Cir. BAP LBR 8013-1(b). See also 6th Cir. BAP LBR 8010-1(c).
File Name: 07b0002n.06
BANKRUPTCY APPELLATE PANEL OF THE SIXTH CIRCUIT
In re )
OHIO BUSINESS MACHINES, INC., )
)
Debtor. )
_________________________________________ )
)
BRIAN A. BASH, TRUSTEE, )
)
Plaintiff - Appellant, )
)
v. ) No. 06-8005
)
SUN TRUST BANKS, INC., )
)
Defendant - Appellee. )
_________________________________________ )
Appeal from the United States Bankruptcy Court
for the Northern District of Ohio, Eastern Division, at Cleveland
No. 04-1356
Argued: November 8, 2006
Decided and Filed: January 25, 2007
Before: AUG, PARSONS, and SCOTT, Bankruptcy Appellate Panel Judges.
____________________
COUNSEL
ARGUED: Christopher J. Niekamp, BERNLOHR WERTZ, LLP, Akron, Ohio, for Appellant.
Rebecca Kucera Fischer, PORTER, WRIGHT, MORRIS & ARTHUR, Cleveland, Ohio, for
Appellee. ON BRIEF: Christopher J. Niekamp, BERNLOHR WERTZ, LLP, Akron, Ohio, for
Appellant. Rebecca Kucera Fischer, Patrick T. Lewis, PORTER, WRIGHT, MORRIS & ARTHUR,
Cleveland, Ohio, for Appellee.
____________________
OPINION
____________________
MARCIA PHILLIPS PARSONS, Bankruptcy Appellate Panel Judge. The bankruptcy court
dismissed this adversary proceeding for lack of subject matter jurisdiction, concluding that the
chapter 7 trustee did not have standing to pursue the state law fraudulent conveyance and breach of
fiduciary duty actions against SunTrust Banks, Inc. (“SunTrust”) because the funds transferred did
not belong to the debtor Ohio Business Machines, Inc. (“OBM”). In conjunction with the dismissal,
the bankruptcy court denied the chapter 7 trustee’s request to substitute the bankruptcy estate of
Point Group, Inc. (“PGI”) as a party plaintiff under Federal Rule of Civil Procedure 17. In this
appeal by the chapter 7 trustee, we conclude that the debtor OBM did have an interest in the funds
transferred and therefore the dismissal for lack of subject matter jurisdiction was erroneous.
Although this conclusion renders the chapter 7 trustee’s substitution motion moot, we find no abuse
of discretion in the bankruptcy court’s denial of the motion.
I. ISSUES ON APPEAL
The issues on appeal are: (1) whether the bankruptcy court correctly determined that the
debtor did not have an interest in the funds transferred and as a result the trustee of its estate lacked
standing to prosecute the state law fraudulent conveyance and breach of fiduciary duties claims; and
(2) whether the bankruptcy court abused its discretion in denying leave for the chapter 7 trustee to
add a party plaintiff.
II. JURISDICTION AND STANDARD OF REVIEW
The Bankruptcy Appellate Panel (“BAP”) has jurisdiction to decide this appeal. The United
States District Court for the Northern District of Ohio has authorized appeals to the BAP, and a final
order of the bankruptcy court may be appealed by right under 28 U.S.C. § 158(a)(1). An order, for
the purpose of an appeal, is final if it “ends the litigation on the merits and leaves nothing for the
court to do but execute the judgment.” Midland Asphalt Corp. v. United States, 489 U.S. 794, 798,
2
109 S. Ct. 1494, 1497 (1989). The bankruptcy court’s order granting SunTrust’s motion for
dismissal was a final order. See, e.g., Southerland v. Smith, 136 B.R. 565 (M.D. Fla. 1992)
(bankruptcy court’s dismissal of adversary proceeding qualified as a final order appealable to the
district court).
An appellate court reviews a decision to dismiss for lack of subject matter jurisdiction de
novo. Joelson v. United States, 86 F.3d 1413, 1416 (6th Cir. 1996). Factual determinations
regarding jurisdictional issues are reviewed for clear error. Gafford v. Gen. Elec. Co., 997 F.2d 150,
155 (6th Cir. 1993). “Where subject matter jurisdiction is challenged pursuant to Rule 12(b)(1), the
plaintiff has the burden of proving jurisdiction in order to survive the motion.” Moir v. Greater
Cleveland Reg’l Transit Auth., 895 F.2d 266, 269 (6th Cir. 1999).
“We review a[n] . . . order denying a Rule 15(a) motion to amend for an abuse of discretion.”
Rose v. Hartford Underwriters Ins. Co., 203 F.3d 417, 420 (6th Cir. 2000) (citing Gen. Elec. Co. v.
Sargent & Lundy, 916 F.2d 1119, 1130 (6th Cir. 1990)). An order denying a Rule 17 motion to
substitute a real party in interest also is reviewed for abuse of discretion. See, e.g., Zurich Ins. Co.
v. Logitrans, Inc., 297 F.3d 528, 530 (6th Cir. 2002). “An abuse of discretion occurs only when the
[trial] court ‘relies upon clearly erroneous findings of fact or when it improperly applies the law or
uses an erroneous legal standard.’” In re Downs, 103 F.3d 472, 480-81 (6th Cir. 1996) (quoting
United States v. Hart, 70 F.3d 854, 859 (6th Cir.1995), and Fleischut v. Nixon Detroit Diesel, Inc.,
859 F.2d 26, 30 (6th Cir. 1988)). “An abuse of discretion is defined as a ‘definite and firm
conviction that the [bankruptcy court] committed a clear error of judgment.’” In re M.J. Waterman
& Assocs., Inc., 227 F.3d 604, 607-08 (6th Cir. 2000) (quoting Soberay Mach. & Equip. Co. v. MRF
Ltd., 181 F.3d 759, 770 (6th Cir. 1999)). “The question is not how the reviewing court would have
ruled, but rather whether a reasonable person could agree with the bankruptcy court’s decision; if
reasonable persons could differ as to the issue, then there is no abuse of discretion.” Id. at 608
(citations omitted).
3
III. FACTS
Incorporated under Ohio law on November 17, 1993, OBM leased and serviced copier
machines throughout northeast Ohio and western Pennsylvania. From 1993 to 2000, OBM generally
served as an exclusive distributor and sales agent for products made by Sharp Electronics. PGI is
the sole shareholder and/or parent holding company of OBM.
On December 13, 1996, OBM, PGI and SunTrust entered into a Subordinated Note and
Warrant Purchase Agreement, which resulted in SunTrust loaning OBM and PGI the sum of $1.5
million. In return, OBM and PGI executed a promissory note in favor of SunTrust in the same
amount, and PGI entered into a warrant agreement (“Agreement”) with SunTrust, which gave
SunTrust the right to purchase up to 291 shares of PGI stock. The Agreement contained a “put”
option that permitted SunTrust to resell the shares back to PGI at the “put” price.
Subsequently, Minolta Corporation (“Minolta”) approached OBM about the possibility of
OBM selling Minolta products instead of Sharp products. Upon reaching an agreement, Minolta
signed a letter of intent on May 3, 2000, agreeing to loan OBM and PGI up to $3.25 million in order
“to enable [OBM and PGI] to retire certain outstanding warrants and indebtedness and to provide
working capital.” (J.A. at 207.) Thereafter, on June 28, 2000, the parties executed a series of
documents in connection with the transaction. Included in those documents were a dealer agreement
and a separate loan agreement, wherein Minolta as “Lender” agreed to loan OBM and PGI as
“Borrower” the $3.25 million sum. The loan agreement provided that the loan proceeds were to be
used to repay all of Borrower’s obligations to SunTrust and another entity, to retire all issued and
outstanding warrants of Borrower held by SunTrust and other specified entities, and for the working
capital of Borrower. The loan agreement also provided that a condition precedent to the loan was
that Borrower reach an agreement with SunTrust for the surrender of the outstanding warrants held
by SunTrust. Concurrently with the execution of these loan documents, PGI and SunTrust entered
into a Warrant Redemption and Note Repayment Agreement (“Warrant Redemption Agreement”),
wherein SunTrust agreed to sell its interests in the warrants to PGI for a specified price and in
conjunction therewith, PGI would pay off the indebtedness owed to SunTrust by OBM and PGI.
4
Also on June 28, 2000, pursuant to the terms of an escrow and wire instructions agreement entered
into among Minolta, OBM and PGI, Minolta wired the loan proceeds to an escrow agent, who then
disbursed to SunTrust the sum of $926,021.29 for the redemption of the PGI stock warrants and
$978,987.50 to pay off the subordinated note owed to SunTrust by OBM and PGI.
Almost two years after the payments to SunTrust, OBM and PGI each filed voluntary
petitions for relief under chapter 11 of the Bankruptcy Code on June 17, 2002, and the bankruptcy
court entered an order for the joint administration of the two cases. The cases subsequently
converted to chapter 7 on May 12, 2004. Brian A. Bash (“Trustee”) was appointed chapter 7 trustee
in each case.
On June 25, 2004, the Trustee initiated the instant adversary proceeding against SunTrust in
the bankruptcy case of OBM, thereafter filing an amended complaint on August 13, 2004, and on
October 27, 2004, a second amended complaint, setting forth two primary causes of action.1 The
Trustee’s first basis for relief was grounded on the assertion that the payment to SunTrust for the
surrender of the warrants was avoidable pursuant to the trustee’s strong-arm powers of 11 U.S.C.
§ 544(b) and under the Ohio fraudulent conveyance laws because it had been made while OBM was
insolvent and without OBM receiving reasonably equivalent value in exchange for the payment. The
second count of the complaint was that SunTrust’s receipt of payment for the indebtedness owed
SunTrust by OBM and PGI was a breach of its fiduciary duty to OBM because SunTrust was an
insider of OBM and had knowledge of OBM’s bleak financial condition at the time of the transfer.
After SunTrust filed an answer admitting receipt of the funds but otherwise denying the
allegations, the Trustee moved for summary judgment, asserting the lack of a genuine issue of
material fact and that he was entitled to judgment as a matter of law. SunTrust responded with a
motion to dismiss pursuant to Federal Rule of Civil Procedure 12(b)(1) or, in the alternative, for
1
A third claim for relief stated to the extent SunTrust had been the recipient of any avoidable,
unreturned transfers, any claim filed by it in the bankruptcy case should be disallowed under 11
U.S.C. § 502. No issues have been raised in this appeal regarding this basis for relief.
5
summary judgment in its favor. The dismissal motion asserted that the Trustee lacked standing to
bring the adversary proceeding because he was seeking recovery on behalf of the OBM bankruptcy
estate rather than the PGI estate. The motion alleged that PGI, not OBM, had made payments to
SunTrust, since the Warrant Redemption Agreement specified that PGI would make the payments
to SunTrust. Alternatively, SunTrust argued that it was entitled to prevail as a matter of law on the
fraudulent transfer and breach of fiduciary duty claims because there had been no conveyance of
property of the debtor, i.e., OBM, and SunTrust’s receipt of funds from PGI would not be a breach
of any fiduciary duties SunTrust might owe to OBM. Also in this regard, SunTrust asserted that it
had no fiduciary duties to OBM and OBM’s creditors because it was not an agent, officer, or director
of OBM. In response, the Trustee moved on August 3, 2005, to add the bankruptcy estate of PGI
as a party plaintiff under Federal Rule of Civil Procedure 17.2
Thereafter, the bankruptcy court heard oral arguments on all of the motions and set a trial for
November 30, 2005. On the eve of trial, however, the bankruptcy court notified the parties that it
had dismissed the Trustee’s claims and cancelled the trial. Subsequently, on January 9, 2006, the
bankruptcy court issued a Memorandum of Opinion and Order, wherein it granted SunTrust’s motion
to dismiss pursuant to Federal Rule of Civil Procedure 12(b)(1) for lack of standing. The bankruptcy
court held that it was “clear that the party to whom the instant cause of action belongs is the estate
of PGI, not that of OBM” (J.A. at 24.), noting that OBM was not a party to the Warrant Redemption
Agreement between PGI and SunTrust. The court observed that the Trustee as trustee of the estate
of OBM could not bring an action on behalf of the bankruptcy estate of PGI because the two
bankruptcy cases had not been substantively consolidated.
2
The Trustee’s motion was based not only on Federal Rule of Civil Procedure 17, but also
on Federal Rule of Civil Procedure 15(c) which governs the circumstances under which an amended
pleading will relate back to the date of the original pleading. The bankruptcy court held that the
Trustee could not use this rule to amend his complaint in order to add the PGI estate as a co-plaintiff
inasmuch as the statute of limitations had expired, citing Marlowe v. Fisher Body, 489 F.2d 1057,
1064 (6th Cir. 1973), which held that such an amendment would create a new cause of action with
no relation back to the original filing for purposes of limitations. In this appeal, the Trustee does
not challenge the bankruptcy court’s rejection of Rule 15, only denial under Rule 17.
6
The bankruptcy court further held that the Trustee could not add the PGI estate as a party
plaintiff under Federal Rule of Civil Procedure 17(a). The bankruptcy court observed that the
Trustee previously had filed two amended complaints without adding the PGI estate as a co-plaintiff,
even though all of the relevant information regarding the transactions at issue was in the Trustee’s
possession. The court also noted that the Trustee had failed to offer any explanation for why he did
not timely include the estate of PGI as a plaintiff.
The Trustee timely filed his notice of appeal on January 17, 2006.
IV. DISCUSSION
Although both the Trustee and SunTrust spend a great deal of their appellate briefs
addressing the issue of constitutional and prudential limitations on standing, there appears to be no
dispute as to the law in this area. Standing with respect to the fraudulent conveyance avoidance
action is conveyed generally by 11 U.S.C. § 544(b)(1) which provides:
Except as provided in paragraph (2), the trustee may avoid any transfer of an interest
of the debtor in property or obligation incurred by the debtor that is voidable under
applicable law by a creditor holding an unsecured claim that is allowable under
section 502 of this title or that is not allowable under section 502(e) of this title.3
Under this provision, a trustee has the right to avoid any transfer of property of a debtor or
any obligation incurred by a debtor that is voidable under applicable law by an unsecured creditor
of the debtor.4 5 Collier on Bankruptcy ¶ 544.09 (15th ed. rev. 2003). Applicable law in this case
is the Ohio Uniform Transfer Act, more specifically Ohio Revised Code Annotated § 1336.05, which
states:
(A) A transfer made or an obligation incurred by a debtor is fraudulent as to a
creditor whose claim arose before the transfer was made or the obligation was
incurred if the debtor made the transfer or incurred the obligation without receiving
3
Paragraph (2) of § 544(b) makes paragraph (1) inapplicable to certain charitable
contributions and is not pertinent to the case at hand.
4
No assertion has been made as to the lack of an unsecured creditor who would have
standing under state law to avoid the transfer to SunTrust to the extent the transfer otherwise met the
requirements of avoidability.
7
a reasonably equivalent value in exchange for the transfer or obligation and the
debtor was insolvent at that time or the debtor became insolvent as a result of the
transfer or obligation.
(B) A transfer made or an obligation incurred by a debtor is fraudulent as to a creditor
whose claim arose before the transfer was made or the obligation was incurred if the
transfer was made to or the obligation was incurred with respect to an insider for an
antecedent debt, the debtor was insolvent at that time, and the insider had reasonable
cause to believe that the debtor was insolvent.
Pursuant to the Act, a “‘[t]ransfer’ means every direct or indirect, absolute or conditional, and
voluntary or involuntary method of disposing of or parting with an asset or an interest in an asset,
and includes payment of money, release, lease, and creation of a lien or other encumbrance.” Ohio
Rev. Code Ann. § 1336.01(L). An “asset” means “property of a debtor,” subject to certain
exceptions inapplicable to this proceeding.5 Ohio Rev. Code Ann. § 1336.01(B).
Indisputably, there was a transfer to SunTrust. The critical inquiry is whether the transfer was
of “an interest of the debtor in property” as contemplated by § 544(b) of the Bankruptcy Code and
Ohio Revised Code Annotated § 1336.05. See Rieser v. Hayslip (In re Canyon Sys. Corp.), 343 B.R.
615, 635-36 (Bankr. S.D. Ohio 2006) (“To establish an actual fraudulent transfer under . . . the Ohio
UFTA, the Trustee must first demonstrate that the Debtor had an interest in the property transferred
to the defendants.”).
The Trustee argues in this appeal that the bankruptcy court erred in finding that the funds
transferred to SunTrust for the redemption of the PGI stock warrants were not property of OBM.
The Trustee observes that the funds transferred were generated from the Minolta loan to both OBM
and PGI, which both entities were jointly and severally obligated to repay; that OBM through its
5
The statutory exceptions are as follows:
1. Property to the extent it is encumbered by a valid lien;
2. Property to the extent it generally is exempt under nonbankruptcy law,
including but not limited to, section 2329.66 of [the Act];
3. An interest in property held in the form of a tenancy by the entireties
created under section 5302.17 of [the Act] prior to April 4, 1985, to the extent
it is not subject to process by a creditor holding a claim against only one
tenant.
Ohio Rev. Code Ann. § 1336.01(B).
8
president executed the wire transfer and escrow agreement, pursuant to which Minolta wired the loan
proceeds to the escrow agent, who then disbursed the funds to SunTrust; and that but for the transfer
to SunTrust, the funds would have been utilized as working capital for OBM since both the Minolta
letter of intent and loan agreement specified that any funds remaining after payment to SunTrust and
the other specified entities would go to OBM for working capital. According to the Trustee, the
bankruptcy court’s reliance on the fact that OBM was not a party to the Warrant Redemption
Agreement between PGI and SunTrust was misplaced because contractual privity is not a
prerequisite to standing for the state fraudulent conveyance action. Moreover, the Trustee asserts
that the Warrant Redemption Agreement was only one document in the larger transaction with
Minolta, which included the loan agreement, the letter of intent, and the wire transfer instructions,
to all of which OBM was a party. Consequently, the Trustee maintains that OBM had a sufficient
interest in the funds transferred to withstand any facial or factual attack on the Trustee’s standing.
In response, SunTrust defends the bankruptcy court’s ruling, noting that the obligation to pay
SunTrust for the warrants was the obligation of PGI alone, as set forth in the Warrant Redemption
Agreement. As to the assertion that absent the transfer the funds would have been available for
working capital for OBM, SunTrust notes that the loan documents used the initials OBM to
collectively refer to both OBM and PGI and that, therefore, the funds would have been available for
the working capital of both entities. Finally, although not cited by the bankruptcy court as a basis
for its holding, SunTrust argues that the Minolta loan proceeds never passed into OBM’s possession
and control and therefore never became an asset of OBM because the funds were disbursed by
Minolta through an escrow agent.
We agree with the Trustee that OBM had an interest in the funds transferred to SunTrust.
Notwithstanding that the original warrant agreement was between PGI and SunTrust alone and the
subsequent Warrant Redemption Agreement was only between these two entities, it is clear that the
funds paid to SunTrust were funds that Minolta had loaned to both OBM and PGI, and that both
OBM and PGI were obligated to repay. OBM was a party to the Minolta loan agreement and a party
to the escrow agreement, wherein it gave its consent to the distribution of funds in which it had an
interest. If OBM had had no interest in the funds, it would not have been necessary for it to be a
9
party to the escrow agreement which directed the distribution to SunTrust. The mere fact that the
funds were to be used to pay a debt owed solely by PGI did not obviate the fact that PGI’s debt was
paid with funds in which OBM had an interest since Minolta had loaned the funds to both OBM and
PGI and each was severally obligated for the funds’ repayment. Because the transfer to SunTrust
was made with funds that had been loaned to OBM, there was a transfer of property of the debtor.
The bankruptcy court’s decision to the contrary was clearly erroneous.
As to SunTrust’s assertion that the funds never became property of OBM because the funds
went from Minolta to SunTrust via an escrow agent and never passed into the debtor’s possession,
SunTrust is referring to what some courts call the “earmarking doctrine,” more customarily asserted
as a defense in preference actions rather than in a fraudulent conveyance suit. See Peoples Bank &
Trust Co. v. Burns, 95 Fed. Appx. 801, 805 (6th Cir. 2004) (“[T]he earmarking doctrine is
traditionally applied as a defense to a preference claim . . . .”); In re Erie World Entm’t, L.L.C., No.
00-13708, 2006 WL 1288578, at *6 (Bankr. S.D.N.Y. April 28, 2006) (question raised and
unresolved as to whether earmarking doctrine can be applied in a fraudulent conveyance case).
Nonetheless, in an unpublished opinion involving a fraudulent conveyance action under 11 U.S.C.
§ 544, the Court of Appeals for the Sixth Circuit stated that “[t]he earmark doctrine applies where:
(1) the assets in question were never under the control of the debtor; (2) the assets are transferred
from a third party to the creditor as a payment for an antecedent debt owed by the debtor; and (3) the
debtor’s estate is not diminished in value.” Alix v. Beim (In re Sanders), 168 F.3d 490, 1998 WL
808373, at * 2 (6th Cir. Nov. 9, 1998) (citing United States Lines (S.A.), Inc. v. United States (In re
McLean Indus., Inc.), 162 B.R. 410, 420 (S.D.N.Y. 1993), rev. on other grounds, 30 F.3d 385 (2d
Cir. 1994)).
Even assuming the first element is established by the facts of this case, although this
proposition is questionable because OBM as a party to the escrow agreement directed the disposition
and use of the funds, the other two elements necessary for the earmarking doctrine are missing. The
funds transferred to SunTrust were not used to repay a debt owed by OBM but were instead used to
pay an obligation of PGI for which OBM had no liability. Additionally, the transaction diminished
OBM’s estate. In essence, OBM was a co-borrower of the funds used to pay off a debt owed by PGI,
10
resulting in an increase of OBM’s liabilities with no commensurate increase in its assets. As such,
the earmarking doctrine provides no defense to the Trustee’s fraudulent conveyance action against
SunTrust.
In summary, because OBM had an interest in the funds transferred to SunTrust, the Trustee
on behalf of the estate of OBM has standing under § 544(b) and consequently under the Ohio state
fraudulent conveyance statute to pursue the avoidance of the transfer. Accordingly, the bankruptcy
court’s ruling on this issue is reversed.
We turn next to the question of whether the Trustee has standing on behalf of the OBM estate
to bring a cause of action for breach of fiduciary duties by SunTrust. Although the bankruptcy court
did not separately reference standing for this action in its opinion, the court dismissed the entire
complaint, presumably because it concluded that OBM had no interest in the property transferred and
therefore conveyance of this property could not constitute a breach of any fiduciary duties owed to
OBM. For the reasons previously addressed with respect to the fraudulent conveyance count, we
conclude that OBM had an interest in the funds transferred.
Furthermore, we conclude that standing to bring the breach of fiduciary duty claim rests as
a general proposition with the Trustee. When a cause of action belongs to the debtor before filing
a bankruptcy petition, 11 U.S.C. § 704(1) grants the trustee the exclusive right to assert that cause
of action. See Stevenson v. J.C. Bradford & Co. (In re Cannon), 277 F.3d 838, 853 (6th Cir. 2002).
Section 704(a)(1) provides such authority to the trustee by stating, in relevant part, that a trustee shall
“collect and reduce to money the property of the estate for which such trustee serves . . . [.]”
Pursuant to 11 U.S.C. § 541(a)(1), “all legal and equitable interests of the debtor,” including any
causes of action belonging to the debtor, comprise part of the “property of the estate.” See, e.g., In
re Cannon, 277 F.3d at 853; Spartan Tube & Steel, Inc. v. Himmelspach (In re RCS Engineered
Prods. Co.), 102 F.3d 223, 225 (6th Cir. 1996). Conversely, if a cause of action does not belong to
the debtor, then it does not become property of the estate as defined by § 541, and the trustee has no
standing to pursue that cause of action. In re Cannon, 277 F.3d at 853. “Whether a particular cause
of action belongs to the debtor so that it constitutes ‘property of the estate’ depends on state law.”
In re Cannon, 277 F.3d at 853; see also Barnhill v. Johnson, 503 U.S. 393, 398, 112 S. Ct. 1386,
11
1389 (1992) (noting that “in absence of any controlling federal law ‘property’ and ‘interests in
property’ are creatures of state law”).
In his complaint, the Trustee asserted that SunTrust committed a breach of its fiduciary duty
owed to OBM’s creditors and that OBM’s creditors were injured by SunTrust’s breach. However,
“[a]ctions for breach of fiduciary duties . . . accrue to the corporation itself because fiduciary duties
are owed to the corporation and it is the corporation that suffers injury when fiduciary duties are
breached.” Limor v. Buerger (In re Del-Met Corp.), 322 B.R. 781, 818 (Bankr. M.D. Tenn. 2005)
(citing, inter alia, Pepper v. Litton, 308 U.S. 295, 307, 60 S. Ct. 238 (1939) (“While normally that
fiduciary obligation is enforceable directly by the corporation, or through a stockholder’s derivative
action, it is, in the event of bankruptcy of the corporation, enforceable by the trustee.”); Keene Corp.
v. Coleman (In re Keene Corp.), 164 B.R. 844, 853-54 (Bankr. S.D.N.Y. 1994) (“Claims based upon
breach of a fiduciary duty belong to a corporation, but once bankruptcy ensues, they are enforceable
by the trustee. The trustee, therefore, is the only person with standing to bring those claims and the
creditors are barred from asserting them.”)). See also KMA Acquisitions Corp. v. Coleman, No.
92AP-1635, 1993 WL 431201 (Ohio App. 10 Dist. October 19, 1993) (“Only the corporation itself
may maintain an action against the directors and officers . . . for breach of their fiduciary duties.”).
Accordingly, the Trustee has standing to bring an action for breach of fiduciary duty on behalf of
OBM. The bankruptcy court’s order dismissing this claim for lack of standing is reversed.
The Trustee also asserts that it was error for the bankruptcy court to refuse to allow him to
join or substitute the estate of PGI as a plaintiff in the underlying adversary proceeding pursuant to
Federal Rule of Civil Procedure 17(a). The Trustee argues that SunTrust will not suffer any
prejudice if he joins the PGI estate as a plaintiff, and that the bankruptcy court erred in not giving
him a reasonable time to make the joinder in light of the fact that SunTrust did not raise the argument
that he was not the real party in interest until it filed its Motion for Summary Judgment and Motion
to Dismiss in July 2005.
Rule 17(a), made applicable to this proceeding by Federal Rule of Bankruptcy Procedure
7017, states in relevant part:
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Every action shall be prosecuted in the name of the real party in interest. An
executor, administrator, guardian, bailee, trustee of an express trust, a party with
whom or in whose name a contract has been made for the benefit of another, or a
party authorized by statute may sue in that person’s own name without joining the
party for whose benefit the action is brought; and when a statute of the United States
so provides, an action for the use or benefit of another shall be brought in the name
of the United States. No action shall be dismissed on the ground that it has been
allowed after objection for ratification of commencement of the action by, or joinder
or substitution of, the real party in interest; and such ratification, joinder, or
substitution shall have the same effect as if the action had been commenced in the
name of the real party in interest.
Fed. R. Civ. P. 17(a).
The bankruptcy court herein denied substitution of the PGI estate as a party plaintiff because
the Trustee advanced no explanation for his failure to timely include the estate, nor did he argue a
lack of access to information relevant in determining the correct plaintiff. See 6A Charles Alan
Wright, et al., Federal Practice and Procedure § 1555 (2d ed. 2006) (“[I]t has been held that when
the determination of the right party to bring the action was not difficult and when no excusable
mistake had been made, then the last sentence of Rule 17(a) was not applicable and the action should
be dismissed.”). Further, the bankruptcy court cited the fact that the Trustee had already filed two
amended complaints without including the estate of PGI as a plaintiff. See id. (“[I]f the real party
in interest is not joined or substituted within a reasonable time, the court should dismiss the suit. . . .
What constitutes a reasonable time is a matter of judicial discretion and will depend upon the facts
of each case.”). Although this issue is moot due to our conclusion that the Trustee as trustee of the
bankruptcy estate of OBM has standing in this adversary proceeding, we are unable to conclude,
based on a review of the entire record in this case, that the bankruptcy court’s denial of the Trustee’s
motion to add the PGI estate as a party plaintiff under Rule 17 was so unreasonable as to constitute
an abuse of discretion. In that respect, the bankruptcy court’s decision is affirmed.
V. CONCLUSION
For the foregoing reasons, the order of the bankruptcy court is REVERSED in part and
AFFIRMED in part.
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