"A creditors' committee [or secured creditor] may acquire standing to pursue the debtor's claims if (1) the committee [or creditor] has the consent of the debtor in possession or trustee, and (2) the court finds that suit by the committee [or creditor] is (a) in the best interest of the bankruptcy estate, and (b) is necessary and beneficial to the fair and efficient resolution of the bankruptcy proceedings."In re Baltimore Emergency Services II, Corp., 432 F.3d 557, 561 (4th Cir. 2005) (alterations in original) (quoting In re Commodore Int'l Ltd., 262 F.3d 96, 100 (2d Cir. 2001)). "The question [of whether to permit derivative standing] is a significant one, for limitations on standing are of paramount importance in bankruptcy proceedings."
Hartford Underwriters Ins. Co. v. Magna Bank, N.A. (In re Hen House Interstate, Inc.), 177 F.3d 719, 721, (8th Cir. 1999), aff'd sub nom. Hartford Underwriters Ins. Co. v. Union Planters Bank, N.A., 530 U.S. 1 (2000); see also Scott v. Nat'l Century Fin. Enter. Inc. (In re Baltimore Emergency Services II Corp.), 432 F.3d 557, 559-60 (4th Cir. 2005); Smart World Tech., LLC v. Juno Online Serv. Inc. (In re Smart World Tech., LLC), 423 F.3d 166, 174 (2nd Cir. 2005); Canadian Pac. Forest Prod. Ltd. v. J.D. Irving, Ltd. (In re Gibson Group, Inc.), 66 F.3d 1436, 1440 (6th Cir. 1995). DISCUSSION
" Id. Hartford Underwriters therefore does not control because it did not answer the question before us: whether the bankruptcy court may authorize a creditor to bring claims the Bankruptcy Code expressly reserves to the trustee (or debtor-in-possession). Finally, we note that no court of appeals has expressly rejected the possibility of derivative standing when a trustee is unable or unwilling to pursue avoidance actions. But see Scott v. National Century Fin. Enters., Inc. (In re Baltimore Emergency Servs. II, Corp.), 432 F.3d 557, 560-61 (4th Cir. 2005) (expressing hostility toward the availability of derivative standing under the Bankruptcy Code); In re Cybergenics Corp., 330 F.3d at 580-87 (Fuentes, J., dissenting, joined by Alito, Sloviter. Smith, JJ.) (arguing that the analytical framework of Hartford Underwriters forecloses the availability of derivative standing.). Even those bankruptcy courts that correctly read In re Lauer as permitting derivative standing, however, "disagree[d] as to what constitutes the trustee's inability or unwillingness to bring suit which justifies derivative standing."
While the Fourth Circuit has yet to have the opportunity to address definitively the viability of derivative standing for Bankruptcy Code chapter 5 actions brought by entities other than a trustee or debtor, the Fourth Circuit has noted with apparent approval that other circuits allow derivative standing in such instances with "strict conditions." In re Baltimore Emergency Servs. II, Corp., 432 F.3d 557, 561 (4th Cir. 2005) ("Even those circuits that permit derivative standing do so only under strict conditions.")
A claim is not moot, however, as long as the parties have a concrete interest in the outcome of the litigation. In re Bait. Emergency Servs. II, Corp., 432 F.3d 557, 560 n. * (4th Cir. 2005). In the present case, Defendants argue that provisions of the trusts permit the trustees to disburse the entire principal prior to the termination of the trusts.
Noting that the provisions granting standing to trustees to bring derivative suits in 11 U.S.C. §§ 544, 545, 547(b), 548(a) and 549(a) use identical language to the costs and expenses language at issue in Hartford Underwriters, some courts have held — notwithstanding the Court's specific exclusion of those sections in footnote five — that Hartford Underwriters calls into question the possibility of derivative standing for parties other than the trustee in both Chapter 11 and Chapter 7 settings. See In re Fox, 305 B.R. 912, 915 (B.A.P. 10th Cir. 2004) (holding that although "in a footnote Hartford recognizes that some courts have permitted creditors or committees to bring derivative suits" the same principles of interpretation should apply to derivative standing); In re Baltimore Emergency Services II, Corp., 432 F.3d 557, 561 (4th Cir. 2005 (stating "[i]t is far from self-evident that the Bankruptcy Code permits creditor derivative standing" while declining to rule on the issue). A greater number of circuits, consistent with footnote five of Hartford Underwriters, have held that bankruptcy courts in both Chapter 11 and Chapter 7 proceedings may grant parties other than the trustee derivative standing to pursue avoidance actions. See In re Racing Services Inc., ___ B.R. ___, 2007 WL 704984 at *3-4 (B.A.P. 8th Cir. Mar. 9, 2007) (holding that, where creditors have properly moved for court permission, derivative standing could be available in a Chapter 7 proceeding); In re Commodore Int'l Ltd., 262 F.3d 96, 98-100 (2d Cir. 2001) (holding, in an action joining a proceeding filed under Chapter 11 and a "Bahamian Court action . . . akin to a Chapter 7 bankruptcy proceeding," that derivative standing may be asserted by a creditor in the event of an unjustified refusal to bring the action or where the creditor h
It has, however, observed that "[o]ur sister circuits that acknowledge the doctrine have allowed a bankruptcy court to grant derivative standing to a creditor or creditors' committee in two limited circumstances." Scott v. Nat'l Century Fin. Enters., Inc. (In re Balt. Emergency Servs. II, Corp.), 432 F.3d 557, 560 (4th Cir. 2005) (citations omitted). "First, several circuits recognize derivative standing when the trustee or debtor-in-possession unreasonably refuses to bring suit on its own.
The Fourth Circuit has concluded that the bankruptcy court does not possess such authority. Scott v. Nat'l Century Fin. Enters., Inc. (In re Baltimore Emergency Servs. II, Corp. ), 432 F.3d 557 (4th Cir. 2005). In the Scott decision, the court concluded that granting retroactive leave to prosecute an action "would run contrary to the very purpose of imposing standing limitations: preventing bankruptcy proceedings from being sidetracked, even temporarily, by wasteful ancillary litigation."
In determining whether Plaintiffs are entitled to derivative standing, the Court begins with the proposition that granting derivative standing should be "the exception rather than the rule." In re Weyandt, 544 Fed.Appx. at 110 (quoting In re Balt. Emergency Servs. II, Corp., 432 F.3d 557, 562 (4th Cir.2005) ). Derivative standing is appropriate only if: "(i) the movant has alleged a colorable claim that would benefit the estate (ii) the trustee has unjustifiably refused to pursue the claim itself; and (iii) the movant has obtained permission from the bankruptcy court to initiate the action on behalf of the estate."
Although the Court is aware of the Fourth Circuit's opinion in In re Baltimore Emergency Servs. II Corp., which stands for the proposition that “consent must occur before, not after, the action is filed,” the Fourth Circuit's reasoning is contrary to a host of other appellate courts that have determined first that derivative standing is allowed, and second that such standing, under certain circumstances, may be sought and granted retroactively. In re Baltimore Emergency Servs. II, Corp., 432 F.3d 557, 563 (4th Cir.2005).See, e.g., Racing Servs., 540 F.3d at 903–04.