Opinion
No. 99-2400 G/V, Chapter 7
March 31, 2000.
ORDER OF DISMISSAL
This is a case arising out of the bankruptcy of William Dunlap Cannon, III. Cannon filed a bankruptcy petition on February 25, 1994. On February 23, 1996, plaintiff George Stevenson, trustee for Cannon's estate, (the "Trustee") filed an eight-count complaint against defendants J.C. Bradford Company, Bradford Co., Inc., and Charles Ross (collectively "Bradford"). These claims were tried in front of the United States Bankruptcy Court for the Western District of Tennessee. Before the court now are the bankruptcy court's proposed findings of fact and conclusions of law regarding counts I-VII of the Trustee's complaint [hereinafter "proposed ruling"]. Counts I-VII of the complaint are claims brought by the Trustee against Bradford for damages under statutory and common law theories independent of the Bankruptcy Code. These claims were within the bankruptcy court's non-core jurisdiction pursuant to 28 U.S.C. § 157 (c) (1), which limits a bankruptcy court to submitting proposed findings of fact and conclusions of law to the district court for de novo review.
Count VIII of the Trustee's complaint is a fraudulent conveyance claim under 11 U.S.C. § 548 and was within the bankruptcy court's core jurisdiction pursuant to 28 U.S.C. § 157 (b) (2) (H). The bankruptcy court entered a judgment against Bradford on count VIII, and Bradford appealed that judgment to this court in case no. 99-2605 L/A. In that case, this court reversed the bankruptcy court and granted summary judgment in favor of Bradford. Stevenson v. J.C. Bradford Co., No. 99-2605 G/A (W.D.Tenn. Mar. 31, 2000) (order reversing bankruptcy court and granting defendants-appellants' motion for summary judgment) [hereinafter "previous order").
The facts of this case are more fully presented in this court's previous order and the bankruptcy court's proposed ruling. Stated briefly, Cannon was a real estate attorney who misappropriated over $3,500,000 of his clients' money for use in his own unprofitable business ventures. One of the unprofitable business ventures that Cannon financed with his clients' money was a commodity futures trading account that he maintained with Bradford. The Trustee alleges that Bradford defrauded Cannon by investing the money Cannon misappropriated in an unreasonably high-risk investment system. The Trustee claims that Cannon was an unsophisticated investor, and that Bradford misled him about the high risk of the investment system and its low chance for success. The Trustee also alleges that Bradford excessively traded Cannon's account to generate commissions.
Specifically, the Trustee alleges against Bradford: (1) violation of the Commodities Exchange Act's fraud provisions, 7 U.S.C. § 6 (b); (2) breach of fiduciary duty (3) common law fraud; (4) gross negligence, (5) violation of the Tennessee Consumer Protection Act, Tenn. Code Ann. § 47-18-109; (6) vicarious liability; and (7) failure to supervise. After a trial, the bankruptcy court proposed that Bradford be held liable on all seven counts and that judgment be entered against Bradford for compensatory damages in the amount of $2,361,736 and punitive damages in the amount of $5,000,000. (proposed ruling at 1.17.)
Bradford objects to the bankruptcy court's proposed ruling claiming, among other things, that the Trustee lacks standing to bring these claims against Bradford. The proposed ruling does not address the issue of the Trustee's standing to bring the claims. A bankruptcy trustee's constitutional standing to bring a lawsuit coincides with the scope of powers the Bankruptcy Code grants a trustee. See Shearson Lehman Hutton, Inc. v. Wagoner, 944 F.2d 114, 117-18 (2d Cir. 1991). The Trustee relies upon 11 U.S.C. § 541, which includes in a bankruptcy estate all the debtor's interests in property at the time of filing the bankruptcy petition, including any causes of action the debtor has against third parties. Pursuant to § 541, a bankruptcy trustee stands in the shoes of the debtor and has standing to bring any lawsuit that the debtor could have instituted had he not petitioned for bankruptcy. See Morgan 944 F.2d at 118. The converse is also true: a bankruptcy trustee lacks standing to bring a lawsuit that the debtor lacked standing to bring upon filing his bankruptcy petition. See In Re Graham Square, Inc., 126 F.3d 823, 831 (6th Cir. 1997).
The relevant issue in this case, therefore, is whether Cannon would have had standing to sue Bradford had he not petitioned for bankruptcy. Constitutional standing, derived from Article III's "case or controversy" language, requires that a plaintiff suffer "a distinct and palpable injury to himself." Warth v. Seldin, 422 U.S. 490, 501 (1975). In this case, it is undisputed that all the money the Trustee alleges Cannon lost by investing with Bradford came from escrow accounts Cannon maintained for the benefit of him clients. (proposed ruling at 26.) In its previous order, this court held that the money in those escrow accounts was money that Cannon was holding in an express trust for his clients. (previous order at 8.) Consequently, this court held that Cannon had no equitable interest in the money he transferred to Bradford. Id. at 9.
Because Cannon held no equitable interest in the money he transferred to Bradford, he suffered ored no "distinct and palpable injury to himself" when that money was lost. Warth, 422 U.S. at 501. Instead, it was Cannon's clients who suffered an injury, and the Trustee lacks standing to assert their claims. See E.F. Hutton Co., Inc. v. Hadley, 901 F.2d 979, 984-87 (11th Cir. 1990) (relying on Caplin v. Marine Midland Grace Trust Co., 406 U.S. 416 (1972), in holding that a bankruptcy trustee does not have standing to recover money owed to particular creditors, rather than the bankruptcy estate).
Because Cannon would riot have bed standing to sue Bradford, the Trustee lacks standing to sue Bradford. Accordingly, the Trustee's claims against Bradford are dismissed.
IT IS SO ORDERED.