Opinion
Case No. 98-16345-SSM, Adversary Proceeding No. 99-1020
April 16, 1999
Richard G. Hall, Esquire, Annandale, VA, of Counsel for the plaintiffs
Lloyd D. Hinrichs, Esquire, Dumfries, VA, of Counsel for the defendant
MEMORANDUM OPINION
This matter is before the court on the motion filed by the plaintiffs on March 3, 1999, to dismiss the defendant's counterclaims. A hearing was held on March 23, 1999, at which time the court heard the contentions of the parties and then took the motion under advisement. For the reasons stated, the motion will be granted.
Background
Pedro Ramos ("the debtor") filed a voluntary petition under chapter 7 of the Bankruptcy Code in this court on August 27, 1998, and has not yet been granted a discharge. On his schedule of assets, he listed no claims or causes of action except for a $6,600 wage claim against Imperial Paint Autobody, Inc., a corporation in which he was a one-third shareholder. The chapter 7 trustee, although originally filing a report of no distribution, withdrew the report and subsequently brought a motion to sell the debtor's shares to the other two shareholders, David Oquendo and Carlos Gonzalez. Messrs. Oquendo and Gonzalez also filed an objection to the debtor's claimed exemption of the stock. After a hearing on January 4, 1999, the court allowed the claimed exemption in the amount of $3,365.00 but also granted the trustee's motion to sell all of the shares to Messrs. Oquendo and Gonzalez for $7,000, with the exemption to be paid out of the proceeds of sale. That sale has apparently been consummated.
On January 22, 1999, Imperial Paint and Body Shop, Inc., Mr. Oquendo, and Mr. Gonzalez filed the present action seeking to bar the debtor's discharge and to determine that their claims against the debtor for money that they allege was improperly withdrawn from the business is nondischargeable. The debtor filed both an answer and a three-count counterclaim. The plaintiffs now seek to have all three of those counts dismissed on the ground that the debtor lacks standing to assert them because they are causes of action belonging to the bankruptcy estate. The plaintiffs also alternatively seek to have the third count dismissed for lack of standing, because, it is argued, the action can be maintained only by a shareholder, and the debtor no longer owns any stock in the corporation.
Subsequent to the filing of the motion to dismiss, the debtor filed on March 18, 1999, amended schedules in his bankruptcy case listing the three counterclaims as assets and claiming them exempt. At a hearing held on April 13, 1999, the court sustained the objections of Mr. Oquendo and Mr. Gonzalez to the claimed exemptions.
Discussion A.
The filing of a bankruptcy petition creates an "estate" consisting, among other things, of "all legal or equitable interests of the debtor in property as of the commencement of the case." § 541(a), Bankruptcy Code. This includes prepetition causes of action belonging to the debtor. Field v. Transcontinental Ins. Co., 219 B.R. 115, 118 (E.D. Va. 1998) (Ellis, J.); Tignor v. Parkinson (In re Tignor), 729 F.2d 977, 981 (4th Cir. 1984). So long as a debtor's causes of action remain property of the bankruptcy estate, only the trustee, as the representative of the estate, has standing to assert them. Rowland v. Novus Financial Corp., 949 F. Supp. 1447, 1453 (D. Hawaii 1996) (TILA claims); Tyler House Apts, Ltd. v. United States, 38 Fed.Cl. 1, 6 (1997); Ball v. Nationscredit Fin. Svcs. Corp., 207 B.R. 869, 872 (N.D. Ill. 1997); Honigman v. Comerica Bank (In re Van Dresser Corp.), 128 F.3d 945, 947 (6th Cir. 1997) ("A debtor's appointed trustee has the exclusive right to assert the debtor's claim.") A cause of action, like other property, ceases to be property of the estate only as a result of being exempted by the debtor or being abandoned by the trustee. 522 and 554, Bankruptcy Code. In the present case, the debtor's attempt to claim the causes of action as exempt has been denied, and the trustee has not yet abandoned them. Accordingly, the debtor lacks standing to pursue them, and they will be dismissed without prejudice. Should the trustee subsequently abandon the causes of action, and the present adversary proceeding still be pending, the court will give favorable consideration to a motion for leave to refile the counterclaims if doing so will not unduly delay the trial of the nondischargeability complaint. Otherwise, the debtor may assert the counterclaims (if they have been abandoned) in any appropriate forum.
B.
In light of the court's ruling concerning standing, it is not necessary to rule on the alternate ground asserted for dismissal of "Count C" of the counterclaim. Some brief comment is appropriate, however, for the guidance of the parties in the event the claim is abandoned. The debtor, as noted, filed his counterclaim in three counts, denominated Counts "A", "B", and "C". Count A seeks monetary damages in the amount of $78,311.58 against Messrs. Oquendo and Gonzalez for an alleged conspiracy to oust the debtor from his position as president of Imperial and to cause the corporation not to pay certain debts that the debtor had incurred on Imperial's behalf. Count B seeks monetary damages against Mr. Oquendo alone for alleged breach of fiduciary duty to the debtor, in his capacity both as a shareholder and as a creditor of Imperial, by diverting and failing to account for cash received by him. Count C seeks monetary damages of $32,400 against Imperial for failing to pay him for shares he surrendered to the corporation at the time Mr. Gonzalez became a shareholder. Briefly, at the time of the transaction in question, the debtor owned 51% of the 1,000 outstanding shares of the corporation, and Mr. Oquendo owned 49% of the shares. The corporation did not have sufficient funds to pay its liabilities, and the debtor and Mr. Oquendo recruited Mr. Gonzalez to purchase a one-third interest in the corporation for $60,000. In order to effectuate the transaction, the debtor and Mr. Oquendo each surrendered a portion of their shares to the corporation, which then issued them to Mr. Gonzalez in exchange for his $60,000 capital contribution. Imperial argues that any right to payment on account of the surrendered shares is somehow tied in with ownership of the retained shares. Those shares, as noted above, have been sold by the chapter 7 trustee and no longer belong to the debtor. Thus, it is argued, the debtor has no standing to assert the claim. This misreads the complaint. Count C is not asserting a claim in tort for diminution in value of the shares retained by the debtor after Mr. Gonzalez became a shareholder. Rather, it is asserting a contract claim for payment of the value of the shares he surrendered. Thus, the viability of Count C is not dependent on the debtor's continued ownership of the shares he retained after the shares he surrendered were issued to Mr. Gonzalez.
Whether the Count C has any chance of success on the merits is a different issue altogether. It would certainly appear, based on evidence previously heard by the court, that there was never an agreement or expectation that the debtor would be paid for the surrendered shares. However, as the Supreme Court has explained,
When a federal court reviews the sufficiency of a complaint, before the reception of any evidence either by affidavit or admissions, its task is necessarily a limited one. The issue is not whether a plaintiff will ultimately prevail but whether the claimant is entitled to offer evidence to support the claims. Indeed it may appear on the face of the pleadings that a recovery is very remote and unlikely but that is not the test . . . [I]t is well established that, in passing on a motion to dismiss . . . the allegations of the complaint should be construed favorably to the pleader.
Scheuer v. Rhodes, 416 U.S. 232, 236, 94 S.Ct. 1683, 1686, 40 L.Ed.2d 90 (1974). Nevertheless, plaintiff's counsel should be aware of his duty not to present claims that are not well-grounded in fact and law, and of the potential for sanctions for a breach of that duty. F.R.Bankr.P. 9011.
C.
A separate order will be entered dismissing the counterclaims without prejudice based on lack of standing.