Larson, III v. Foster (In re Foster)

Summarized by William Wallo , Bakke Norman, S.C.
11 years 5 months ago

Citation:

Larson v. Foster (In re Foster), Case No. 14-6007 (8th Cir. BAP 2014)

Tag(s):

Ruling:

Court affirmed dismissal of creditor's fraudulent conveyance action and denial of creditor's motion for retroactive approval of prosecution of derivative action.

Procedural context:

Purchaser of debtor's business, who also had claim against the debtor, brought an adversary proceeding which alleged that debtor's assignment of purchase contract constituted a fraudulent transfer. Prior to trial, debtor moved to dismiss for lack of standing, while creditor filed a motion for "retroactive" approval to prosecute the action on behalf of the estate. Bankruptcy court denied the creditor's motion and dismissed the action. On appeal, the BAP affirmed.

Facts:

Debtor filed bankruptcy and failed to list her interest under a contract for the sale of her insurance business, or her assignment of that interest to another creditor prior to the petition date. The purchaser of the debtor's business, who also held a claim against the debtor, brought an adversary action which alleged that the debtor's assignment of her rights to payments under the purchase contract constituted a fraudulent transfer under 11 U.S.C. Section 548. The complaint alleged that the purchaser had derivative standing to pursue the fraudulent transfer because he had only recently learned of the bankruptcy and the trustee would not bring the action without further investigation. Prior to trial, the debtor moved to dismiss the adversary proceeding for lack of standing. The purchaser moved for retroactive approval of his alleged derivative standing. The bankruptcy court denied the motion for retroactive approval and dismissed the adversary proceeding for lack of standing. On appeal, the BAP noted that derivative standing to bring an adversary proceeding is available when it can be shown the trustee is unwilling or unable to do so. The party seeking such standing must show the trustee refused to bring the claim, the claim is colorable, the bankruptcy court granted permission to bring the action, and the trustee's refusal to pursue the claim is unjustified. The court found that the purchaser did not establish that the trustee refused to bring an avoidance action, or consented to the derivative action. The purchaser could also not demonstrate that the trustee's refusal to bring the action was unjustified. Arguments of equitable estoppel could not cure the purchaser's failure to appropriately seek derivative standing. Standing is a component of subject matter jurisdiction that can be challenged at any time. Because derivative standing was properly denied, there was no subject matter jurisdiction and the complaint was properly dismissed. Affirmed.

Judge(s):

Kressel, Saladino, and Shodeen

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