In Re Rcs Engineered Products Company, Inc., Debtor. Spartan Tube and Steel, Inc. v. Daniel C. Himmelspach Railcar Specialties, Inc.

Citations: 102 F.3d 223; 37 Collier Bankr. Cas. 2d 268; 1996 U.S. App. LEXIS 32211; 30 Bankr. Ct. Dec. (CRR) 26; 1996 WL 708896Docket: 95-1223

Court: Court of Appeals for the Sixth Circuit; December 11, 1996; Federal Appellate Court

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Spartan Tube and Steel, Inc. appeals a district court order affirming a bankruptcy court ruling that only a debtor's bankruptcy trustee has the authority to pursue an alter ego claim against the debtor's parent company, Railcar Specialties, Inc. The bankruptcy court determined that under Michigan law, such claims are considered property of the debtor's estate, leading to a stay of Spartan's state court action against Railcar under 11 U.S.C. § 362(a)(3). 

RCS Engineered Products Company (RCS), a wholly owned subsidiary of Railcar, had incurred debt to Spartan, which increased from a credit limit of $10,000 to $50,000 based on representations that RCS was part of Railcar. In 1991, Spartan and other creditors initiated an involuntary bankruptcy against RCS, subsequently leading Spartan to file a state court lawsuit against both RCS and Railcar, asserting that Railcar should be liable for RCS’s debts due to an alter ego relationship.

After RCS filed its own Chapter 7 bankruptcy petition, its trustee, Daniel C. Himmelspach, commenced an adversary proceeding against Railcar, arguing it should be liable for RCS’s obligations. In response, Railcar sought declaratory relief, asserting that only one party—either the bankruptcy trustee or Spartan—could pursue an alter ego claim. The case was removed to federal court, and the bankruptcy court was tasked with determining who had the standing to sue Railcar under the alter ego theory. The appellate court ultimately reversed the bankruptcy court's judgment regarding standing.

On May 31, 1994, the bankruptcy court ruled that under Michigan law, an alter ego claim is considered property of the debtor's estate, thereby granting RCS's bankruptcy trustee standing to bring such a claim against Railcar. The court also determined that the automatic stay provision of the Bankruptcy Code precluded Spartan from pursuing its state court action. On February 2, 1995, the district court affirmed this judgment. Spartan did not contest the trustee's standing but argued that its unique alter ego action should not be stayed. The appellate review found that the bankruptcy court erred in its conclusion that an alter ego claim constitutes property of the estate, leading to the determination that the trustee lacks standing to pursue the claim against Railcar. Consequently, the automatic stay does not apply to Spartan's action. It was noted that the classification of a cause of action as property of the estate is governed by state law. In reviewing Michigan law, it was concluded that a subsidiary does not possess standing to assert an alter ego claim against its parent or shareholders.

In Michigan, corporate identities are generally respected, allowing for piercing of the corporate veil only to prevent fraud or injustice. Courts require three elements to establish that one entity is the alter ego of another: (1) the corporate entity must be a mere instrumentality of another; (2) it must be used to commit fraud or wrongdoing; and (3) there must be unjust loss or injury to the plaintiff. A subsidiary cannot successfully assert an alter ego claim against its parent company because it cannot demonstrate suffering an unjust loss or injury from actions against itself. Additionally, corporate veil piercing is intended to benefit third parties, not the corporation or its shareholders. An alter ego claim is a liability doctrine applied to individuals misusing a corporation for personal business, arising from fraud or injustice inflicted on third parties rather than the corporation itself. The Michigan Supreme Court's decision in Wells v. Firestone Tire and Rubber Co. permitted a parent company to invoke the alter ego doctrine to defend against a third-party claim, but this ruling does not support a subsidiary's standing to claim the same against its parent. The bankruptcy court's interpretation that a subsidiary could similarly invoke the alter ego doctrine overlooks this essential limitation, as the doctrine is meant to protect third-party interests.

A subsidiary cannot assert an alter ego claim against its parent company under Michigan law, meaning such a claim does not become part of the estate when the subsidiary files for bankruptcy under 11 U.S.C. § 541(a)(1). Consequently, the bankruptcy trustee of the subsidiary lacks the authority to bring an alter ego claim under § 704(1) of the Bankruptcy Code. The bankruptcy court incorrectly held that the trustee had standing to pursue this claim against Railcar. Additionally, under 11 U.S.C. § 362, the automatic stay that protects property of the bankruptcy estate does not apply to Spartan's state court alter ego action against Railcar, as the claim is not considered property of the subsidiary's estate. The judgment of the district court is therefore reversed.