Ivey, Barnum & O'Mara, LLC v. Bear, Stearns & Co. (In re Stanwich Financial Services Corp.)
Docket: No. 3:11cv1838 (SRU)
Court: District Court, D. Connecticut; March 26, 2013; Federal District Court
Appellant Ivey, Barnum, O’Mara, LLC (the "Liquidating Agent") appeals the April 7, 2011 and September 30, 2011 Orders from the United States Bankruptcy Court, asserting that the court erred in determining that the Liquidating Agent lacked standing to pursue fraudulent conveyance claims under 11 U.S.C. §§ 544(b) and 548(a) against Bear Stearns & Co. Inc. and Hinckley, Allen & Snyder, LLP. The district court vacated the bankruptcy court's orders and remanded the case for further proceedings. The district court's review is conducted de novo for legal conclusions and for clear error regarding factual findings, as established under 28 U.S.C. § 158(a)(1) and Fed. R. Bankr. P. 8013.
The background indicates that Stanwich Financial Services Corp. (the Debtor) filed for Chapter 11 bankruptcy on June 25, 2011. Subsequently, the Official Committee of Unsecured Creditors initiated an adversary proceeding on May 2, 2012, to recover alleged fraudulent transfers related to a leveraged buyout involving Settlement Services Treasury Assignment, Inc. (SSTAI), with Bear Stearns serving as financial advisor and Hinckley Allen as legal advisor. The Liquidating Agent claimed that Bear Stearns misrepresented the sale of SSTAI and facilitated transactions that depleted trust assets, while Hinckley Allen was implicated as a recipient of fraudulent transfers linked to legal services provided during the buyout. The original complaint sought to void and recover these fraudulent transfers, and an amended complaint added various counts against the professional defendants for breaches of fiduciary duties and other claims. The bankruptcy court ruled that the Committee lacked standing to assert these counts based on the Wagoner rule.
In January 2005, the Liquidating Agent sought permission to file a Second Amended Complaint to address defects identified by the Bankruptcy Court in Counts I, II, V, and VII. In April 2011, the Bankruptcy Court denied this motion, citing futility due to the Liquidating Agent's lack of standing to assert claims against Bear Stearns and Hinckley Allen, based on the Wagoner rule, which states that claims related to corporate fraud by management accrue to creditors, not the corporation itself. The Bankruptcy Court noted that the Liquidating Agent alleged a conspiracy among the debtor’s shareholders and professionals, including Bear Stearns and Hinckley Allen, to defraud creditors during the 1997 leveraged buyout (LBO). Although the Liquidating Agent removed the term “aiding and abetting” from its claims, the court viewed this change as superficial, maintaining that the core allegations of fraudulent transfer against Bear Stearns and Hinckley Allen remained unchanged. Following a Motion for Reconsideration, the Bankruptcy Court reiterated its April ruling, affirming that the Liquidating Agent lacked standing under the Wagoner rule to pursue these claims. The court stated that the April ruling barred the Liquidating Agent from pursuing its original fraudulent transfer claims against Bear Stearns and Hinckley Allen. The Liquidating Agent subsequently appealed the Bankruptcy Court’s decisions.
Under the Bankruptcy Code, a trustee representing a bankrupt corporation can only pursue claims that the corporation itself could have brought, not those on behalf of creditors. While generally lacking standing to sue third parties for creditors, the trustee can pursue certain avoidance actions, specifically under Sections 544 and 548, which address fraudulent transfers. Section 544(b) allows the trustee to avoid transfers that an unsecured creditor could challenge, while Section 548(a) permits avoidance of transfers made with intent to defraud or for less than reasonably equivalent value within two years before bankruptcy filing.
The Liquidating Agent claims standing to assert fraudulent conveyance actions against Bear Stearns and Hinckley Allen, alleging their involvement in SSTAI’s management misconduct. However, the Bankruptcy Court ruled against this claim, citing Second Circuit precedent that prevents a corporation from asserting aiding-and-abetting claims related to its own misconduct. According to the Second Circuit, such claims belong to the creditors, not the corporation or its representatives. The court concluded that the Wagoner rule applies, preventing the Liquidating Agent from asserting professional malpractice claims due to the debtor's collaboration with the defendants in the fraudulent schemes.
The Bankruptcy Court ruled that the Wagoner rule prevents the Liquidating Agent from pursuing fraudulent conveyance claims. It determined that the Liquidating Agent lacked standing by using sections 544 and 548 as a facade for claims not within its authority. The removal of the term ‘aiding-and-abetting’ by the plaintiffs is deemed a superficial change, as they continue to assert fraudulent transfer actions against Bear Stearns and Hinckley Allen for their involvement in the 1997 leveraged buyout (LBO). The Court emphasized that claims of fraud against a corporation, facilitated by management, belong to creditors, not the corporation itself, thereby barring the Liquidating Agent from aiding-and-abetting claims under the Wagoner rule.
However, the Liquidating Agent can assert fraudulent transfer claims based on allegations that certain professional fee payments were made with intent to defraud or without equivalent value, as outlined in both federal and Rhode Island law. The Court distinguished between aiding-and-abetting claims and fraudulent transfer claims for standing purposes. Although the Liquidating Agent cannot pursue fraud or malpractice claims against Bear Stearns and Hinckley Allen, it does have the statutory authority to assert fraudulent transfer claims under the Bankruptcy Code, which is not limited by the Wagoner rule.
The Court noted that under section 544(b), a trustee possesses the rights of actual creditors to avoid certain transfers, meaning that while a trustee may be barred from asserting claims due to Wagoner, the creditors' rights remain intact. Furthermore, the Wagoner rule does not apply to claims explicitly granted to a trustee or debtor in possession by the Bankruptcy Code. The rights to recover such transfers are conferred by federal law, and denying the Liquidating Agent standing to recover the payments would contradict the principles of the Wagoner rule. Should the alleged transfers meet the required legal elements, the Liquidating Agent is authorized to utilize sections 544 and 548 to contest them. The Court concluded that the Liquidating Agent has standing for fraudulent conveyance claims against Bear Stearns and Hinckley Allen and remanded the case to the Bankruptcy Court, noting that the claims under 11 U.S.C. 548 fail as a matter of law.
Section 548 allows a trustee to avoid any transfers made by the debtor within two years prior to the filing of a bankruptcy petition. This two-year timeframe is a statutory requirement and not subject to equitable tolling. The original and Second Amended Complaints reference transfers to Bear Stearns and Hinckley Allen from 1997, specifically noting that these occurred on May 20, 1997, during the closing of a leveraged buyout (LBO) alleged to involve fraudulent transfers. Stanwich filed for Chapter 11 bankruptcy on June 25, 2001, which was beyond the two-year period for the transfers in question. Consequently, the Liquidating Agent’s claims under section 548 against Bear Stearns and Hinckley Allen do not meet the necessary temporal requirement and are legally inadequate. The Bankruptcy Court's orders are vacated, and the case is remanded for further proceedings. The Liquidating Agent, as the successor to the Committee established by the Debtor's First Amended Chapter 11 Plan confirmed on January 13, 2004, is empowered to pursue these claims. An earlier order from April 16, 2002, confirmed that the Debtor assigned these claims to the Committee, which has the standing to initiate and pursue the adversary proceeding on behalf of the bankruptcy estate. SSTAI has since been renamed Stanwich Financial Services Corp.
