Blawgletter's unscientific survey of practicing lawyers confirms two things you would've expected — that mergers and acquisitions, real estate transactions, and other deals have fallen off the table while bankruptcy work has picked up.
But even in the bankruptcy up-tick lies a negative subtrend: Our friends see more chapter 7 liquidations and fewer chapter 11 reorganizations.
The reorg cases last longer (hence more work) and aim to rehabilitate the business (ergo more professional satisfaction). The 7s, on the other hand, go swiftly into carving up the businesses' still-warm corpses.
Yet that ill wind may blow more jobs towards another slice of the profession — the commercial litigation and trial types.
A decision by the Sixth Circuit today offers a glimpse into why. It has to do with "derivative standing" of creditors.
The case concerned a debtor that owed around $18 million to Hyundai, a semi-truck trailer manufacturer. Hyundai threw the debtor, Trailor Source, into an involuntary liquidation proceeding. The bankruptcy court appointed a trustee. Hyundai asked him to file an action to undo transfers that Trailer Source and an affiliate, Southern Trailer, made to another affiliate. The trustee demurred, pleading poverty.
Hyundai countered by filing a motion for permission to pursue the claims derivatively (on behalf of the bankruptcy estate of Trailer Source). The trustee replied the same day by moving for approval of a settlement that traded a release claims to recover $20 million worth of allegedly fraudulent transfers for a cash payment of $50,000. The bankruptcy court denied Hyundai's motion and granted the trustee's.
The district court reversed, and the Sixth Circuit agreed. The bankruptcy court didn't make adequate findings to support approval of the $50,000 settlement, the both courts held. Nor did it have grounds for denying Hyundai's application to proceed derivatively on the fraudulent transfer claims. On the latter point, the court said:
[I]n 11 U.S.C. § 503(b)(3)(B) Congress has expressly provided that creditors may be compensated on a priority basis for their efforts in recovering property for the benefit of the estate. Specifically, § 503(b)(3)(B) provides for the priority payment of the expenses of “a creditor that recovers, after the court’s approval, for the benefit of the estate any property transferred or concealed by the debtor.” 11 U.S.C. § 503(b)(3)(B). An avoidance action pursuant to § 544(b)—as Hyundai proposes here—falls within the scope of § 503(b)(3)(B) as an action to recover “property transferred . . . by the debtor.” Based upon the text and statutory history of § 503(b)(3)(B), we believe that the only explanation for this provision is that it approves the practice of permitting creditors, with court authorization, to pursue claims on behalf of bankrupt debtors.
In re Trailer Source, Inc. (Hyundai Translead, Inc. v. Jackson Truck & Trailer Repair, Inc.), No. 07-5584, slip op. at 14 (6th Cir. Feb. 6, 2009).
The recognition of derivative standing in chapter 7 cases gives creditors the option of pursuing commercial claims when the trustee declines to do so. Trustees do that from time to time because estates in liquidation often lack resources or the trustees don't want to work on a contingent fee basis.
