South-Western Legal Studies in Business

Trustee May Sue on Behalf of Bankrupt Estate to Try to Recover Looted Funds
Description Appeals court held that the trustee of a bankrupt firm could sue former executives and attorneys for looting the firm immediately prior to bankruptcy. Such suit need not only be brought by creditors of the bankrupt firm; the trustee can enforce the obligations of executives and attorneys.
Topic Bankruptcy Law
Key Words Trustee; Damage to Bankrupt; Right of Action
C A S E   S U M M A R Y
Facts Senior Cottages was a senior citizen housing project. Klane was majority owner; Morris and Cohen were his lawyers. The business went broke and filed Chapter 7. The trustee believed that the lawyers conspired to help Klane loot the assets of Senior Cottages; so he sued them. He contended that $4.8 million in assets were diverted in a sweetheart deal. The complaint was dismissed. The bankruptcy court held that the creditors had to bring such suit, not the trustee. The trustee appealed, but the district court affirmed the decision. Trustee appealed again.
Decision

Reversed and remanded. A trustee has standing to assert such a claim. The suit is for misconduct by the principals of the firm for breach of fiduciary duty. A corporation has the right to bring such an action, so that right passes to the trustee when the business is in bankruptcy. The creditors would have the right to bring such a claim also, but are not the only parties who can raise the issues. Klane, as principal, could be liable. The attorneys could be liable for legal malpractice for breaching a duty of care.

Citation In re Senior Cottages of America, LLC, 482 F.3d 997 (8th Cir., 2007)

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