Section 541 of the Bankruptcy Code establishes that a debtor’s bankruptcy estate includes “all legal and equitable interests of the debtor in property as of the commencement of the case.” This includes potential and actual causes of action that run in the debtor’s favor. For such causes of action, similar extraneous lawsuits brought by individual creditors will be subject to the automatic stay provisions of Section 362(a)(3) of the Bankruptcy Code. Are alter ego, piercing and successor liability claims property of the bankruptcy estate? Courts are divided on this question.
Giron v. Zeytuna, Inc., 2022 WL 856385 (D.D.C. March 23, 2022) provided a two-part test to determine whether alter ego, piercing and successor liability claims are bankruptcy assets. It held that (1) where state law allows a corporation to “pierce its own veil” or bring claims against an alter ego or successor entity and (2) such a veil-piercing, alter ego or successor liability “claim” is “a general one, with no particularized injury arising from it,” that “could be brought by any creditor of the debtor,” then (3) the claim is property of the bankruptcy estate. Id. at *7. With respect to this test, the question of whether a corporation can seek to hold its successor or alter ego liable for the corporation’s own wrongs is uniquely governed by state law. Id. at *8.
According to Zeytuna, if the relevant state law allows such a claim, the court must then determine whether the claim is “general,” which is determined by focusing “not on the cause of action underlying the alter ego/successor liability theory, but on that theory itself.” In other words, where the success of that theory would result in increasing the bankruptcy estate, such as by recovering assets transferred or wasted by the debtor or its managers or making a different entity liable for any and all of the debtor’s wrongs, it belongs to the estate. The court cited to In re Emoral, Inc., 740 F.3d 875, 880 (3d Cir. 2014), where the plaintiffs’ claim, which relied on a theory of successor liability, was deemed a “general” claim because, even though the plaintiffs asserted that they had been personally injured by a product made by Emoral, they “fail[ed] to demonstrate how any of the factual allegations that would establish their cause of action based on successor liability [were] unique to them as compared to other creditors of Emoral” and “fail[ed] to demonstrate how recovery on their successor liability cause of action would not benefit all creditors of Emoral given that Aaroma, as a mere continuation of Emoral, would succeed to all of Emoral’s liabilities.”
Thus, some cases hold that alter ego actions against shareholders do not constitute property of a corporate debtor’s estate, because such actions are personal to the corporation’s creditors (the claim failed to satisfy factor 2 of the Zeytuna test). Other courts note that in their jurisdiction, a corporation cannot bring a cause of action under the alter ego theory against itself (the claim failed to satisfy factor 1 of the Zeytuna test). See, Koch Refining v. Farmers Union Cent. Exchange, Inc., 831 F.2d 1339 (7th Cir. 1987) (Under Illinois and Indiana law, trustee of bankrupt corporation was proper party to bring alter ego action against debtor’s shareholders; defendants in trustee’s pending preference action did not have standing to bring such claim in that they would not be creditors unless trustee succeeded in preference action, and shareholders’ liability, if alter ego claims succeeded, would be to debtor’s creditors in general, rather than to particular creditors.); and In re AAA Bronze Statutes & Antiques, Inc., 2019 WL 1150033 (Bankr. N.D.Fla. January 8, 2019).
The above analysis is reflected in Baillie Lumber Co., LP v. Thompson, 413 F.3d 1293 (11th Cir. 2005), where the court noted that in order to determine whether an alter ego action is property of the estate, the court needed to look to state law to determine whether a debtor could bring an alter ego action against its former principal. Baillie Lumber held that in order for an alter ego action to be property of the bankruptcy estate, the claims should: (1) be a general claim that is common to all creditors and (2) be allowed by state law. Id. at 1295. A claim is allowed by state law when equitable principles required courts to recognize that a corporation has the right to pursue an alter ego action. In Baille Lumber the court after getting a positive response to the question of whether Georgia law allowed corporations to pursue alter ego actions, from the Supreme Court of Georgia, ruled that alter ego actions are property of the estate. See, Baille Lumber Co. v. Thompson, 612 S.E.2d 296 (2005).
In Matter of S.I. Acquisition, Inc., 817 F.2d 1142 (5th Cir. 1987), a creditor filed an alter ego suit against the principal of the debtor. After the debtor filed a Chapter 11 petition, it claimed that the creditor’s suit violated the automatic stay, even though the debtor had been severed from the case and was not a party to the suit. The court found that under Texas law a corporation could pierce its own corporate veil because “the predominate policy of Texas alter ego law is that the control entity that has misused the corporation form will be held accountable for the corporations’ obligations. Id. at 1152. As a result, the court concluded that the alter ego action was property of the estate, and any such suits by creditors ran afoul of the automatic stay. Id. at 1153.
In In re Expert South Tulsa, LLC, 506 B.R. 298 (Bankr. D.Kan. 2011), the court held that it needed to consult state law to determine property rights and, likewise, it is state law that determines whether the debtor has standing to bring an action under the alter ego theory. With respect to alter ego claims, the relevant state law is the law of the state of incorporation of the debtor. Id. at 303. The court then noted that corporations do not usually seek to disregard their corporate form; rather, corporations seek remedies from its officers and directors for breach of duties or mismanagement. “Whether a creditor’s alter ego remedy also becomes property of the estate depends upon whether the underlying claim redresses a specific injury to a particular creditor or is a general claim which could inure to the benefit of any creditor dealing with the company.” Id. And whether the claim is personal or general depends upon the alleged misconduct and the resulting injury underlying the alter ego claim.
The court focused on Oklahoma law which stated that corporations do have standing to pursue an alter ego claim which benefits its creditors generally. Id. Further, it noted that bankruptcy law favors the trustee’s standing because its ultimate goal is the equitable distribution of assets and the prevention of one creditor recovering a fund rightfully belonging to other creditors similarly situated. Id. at 303-04. In this regard, the court noted the similarity of piercing a corporate debtor’s veil and substantive consolidation. Here, the basis for piercing was the fact that the corporation was allegedly undercapitalized. This was a general claim any creditor transacting business with the debtor could assert. “Accordingly, the claim is property of the estate to be administered or abandoned.” Id. at 304.
In In re Tronox Inc., 855 F.3d 84 (2d Cir. 2017), the court stated that if the claim is a general one, with no particularized injury arising from it, and if that claim could be brought by any creditor of the debtor, the trustee is the proper person to assert the claim, and the creditors are bound by the outcome of the trustee’s action. Whereas a derivative injury “is based upon ‘a secondary effect from harm done to the debtor, an injury is said to be ‘particularized’ when it can be ‘directly traced to the third party’s conduct. Id. at 100. In describing the difference between a derivative and particularized claim, the court cited to its decision in St. Paul Fire & Marine Ins. Co. v. PepsiCo, Inc., 884 F.2d 688 (2d Cir. 1989):
In St. Paul, PepsiCo sued Banner, the corporate parent of the debtor, for claims PepsiCo had against the debtor, claiming that Banner had stripped away the assets of its alter ego subsidiary, the debtor. 884 F.2d at 692. PepsiCo argued that its claim was particularized, emphasizing its individualized harm suffered at the hands of the debtor. We determined that PepsiCo’s harm stemmed from its original relationship to the debtor, not Banner. Id. at 704. But that harm – the failure to honor contractual obligations – was not the harm for which PepsiCo sought redress against Banner. Instead, PepsiCo “alleged a secondary effect from harm done to [the debtor]” by Banner – removing assets from the debtor that would have allowed it to meets its obligations to PepsiCo and other creditors. Id. Thus, we held the proper remedy for any harm caused by Banner to the debtor, and in turn all of its creditors, was “for the trustee to bring an alter ego claim as property of the estate, … or to bring an action alleging preferential or fraudulent transfer of assets to Banner.” Id.
In In re Capriati Construction Corporation, Inc., 2018 WL 1404439 (9th Cir. BAP, March 20, 2018), the court noted that the alter ego doctrine is used to establish the direct liability of a shareholder when that shareholder improperly uses the corporate entity to commit acts which harm the corporation. Id. at *6. Similar to Baillie Lumber, the court stated that whether an alter ego claim is property of the bankruptcy estate depends on two things: “(1) whether under state law where the corporate debtor is incorporated, the debtor is permitted to pierce its own corporate veil; and (2) whether the claim is a general one, of the type that could be brought by any creditor of the debtor.” Id. If the answer to both of these questions is yes, then the alter ego claim is property of the estate, belongs to the trustee or debtor-in-possession, and cannot belong to any individual creditor.
Under the facts of this particular case, the court noted that the alter ego claim alleged was a general, as opposed to a personal or individualized, claim. It distinguished between the two types of actions noting that an action is personal “if the claimant himself is harmed and no other claimant or creditor has an interest in the cause.” Id. On the other hand, “[a] general claim exists if the liability is to all creditors of the corporation without regard to the personal dealings between such officers and such creditors.” Id. Thus, if the alter ego claim alleges acts that harmed the financial condition of the corporation as a whole and all creditors equally, such claims are general alter ego claims. Here, it found that:
SPER’s alter ego claim alleg[ed] that Rocchio (1) had failed to observe corporate formalities with respect to Capriati, (2) used corporate funds for his own personal use, and (3) had manipulated Capriati’s assets and funds to avoid payment of creditors [which were] general claim[s] because all creditors are affected; no particularized injury to SPER existed that could not be brought by other Capriati creditors harmed by Rocchio’s alleged bad acts.
Id. at *7. The court then noted that the general rule in most (if not all) states is that “alter ego” is not an independent cause of action, but is an equitable remedy – a legal theory or doctrine used to impose liability against the alter ego defendant under another cause of action. It assumed that Rhode Island law, which governed, would follow this general rule. Id. at *7.
In re Ozark Restaurant Equipment Co., Inc., 816 F.2d 1222 (8th Cir. 1987), is one of those seemly rare cases that stands for the proposition that the nature of the alter ego theory of piercing the corporate veil is one which is personal to corporate creditors rather than the corporation itself. Therefore, the claim does not become property of the estate nor is it enforceable by a trustee under Section 704(1). A similar conclusion was reached in Mullin v. Dzikowski, 257 B.R. 356 (S.D.Fla. 2000), where the court, interpreting Florida law stated that “a bankruptcy trustee lacks standing to assert such a claim because the money sought to be collected is not owed to the estate, but rather is owed to the estate’s creditors. Id. at 363.
Matthew T. Gensburg