A Michigan Bankruptcy Court Enunciates Requirements to Grant a Creditor’s Motion for Derivative Standing in Chapter 13 Cases.
January 30, 2021, Eastern District of Michigan – The Chapter 13 Trustee refused to prosecute the estate’s malpractice claims herself and objected to the derivative standing motion brought by Defendant Peskin-Shepherd. Peskin-Shepherd is a creditor of the Debtor Nicole Blume
At issue is – Whether the Court should grant derivative standing to Peskin-Shepherd to file and prosecute a legal malpractice action against the Debtor’s former state court attorney on behalf of the bankruptcy estate. The Debtor’s former state court attorney includes – Loren Mannino, and his law firm, Mannino Martin (collectively, “Mannino”).
Peskin-Shepherd sought to pursue specific proposed legal malpractice claims, alleging that Loren Mannino was negligent in several respects, in the advice he gave and failed to give to the Debtor, and in representing Nicole Blume in state court actions.
Citing In re Dzierzawski, 518 B.R. 415, 417-19 ( Bankr. E.D. Mich. 2014), the Court stated that according to the Sixth Circuit, the bankruptcy courts may grant derivative standing to a creditor in Chapter 11 cases and Chapter 7 cases, if certain requirements are met, namely;
a) Colorable Claim – Whether the draft complaint by a defendant states “plausible” malpractice claims, such that they would survive a Rule 12(b)(6) motion.
b) Cost-Benefit Analysis – Whether the “colorable claims” will be ‘successful,’ and based on a cost-benefit analysis and whether such successful claims ‘would benefit the estate’ in the bankruptcy case.
c) Refusal – Whether both trustee and the debtor have refused the defendant’s demand to pursue the malpractice claims.
d) Unjustified. – Whether the debtor’s refusal to file and pursue the malpractice claims alleged when combined, are “unjustified,” as the Sixth Circuit has defined that concept in Trailer Source. Whether the refusal initiates an unjustified risk that those claims might soon be lost, because the statute of limitations may soon bar them.
The Michigan court states that there is no good reason not to grant derivative standing in Chapter 13 cases and courts have done so in the past. Accordingly, the Court found that Peskin-Shepherd met each of the above Sixth Circuit requirements for granting derivative standing, as those requirements are properly adapted and applied to the Chapter 13 case.
Further, the Court found that the Trustee failed to demonstrate that the malpractice claims against Mannino were either “burdensome to the estate” or “of inconsequential value and benefit to the estate.” The claims imposed no burden whatsoever on the bankruptcy estate. Instead, they may add significant value to the bankruptcy estate.
The Court granted Peskin-Shepherd’s derivative standing motion, with certain conditions and denied the Trustee’s abandonment motion.
In re Blume, No. 17-49602, 2021 Bankr. LEXIS 208 (Bankr. E.D. Mich. Jan. 29, 2021)