In re Blume

625 B.R. 662

IN RE: Sean BLUME, and Nicole Blume, Debtors.

Case No. 17-49602

United States Bankruptcy Court, E.D. Michigan, Southern Division.

Signed January 29, 2021

Jay A. Abramson, Joanna Abramson, Abramson Law Offices, PLLC, West Bloomfield, Michigan, Attorneys for the Alisa A. Peskin-Shepherd, PLLC

Kimberly Bedigian, Stevenson & Bullock, P.L.C., Southfield, Michigan, Attorneys for Debtors Sean Blume and Nicole Blume

Tammy L. Terry, Kimberly Shorter-Siebert, Marilyn R. Somers-Kantzer, Detroit, Michigan, Attorneys for Tammy L. Terry, Chapter 13 Trustee

Trent B. Collier, Michael J. Sullivan, Collins Einhorn Farrell PC, Southfield, Michigan, Attorneys for Loren Mannino and ManninoMartin

OPINION REGARDING ALISA A. PESKIN-SHEPHERD, PLLC'S MOTION FOR DERIVATIVE STANDING AND RELATED RELIEF, AND REGARDING THE CHAPTER 13 TRUSTEE'S MOTION TO ABANDON MALPRACTICE CLAIMS

Thomas J. Tucker, United States Bankruptcy Judge

I. Introduction

This Chapter 13 case, in which no plan has yet been confirmed, presents the issue of whether the Court should grant derivative standing to Alisa A. Peskin-Shepherd, PLLC ("Peskin-Shepherd"), a creditor of the Debtor Nicole Blume, to file and prosecute, on behalf of the bankruptcy estate, a legal malpractice action against the Debtor's former state court attorney, Loren Mannino, and his law firm, ManninoMartin (collectively, "Mannino"). In its Motion seeking derivative standing (the "Derivative Standing Motion"),¹ Peskin-Shepherd seeks to pursue specific proposed legal malpractice claims. Those claims allege that Loren Mannino was negligent in several respects, in certain advice he gave and failed to give to Nicole Blume, and in representing Nicole Blume in state court actions related to Nicole Blume's divorce. The claims are non-exempt property of the bankruptcy estate.² Peskin-Shepherd fears, with some justification, that if suit is not filed against Mannino before February 18, 2021, the applicable statute of limitations may bar some or all of the malpractice claims.

The Chapter 13 Trustee has refused to prosecute the estate's malpractice claims herself, but she also objects to the Derivative Standing Motion. The Chapter 13 Trustee has moved to abandon the malpractice claims to the Debtors (the "Abandonment Motion").³ The Debtors, for their part, object to the Derivative Standing Motion, but also refuse to pursue the malpractice claims themselves. Mannino also objects to the Derivative Standing Motion.

This case came before the Court for a hearing on December 17, 2020, on: (1) the unresolved portion of Peskin-Shepherd's Derivative Standing Motion;⁴ and (2) the Chapter 13 Trustee's Abandonment Motion. During the hearing, the Court heard oral arguments of Peskin-Shepherd and of the parties who object to Peskin-Shepherd's Derivative Standing Motion and who support the Chapter 13 Trustee's Abandonment Motion — namely, the Debtors; the Chapter 13 Trustee; and Mannino. The Court then took these matters under advisement.

For the reasons stated below, the Court will grant Peskin-Shepherd's Derivative Standing Motion, with certain conditions, and the Court will deny the Trustee's Abandonment Motion.

II. Jurisdiction

This Court has subject matter jurisdiction over this bankruptcy case, and these contested matters, under 28 U.S.C. §§ 1334(b), 157(a) and 157(b)(1), and Local Rule 83.50(a) (E.D. Mich.). This is a core proceeding under 28 U.S.C. § 157(b)(2)(A) and § 157(b)(2)(O). This proceeding also is "core" because it falls within the definition of a proceeding "arising in" a case under title 11, within the meaning of 28 U.S.C. § 1334(b). Matters falling within this category in § 1334(b) are deemed to be core proceedings. See Allard v. Coenen (In re Trans–Industries, Inc .), 419 B.R. 21, 27 (Bankr. E.D. Mich. 2009). This is a proceeding "arising in" a case under title 11, because it is a proceeding that "by [its] very nature, could arise only in bankruptcy cases." See id. at 27.

III. Discussion

A. The Derivative Standing Motion

1. Giving a creditor "derivative standing" to prosecute claims on behalf of a bankruptcy estate

Normally, a creditor in a bankruptcy case does not have authority or standing to file and prosecute claims that belong to the bankruptcy estate. But courts sometimes grant such authority to a creditor, often to prosecute an action to avoid a preferential or fraudulent transfer, and this is commonly referred to as derivative standing. The Sixth Circuit has held that bankruptcy courts may grant derivative standing to a creditor in Chapter 11 cases and in Chapter 7 cases, if certain requirements are met. See In re Dzierzawski , 518 B.R. 415, 417-19 (Bankr. E.D. Mich. 2014) (discussing Sixth Circuit cases).

There is no good reason not to grant similar derivative standing in Chapter 13 cases. And courts have done so. See , e.g. , In re Demeza , 582 B.R. 868, 876-77 (Bankr. M.D. Pa. 2018) (citing cases); see also Countrywide Home Loans v. Dickson (In re Dickson ), 427 B.R. 399, 403-06 (B.A.P. 6th Cir. 2010) (bankruptcy court had authority to grant derivative standing to Chapter 13 debtor to pursue a lien avoidance action under Bankruptcy Code §§ 544 and 547, which sections authorize such actions by "the trustee").

In this case, Peskin-Shepherd has met each of the Sixth Circuit requirements for granting derivative standing, as those requirements are properly adapted and applied to this Chapter 13 case.

2. The Sixth Circuit requirements for derivative standing

In Dzierzawski , this Court described the Sixth Circuit's requirements that must be met for a bankruptcy court to grant derivative standing to a creditor in cases under Chapter 11 and Chapter 7. The Court reiterates and adopts the following from the Dzierzawski case:

In Hyundai Translead, Inc. v. Jackson Truck & Trailer Repair, Inc. (In re Trailer Source, Inc. ), 555 F.3d 231, 243-45 (6th Cir. 2009), the United States Court of Appeals for the Sixth Circuit held that a bankruptcy court may grant standing to a creditor in a Chapter 7 case to pursue claims on behalf of the bankruptcy estate, when the creditor meets the requirements for derivative standing set forth in Canadian Pac. Forest Prods. Ltd. v. J.D. Irving, Ltd. (In re The Gibson Group, Inc. ), 66 F.3d 1436 (6th Cir. 1995). In Gibson Group , a Chapter 11 case, the Sixth Circuit held that the following requirements must be met for such standing to be granted:

[A] bankruptcy court may permit a single creditor in a Chapter 11 case to initiate an action to avoid a preferential or fraudulent transfer instead of the debtor-in-possession if the creditor: 1) has alleged a colorable claim that would benefit the estate, if successful, based on a cost-benefit analysis performed by the bankruptcy court; 2) has made a demand on the debtor-in-possession to file the avoidance action; 3) the demand has been refused; and, 4) the refusal is unjustified in light of the statutory obligations and fiduciary duties of the debtor-in-possession in a Chapter 11 reorganization. We also hold that, while the creditor has the initial burden to allege facts showing that the refusal to file suit is "unjustified," the debtor-in-possession must rebut the presumption if the creditor carries its initial burden. Contrary to the district court's view, we believe that a creditor need not plead facts alleging the debtor-in-possession's reason or motive for the inaction, but may meet its burden to allege unjustified inaction through notice pleading by alleging the existence of an unpursued colorable claim that would benefit the estate. See Fed.R.Civ.P. 8 ; Fed.R.Bankr.P. 7008 (making Fed.R.Civ.P. 8 applicable in bankruptcy adversary proceedings). If the debtor-in-possession gives no reason for its inaction when a demand is made, the bankruptcy court may presume that its inaction is an abuse of discretion ("unjustified") if the complaint alleges a colorable claim.

Gibson Group , 66 F.3d at 1438-39 (emphasis added). Later in its opinion, the Sixth Circuit stated the fourth of the requirements quoted above in slightly different words:

In conclusion, we hold that a creditor or creditors' committee may have derivative standing to initiate an avoidance action where: 1) a demand has been made upon the statutorily authorized party to take action; 2) the demand is declined; 3) a colorable claim that would benefit the estate if successful exists, based on a cost-benefit analysis performed by the court, and 4) the inaction is an abuse of discretion ("unjustified") in light of the debtor-in-possession's duties in a Chapter 11 case . A creditor has met its burden to show standing to file an avoidance action if it has fulfilled the first three requirements and the trustee or debtor-in-possession declined to take action without stating a reason. The burden then shifts to the debtor-in-possession to establish, by a preponderance of the evidence, that its reason for not acting is justified.

Id. at 1446 (emphasis added). Thus, the court equated "unjustified" with an "abuse of discretion" in this context.

Later, in Trailer Source , the Sixth Circuit summarized the Gibson Group requirements for derivative standing by stating Gibson Group's "colorable claim ..." requirement in a different way:

In Gibson Group , we held that a party moving for derivative standing must show that: (1) a demand was made on the trustee (or debtor-in-possession) to act, (2) the trustee (or debtor-in-possession) declined, (3) a colorable claim exists that would benefit the estate , and (4) the trustee's (or debtor-in-possession's) inaction was an abuse of discretion. 66 F.3d at 1446.

Trailer Source , 555 F.3d at 244-45 (emphasis added). Thus, the difference is that Gibson Group stated the "colorable claim" requirement as this: "the creditor ... has alleged a colorable claim that would benefit the estate, if successful, based on a cost-benefit analysis performed by the bankruptcy court" or "a colorable claim that would benefit the estate if successful exists, based on a

...