Estate Lawsuits may benefit equity

 Retainer from Third Party no Automatic Disqualification - bankruptcy law firmTrust May Sue Even After Creditors Are Paid in Full

A trustee for a bankrupt company can continue a lawsuit even after unsecured creditors are paid in full, the U.S. Court of Appeals in New Orleans ruled on March 20, 2012, allowing trustee lawsuits to benefit equity.

The case involved Mirant Corp., a power producer that confirmed a Chapter 11 plan paying creditors in full. The plan also created a trust to bring lawsuits.

After confirmation, the trust sued several banks for preferences received before bankruptcy. The district court dismissed the suit, saying the trustee lost standing to sue once creditors were fully paid.

U.S. District Judge Micaela Alvarez, sitting by designation on the appellate panel of three judges, reversed, in the process taking sides with the U.S. Court of Appeals in San Francisco on the same issue.

She ruled that “a bankruptcy trustee may still have standing to avoid a fraudulent transfer after the unsecured creditors are paid in full.” She disagreed with a New York district judge’s decision in 2008 finding no standing for a trust to sue in the liquidation of Adelphia Communications Corp.

If there are priority claims remaining to be paid, such as the fees of lawyers in bringing suits, the estate still can benefit even though unsecured creditors are fully paid, Alvarez said.

The case is MC Asset Recovery LLC v. Commerzbank AG (In re Mirant Corp.), 11-10070, 5th U.S. Circuit Court of Appeals (New Orleans).