8th Circuit Notes Intra-Circuit Split Re Recognition Of Derivative Standing To Pursue Avoidance Actions On Behalf Of A Bankruptcy Estate

Per In re Racing Services, Inc., 363 B.R. 911, 47 Bankr. Ct. Dec. 246 (8th Cir. BAP (N.D.) March 9, 2007) (NO. 06-6058):

The Eighth Circuit Court of Appeals concluded that creditors cannot bring avoidance actions under Section 548 of the Bankruptcy Code absent evidence that the trustee cannot be relied upon to assert such claims. Nangle v. Lauer (In re Lauer), 98 F.3d 378, 388 (8th Cir.1996). In order for a creditor to assert standing under Section 548, the creditor must establish that the trustee was unable or unwilling to pursue the claims on behalf of the bankruptcy estate. Id.

Courts within the Eighth Circuit have split in their interpretation of the Lauer opinion. A prior panel of the Eighth Circuit Bankruptcy Appellate Panel interpreted the Lauer opinion as a determination by the Eighth Circuit Court of Appeals that the statutory language of Section 548 of the Bankruptcy Code expressly confers avoidance powers exclusively on the trustee. LaBarge v. Benda (In re Merrifield), 214 B.R. 362, 365 (8th Cir. BAP 1997). While this statement is technically true, it ignores the Eighth Circuit Court of Appeals' acknowledgment that creditors may be able to assert avoidance actions where the trustee cannot be relied upon to do so or is unable or unwilling to pursue such claims.

One court has followed the Merrifield decision and focused on the strict language of the statute to determine that a Chapter 13 debtor lacks standing to bring an avoidance action because the statutory language limits the authority to the trustee. Wood v. Mize (In re Wood), 301 B.R. 558 (Bankr.W.D.Mo.2003).

Courts within the circuit have recognized derivative standing to pursue avoidance actions under certain circumstances. At least one court has recognized derivative standing where the bankruptcy court has approved the assignment of such claims from the trustee to the creditor. Quad City Bank v. Union Planters Bank (In re Chapman Lumber Co., Inc.), 2006 WL 3861107 (Bankr.N.D.Iowa 2006). Other courts have recognized derivative standing where the trustee is unable or unwilling to do so. However, the courts disagree as to what constitutes the trustee's inability or unwillingness to bring suit which justifies derivative standing. Some courts require the trustee's failure to bring the avoidance action to be unjustifiable and, accordingly, an abuse of discretion. Cambridge Tempositions, Inc. v. Cassis (In re Cassis), 220 B.R. 979, 983 (Bankr.N.D.Iowa 1998). Others require the party seeking standing to have made demand upon the trustee which was refused and to establish a colorable claim which will benefit the bankruptcy estate. In re Newcorn Enter. Ltd., 287 B.R. 744, 750 (Bankr.E.D.Mo.2002).

Other courts have refused to expressly acknowledge the availability of derivative standing within the Eighth Circuit, concluding that the issue is unclear, yet have agreed that if it is available a creditor must obtain permission from the bankruptcy court prior to asserting the claim. St. Francis County Farmers Ass'n v. Wright (In re Wright), 353 B.R. 627, 652-54 (Bankr.E.D.Ark.2006); Quad City Bank v. Chapman (In re Chapman Lumber Co. Inc.), 343 B.R. 217, 220-221 (Bankr.N.D.Iowa 2006). Regardless, no court has allowed a creditor to assert an avoidance action without prior court approval to do so. In re Wright, 353 B.R. at 653; In re Chapman Lumber, 343 B.R. at 221; JBD Pork Inc. v. Bank of America, N.A. (In re Premier Farms L.C.), 2004 WL 1175223 (Bankr.N.D.Iowa 2004). One court, in dicta, refused to weigh in on the issue without further guidance from the Eighth Circuit Court of Appeals. Lee v. Nat'l Home Centers, Inc. (In re Bodenstein), 248 B.R. 808, 817-18 n. 39 (Bankr.W.D.Ark.2000).

In 2000, the Supreme Court concluded that a creditor could not assert surcharge rights available to a trustee under Section 506(c) of the Bankruptcy Code. Hartford Underwriters Ins. Co. v. Union Planters Bank, N.A., 530 U.S. 1, 120 S.Ct. 1942, 147 L.Ed.2d 1 (2000). The language in Section 506(c) is similar to the language in the avoidance sections at issue today: the "trustee may...." 11 U.S.C. § 506(c). In the Hartford Underwriters case, the creditor never sought court permission to pursue the surcharge action. The Supreme Court noted this fact and expressly left unanswered the question before us today: can a bankruptcy court authorize another interested party to act in the trustee's stead in pursuing a claim or cause of action belonging to the estate and about which the Bankruptcy Code states only that the trustee may assert such claim or cause of action. Hartford Underwriters, 530 U.S. at 14 n. 5, 120 S.Ct. 1942.

Every circuit court which has addressed this issue since the Hartford Underwriters opinion was decided has recognized the possibility of derivative standing to pursue avoidance actions on behalf of a bankruptcy estate. Scott v. Nat'l Century Fin. Enter. Inc. (In re Baltimore Emergency Services II Corp.), 432 F.3d 557 (4th Cir.2005); Official Comm. of Unsecured Creditors of Cybergenics Corp. v. Chinery, 330 F.3d 548 (3rd Cir.2003); Commodore Int'l Ltd v. Gould (In re Commodore Int'l Ltd.), 262 F.3d 96 (2nd Cir.2001); Fogel v. Zell, 221 F.3d 955 (7th Cir.2000). None has gone so far as to say a bankruptcy court cannot authorize derivative standing.

The bankruptcy court thoroughly analyzed Eighth Circuit law on the subject of derivative standing and concluded that under the circumstances of this case the Plaintiff should not be granted standing to pursue the avoidance claims against the Defendants. We need not address the various factors relied upon by the bankruptcy court in reaching its well reasoned decision because one factor alone is sufficient to deny the request for standing: lack of prior court permission. At a minimum, prior court approval is required for a creditor to assert an avoidance action. In re Wright, 353 B.R. at 653; In re Chapman Lumber, 343 B.R. at 221; JBD Pork Inc. v. Bank of America, N.A. (In re Premier Farms L.C.), 2004 WL 1175223 (Bankr.N.D.Iowa 2004). Without prior approval, derivative standing does not exist.

First Circuit Creates Split Re Application of RICO to Violent but Noneconomic Criminal Activity

Per U.S. v. Nascimento, --- F.3d ----, 2007 WL 1881304 (1st Cir. July 02, 2007):

The pivotal issue in this case concerns the application of the Racketeer Influenced and Corrupt Organizations Act (RICO), 18 U.S.C. § 1962, to a street gang engaged in violent, but noneconomic, criminal activity. That issue possesses constitutional implications weighty enough to have led one of our sister circuits to fashion a special, more rigorous, version of RICO's statutory “affecting commerce” requirement for use in connection with defendants involved with enterprises that are engaged exclusively in noneconomic criminal activity. See Waucaush v. United States, 380 F.3d 251, 256 (6th Cir.2004). Although we are reluctant to create a circuit split, we conclude, after grappling with this difficult question, that the normal requirements of the RICO statute apply to defendants involved with enterprises that are engaged only in noneconomic criminal activity.

EDNY Notes Split Re Whether Employment Relationship Alone Is Sufficient to Find a Common Nucleus of Operative Fact between FSLA and State Law Claims

Per Rivera v. Ndola Pharmacy Corp., --- F.Supp.2d ----, 2007 WL 1874370 (E.D.N.Y. June 29, 2007):

Typically, supplemental jurisdiction is appropriate for claims during the employment relationship because those claims arise from the same underlying factual basis. However, the only factual link between plaintiff's claims of sexual harassment by M. Patel and Hameed, unlawful retaliation, negligent retention and supervision of a supervisor, intentional infliction of emotional distress, and battery (collectively “plaintiff's remaining state law claims”) and the FLSA overtime claim is that the underlying events occurred during the course of plaintiff's employment by Ndola Pharmacy.

The Circuits are divided as to whether the employment relationship alone is sufficient to find a “common nucleus of operative fact” between an employee's FLSA claims and state law claims. Lyon v. Whisman, 45 F.3d 758 (3d Cir.1995) (employment relationship was insufficient); cf. Prakash v. American Univ., 727 F.2d 1174 (D.C.Cir.1984) (employment relationship was sufficient). Although the Second Circuit has yet to address this issue, precedents suggest that the link is too tenuous in the instant case to provide a “common nucleus of operative fact.” In Young v. New York City Transit Authority, 903 F.2d 146 (2d Cir.1990), the court found there was no “common nucleus of operative fact” where the federal claim raised “legal issues completely unrelated to those presented by the state” claim. Id. at 164; see also Bu v. Benenson, 181 F.Supp.2d 247, 254 (S.D.N.Y.2001) (claims were not “part of the same case or controversy” where state law claims “involve[d] different rights, different interests, and different underlying facts” than the federal law claims). Additionally, courts have held that there is no common nucleus of operative fact where the events underlying the federal claims occur at a different time than the events underlying the state law claims. See, e.g., Wigand v. Flo-tek, Inc., 609 F .2d 1028, 1033 (2d Cir.1980) (no common nucleus of fact where the events relevant to the federal claim occurred prior to the contract date but the events relevant to the state law claim occurred after); Bray v. City of New York, 356 F.Supp. 277 (S.D.N.Y.2004) (plaintiffs' status as bike ride participants did not render claims “part of the same case or controversy” because the federal claim involved events which occurred during the bike ride whereas the state law claim involved events which occurred before the bike ride).

. . .

Plaintiff cites to the Second Circuit's holding in Ford Motor Credit Co., 358 F.3d at 213-214, in support of her argument that the employment relationship satisfies the common nucleus test; however, that case is distinguishable. In Ford Motor Credit Co., the Second Circuit found a “common nucleus of operative fact” between plaintiff's allegations of racial discrimination and Ford's counterclaims that plaintiffs were in default on their car loans. Id. The court found that all claims originated “from the Plaintiffs' decisions to purchase Ford cars.” Id. at 214. Unlike the instant case, all claims could be traced to a single loan transaction between each individual plaintiff and Ford. Here, plaintiff's claims arise from many transactions occurring over several years and are related only because they occurred while plaintiff was an employee of Ndola Pharmacy.

Third Circuit Switches Sides in Split Re Whether Violations of IDEA-Created Rights Are Actionable under § 1983

A.W. v. Jersey City Public Schools, 486 F.3d 791 (3d Cir. May 24, 2007):

In [W.B. v. ]Matula . . . we held that violations of IDEA-created rights are actionable under § 1983.

In Matula, we concerned ourselves with the jurisprudential and legislative directives regarding the availability of relief for IDEA violations. We noted that in Smith v. Robinson, 468 U.S. 992, 104 S.Ct. 3457, 82 L.Ed.2d 746 (1984), the Supreme Court held that the IDEA FN8 provided the exclusive means by which parents and children could remedy violations of the rights guaranteed therein, and that no constitutional claim would be therefore allowed. . . . However, in response to this decision, Congress enacted § 1415( l ) of the IDEA, to countermand Smith and make clear that actions can be maintained under the Constitution or under federal laws protecting the rights of children with disabilities notwithstanding the fact that the IDEA also protects these rights.

. . .

However, following Matula, reasonable minds have differed as to the correctness of our interpretation of the congressional reaction to Smith v. Robinson embodied in § 1415( l ). In addition, over the past decade, the Supreme Court has further refined its guidance as to how we should decide whether § 1983 relief is available for violations of statutory rights, most recently in City of Rancho Palos Verdes v. Abrams, 544 U.S. 113, 120, 125 S.Ct. 1453, 161 L.Ed.2d 316 (2005). All of these developments since Matula have informed our analysis in a way that requires us to reconsider our view.

The Courts of Appeals for the Fourth and Tenth Circuits have taken issue with our reading of § 1415( l ) and discernment of Congress' intent in enacting it. They note that the provision does not refer to § 1983; rather, it focuses on substantive rights.FN10 In *798 Sellers v. School Board of Manassas, Virginia, 141 F.3d 524 (4th Cir.1998), and Padilla v. School District No. 1, 233 F.3d 1268, 1273 (10th Cir.2000), the Courts of Appeals for the Fourth and Tenth Circuits, respectively, challenged our analysis of the congressional enactment of § 1415( l ) in reaction to Smith. . . .

In Padilla, the Court of Appeals for the Tenth Circuit noted that the issue had created a circuit split. Padilla, 233 F.3d at 1273 (comparing Sellers with Matula and Marie O. v. Edgar, 131 F.3d 610, 620-22 (7th Cir.1997)). . . .

Were we deciding this case in the year 2001, after these courts had voiced their disagreement with Matula, we might be conflicted as to whether to revisit the issue. On the one hand, the Courts of Appeals for the Fourth and Tenth Circuits offered the convincing arguments, noted above, as to how Congress' enactment of § 1415( l ) did not provide for § 1983 as a remedial tool here, and as to how our analysis with respect to the availability of relief in Matula was incomplete in light of other Supreme Court cases. On the other hand, several other courts had expressed views similar to ours in Matula, or had assumed § 1983 to be available.FN12 While the former may have tipped the scales somewhat towards rethinking Matula even then, the Supreme Court's discussion of the availability of § 1983 as a vehicle for redressing violations of federal statutory rights in Rancho Palos Verdes, 544 U.S. 113, 125 S.Ct. 1453, has tipped them definitively, and we are now convinced that our ruling in Matula is no longer sound.

S.D.N.Y. Notes Split Re Application of Administrative Exaustion Requirement to Statutory ERISA Claims

Per American Medical Ass'n v. United HealthCare Corp., Slip Copy, 2007 WL 1771498 (S.D.N.Y. June 18, 2007):

Decisions from six other circuits have held that the administrative exhaustion requirement applies to plan-based ERISA claims-that is, claims relating to violations of the terms or provisions of the plan at issue-but not to statutory ERISA claims-that is, claims that arise from a violation of the statute itself rather than of a plan. See Smith v. Snydor, 184 F.3d 356, 364-65 (4th Cir.1999); Chailland v. Brown & Root, Inc., 45 F.3d 947 (5th Cir.1995); Richards v. General Motors Corp., 991 F.2d 1227 (6th Cir.1993); Held v. Manufacturers Hanover Leasing Corp., 912 F.2d 1197 (10th Cir.1990); Zipf v. American Telephone & Telegraph Co., 799 F.2d 889, 891-92 (3d Cir.1986); Amaro v. Continental Can Co., 724 F.2d 747, 749-50 (9th Cir.1984). See also De Pace v. Matsushita Elec. Corp. of Am., 257 F .Supp.2d 543, 557 (E.D.N.Y.2003) (collecting cases). The Seventh and Eleventh Circuits, however, have declined to distinguish between statutory and plan-based ERISA claims, and instead require exhaustion regardless of the nature of the claim. See Mason v. Continental Group, Inc., 763 F.2d 1219, 1227 (11th Cir.1985); Kross v. Western Electric Co., 701 F.2d 1238 (7th Cir.1983).

Despite its earlier reference in Leonelli to administrative exhaustion in connection with fiduciary duty claims, the Second Circuit has explicitly recognized that the question of whether exhaustion is required for statutory as well as plan based claims remains open in this circuit. See Nechis v. Oxford Health Plans, Inc., 421 F.3d 96, 102 (2d Cir.2005) (recognizing the existence of a split among the circuits on this question and declining to “here decide whether administrative exhaustion is a prerequisite to a statutory ERISA claim.”).FN15 As the Nechis Court recognized, “[d]istrict courts in the Second Circuit have routinely dispensed with the exhaustion prerequisite where plaintiffs allege a statutory ERISA violation.” Id. (quoting De Pace, 257 F.Supp.2d at 558). District courts have continued to do so subsequent to the Nechis decision. See, e.g., Richards v. FleetBoston Financial Corp., 427 F.Supp.2d 150, 180 (D.Conn.2006) (declining to require exhaustion of administrative remedies where the plaintiff sought “relief for statutory violations, rather than violations of the terms of the Amended Plan.”) This Court agrees with the reasoning of De Pace and Richards, as well as with that of the Third, Fourth, Fifth, Sixth, Ninth, and Tenth Circuits, and notes that the Second Circuit has hinted that it also may do so, observing that it was “dubious that Nechis's claims may be dismissed for failure to exhaust administrative remedies[.]” Nechis, 421 F.3d at 100. The Court declines, therefore, to require administrative exhaustion of statutory-as opposed to plan-based-ERISA claims.

W.D.N.C. Notes Split Re Whether Rule 59(e) Motions Are Successive Applications for Habeas Relief

Per Strickland v. Lee, Slip Copy, 2007 WL 1792503 (W.D.N.C. June 19, 2007):

The Court is aware that two Federal Appellate Courts have issued published opinions treating the movants' Rule 59(e) motions as successive applications for habeas relief under 28 U.S.C. § 2244(b). See U.S. v. Pedraza, 466 F.3d 932, 933 (10th Cir.2006) ( citing Spitznas v. Boone, 464 F.3d 1213 (10th Cir.2006) (finding that Rule 59(e) motion was, in part, a successive § 2255 motion for habeas relief); U.S. v. Lambros, 404 F.3d 1034, 1036 (8th Cir.2005) (requiring certificate of appealability for Rule 59(e) motion because the motion “sought ultimately to resurrect the denial of [the] earlier [28 U.S.C.] § 2255 motion”); but see, Curry v. U.S., 307 F.3d 664, 666 (7th Cir.2002) (Since a 59(e) motion does not seek collateral relief, it is not subject to AEDPA's statutory limitations on such relief). The Court also is aware that separate three-judge panels of the Fourth Circuit Court of Appeals have issued unpublished opinions finding that the movants' Rule 59(e) motions were successive motions attacking their convictions and sentences under § 2255. See U.S. v. Mann, 141 Fed.Appx. 175 (4th Cir.2005) (unpublished) (citing United States v. Winestock, 340 F.3d 200, 206-07 (4th Cir.) cert. denied, 540 U.S. 995, 124 S.Ct. 496, 157 L.Ed.2d 395 (2003).); U.S. v. Martin, 132 Fed.Appx. 450 (4th Cir.2005) (unpublished) (citing Winestock, 340 F.3d at 207). However, in light of the split among the circuit courts, and in the absence of a published opinion from the Fourth Circuit, the Court will not treat Petitioner's Rule 59(e) Motion as successive under § 2244(b).

Second Circuit Notes Split Re Whether Ability of BIA Petitioner to Move to Reopen Cures a Lack of Notice

Per Chhetry v. U.S. Department of Justice, --- F.3d ----, 2007 WL 1759472 (2d Cir. June 20, 2007):

[T]he BIA did exceed its allowable discretion in denying Chhetry's motion to reopen based on inferences it drew from those noticed facts without giving him the opportunity to rebut the significance of the noticed facts as applied to his particular situation. The U.S. Courts of Appeals for the Fifth, Seventh, Ninth, Tenth, and D.C. Circuits have all concluded that petitioners must be given the opportunity to challenge, for both truth and significance, facts of which the BIA takes administrative notice when its reliance on those facts is dispositive, as was the case here. See Rivera-Cruz v. INS, 948 F.2d 962, 968 (5th Cir.1991) (“It is a fundamental proposition of administrative law that interested parties must have an effective chance to respond to crucial facts.”) (internal quotation marks omitted); Kaczmarczyk v. INS, 933 F.2d 588, 596 (7th Cir.1991) (“We believe the due process clause of the fifth amendment requires that petitioners be allowed an opportunity to rebut officially noticed facts, particularly when ... those facts are crucial to-indeed dispositive of-the outcome of the administrative proceeding.”); Castillo-Villagra v. INS, 972 F.2d 1017, 1029 (9th Cir.1992) (holding that the BIA violated the Fifth Amendment's due process clause “in taking notice of the change of government without providing the petitioners an opportunity to rebut the noticed facts”); de la Llana-Castellon, 16 F.3d at 1099 (holding, where the BIA made “disputable inferences” based on noticed facts, “due process require[d] the BIA to give Petitioners advance notice and an opportunity to be heard”); Gutierrez-Rogue v. INS, 954 F.2d 769, 773 (D.C.Cir.1992) (“[D]ue process guarantees an asylum applicant the right to challenge an officially noticed fact-with respect both to its truth and its significance.”). No court of appeals has concluded otherwise. We agree with our sister circuits that a petitioner must be given notice of, and an effective chance to respond to, potentially dispositive, administratively noticed facts.

There is, however, a circuit split as to whether a petitioner's ability to file a subsequent motion to reopen cures a lack of notice. The Fifth, Seventh, and D.C. Circuits have held that, for a petitioner on direct appeal from a final order of removal, the availability of a motion to reopen serves as a sufficient “mechanism to rebut officially noticed facts” because petitioners can use such a motion to present the BIA with “evidence that the facts it officially noticed are incorrect or that they are true but irrelevant to their case,” and, if the BIA refuses the motion, petitioners can appeal. Kaczmarczyk, 933 F.2d at 597; see also Rivera-Cruz, 948 F.2d at 968-69; Gutierrez-Rogue, 954 F.2d at 773. The Ninth and Tenth Circuits, on the other hand, have held in similar cases that the availability of a motion to reopen is an inadequate substitute for a full opportunity to rebut administratively noticed facts because, inter alia, the discretionary nature of motions to reopen does not guarantee a petitioner an effective ability to respond to previously-noticed facts, and petitioners are not guaranteed a stay of deportation while awaiting a decision on reopening. See Castillo-Villagra, 972 F.2d at 1030; Gomez-Vigil v. INS, 990 F.2d 1111, 1124 (9th Cir.1993) (Fletcher, J., concurring); de la Llana-Castellon, 16 F.3d at 1100.

Like the Ninth and Tenth Circuits, we doubt whether the protection afforded by the availability of a motion to reopen is enough for petitioners on direct appeal from final orders of removal. However, we need not decide this broader question because Chhetry appeals from the denial of a motion to reopen; he does not appeal from the BIA's final order of removal.