2009 Chapter 11 Recent Developments (Part I)

Rules:

(1)

Under the Wagoner rule, which is based on the "principle of agency that the misconduct of managers within the scope of their employment will normally be imputed to the corporation...," a bankruptcy trustee does not have standing to file claims related to professional malpractice in the context of cooperative wrongdoing between the debtor and its auditors. However, an exception to Wagoner exists when the "misconduct will not be imputed to the corporation if the officer acted entirely in his own interest and adversely to the interests of the corporation [the adverse interest exception]." This 'total abandonment' standard "looks principally to the intent of the managers engaged in the conduct."

(2)

Section 547(a)(7) of the Bankruptcy Code, which includes as property of the debtor's estate any property acquired after the commencement of the case, allows the assignment of creditor claims to a bankruptcy trustee (or equivalent).

(3)

"Filing a proof of claim against a bankruptcy estate triggers the process of 'allowance and disallowance of claims,' and, therefore, a creditor who files such a claim subjects itself to the bankruptcy court's equitable jurisdiction in proceedings affecting that claim."

(4)

Under Katchen v. Landy, 382 U.S. 323 (1966), Lytle v. Household Manufacturing, Inc., 494 U.S. 545 (1990) does not apply in the context of bankruptcy proceedings. Moreover, to the degree that the bankruptcy court's judgment on the CBI Claims is dispositive on factual issues underlying the TCW Claims, E&Y may be collaterally stopped from relitigating those same issues in its jury trial on the TCW Claims.

Holding: Bankruptcy court is affirmed.

(1)

BSI has standing to assert the CBI Claims against E&Y under the exception to the Wagoner rule.

(2)

BSI has standing to assert the TCW Claims against E&Y pursuant to § 547(a)(7).

(3)

All of the claims asserted in the Complaint by BSI are covered under § 157(b) and are integrally related to the E&Y Claim, which was voluntarily filed against the estate and, thus, are core proceedings.

(4)

E&Y waived its right to a jury trial on the CBI Claims when it filed the E&Y Claim. And, under Katchen v. Landy, 382 U.S. 323 (1966) E&Y does not have a right to have the bankruptcy court's ruling on the CBI Claims vacated under the Lytle case.

Reasoning:

(1)

The bankruptcy court's factual findings with regard to whether CBI's management acted in its own interest - that the real reason for the fraud was to maximize management's bonus - were not in error. Thus, the bankruptcy court's ruling is affirmed. Evidence that CBI benefitted from the manager's fraud does not make the bankruptcy court's finding that management did not intend to benefit the company clearly erroneous.

(2)

"Allowing a debtor's creditor to assign their claims for the benefit of the debtor's estate permits debtors, creditors, and bankruptcy courts the flexibility in reorganizing or liquidating a debtor's assets necessary to achieve efficient administration of the reorganization or liquidation." To the extent the Barnes v. Schatzkin, 215 A.D. 10 (1st Dep't 1925) case prohibits the assignment of a creditor's claim to a bankruptcy trustee is interpreting federal bankruptcy law, it is not binding on the Second Circuit Court of Appeals.

(3)

All of the claims affect core bankruptcy proceedings - determining whether a creditor may collect from a debtor's estate. And all of the CBI Claims are interconnected with the E&Y Claim and are thus counterclaims against E&Y and are core under § 157(b)(2)(C). Moreover, there is no