MARY KAY VYSKOCIL, UNITED STATES BANKRUPTCY JUDGE.
The Renco Group, Inc. (the "
This Court has jurisdiction over this adversary proceeding pursuant to 28 U.S.C. §§ 1334(b) and 157(a) and the Amended Standing Order of Referral of Cases to Bankruptcy Judges of the United States District Court for the Southern District of New York (M-431), dated January 31, 2012 (Preska, C.J.). This is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(B). Venue is proper in this Court pursuant to 28 U.S.C. §§ 1408 and 1409. The Renco Group and Wilmington Trust consented to the entry of a final order or judgment by this Court at the First Hearing. See First Hr'g Tr. 5:1-12; 6:15-20 [ECF No. 31].
The extensive factual, procedural and legal history of the underlying bankruptcy cases and the associated litigations spans approximately 17 years. The Court therefore limits its discussion to the facts most directly relevant to the Motion to Dismiss.
On August 2, 2001 (the "
At the time the Renco Group commenced this adversary proceeding, hundreds of claims had been filed against the Debtors. The principal liabilities included the Bond Claims and various unliquidated environmental claims (collectively, the "
The Bond Claims arise out of a $150 million public bond offering by Metals in 1996 pursuant to the Indenture (the "
At the time the Complaint was filed, the Debtors' Claims Registers reflected claims totaling "approximately $670 million." Compl. ¶ 29. This amount included, inter alia, the two Bond Claims and multiple claims filed by the Pension Benefit Guaranty Corporation. It did not include the Environmental Claims which were significant, but unliquidated. See 27th Interim Report ¶ 52. Debtors' bankruptcy schedules also indicated approximately $5 million in trade debt. See 27th Interim Report ¶ 52.
On July 31, 2003, the Trustee, on behalf of the Debtors, commenced a fraudulent transfer action (the "
The Fraudulent Transfer Litigation was subsequently assigned to, and presided over, by the Honorable Alison J. Nathan (Case No. 13-cv-7948), who ultimately conducted a month-long trial. On February 27, 2015, the jury returned a verdict in the Trustee's favor, consisting of, inter alia, a $101 million damages award against the Renco Group and a $16.2 million damages award against Rennert. On March 16, 2015, Judge Nathan issued a Memorandum and Order awarding the Trustee pre-judgment interest at the rate of 6% per annum from the Petition Date. See Memorandum and Order [Case No. 13-cv-7948, ECF No. 342]. The pre-judgment interest increased the overall judgment in that action to $214,697,948.44 (the "
The Renco Group and Rennert appealed the Fraudulent Transfer Judgment to the Second Circuit, and on March 8, 2017, the Second Circuit issued an order, inter alia, denying the appeal and affirming the Fraudulent Transfer Judgment. See Buchwald v. Renco Grp., Inc. (In re Magnesium Corp. of Am.), 682 Fed.Appx. 24 (2d Cir. 2017) (the "
While the Fraudulent Transfer Litigation was pending in the District Court, the Renco Group began taking steps to challenge claims asserted against the Debtors. On December 30, 2014, the Renco Group sent a letter to the Trustee demanding that the Trustee begin bringing objections to claims, alleging, inter alia, that: (i) all of the claims asserted against Metals are subject to disallowance for a variety of reasons and (ii) expungement of the claims would have a significant impact with respect to the Fraudulent Transfer Litigation. See Motion for Leave to Object to Creditors' Claims (the "
In response, the Trustee argued that because he was not unreasonably failing to object to claims, the Standing Motion should be denied. See Response of Chapter 7 Trustee to Motion of The Renco Group, Inc. for Leave to Object to Creditors' Claims (the "
On February 10, 2015, Judge Gerber held a hearing on the Standing Motion (the "
Shortly after the Debtors' cases were reassigned upon Judge Gerber's retirement,
The Renco Group alleges in its Complaint that it has standing to commence this action "as the sole shareholder of ... Metals." Compl. ¶ 11 "[I]f, and to the extent, the proceeds of the [Fraudulent Transfer] Judgment are paid to the Chapter 7 trustee, the Debtors will enter the zone of solvency and, under such circumstances, [the] Renco [Group], as the Debtors' residual equity holder, would benefit from any disallowance of the Bond Claims." Compl. ¶ 3. The Renco Group further maintains that the 2015 Standing Ruling does not preclude it from commencing this action since that ruling "was issued before the Chapter 7 trustee obtained the [Fraudulent Transfer] Judgment, and was predicated upon the Debtors' then administrative insolvency, which, according to the Court, meant that [the] Renco [Group], as a shareholder, was not a `party in interest' of the Debtors' estates under [s]ection 502(a) [of the Bankruptcy Code]." Compl. ¶ 4 (emphasis in original).
The crux of the Complaint rests on the allegation that the Bondholders knew or should have known that one of the main purposes of the 1996 Bond Offering was to facilitate the payment of dividends by Metals to the Renco Group. Specifically, the Renco Group alleges that the 1996 Bond Offering prospectus explicitly disclosed that "one of the main purposes of the [1996] Bond Offering was to facilitate" payment by Metals of dividends to the Renco Group. Compl. ¶ 15. The Renco Group also alleges that (i) prior to the 1996 Bond Offering, Metals had made a $13.9 million dividend payment to the Renco Group, which was also disclosed in the prospectus, see Compl. ¶ 19, and (ii) in July 1996, using the proceeds from the Bond Offering, Metals made another $75.7 million dividend payment to the Renco Group. See Compl. ¶ 18. From that point through October 1998, according to the Renco Group, Metals made additional dividend payments totaling approximately $14 million. See Compl. ¶ 18. The Renco Group contends that by purchasing the Bonds, the Bondholders ratified these dividend payments. See Compl. ¶ 18.
Significantly, these dividend payments to the Renco Group are among the transfers the Trustee sought to recover in the Fraudulent Transfer Litigation.
Wilmington Trust moves to dismiss the Complaint under Rules 12(b)(1) and 12(b)(6) of the Federal Rules of Civil Procedure, each of which are made applicable to this adversary proceeding pursuant to Rule 7012(b) of the Federal Rules of Bankruptcy Procedure. Wilmington Trust argues that the Complaint must be dismissed because the Renco Group failed to demonstrate that it has standing to bring this adversary proceeding since the Renco Group failed to seek leave of the Bankruptcy Court to object to the Bond Claims
Both the Renco Group and Wilmington Trust have submitted supplemental briefs on the impact of the Second Circuit's Summary Order. In its supplemental brief, the Renco Group urges the Court to take judicial notice of the Summary Order and argues that the Summary Order is relevant to the consideration of the pending motion to dismiss. See Plaintiffs Supplemental Brief in Opposition to Defendant's Motion to Dismiss (the "
Wilmington Trust, by contrast, maintains that the entry of the Summary Order has no effect on its Motion to Dismiss and argues that dismissal of this adversary proceeding in its entirety remains warranted. See Supplemental Brief in Further Support of Motion to Dismiss (the "
The party invoking federal jurisdiction bears the burden of demonstrating
The Constitutional standing requirement derives from Article III of the Constitution, which provides that the "judicial power" of the United States extends only to "cases" or "controversies." See U.S. Const. art. III, § 2. To establish standing under Article III, "[t]he plaintiff must have (1) suffered an injury in fact, (2) that is fairly traceable to the challenged conduct of the defendant, and (3) that is likely to be redressed by a favorable judicial decision." Spokeo, 136 S.Ct. at 1547 (citing Lujan, 504 U.S. at 560-61, 112 S.Ct. 2130). The Supreme Court recently made clear in Spokeo that "[t]o establish injury in fact, a plaintiff must show that he or she suffered an invasion of a legally protected interest that is concrete and particularized and actual or imminent, not conjectural or hypothetical." 136 S.Ct. at 1548 (internal quotations omitted) (emphasis added) (citing Lujan, 504 U.S. at 560, 112 S.Ct. 2130). For an injury to be particularized it must affect the party invoking federal jurisdiction in a personal and individual way, while "concrete injury must be de facto; that is, it must actually exist." Spokeo, 136 S.Ct. at 1548 (internal quotations omitted) (emphasis in original) (quoting BLACK'S LAW DICTIONARY 479 (9th ed. 2009)).
The proper procedural challenge to Article III standing is a motion to dismiss for lack of subject matter jurisdiction pursuant to Rule 12(b)(1), rather than motion to dismiss for failure to state a claim pursuant to Rule 12(b)(6). See All. For Envtl. Renewal, Inc. v. Pyramid Crossgates Co., 436 F.3d 82, 87-88 (2d Cir. 2006).
Although Wilmington Trust urges a Rule 12(b)(1) analysis here, it neither argues that the Renco Group fails to meet the standing requirements in the Article III "case or controversy" sense nor cites to the Supreme Court's decision in Spokeo or earlier cases discussing Article III standing. Clearly this Court has authority delegated to it by the District Court, to resolve objections to claims. See 28 U.S.C. § 157(b)(2)(B). In apparent recognition of this, Wilmington Trust does not argue that the Court lacks subject matter jurisdiction. Rather, Wilmington Trust argues that the Renco Group is not the proper party to object to the Bond Claims and that it did not follow the requisite procedures to obtain standing to do so. In response, the Renco Group contends that Rule 12(b)(1) is inapplicable here, and argues that the Renco Group has "statutory standing" as a "party in interest" under section 502(a) of the Bankruptcy Code, which is properly
"The `prudential standing rule... normally bars litigants from asserting the rights or legal interests of others in order to obtain relief from injury to themselves." Rajamin v. Deutsche Bank Nat. Tr. Co., 757 F.3d 79, 86 (2d Cir. 2014) (quoting Warth, 422 U.S. at 509, 95 S.Ct. 2197 (1975)). "[T]he plaintiff generally must assert his own legal rights and interests, and cannot rest his claim to relief on the legal rights or interests of third parties." Warth, 422 U.S. at 499, 95 S.Ct. 2197. Prudential limitations on standing is "important in bankruptcy proceedings which often involve numerous parties who may seek to assert the rights of third parties for their own benefit." In re Ampal-Am. Israel Corp., 502 B.R. 361, 369 (Bankr. S.D.N.Y. 2013) (citing Kane v. Johns-Manville Corp. (In re Johns-Manville Corp.), 843 F.2d 636, 644 (2d Cir. 1988)) ("The prudential concerns limiting third-party standing are particularly relevant in the bankruptcy context. Bankruptcy proceedings regularly involve numerous parties, each of whom might find it personally expedient to assert the rights of another party even though that other party is present in the proceedings and is capable of representing himself.").
The Supreme Court recently clarified that prudential standing (also known as statutory standing) is not really standing in a jurisdictional sense, and as such, a defendant may not bring a motion to dismiss for lack of subject matter jurisdiction pursuant to Rule 12(b)(1) where the alleged "lack of standing" is merely prudential (i.e., statutory). See Lexmark Int'l, Inc. v. Static Control Components, Inc., ___ U.S. ___, 134 S.Ct. 1377, 1388 n. 4, 188 L.Ed. 2d 392 (2014). When, as here, a plaintiff asserts a cause of action based on a statute, the Court should inquire "whether the particular plaintiff `has a cause of action under the statute.'" Am. Psychiatric Ass'n v. Anthem Health Plans, Inc., 821 F.3d 352, 359 (2d Cir. 2016) (quoting Lexmark, 134 S.Ct. at 1387). Prior to the Lexmark decision, the Second Circuit had suggested that statutory standing was either "a separate aspect of standing or a part of the prudential aspect of standing." Lerner v. Fleet Bank, N.A., 318 F.3d 113, 126 n. 12 (2d Cir. 2003); see also Kendall v. Emps. Ret. Plan of Avon Prods., 561 F.3d 112, 118 (2d Cir. 2009). The Lexmark decision clarified that the question of whether a particular plaintiff has a cause of action under the applicable statute does not belong to the family of standing inquiries, Lexmark, 134 S.Ct. at 1387, because "the absence of a valid ... cause of action does not implicate subject-matter jurisdiction, i.e., the court's statutory or constitutional power to adjudicate the case." Id. at 1386 n. 4 (emphasis in original) (internal quotation marks omitted).
Accordingly, when a defendant's motion to dismiss challenges a plaintiff's ability to bring an action under an applicable statute, it should be understood as a motion to dismiss for failure to state a claim upon which relief can be granted pursuant to Rule 12(b)(6). See Henry Avocado Corp. v. Z.J.D. Brother, LLC, No. 17-CV-4559 (ARR), 2017 WL 6501864, at *2 (E.D.N.Y. Dec. 19, 2017); see also Alphas Co. v. Hunts Point Terminal Produce Coop., No. 1:14-CV-00145 (ALC), 2017 WL 1929506, at *3 (S.D.N.Y. May 9, 2017) (holding that the defendants' motions to dismiss for lack of standing under the Racketeer Influenced and Corrupt Organizations Act "should have been brought under Rule 12(b)(6), not 12(b)(1).")
Based on the foregoing, Wilmington Trust's challenge to the Renco Group's
In considering a motion to dismiss for failure to state a claim for relief under Rule 12(b)(6), a court must accept as true all material facts alleged in the complaint and draw all reasonable inferences in favor of the plaintiff. See Walker v. City of New York, 974 F.2d 293, 298 (2d Cir. 1992). However, it is "not bound to accept as true a legal conclusion couched as a factual allegation." Papasan v. Allain, 478 U.S. 265, 286, 106 S.Ct. 2932, 92 L.Ed.2d 209 (1986). Moreover, "[t]hreadbare recitals of the elements of a cause of action supported by conclusory statements" do not constitute sufficient factual allegations. See Ashcroft v. Iqbal, 556 U.S. 662, 678, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009). "To survive a motion to dismiss, a complaint must contain sufficient factual matter, accepted as true, to `state a claim to relief that is plausible on its face.'" Iqbal, 556 U.S. at 678, 129 S.Ct. 1937 (2009) (quoting Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 570, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007)).
"The plausibility standard is not akin to a probability requirement, but it asks for more than a sheer possibility that a defendant has acted unlawfully .... Where a complaint pleads facts that are merely consistent with a defendant's liability, it stops short of the line between possibility and plausibility of entitlement to relief." Iqbal, 556 U.S. at 678, 129 S.Ct. 1937 (internal quotation marks omitted) (quoting Twombly, 550 U.S. at 557, 127 S.Ct. 1955)). "Plausibility thus depends on a host of considerations: the full factual picture presented by the complaint, the particular cause of action and its elements, and the existence of alternative explanations so obvious that they render plaintiff's inferences unreasonable." L-7 Designs, Inc. v. Old Navy, LLC, 647 F.3d 419, 430 (2d Cir. 2011) (citing Iqbal, 556 U.S. at 547-82, 129 S.Ct. 1800). Accordingly, courts are "not required to draw unreasonable inferences or to credit legal conclusion at odds with the plaintiffs own factual allegations.'" See BLT Rest. Grp. LLC v. Tourondel, 855 F.Supp.2d 4, 15 (S.D.N.Y. 2012) (quoting Solow v. Stone, 994 F.Supp. 173, 181 (S.D.N.Y. 1998); see also Rectde-Alvarez v. Eltman, Eltman & Cooper, P.C., 369 F.Supp.2d 353, 359 (E.D.N.Y. 2005) (holding the court was not "obligated to draw unreasonable inferences in plaintiffs' favor.") (citing Old Republic Ins. Co. v. Hansa World Cargo Serv., Inc., 170 F.R.D. 361, 376 (S.D.N.Y. 1997)).
When considering a motion to dismiss, a court also may consider documents attached to or incorporated into a complaint by reference, documents that are integral to the complaint and relied upon in it, and facts of which judicial notice may be taken. See Grant v. County of Erie, 542 Fed. Appx. 21, 23 (2d Cir. 2013) (citing Rothman v. Gregor, 220 F.3d 81, 88 (2d Cir. 2000)). "A document is integral to the complaint `where the complaint relies heavily upon its terms and effect.'" Goel v. Runge, Ltd., 820 F.3d 554, 559 (2d Cir. 2016) (quoting Chambers v. Time Warner Inc., (In re Chambers), 282 F.3d 147, 153 (2d Cir. 2002)). However, "[l]imited quotation from or reference to documents that may constitute relevant evidence in a case is not enough to incorporate those documents, wholesale, into the complaint." Sira v. Morton, 380 F.3d 57, 67 (2d Cir. 2004); accord Sahu v. Union Carbide Corp., 548 F.3d 59, 67 (2d Cir. 2008).
In light of the fact that the Renco Group's previous Standing Motion was denied, albeit without prejudice, this Court has concerns regarding the Renco Group's commencement of this adversary proceeding. Based on the record of the February 2015 Hearing, and Judge Gerber's 2015 Standing Ruling, the Court finds that, in denying the Standing Motion without prejudice, Judge Gerber allowed the Renco Group to renew its previous Standing Motion, or if subsequent events warrant, to file a new motion seeking similar relief.
Instead of renewing its Standing Motion, shortly after Judge Gerber retired, the Renco Group challenged the Bond Claims by commencing this adversary proceeding. By that time, the Fraudulent Transfer Litigation had concluded in the District Court and the Fraudulent Transfer Judgment was affirmed by the Second Circuit. However, for the reasons discussed below, the Complaint fails to allege sufficient facts to state a facially plausible claim that the Renco Group will receive a distribution on account of its equity interests as a result of the Fraudulent Transfer Judgment, such that it would have standing to assert the claims it now pleads in the Complaint. As such, and in line with Judge Gerber's prior ruling, if the Renco Group had sought to renew its Standing Motion, granting leave would have been unwarranted. But, instead of renewing its Standing Motion or filing a new similar motion, the Renco Group attempts to sidestep this requirement by objecting to the Bond Claims by means of an adversary proceeding, which in many ways appears to be an attempt to circumvent Judge Gerber's 2015 Standing Ruling. Notwithstanding its serious concern with the Renco Group's tactics, the Court turns to the merits of the standing issue.
In its Complaint, the Renco Group contends that, "as the sole shareholder of... Metals, [it] is a `party in interest'" under section 502(a) of the Bankruptcy Code. Compl. ¶ 11. Section 502(a) provides that "a claim or interest, proof of which is filed under section 501 of this title ... is deemed allowed, unless a party in interest... objects." The term "party in interest," as used in section 502(a), is not defined in the Bankruptcy Code. In the Second Circuit, a chapter 7 debtor becomes a party in interest with standing to participate in litigation surrounding the assets of the estate "only if there could be a surplus after all creditors' claims are paid" pursuant to the distribution priorities set forth in the Bankruptcy Code. In re 60 E. 80th St. Equities, Inc., 218 F.3d 109, 115 (2d Cir. 2000) (emphasis added) (citing COLLIER ON BANKRUPTCY, ¶ 21.02[2] (15th ed. 1996)); see cf. In re Friedberg, 634 Fed.Appx. 333 (2d Cir. Feb. 24, 2016) ("[W]e conclude that the bankruptcy court correctly held that the debtor lacked standing to oppose the approval of the settlement agreement because he had no pecuniary interest directly and adversely affected by the bankruptcy
This principal applies with respect to a debtor's standing to object to a claim against the estate. See Pascazi v. Fiber Consultants, Inc., 445 B.R. 124, 127 (S.D.N.Y. 2011) (citing In re Manshul, 223 B.R. 428, 429 (Bankr. S.D.N.Y. 1998)); see also In re Vebeliunas, 231 B.R. 181, 190 (Bankr. S.D.N.Y. 1999) (finding that a debtor is a party in interest if the liquidation of the estate will generate a surplus) (citing In re McCorhill Pub., Inc., 89 B.R. 393, 395 (Bankr. S.D.N.Y. 1988); In re Bucala, 464 B.R. 626, 634 (Bankr. S.D.N.Y. 2012) (finding that the debtor lacked standing when the "trustee has indicated — through the filing of his report — that there is no possibility of a surplus for the [debtor].")
Similarly, an equity holder, such as the Renco Group — which under Bankruptcy Code section 726(a)(6) falls at the bottom of the priority distribution scheme — lacks standing to object to claims against the estate unless there is a reasonable possibility of a surplus after all claims against the debtor's estate are paid in full. See Pascazi, 445 B.R. at 127 ("The rule is based on the assumption that `[t]he success of [the debtor's] objection cannot affect him because the debtor receives a distribution only after all creditors have been paid in full, and an estate will rarely have enough assets to do even that.'") (quoting In re Ulz, 401 B.R. 321, 328 (Bankr. N.D. Ill. 2009)). Otherwise, since equity is last in the priority distribution scheme, it is not reasonably plausible that the Renco Group will be impacted in a pecuniary way by disallowance of the Bond Claims.
Wilmington Trust and the Renco Group agree that the Debtors' estates consists of only two sources of assets: (1) the $213 million Fraudulent Transfer Judgment and (2) approximately $26.8 million in cash proceeds remaining from the sale of a portion of the estates' interest in the Fraudulent Transfer Litigation (the "
According to Wilmington Trust, before any funds may be distributed to general unsecured creditors, the Trustee's commission ($6.4 million), Beus Gilbert PLLC's contingency fee ($87.3 minion), Kellogg, Hansen, Todd, Figel & Frederick PLLC's contingency fee ($1.5. million), Stevens & Lee's legal fees ($2.5 million) and the Renco Litigation Interest (850 million) each must be paid from the proceeds of the Fraudulent Transfer Judgment and/or sale of the Renco Litigation Interest. See Wilmington Suppl. at 12. Thus, according to Wilmington Trust, a total of only approximately $92.3 million would then be available for distribution to general unsecured creditors. See Wilmington Suppl. at 12.
Next, Wilmington Trust points out that the total amount of outstanding claims,
The Renco Group, on the other hand, discounts the $670 million in claims reflected on the Debtors' Claims Registers and argues that the Claims Registers are vastly overstated and contain numerous duplicative claims. Compl. ¶ 29; Renco Supp. ¶ 7. Moreover, the Renco Group argues that the Court may only take judicial notice that the proofs of claim were filed, but may not take judicial notice of the validity, accuracy or the amount owing with respect thereto. Renco Suppl. ¶¶ 22-23. In support of its position, the Renco Group highlights that, in 2001, when the cases were initially filed, the Debtors' estimation of general unsecured claims against them totaled approximately $6 million. Compl. ¶ 29; Renco Supp. ¶ 7.
The Renco Group also discounts the magnitude of the Environmental Claims and makes the conclusionary allegation in its Complaint that "[a]ny environmental remediation obligations, to the extent they are not undertaken by the current owner of the MagCorp property and assets, are likely to be immaterial." Compl. ¶ 29. It also argues that "Metals is unlikely to face any environmental liabilities because it is merely the holding company of MagCorp...." Renco Suppl. ¶ 10 (emphasis added); see also Compl ¶ 11. The Renco Group therefore asks the Court to draw the inference that the Environmental Claims will be insignificant and immaterial once the claims have been resolved:
Suppl. Hr'g Tr. 17:18-24 [ECF No. 48].
In sum, the Renco Group argues that the Debtors' only "substantial liability is their purported liability on the Bond Claims, in the alleged amount of approximately $170 million." Compl. ¶ 30. Based on these assertions, the Renco Group argues that if the relief requested in the Complaint is granted and the Bond Claims are disallowed, Metals will have sufficient
The Court finds that the inferences which the Renco Group asks the Court to draw from its allegations in support of its claim (that there will be a surplus of assets available for distribution to equity) are not reasonable. The Renco Group's Complaint asserts conclusions regarding legal issues that are without support and as such, its claim of entitlement to a distribution as a shareholder is not plausible on its face. First, and most obvious, the Renco Group fails to account for the litigation costs associated with obtaining the Fraudulent Transfer Judgment (totaling approximately $120 million) and costs the Trustee will incur in negotiating and/or litigating the Environmental Claims, which under the Bankruptcy Code indisputably are afforded priority over creditors and equity holders. See 11 U.S.C. § 726(a). Second, the Renco Group's allegation concerning the value and/or legitimacy of the Environmental Claims are interwoven in legal conclusions that the Court is "not bound to accept as true." Papasan, 478 U.S. at 286, 106 S.Ct. 2932 (1986). Third, the Renco Group asks the Court to infer from the allegations in its Complaint that if the Bond Claims were disallowed, the total value of all claims (other than the Environmental Claims) against Debtors' estates will be reduced from approximately $670 million to $0. See Compl. ¶ 30; Renco Supp. ¶ 7. Even if the Court were to draw an inference that (i) as in many large commercial bankruptcy cases, creditors file duplicate claims that ultimately are disallowed during the claims resolution process, and (ii) if the Renco Group were to be successful in this adversary proceeding, resulting in the disallowance of the Bond Claims, there would be a dramatic reduction in the value of all outstanding claims against the Debtors by approximately $340 million (i.e., the $170 million bond claim in each of the Debtors' cases), it is nonetheless not plausible that the Renco Group would be impacted pecuniarily by pursuing the relief sought in the Complaint. Even without considering the Environmental Claims — which it is not reasonable to infer will be "immaterial" as the Renco Group alleges, see Compl. ¶ 29 — there would still remain hundreds of claims valued in the hundreds of millions of dollars on the Debtors' Claims Registers. See BLT Rest., 855 F.Supp.2d at 15 (finding that courts are "`not required to draw unreasonable inferences or to credit legal conclusion at odds with the plaintiff's own factual allegations.'"); Reade-Alvarez, 369 F.Supp.2d at 359 (a "[c]ourt is not obligated to draw unreasonable inferences in plaintiffs' favor" on a motion to dismiss).
As such, it is not facially plausible based on the allegations made in the Complaint that claims valued in the hundreds of millions of dollars ultimately will be disallowed to an extent that would result in the availability of estate assets sufficient for a distribution to the Renco Group. See Iqbal, 556 U.S. at 678, 129 S.Ct. 1937 ("only a complaint that states a plausible claim for relief survives a motion to dismiss") (citing Twombly, 550 U.S. at 556, 127 S.Ct. 1955)). Accordingly, the Renco Group lacks standing as an equity holder to bring this adversary proceeding.
In its Complaint, the Renco Group plead only that it has standing to bring this adversary proceeding as a shareholder. Compl. ¶ 11. However, in its supplemental briefing, the Renco Group asserts
Pascazi v. Fiber Consultants, Inc., 445 B.R. 124, 128 (S.D.N.Y. 2011) (citing In re FBN Food Servs., Inc., 82 F.3d 1387, 1391 (7th Cir. 1996)). However, the right of one creditor to object to another creditor's claim is not absolute and is subject to judicial limitation. See Pascazi, 445 B.R. at 129. Policy considerations, including the necessity for an orderly and expeditious administration of the estate, have led the majority of courts that have addressed the issue to conclude that as "a general rule, absent leave of court, the chapter 7 trustee alone may interpose objections to individual proofs of claim." Id. (quoting In re Thompson, 965 F.2d 1136, 1147 (1st Cir. 1992)) (internal quotations omitted); see also 1983 Advisory Committee Note to F.R.B.P. 3007 ("the demands of orderly and expeditious administration have led to a recognition that the right to object [to claims] is generally exercised by the trustee").
The principle described above was expressly adopted by the District Court in Pascazi, where Judge Pauley affirmed the Bankruptcy Court's decision denying the debtor's shareholder and creditor standing to object to claims because doing so "would threaten the orderly and expeditious administration of proceedings." 445 B.R. at 129. Pascazi concerned chapter 7 case in which a trustee had been appointed to administer the debtor's estate. Notwithstanding the appointment of a chapter 7 trustee, an individual asserting to be the debtor, its shareholder and its creditor (Mr. Pascazi) objected to a claim against the debtor. The Bankruptcy Court overruled the objection and sua sponte raised the issue of Mr. Pascazi's standing to object to claims. See id. at 126. Mr. Pascazi then filed a letter requesting that the chapter 7 trustee investigate and object to the claim at issue, to which "the [t]rustee responded that he would `examine all claims once the liquidation process is complete, and will object to claims where appropriate.` Id. (internal citation omitted).
On appeal to the District Court, Mr. Pascazi argued that he had standing to object to claims filed against the chapter 7 debtor based on "his status as a debtor, creditor, and equity security holder." Id. at 127. Judge Pauley disagreed, and held that "Pascazi only has standing to object to the claim as a debtor if he can demonstrate a `reasonable possibility of surplus once all claims are paid.'" Id. (internal citation omitted). Moreover, Judge Pauley explained that the principle that a creditor is a party in interest with standing to object to claims "is subject to a significant — though not universally adopted — judicial limitation." Pascazi, 445 B.R. at 128-29. Based on the underlying policy of ensuring an orderly and expeditious administration in bankruptcy, the District Court adopted the rule adopted by a majority of courts that, "absent leave of court, the chapter 7 trustee alone may interpose objections to individual proofs of claim." Id. at 129 (internal
The Renco Group argues that recent case law in this District rejects the majority rule requiring a creditor to seek leave of the Bankruptcy Court before objecting to other creditors' claims. See Plaintiffs Memorandum of Law in Opposition to Defendant's Motion to Dismiss ¶ 28 [ECF No. 24]; Renco Suppl. ¶¶ 28-29. In support of its argument that it has standing to pursue this action without first seeking leave for the Bankruptcy Court, the Renco Group relies on a decision by Judge Bernstein, in In re Ampal-Am. Israel Corp., 545 B.R. 802, 808 (Bankr. S.D.N.Y. 2016). In that case, the Bankruptcy Court found that certain creditors had standing to object to claims under the circumstances of the case before it. See Ampal-Am. Israel Corp., 545 B.R. at 808. However, that case is clearly distinguishable. There, although the Court acknowledged the majority rule, it did not need to decide whether the majority rule applied because the chapter 7 trustee in that case did not oppose the creditors' efforts to disallow or reduce the claims, and did "not intend to file his own objection" to the claims. Id. at 809. Here, however, the Renco Group has failed to allege any facts in its Complaint that it first requested that the Trustee investigate and object to the Bond Claims. And, as discussed above, the Renco Group never sought leave of this Court to renew its claim of standing which was previously denied (without prejudice) by Judge Gerber.
The majority rule applies equally to creditors asserting claims under Bankruptcy Code section 502(h),
This Court echoes Judge Gerber's strong sentiments that "[section] 502(a) of the Bankruptcy Code is designed to maximize the estate for the benefit of all general creditors; it is not designed to enable a lone creditor to act solely in his own self-interest." Feb. Hr'g Tr. 34:11-13. By bringing this adversary proceeding, the Renco Group is attempting to achieve an ironic and almost inconceivable result of aligning itself to be repaid monies which it has been adjudicated to owe to the Debtors' estates as a result of the Fraudulent Transfer Judgment. The Court concludes that, in the light of Judge Gerber's 2015 Standing Ruling and under applicable law in this District discussed above, the Renco Group lacks standing to bring this adversary proceeding as a creditor of the Debtors' estates.
For the reasons set forth above, the Court concludes that the Renco Group lacks statutory standing to bring this adversary proceeding. The Motion to Dismiss is granted and the Complaint is dismissed without prejudice. Based on the ruling that the Renco Group lacks standing to bring this adversary proceeding, the Court will not address the remaining arguments made by Wilmington Trust in support of the Motion to Dismiss. The Clerk of Court is directed to close this adversary proceeding.
