In v. Royal Metal Industries, Inc (In re X-treme Bullets, Inc.), Case No. 22-16143 (February 28, 2024), the Court of Appeals for the Ninth Circuit (“Ninth Circuit”) reaffirmed the long-standing principle that a creditors’ committee can obtain derivative standing to prosecute a claim belonging to the bankruptcy estate (“Estate”) if the debtor refuses to do so or the debtor grants derivative standing to the committee.
A party has standing (the right to challenge the conduct of another in court) when that person or entity has suffered an injury in fact. Derivative standing is when a person or entity other than the harmed party steps in to assert the claim of the harmed party.
In X-Treme Bullets, the Committee of Unsecured Creditors (“Committee”), which was appointed by the United States Trustee, filed an adversary proceeding against Royal Metal Industries, Inc. (“Defendant”) to avoid transfers, recover property, and disallow claims. The Debtors consented to the grant of derivative standing to the Committee and the derivative standing was approved by the bankruptcy court. Defendant then moved to dismiss the adversary proceeding on the basis that the Plaintiff, the Liquidating Trust’s Trustee, lacked standing. Defendant also sought reconsideration of the grant of derivative standing to the Committee.
The Ninth Circuit held that the Committee had derivative standing because the Committee and the Debtors stipulated to such, and the bankruptcy court approved the stipulation. The Ninth Circuit further held that the Committee was not required to establish Article III standing since the Committee filed suit on behalf of the Eestate and asserted derivative standing, which obviated the requirement that the Committee demonstrate Article III standing.
Thus, the Ninth Circuit reaffirmed the long-standing principle that a creditors’ committee can obtain derivative standing to prosecute a claim belonging to the estate if the debtor refuses to do so or the debtor grants derivative standing to the committee. This is critical for a creditors’ committee to keep in mind because it provides a way for a creditors’ committee to assert third party claims to generate value for the state from litigation recoveries, if a debtor or a trustee refuses to do so.