Property of the Estate and Creditors Rights to Bring Individual Suits

(Excerpt)Once bankruptcy proceedings begin, section 541 of the United States Bankruptcy Code (the “Bankruptcy Code”) defines the scope of a debtor’s property as including all legal and equitable interests of the debtor. Courts have adopted an expansive interpretation of this section, noting that “every conceivable interest of the debtor, future, nonpossessory, contingent, speculative, and derivative, is within reach of the bankruptcy estate.” As a result, a trustee of the debtor’s estate, or a debtor-in-possession, obtains standing to assert general claims which are common to the creditors, and creditors are thus bound by the outcome of the trustee’s actions.If creditors wish to assert claims independent of the debtor’s estate, they must be able to show specific injury which can be directly linked to the conduct of the party they intend to assert their claims against. Some examples of situations where creditors can show specific injury, and thus obtain standing to bring actions independent of the trustee, are where the defendant violates “an independent legal duty” which it held to the plaintiff, or where a defendant knowingly misleads a plaintiff to purchase securities issued by the debtor.This memorandum will analyze how these standing principles apply to bankruptcy proceedings involving complex fraudulent schemes, known as Ponzi schemes.