Article Courtesy of David Simonds, Katherine Lynn, and Edward McNeilly of Hogan Lovells
Issa v. Royal Metal Industries, Inc. (In re X-Treme Bullets, Inc.), 2024 WL 837043 (9th Cir. Feb 28, 2024)
In a short, unpublished opinion, the United States Court of Appeals for the Ninth Circuit (the “Ninth Circuit”), following prior Ninth Circuit decisions, affirmed the district court’s decision to reverse the bankruptcy court’s dismissal, for lack of standing, of an adversary proceeding to recover fraudulent transfers, originally brought by the unsecured creditors’ committee (the “Committee”).
On June 8, 2018, X-Treme Bullets, Inc. and seven affiliated companies (the “Debtors”) filed for chapter 11 relief in the United States Bankruptcy Court for the District of Nevada (the “Bankruptcy Court”). Shortly after the petition date, the Debtors hired J. Michael Issa as Chief Restructuring Officer. The Committee was also appointed. On June 1, 2020, Mr. Issa and the Committee executed a stipulation granting the Committee derivative standing to pursue claims relating to certain prepetition transactions between certain Debtors and a list of third-party targets (the “Standing Stipulation”), which included defendant Royal Metal Industries, Inc. (“Royal Metal”).
Later in 2020, on behalf of Debtor Howell Munitions & Technology, the Committee filed an adversary complaint against Royal Metal to avoid and seek recovery of more than $300,000 in transfers as fraudulent transfers and to disallow Royal Metal’s claims. Royal Metal successfully moved to dismiss the adversary proceeding on the grounds that only a trustee or debtor in possession has standing to bring adversary claims. The Bankruptcy Court also granted Royal Metal’s request for relief from the order approving the Standing Stipulation (the “Stipulation Order”).
Under the Debtors’ confirmed chapter 11 plan, which created a liquidating trust, of which Mr. Issa was the trustee, all estate claims and causes of action vested in Mr. Issa, as liquidating trustee. Mr. Issa appealed the Bankruptcy Court’s order and the reconsideration of the Stipulation Order. In June 2022, the District Court reversed and Royal Metal appealed.
The Ninth Circuit affirmed the District Court for two reasons. First, binding Ninth Circuit authority confirmed a creditors’ committee’s standing to initiate an adversary proceeding as a party in interest. Indeed, directly on point was the Ninth Circuit’s decision in Avalanche Maritime, Ltd. v. Parekh (In re Parmetex, Inc.), 199 F.3d 1029 (9th Cir. 1999), in which the Ninth Circuit, approving an earlier Ninth Circuit Bankruptcy Appellate Panel decision in In re Spaulding Composites Co. Inc., 207 B.R 899 (B.A.P. 9th Cir. 1997), held that creditors had standing to assert a derivative suit where the trustee stipulated that the creditors could sue and the bankruptcy court approved the stipulation. Second, the Ninth Circuit rejected the claim that the Committee had to establish Article III standing. As the Committee filed suit on behalf of the estate, it had derivative standing and so did not need to establish standing in its own right.
This was the second unpublished opinion the Ninth Circuit issued in these chapter 11 cases. Four months earlier, in October 2023, the Ninth Circuit issued a virtually identical opinion, affirming a virtually identical District Court opinion issued on the same day as the Royal Metal opinion, reversing the Bankruptcy Court in another fraudulent transfer adversary proceeding filed in these chapter 11 cases.
Given this clear black letter law, how did the Royal Metal case (and the companion adversary proceeding) make it to the Ninth Circuit on a standing issue? The District Court’s opinion suggests the answer. Royal Metal (and the defendant in the companion adversary proceeding) apparently failed to cite to Parmetex in its motion to dismiss before the bankruptcy court. Moreover, in response to the Committee introducing Parmetex and Spaulding, Royal Metal (and the defendant in the companion adversary proceeding) erroneously asserted that the law had changed. While these cases probably should not have reached the Ninth Circuit, they nevertheless provide a reminder that standing stipulations are alive and well in the Ninth Circuit.
