Article courtesy of Ariel Emmanuel (King & Spalding)
In re Total Auto Financing LLC, 185 F.4th 123 (2026)
A lien holder and loan servicer that work with a limited liability company does not owe fiduciary duties to owners to properly manage such limited liability company’s loan portfolio.
The plaintiffs Elshan Bayramov and Babak Bayramov (collectively, the “Plaintiffs”) own a limited liability company, Total Auto Financing, LLC (the “Debtor”), which is in the business of providing loans to car buyers. Over several years, the Debtor built a valuable portfolio of these loans. The Debtor then entered into a series of credit facilities with American Credit Acceptance, LLC (the “Lender”) in the aggregate amount of $30 million, which were secured by the Debtor’s loan portfolio and were personally guaranteed by the Plaintiffs. The Debtor subsequently defaulted on the payment of the credit facilities at its maturity, and the Lender selected a third-party servicer, Peritus Portfolio Services II, LLC (the “Servicer”) to service the Debtor’s loan portfolio. The Debtor’s business declined and the Debtor filed for bankruptcy. The loan portfolio was sold at auction for $6.4 million (which was a fraction of the $47 million a which the Debtors valued it). Due to the personal guarantees, the Plaintiffs were liable for the deficiency. The Plaintiffs then filed two complaints in their personal capacity against the Lender and the Servicer (collectively, with certain other parties, the “Defendants”) claiming that Lender essentially used deceptive practices to allow the Debtor to default on its credit facility, to cause the value of the loan portfolio to decline and to allow the loan portfolio to be sold at a deep discount. In one claim, the Plaintiffs alleged that the Lender’s lien was either “not valid” or would be paid out only after the Plaintiffs recouped their equity investment. In another claim, Elshan Bayramov sued the Servicer, claiming a breach of fiduciary duty and a breach of the implied covenant of good faith and fair dealing. The Bankruptcy Court dismissed both complaints. The District Court for the Eastern District of Virginia and subsequently the Fourth Circuit affirmed such ruling.
In coming to its decision, the Fourth Circuit noted that a plaintiff generally cannot raise another person’s claim due to the claim-ownership principle. On the question of fiduciary duties, the Fourth Circuit noted that although some Defendants may have been fiduciaries of the Debtor, the complaint alleged no facts establishing that Defendants owed a fiduciary duty to Bayramov personally. The Fourth Circuit reached the same conclusion on Bayramov’s claim for breach of the implied covenant of good faith and fair dealing. Setting aside that this was a contract claim (and that Bayramov alleged no contract of his own with these Defendants (as opposed to the Lender)), he had no direct claim for breach. The Fourth Circuit concluded that once the Debtor entered bankruptcy, any such claims became property of its estate, to be pursued by the trustee alone for the benefit of all creditors. The Bayramovs never asked the trustee to act, never sought authority to act in her place, and never pleaded a direct claim of their own. And on the issue of the Lender’s lien not being valid or only being payable after the Plaintiff’s equity recoupment, the Fourth Circuit rejected that claim, noting that the statute providing for equitable subordination (11 U.S.C. § 501(c)) does not allow for debt claims to be subordinated to equity interests. With that, the Fourth Circuit ruled that the lower courts property dismissed the Plaintiff’s claims.
