UNITED STATES COURT OF APPEALS
FIFTH CIRCUIT
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No. 93-8876
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IN THE MATTER OF: EDUCATORS GROUP HEALTH TRUST,
Debtor.
SCHERTZ-CIBOLO-UNIVERSAL CITY,
INDEPENDENT SCHOOL DISTRICT, ET AL
Appellants,
versus
STANLEY W. WRIGHT, Trustee,
Appellee.
________________________________________________
Appeal from the United States District Court
for the Western District of Texas
________________________________________________
(June 30, 1994)
Before GARWOOD and EMILIO M. GARZA, Circuit Judges, HEAD,*
District Judge.
EMILIO M. GARZA, Circuit Judge:
Schertz-Cibolo-Universal City Independent School District,
Devine Independent School District, Charlotte Independent School
District, Rosebud-Lott Independent School District, Ben Bolt-Palito
Blanco Independent School District, Fairfield Independent School
District, and Ballinger Independent School District ("plaintiff
school districts") appeal from the district court's decision
affirming the bankruptcy court's ruling that certain causes of
*
District Judge of the Southern District of Texas, sitting by
designation.
action filed in state court belong to the bankruptcy estate.
Finding that the bankruptcy court erred in arriving at a legal
standard for determining which causes of action belong to the
bankruptcy estate, we reverse and remand for entry of judgment in
conformity herewith.
I
In August 1983, Education Group Health Trust ("EGHT") was
established to provide health benefits to teachers in small school
districts. The plaintiff school districts are seven of the over
two hundred school districts which participated in EGHT. CRC
Administration ("CRC") was the initial third-party administrator
for EGHT. CRC not only collected premiums and paid claims, but
also marketed EGHT's plan of benefits to various school districts.
The principals of CRC were William Boon, Jerry Cunningham, Henry
Labaj, and Elgin Allen ("defendants"). In 1986, American Group
Life ("AGL") began marketing EGHT's plan of benefits and took over
as third-party administrator for EGHT. The principals of AGL were
identical to those for CRC.
In 1988, EGHT filed for Chapter 7 relief under the Bankruptcy
Code. Stanley Wright was appointed as trustee of the estate. The
school districts participating in EGHT became creditors of the
estate. Two years later, the plaintiff school districts initiated
a lawsuit in state court against the defendants, seeking to recover
damages on various causes of action, including the mismanagement of
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EGHT and fraud.1 The trustee intervened in the state court lawsuit
in order to assert those claims allegedly belonging to the
bankruptcy estate. For the next two years, both the trustee and
the plaintiff school districts participated in the state court
lawsuit.
In 1990, the trustee filed a motion with the bankruptcy court
to determine which party, the plaintiff school districts or the
trustee, has the authority to pursue each particular cause of
action asserted in the state court lawsuit. Both parties submitted
the matter to the bankruptcy court on stipulated facts. The
bankruptcy court entered an order granting the trustee's motion to
determine its authority. In effect, the court divided the causes
of action into three categories: (1) claims which belong solely to
the bankruptcy estate; (2) claims which may belong to the
bankruptcy estate depending upon the facts established at trial;
and (3) claims which belong to the plaintiff school districts. For
the purpose of determining whether a cause of action may belong to
the estate, the court concluded that if the act or omission giving
rise to the claim was directed generally at the school districts
participating in EGHT, then the claim would belong to the estate.
The district court affirmed the decision of the bankruptcy court
with a minor modification. The school districts then filed a
timely notice of appeal from that decision.
II
1
See Appendix.
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This case requires that we decide whether the bankruptcy court
erred in determining whether certain causes of action are property
of the estate. For our purposes, property of the estate includes
"all legal or equitable interests of the debtor in property as of
the commencement of the case." 11 U.S.C. § 541(a)(1) (1988). The
term "all legal or equitable interests" has been defined broadly to
include causes of action. See Louisiana World Exposition v.
Federal Ins. Co., 858 F.2d 233, 245 (5th Cir. 1988) ("Section
541(a)(1)'s reference to `all legal or equitable interests of the
debtor in property' includes causes of action belonging to the
debtor at the time the case is commenced."); In re Mortgage America
Corp., 714 F.2d 1266, 1274 (1983) (noting that the meaning of the
term "all legal or equitable interests" includes, at the very
least, rights of action). If a cause of action belongs to the
estate, then the trustee has exclusive standing to assert the
claim. See Matter of S.I. Acquisition, Inc., 817 F.2d 1142, 1153-
54 (5th Cir. 1987) (observing that the "general bankruptcy policy
of ensuring that all similarly-situated creditors are treated
fairly" requires that the trustee have the first opportunity to
pursue estate actions without interference from individual
creditors); see also In re E.F. Hutton Southwest Properties II,
Ltd., 103 B.R. 808, 812 (Bankr. N.D. Tex. 1989) ("If an action
belongs to the estate, the trustee has the power and duty to
prosecute the action for the benefit of all creditors and
shareholders in the estate."). If, on the other hand, a cause of
action belongs solely to the estate's creditors, then the trustee
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has no standing to bring the cause of action. See Caplin v. Marine
Midland Grace Trust Co., 92 S. Ct. 1678, 1688 (1972) (holding that
a trustee does not have standing to sue a third-party on behalf of
debenture holders); In re Rare Coin Galleries of America, Inc., 862
F.2d 896, 900 (1st Cir. 1988) ("The trustee, however, has no power
to assert any claim on behalf of the creditors when the cause of
action belongs solely to them.").
Whether a particular state cause of action belongs to the
estate depends on whether under applicable state law the debtor
could have raised the claim as of the commencement of the case.
See S.I. Acquisition, 817 F.2d at 1142 (examining the cause of
action premised on alter ego under Texas law); MortgageAmerica, 714
F.2d at 1275-1277 (examining the causes of action based on the
Fraudulent Transfers Act and "denuding the corporation" theory
under Texas law). As part of this inquiry, we look at the nature
of the injury for which relief is sought. See E.F. Hutton, 103
B.R. at 812 ("The injury characterization analysis should be
considered as an inseparable component of whether an action belongs
to the [estate] or individual [creditor]."). If a cause of action
alleges only indirect harm to a creditor (i.e., an injury which
derives from harm to the debtor), and the debtor could have raised
a claim for its direct injury under the applicable law, then the
cause of action belongs to the estate. See, e.g., S.I.
Acquisition, 817 F.2d at 1152-53 (concluding that an action based
upon alter ego properly belongs to the estate, where (1) the debtor
could have pierced its own corporate veil under Texas law; and (2)
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the debtor was unable to meets its corporate obligations due to the
misuse of the corporate form, causing a derivative injury to the
individual creditor); MortgageAmerica, 714 F.2d at 1275 (concluding
that an action under the Fraudulent Transfers Act properly belongs
to the estate, where (1) the debtor could have brought the action
to recover its assets; and (2) the debtor is stripped of assets,
causing a derivative injury to the individual creditor).
Conversely, if the cause of action does not explicitly or
implicitly allege harm to the debtor, then the cause of action
could not have been asserted by the debtor as of the commencement
of the case, and thus is not property of the estate.
The bankruptcy court concluded as a matter of law that the
trustee has the exclusive authority to bring certain causes of
action listed in the complaint, based on its conclusion that those
causes of action belong to the estate. The plaintiff school
districts contest the bankruptcy court's legal conclusions, arguing
that (1) the debtor itself was not injured or harmed; and (2) even
if the debtor was harmed, the debtor shared responsibility for such
harm. We address each of these arguments in turn.
The plaintiff school districts first argue that the causes of
action are not property of the estate because the claims do not
allege that the debtor suffered any injury or harm. We disagree
with this broad assertion. Several of the causes of action allege
a direct injury to the debtor, from which an injury to the
plaintiff school districts is derived. For example, the plaintiffs
school districts allege in paragraph XIII of the complaint that the
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defendants negligently managed EGHT, causing EGHT to become
insolvent and thus unable to pay the claims of employees of the
plaintiff school districts. To the extent that this cause of
action and others allege only a derivative harm to the plaintiff
school districts, they belong exclusively to the estate.2
We do agree, however, with the plaintiff school districts'
contention that some of the causes of action allege a direct injury
to the themselves, which is not derivative of any harm to the
debtor. For example, the plaintiff school districts allege in
paragraph XI of the complaint that the defendants intentionally
misrepresented to them the financial situation of EGHT, and that
they materially relied on such representations to their detriment.
To the extent that this cause of action and others allege a direct
injury to the plaintiff school districts, they belong to the
plaintiff school districts and not the estate.
In determining whether a cause of action may belong to the
estate, the bankruptcy court focused on whether the act or omission
complained of was directed specifically or generally at the school
districts participating in EGHT. Consequently, if the factfinder
were to find that the act or omission was directed generally at the
school districts participating in EGHT, then the cause of action
2
This assumes, of course, that the debtor otherwise could
have brought a cause of action under Texas law for its direct
injury as of the commencement of the case))e.g., the debtor could
have brought a negligence action under Texas law against the
defendants. Aside from the injury argument and shared-
responsibility argument, the plaintiffs school districts do not
dispute that the debtor could have raised the causes of action
listed in the complaint.
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would belong to the estate; if not, then the cause of action would
belong to the plaintiff school districts. The problem with the
bankruptcy court's framework is that it assumes, rather than
decides, whether a cause of action belongs to the bankruptcy
estate. Stated differently, the fact that creditors in general are
harmed does not determine whether a cause of action belongs to the
bankruptcy estate; rather, general harm to creditors necessarily
follows from the fact that the debtor has been injured.3 The
bankruptcy court's standard for determining whether a cause of
action belongs to the estate ignores the relationship between the
debtor and the nature of the injury suffered. Because that
relationship must be considered when determining whether a cause of
action belongs to the estate, we conclude that the bankruptcy court
applied the wrong legal standard to the causes of action listed in
the complaint.4
3
Another problem with the bankruptcy court's framework is
that it assumes, without explicitly finding, that the school
districts purchasing health care coverage through the EGHT
constitutes all of EGHT's creditors. Based on this assumption, the
bankruptcy court equates general harm to the school districts with
general harm to creditors.
4
We reject the argument that the bankruptcy court's
framework is somehow consistent with our prior opinion in S.I.
Acquisitions. There, we held that an alter ego action is property
of the estate under Texas law, and thus, can be brought by the
trustee on behalf of all similarly-situated creditors. See id.,
817 F.2d at 1153-54. We neither held nor implied that a cause of
action belongs to the estate simply because it could be brought by
many creditors, as opposed to only one. Interpreting S.I.
Acquisitions to stand for this latter proposition would violate the
well-established rule that trustees have no standing to bring
personal claims of creditors. See Caplin, 92 S. Ct. at 1688.
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We decide, rather than remand, the question of what specific
causes of action belong to either party, as it is a matter of law
based on the application of the legal standard discussed above to
the facial allegations in the complaint. Accordingly, to the
extent that the complaint alleges an injury to the plaintiff school
districts which derives from a direct injury to the bankruptcy
estate, we hold that the following claims belong solely to the
estate: (1) the claims that the defendants negligently managed,
and conspired to negligently manage, EGHT (paragraphs XII-XIII of
complaint); (2) the claim that the defendants conspired to commit
fraudulent transfers (paragraph XII);5 (3) the claims that the
defendants conspired to make EGHT insolvent and to commit fraud on
EGHT (paragraph XII); (4) the claim that the defendants breached
their contracts with EGHT, as well as their duties of good faith
and fair dealing (paragraph XIV); (5) the claim that the defendants
were unjustly enriched with funds of EGHT (paragraph XV); and (6)
the claim that the defendants breached their fiduciary duties. See
Appendix paragraph XVI.
To the extent that the complaint alleges a direct injury to
the plaintiff school districts, we further hold that the following
claims belong solely to them: (1) claims based on violations of
the Texas Deceptive Trade Practices Act, and conspiracy to commit
same (paragraphs IX, XII); (2) claims based on violations of the
5
See MortgageAmerica, 714 F.2d at 1275 (holding that
because an action under the Texas Fraudulent Transfers Act is
essentially one for property that properly belongs to the debtor,
the cause of action belongs to the debtor).
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Texas Insurance Code (paragraph X); (3) claims based on fraud, and
conspiracy to commit fraud (to the extent that these claims are
based on alleged false misrepresentations to the plaintiff school
districts) (paragraphs XI-XII); (4) claims based on negligence (to
the extent that these claim allege a breach of a duty of care owed
to the plaintiff school districts) (paragraph XIII);6 and (5) the
claim that the defendants negligently misrepresented the financial
status of EGHT to the plaintiff school districts. See Appendix
paragraph XVII.
The plaintiff school districts also argue that the causes of
action listed in the complaint are not property of the estate
because the debtor's representatives participated in the acts or
omissions giving rise to the causes of actions. Implicit in this
argument is the notion that a debtor cannot raise a cause of action
for which the defendant may have a valid defense on the merits. It
is well-established that the bankruptcy estate succeeds to the
causes of action which the debtor could have brought as of the
commencement of the case, subject to any defenses the debtor may
have faced. 11 U.S.C. § 541(a)(1). However, the plaintiff school
districts fail to cite, and we cannot find, any support for the
proposition that a defense on the merits of a claim brought by the
debtor precludes the debtor from bringing the claim. That the
defendant may have a valid defense on the merits of a claim brought
by the debtor goes to the resolution of the claim, and not to the
6
For example, paragraph XIII alleges that the defendants
failed to use ordinary care to inform the plaintiff school
districts that the EGHT was insolvent.
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ability of the debtor to assert the claim.7 The latter, of course,
determines what is, or is not, property of the bankruptcy estate.
We therefore reject the plaintiff school districts' second argument
on appeal.
III
For the foregoing reasons, we REVERSE the decisions of the
district court and bankruptcy court, and REMAND for entry of
judgment in conformity herewith.
7
We cannot conclude from the allegations in the complaint
whether representatives of EGHT actually participated in the acts
or omissions giving rise to the causes of action. For this reason,
we find misplaced the plaintiff school districts' reliance on
Shearson Lehman Hutton Inc. v. Wagoner, 944 F.2d 114 (2d Cir.
1991). There, "it [was] uncontested" that the management of the
debtor-corporation cooperated with the third-party defendant in
stripping the corporation of its assets. See Shearson, 944 F.2d at
120.
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APPENDIX
The complaint alleges the following:
IX.
VIOLATIONS OF THE DECEPTIVE TRADE PRACTICES ACT
9.01 The actions of Defendants Boon, Cunningham, Seale,
Labaj, Allen, and DeLeon in representing to the Plaintiff
School Districts that the EGHT was "sponsored" by TACS, was
done in such a way as to imply that the TACS had control over
the EGHT plan, which it did not. Said representations
violated §17.46(b)(2), (3) and (5) of the DTPA.
9.02 Defendants DeLeon, Boon, Cunningham, Labaj, and
Seale, in representing that "the liability of the
participating school and the trust for the payment of benefits
under the plan as of any date is limited solely to the assets
of the fund," in contradiction of §21.922 of the Texas
Education Code, violated §17.46(b)(12) of the DTPA.
9.03 Defendants AGL, Boon, Cunningham, Labaj and Allen,
by misrepresenting that substitute coverage at the same level
of benefits and premiums would be automatically extended on
September 1, 1988 for the Plaintiffs, violated §17.46(b) (12)
of the DTPA.
9.04 The failure to disclose that EGHT was having
financial difficulties, while continuing to market
participation in the EGHT to the Plaintiff School Districts
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was a violation of §17.46(b)(23) of the DTPA by Boon,
Cunningham, Labaj, Allen, Seale, DeLeon and AGL.
9.05 In their failure to disclose a conflict between
their actions as third part administrators of EGHT and as
retrocessionaires, Defendants Boon, Cunningham, Labaj and
Allen violated §17.46(1), (2), and (3) of the DTPA.
9.06 All of the foregoing acts, in addition to violating
specific sections of §17.46, as described more particularly
herein, constituted unconscionable actions or courses of
action by the specified Defendants, pursuant to §17.50(a)(3).
X.
VIOLATIONS OF THE TEXAS INSURANCE CODE
10.01 The actions of AGL, Boon and Cunningham, in acting
as third party administrators for the EGHT violated arts.
21.07-5 and 21.07-6 of the Texas Insurance Code.
10.02 The actions of Boon, Cunningham, Labaj, Seale,
Allen, DeLeon and AGL, described more completely in Paragraph
IX above, constituted violations of arts. 21.21 §4(2) and §16
of the Texas Insurance Code, Board Orders 18663, 37550, 41060,
41454, and §§21.3, 21.4, 21.103, 21.105, 21.112 and 21.203 of
Title 28 of the Texas Administrative Code, adopted by the
State Board of Insurance pursuant to authority granted by the
Texas Insurance Code.
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XI.
FRAUD AND CONSTRUCTIVE FRAUD
Defendants Boon, Cunningham, DeLeon, Seale, Labaj and Allen
committed fraud with regard to the Plaintiff School Districts
in that their representations to the School Districts with
regard to the financial situation of the EGHT constituted
false representations of material facts which were made for
the purpose of inducing the School Districts to enter into
contracts with the EGHT, and which representations were relied
upon by the School Districts in entering the contracts with
the EGHT. In addition, or in the alternative, the actions of
said Defendants constituted constructive fraud in that they
concealed the financial condition of the EGHT and the improper
or inadequate structure of the EGHT plan and such concealment
was a breach of a legal duty, trust or confidence which was
injurious to the School Districts or by which undue and
unconscionable advantage was taken of the School Districts.
XII.
CONSPIRACY
12.01 The actions of Defendants Boon, Cunningham, DeLeon,
Seale, Labaj and Allen, were in the nature of a conspiracy.
That is, acts were committed by each of these parties in the
pursuance of an agreement to commit fraud, to commit
fraudulent transfer (in violation of §24.001, et. seq., TEX.
BUS. & COMM. CODE) to violate the Deceptive Trade Practices
Act, and to commit negligence.
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12.02 The actions of Defendants Boon, Cunningham, DeLeon,
Seale, Labaj, in terminating the reinsurance, were in the
nature of a conspiracy to make EGHT insolvent and/or commit
fraud on EGHT, to the detriment of the Plaintiffs.
XIII.
NEGLIGENCE AND GROSS NEGLIGENCE
13.01 Defendants Boon, Cunningham, DeLeon, Seale, Labaj
and Allen were negligent in the following particulars: in
failing to use ordinary care to inform the School Districts
that the EGHT was insolvent or in eminent danger of becoming
insolvent; in engaging in conflicts of interest in their
dealing with the School Districts and the EGHT; in failing to
take action to prevent EGHT from becoming insolvent or
improving its financial condition, rather than recommending or
accepting that EGHT file bankruptcy; by failing to properly
manage and oversee the administration of the EGHT; by
negligently misrepresenting the financial condition of the
EGHT to the School Districts; and/or by allowing and/or
recommending that the stop loss insurance be terminated, in
violation of §21.922 of the Texas Education Code.
13.02 Defendants Stop Loss and Unilife were negligent in
their involvement in the decision to terminate the stop loss
insurance for EGHT.
13.03 Defendant Boon was also negligent in having signed
a $2 million loan on behalf of EGHT without prior authority
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from EGHT and in failing to inform the School Districts that
the EGHT was $2 million in debt and financially unhealthy.
13.04 Defendant Cunningham was also negligent in
encouraging the EGHT Board to ratify the loan signed by
Defendant Boon without authority.
13.05 Defendants Boon and Cunningham were also negligent
in failing to reveal the conflict between their relationship
as their party administrators to the EGHT and as
retrocessionaires.
13.06 Defendant AGL was negligent in marketing a plan (the
EGHT plan) which was insolvent, without disclosing its
financial condition to the School Districts.
13.07 Defendant DeLeon was also negligent in his legal
representation of the EGHT, and therefore, in his legal
representation of the School Districts as members or
beneficiaries of the EGHT.
13.08 Defendants AGL, Boon, Cunningham, Labaj and Allen
were also negligent in misrepresenting that substituted
coverage at the same level of benefits and premiums would be
automatically extended to the Plaintiffs on September 1, 1988.
13.09 All of the foregoing acts by the specified
Defendants, in addition to constituting negligence,
constituted gross negligence which proximately caused the
Plaintiffs' damages and give rise to exemplary and/or punitive
damages.
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XIV.
BREACHES OF CONTRACT AND OF THE DUTIES
OF GOOD FAITH AND FAIR DEALING
14.01 Defendants AGL and Boon, Cunningham, Labaj and
Allen, acting through various corporate fictions, breached
their contracts with EGHT, and therefore with the members
and/or beneficiaries of EGHT, by failing to pay medical claims
to Plaintiffs, and by failing to provide reinsurance and/or
properly protect or otherwise properly manage and/or structure
the EGHT plan. These actions also constituted breaches of the
duties of good faith and fair dealing by said Defendants.
14.02 Defendants Stop Loss and Unilife breached their
contracts with EGHT, of which Plaintiffs were beneficiaries,
by their failure to pay claims which were incurred by the EGHT
and breached duties of good faith and fair dealing by their
involvement in the decision to terminate the reinsurance.
XV.
UNJUST ENRICHMENT/QUANTUM MERUIT
Defendants Boon, Cunningham, AGL and Seale were all
compensated with funds of the Plaintiffs by EGHT for acts
which were not performed by them, and for which they should
not have been compensated. Accordingly, they should be
required to disgorge said sums and return them to the
Plaintiffs.
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XVI.
BREACHES OF FIDUCIARY DUTIES
Defendants DeLeon, Seale, Boon, Cunningham, Labaj, Allen and
Stop Loss all owed fiduciary duties to the EGHT, and, as a
result, owed duties to the individual members or beneficiaries
of the EGHT, including the Plaintiffs, which duties were
breached by the actions more particularly described in
Paragraphs IX - XV herein.
XVII.
NEGLIGENT MISREPRESENTATION
Defendants De Leon, Seale, Boon, Cunningham, Labaj and Allen
committed negligent misrepresentation with regard to the
Plaintiff school districts in that they supplied false
information to the school districts regarding the financial
status of the EGHT, which statements were relied upon by the
Plaintiff school districts as more particularly described in
paragraphs IX-XVI, which was a breach of a legal duty, trust
or confidence and which was injurious to the school districts.
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