SAK Development, Inc.

UNITED STATES BANKRUPTCY COURT
EASTERN DISTRICT OF NORTH CAROLINA
WILSON DIVISION
IN RE:
SAK DEVELOPMENT, INC.,
Debtor. 	CASE NO. 07-02215-8-JRL
____________________________________________________________________________
ORDER
On December 7, 2007, American Constructors of North Carolina, Inc. (American
Constructors), a creditor of the debtor, filed a motion with the court to surcharge its expenses
against the interests in the debtor’s property of its secured creditor, Paragon Commercial Bank
(Paragon), pursuant to Section 506(c) of the Bankruptcy Code. On January 4, 2008, the court
entered an order giving American Constructors and all other parties in interest ten days with
which to show cause why American Constructors’ motion should not be dismissed for lack of
standing pursuant to the Supreme Court’s ruling in Hartford Underwriters Insurance Company v.
Union Planters Bank, N.A., 530 U.S. 1, 120 S. Ct. 1942 (2000). On January 14, 2008, American
Constructors filed a brief in response to the court’s order.
In Hartford Underwriters, the United States Supreme Court held that only the trustee (and
by implication, the debtor-in-possession under Section 1107) has standing to seek payment of
SO ORDERED.
SIGNED this 22 day of January, 2008.
________________________________________
J. Rich Leonard
United States Bankruptcy Judge
____________________________________________________________
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administrative claims under Section 506(c). 530 U.S. at 14. Specifically, the Supreme Court
held “that 11 U.S.C. 506(c) does not provide an administrative claimant an independent right to
use the section to seek payment of its claim.” Id. Hartford Underwriters ratified what had long
been the law in the Fourth Circuit. In re JKJ Chevrolet, Inc., 26 F.3d 481(4th Cir. 1994).
In its brief in support of its 506(c) motion, American Constructors does not contend that
it has the permission of the debtor-in-possession to bring this suit. Further, there is no indication
in the record before the court that the debtor-in-possession here has joined in or ratified the
motion, or assigned its rights under Section 506 to American Constructors. Rather, American
Constructors contends that the court has the authority to allow it to file a creditor derivative
action, despite the Supreme Court’s ruling in Hartford Underwriters and the Fourth Circuit’s
decision in JKJ Chevrolet. Specifically, American Constructors asserts that both the Supreme
Court and the Fourth Circuit have contemplated the permissibility of creditor derivative suits
under some circumstances, and that the court here should allow American Constructors to bring
the derivative suit to prevent a secured creditor, Paragon, from obtaining what American
Constructors calls “an inequitable windfall.”
The court does not find this argument persuasive. In In re Baltimore Emergency Services
II, Corp., 432 F.3d 557, 560 (4th Cir. 2005), the Fourth Circuit clearly expressed its hostility
towards creditor derivative suits. Although the Court noted that “[w]e have never decided
whether creditor derivative suits are permitted in the bankruptcy courts of this circuit,” the
Fourth Circuit made clear that bankruptcy courts may only approve creditor derivative suits if,
at a minimum, the two part test articulated in In re Commodore Int’l, Ltd., 262 F.3d 96 (2d Cir.
2001) is satisfied. In Commodore, the Second Circuit Court of Appeals stated that for a secured
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creditor to acquire standing to pursue a debtor-in-possession’s claims, the following must be
met: (1) the creditor must have the consent of the debtor-in-possession, and (2) the court must
find that the creditor’s suit is in the best interest of the bankruptcy estate and is necessary and
beneficial to the fair and efficient resolution of the bankruptcy proceedings. 262 F.3d at 100.
The Baltimore Emergency Services case further makes clear that prior consent of the
debtor-in-possession is required for the bankruptcy court to allow a creditor to bring a derivative
action. For example, in Baltimore Emergency Services, the secured creditor attempted to
establish its standing to bring a derivative suit on appeal by filing an affidavit, several months
after the case was appealed to the district court, which purported to give the creditor permission
from the debtor-in-possession to bring the derivative suit. 432 F.3d at 562-63. The Fourth
Circuit found that this attempt was insufficient to establish standing, rejecting the finding of the
district court that a debtor-in-possession’s approval after the fact may be sufficient to confer
standing. Specifically, the Court stated that “[i]f such suits are to be allowed at all, the consent
must occur before, not after, the action is filed. Id. at 563.
Based on the foregoing the court allows the debtor-in-possession ten days to
unequivocally state its consent to allow American Constructors to bring the 506(c) action. If
such consent is given, the court will provide American Constructors an additional opportunity to
meet the second step of the Commodore test. If the debtor-in-possession does not unequivocally
give American Constructors consent to bring the action, the motion will be dismissed for lack of
standing.
“END OF DOCUMENT”
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