BMO Harris Bank N.A. v. Kuskie

Background

On January 4, 2023, the court had granted in part and denied in part several motions to dismiss. On December 27, 2022, Third-Party Defendant Capitol Sales Company, Inc. filed for Chapter 7 bankruptcy. The court then stayed the litigation as to Capitol Sales under the Bankruptcy Code’s automatic-stay provision, 11 U.S.C. § 362, and required updates about the bankruptcy proceedings.

BMO later moved to alter or amend the earlier order, dismiss the fraudulent-transfer claims against the shareholders without prejudice, and obtain permission to file a proposed Second Amended Complaint. The court took that motion under advisement. In May 2023, the parties informed the court that the Chapter 7 trustee believed BMO’s fraudulent-transfer claims against the shareholders, and possibly its fiduciary-duty claims, belonged to the bankruptcy estate. The parties made different requests concerning whether and how the case should proceed, including requests to stay some or all claims.

Court’s Analysis

The court found that judicial economy and efficiency supported staying all proceedings. The parties appeared to agree that, at minimum, BMO’s fraudulent-transfer claims were property of the bankruptcy estate. The court explained that causes of action the debtor could have brought belong to the debtor and, by extension, the bankruptcy trustee, rather than to individual creditors. Creditors therefore lack standing—legal authority—to pursue claims belonging to the bankruptcy trustee.

The court also concluded that the fraudulent-transfer claims were subject to the automatic stay because pursuing them would involve exercising control over property of the bankruptcy estate. To the extent the remaining claims were not automatically stayed, the court found that they were so intertwined with the other claims that proceeding with them at that stage was unworkable.

Disposition

The court exercised its discretion to stay all proceedings in the case. The stay remains in place until further order of the court. The parties must submit letters every six months, beginning December 1, 2023, about the progress of the bankruptcy proceedings. Within two weeks after those proceedings conclude, counsel must file a final update. The order does not state a separate disposition of BMO’s pending motion to alter or amend the earlier order. Judge Katherine Menendez signed the order.