Commercial Litigation and Arbitration

Standing to Assert RICO Claims Passes to Bankruptcy Estate on Filing Bankruptcy

Individual mortgagors sued financial institutions for deceiving them into taking out inflated mortgages which they could not afford, precipitating their bankruptcy, in Roberts v. First Bank of Delaware, 2008 U.S. Dist. LEXIS 71266 (M.D. Pa. Sept. 19, 2008):

[D]efendants argue that plaintiffs lack standing because any RICO claims they possessed passed from their hands when they filed for bankruptcy. A bankruptcy estate consists of, inter alia, "all legal and equitable interests of the Debtor in property as of the commencement of the case." 11 U.S.C. § 541(a)(1). "Congress intended a broad range of property to be included in the estate." U.S. v. Whiting Pools, Inc., 462 U.S. 198, 204, 103 S. Ct. 2309, 76 L. Ed. 2d 515 (1983). Courts have found that legal claims which accrued before the filing of the bankruptcy petition are included in the estate. [Citations omitted.] Accordingly, to the extent that plaintiffs' RICO claims existed at the time of the bankruptcy filing, they were part of the bankruptcy estate.

Bankruptcy law also provides that once the bankruptcy is filed, the bankruptcy trustee "is the representative of the estate [and] has the capacity to sue and be sued." 11 U.S.C. § 323(a)-(b). The trustee, not the debtor, has the authority to bring any legal claims which are part of the estate. See, e.g. Bailey v. Household Fin. Copr. III, 306 B.R. 391, 394 (D. D.C. 2004) (finding that "a debtor in a chapter 7 case under the Bankruptcy Code violates § 362(a)(3) when she continues prosecution of litigation initiated prepetition, or when she commences litigation postpetition of a prepetition claim, if the claim pursued is property of the estate."). [Citation omitted.] Thus, only the bankruptcy trustee has standing to pursue causes of action that existed at the time of the bankruptcy filing, and "the debtor no longer has standing to pursue a cause of action which accrued at the time the Chapter 7 petition was filed." Anderson v. Acme Markets, Inc., 287 B.R. 624, 628 (E.D. Pa. 2002). The question before the court, then, is whether the plaintiff's RICO claims accrued before plaintiffs filed their bankruptcy petition.

Held, plaintiffs were on notice of their injury, and therefore of their RICO claims, “when they realized that they could not afford to pay the mortgage they made. Since the inflated mortgage was their injury, the maker of the mortgage was the source of the injury.” Therefore, their RICO claims had accrued prior to their bankruptcy filings, and the claims passed to their bankruptcy estates. Case dismissed.

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