New Products Corp. v. Tibble (In Re Modern Plastics Corp.), 534 B.R. 723 (Bankr. W.D. Mich. 2015) –

The assignee of a mortgage lender sued a former Chapter 7 trustee and his surety for claims based on breach of fiduciary duty. After some nudging from the court, the defendants brought a motion for summary judgment that was characterized as a challenge to plaintiff’s standing to bring the claims.

The debtor’s former lender (Bank of America) assigned the debtor’s loan to the plaintiff (New Products). New Products sued the chapter 7 trustee alleging a breach of fiduciary duty, apparently based on a resulting loss of value of the collateral.

From the beginning the bankruptcy court expressed doubts about the claims. It questioned counsel for both parties about the scope of the claims acquired through the assignment. In particular the court focused on whether New Products acquired tort claims as well as contract claims: “You’re saying ‘You breached your fiduciary duty;’ is that a tort claim? Did you buy a tort claim? Can tort claims like this be bought and sold? Or did you buy a right to payment for a million two?”

Initially both counsel responded that New Products bought all claims. As the lender’s counsel put it “We stand in the shoes of Bank of America. We don’t stand in one of their shoes. We don’t stand, you know, on our tippy toes in their shoes. If we’re the assignee of Bank of America, we have all the rights of Bank of America.”

However, the defendants subsequently followed down the path identified by the court. They argued that New Products acquired only contract claims, not tort claims. A breach of fiduciary claim sounds in tort, not contract. Consequently they argued that New Products did not have standing to sue the trustee.

The court noted with approval a prior case holding that the language in an assignment is dispositive, and that an assignment of rights under all contracts does not necessarily include the right to bring tort or statutory claims that are “merely related somehow to the contractual relationship.”

In this case the operative language was: “Assignor does hereby sell, assign, transfer and set over to Assignee all the right, title and interest of assignor in, to and under the Loan Documents” (with certain exceptions). The court concluded that the scope of the assignment was limited to contractual claims.

In response New Products argued that the Loan Documents included a security interest in commercial tort claims. In the court’s view, this argument “completely misses the mark for a couple of reasons.”

First, the security interest would relate to claims for injuries to the debtor, not to the lender. Second, neither Bank of America nor New Products would have an enforceable interest in commercial tort claims that arose after the security agreement and after the bankruptcy was filed. Under the UCC, a general after-acquired property clause does not reach commercial tort claims, and under the Bankruptcy Code generally a security interest does not extend to property acquired post-petition (other than proceeds of pre-petition collateral). Further, the UCC requires that a security agreement include a specific description of commercial tort claims in order for the security interest to be enforceable.

New Products argued in the alternative that tort claims were included in the phrase “all the right, title and interest of assignor in, to and under the Loan Documents.” However, the claim was based on an argument that the trustee owed a duty to first Bank of America, and then New Products, under the Bankruptcy Code and common law. The court found that rights “in, to, and under” contracts were necessarily contractual rights, and duties arising under statutes and common law were necessarily separate and distinct.

Consequently, the court granted the defendants’ motion for summary judgment with respect to claims arising prior to the assignment. The court left open the possibility that New Products could have a direct claim post-assignment. However, the court also stated that it “strongly encourages the Plaintiff, before proceeding further, to carefully evaluate the remaining, theoretically viable aspects of its claim, weighing the prospects for success against the mounting expenses.”

The court noted in a footnote that New Products acquired a mortgage loan of more than $1.2 million for only $225,000. There was nothing in the analysis that turned on this fact. However, it would not be surprising if it influenced the court’s views – leaving it less sympathetic to the assignee’s position than it might otherwise have been.

The language in the assignment that was the subject of this case is fairly typical. This suggests that the purchaser of a loan should carefully consider whether there are ancillary rights that need to be expressly included in the assignment.

Vicki R Harding, Esq.