Altered Ego: New Ninth Circuit Opinion Overrules Previously Well-Settled Law Regarding Exclusive Standing Of Bankruptcy Trustees To Pursue General Claims On Behalf Of The Estate

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On October 21, 2010, the Ninth Circuit overruled what many thought to be well-settled law, and held that a bankruptcy trustee does not have standing to pursue alter ego claims, at least in cases governed by California law. The court first held that California state law does not recognize a general alter-ego cause of action that allows an entity and its equity holders to be treated as alter egos for purposes of all of the entity’s debts. As a result, the court found that bankruptcy trustees (or debtors-in-possession) do not have standing to bring such a claim on behalf of a bankruptcy estate, even if the claim affects all of the bankrupt entity's creditors.

The opinion, Ahcom, Ltd. v. Smeding, 2010 WL 4117736 (9th Cir. 2010), overruled at least two other opinions, one entered in California Central District Bankruptcy Court and another entered by a Ninth Circuit Bankruptcy Appellate Panel, both of which held that trustees had the right – and the exclusive right – to bring general alter-ego claims on behalf of the estate when no particular injury was shown to a specific creditor. Both of the overruled opinions relied on a California state court case, Stodd v. Goldberger, 73 Cal. App. 3d 827 (1977), for the proposition that California recognized a general alter-ego claim.

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