In the Second U.S. Circuit, the so-called Wagoner rule deprives a trustee of standing to sue third parties, such as lawyers and investment bankers, if the bankrupt corporation participated with them in defrauding creditors. A recent decision from Connecticut clarifies the limitation of the Wagoner rule when a trustee asserts fraudulent transfer claims.

The case involved Settlement Services Treasury Assignments Inc. (SSTAI), which was sold in 1997 in a leveraged buyout (LBO). However, according to allegations in a lawsuit that followed, the deal rendered the company insolvent and unable to pay its debts, and the company’s management had allegedly misappropriated corporate funds and improperly amended key corporate documents. SSTAI spiraled downward and, in 2001, filed for Chapter 11 in Connecticut. The debtor confirmed a plan in 2004, and a liquidating agent was appointed.