What showing must creditors make to be granted the right to prosecute claims on behalf of the bankruptcy estate? Under the widely recognized standard established by the Second Circuit in In re STN Enterprises, a bankruptcy court will grant standing to a creditor where the debtor has “unjustifiably failed” to bring “colorable” claims that are “likely to benefit the reorganization estate.” A recent Southern District of New York Bankruptcy Court decision, In re Sabine Oil & Gas Corp., demonstrates that these discretionary standards may be applied restrictively and serves as an important reminder that bankruptcy courts take their role as gatekeepers seriously and will not rubber-stamp a request for derivative standing that may materially alter the balance of power between the debtor in possession and its creditors.

SECOND CIRCUIT STANDARD -

The doctrine of derivative standing has no express statutory basis in the Bankruptcy Code. In STN Enterprises, the Second Circuit agreed with the majority of bankruptcy courts and recognized an implied right of creditors’ committees to initiate adversary proceedings in the name of a debtor in possession. To obtain so-called “STN standing,” a creditor must present a colorable claim for relief “that on appropriate proof would support a recovery,” and show that the debtor “unjustifiably failed to bring suit.”