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DECISIONS BUSINESS LAW a bankruptcy trustee for a company whose two shareholders acquiesced in fraud lacks standing to sue third parties who are alleged to have been in on the fraud, the 2d U.S. Circuit Court of Appeals held on July 15. In re Bennett Funding Group (Breeden v. Kirkpatrick & Lockhart), No. 01-5062(L). The Bennett Funding Group (BFG) was a closely held family business which was a vehicle for fraud, involving the sale and resale of the same office equipment leases. BFG’s bankruptcy trustee brought suit in a New York federal court against BFG’s lawyers and accounting firm on the theory that they should have detected the fraud. Following an evidentiary hearing, the district court dismissed the complaint on the ground that the trustee lacked standing to sue third parties where the fraud was perpetrated by the debtor itself. On appeal, the trustee argued that if less than all of the company’s decision-makers were implicated, it is inappropriate to apply the 2d Circuit’s Wagoner rule that a bankrupt corporation that has joined with third parties in defrauding its creditors cannot recover damages from the third party on behalf of creditors. Affirming the dismissal, the 2d Circuit said that the presence of an oversight committee and a handful of innocent BFG insiders were not enough to avoid the Wagoner rule because these innocent nonparties were not the decision-makers and lacked authority over the problematic transactions. The court held that the defrauded investors, and not the trustee, are entitled to pursue the fraud claims. It also rejected the challenge to the evidentiary hearing, finding that the lower court was following an appropriate procedure to assess whether there was a genuine need for trial.

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