Florida Bar Journal

Avoiding Sticky Situations: Why Understanding the Distinction Between Direct and Derivative Claims Is Essential When Litigation Intersects With Bankruptcy

Distinguishing between direct and derivative claims is not always straightforward. A bankruptcy filing only further complicates the analysis. The stakes are even higher if the party asserting the claim does not reach the same conclusion as the bankruptcy court as to whether the claim is, in fact, a direct or a derivative claim.

Parties have wrangled over whether claims are direct or derivative claims for more than a decade. But two bankruptcy judges in the Middle District of Florida recently weighed in on the issue, further refining the distinction between direct and derivative claims and offering new cautionary tales to heed when pursuing claims against debtors and non-debtor insiders.

We first attempt to explain the differences between a direct claim and derivative claim. Then, we address why the distinction is particularly important in the context of a bankruptcy case. Finally, we suggest how parties can take proactive steps to protect their interests without risking sanctions for violating the automatic stay or encounter other unintended consequences.

Whether a claim is a direct or a derivative claim is a critical inquiry in a bankruptcy case. Derivative claims are property of the estate and subject to the automatic stay.^[1] In turn, direct claims are not property of the estate and may be independently pursued.^[2]

Courts in the 11th Circuit distinguish between direct and derivative claims by asking whether the injury alleged is particularized to the creditor or instead, general to all creditors, which involves applying state law.^[3] Under Florida law, to bring a direct claim a shareholder must satisfy a two-prong test articulated by the Florida Supreme Court in Dinuro Investments, LLC v. Camacho, 141 So. 3d 731, 739-40 (2014), establishing “(1) there is direct harm to the shareholder; and (2) the shareholder has suffered a special injury distinct from the injury sustained by other shareholders or members.”^[4] However, “a shareholder need not satisfy the two-prong test if there is a separate duty owed by the defendants to the individual plaintiff under contractual or statutory mandates.”^[5]

While it may not be obvious whether a claim is direct or derivative, the bankruptcy court has the exclusive jurisdiction to determine whether property, including claims, is property of the bankruptcy estate.^[6] Property of a bankruptcy estate is a broad concept encompassing a wide range of property, including “all legal or equitable interests of the debtor in property as of the commencement of the case”^[7] and “all property in which a debtor has any interest.”^[8] So how does a Florida bankruptcy court actually apply the Dinuro test to decide whether claims are direct or derivative claims?

Generally, fraudulent transfer claims are derivative claims and property of the estate.^[9] Such claims are often premised on allegations regarding the concealment and depletion of assets available to pay creditors.^[10] Likewise, “[a] claim for breach of fiduciary duty by an officer or director of a corporation that caused generalized harm to the corporation and its shareholders is derivative and property of the estate.”^[11] However, outside these quintessential derivative claims, the analysis gets stickier.

In In re Sticky Holsters, Inc., Case No. 2:23-bk-00962-FMD, 2024 WL 3359368, at *1 (Bankr. M.D. Fla. July 10, 2024), the plaintiff, a minority shareholder, sued the debtor and Michael Christoff, the debtor’s majority (and only other) shareholder. There, the plaintiff sought a declaration that he was a shareholder and director of the debtor, which the debtor and Mr. Christoff disputed.^[12] The plaintiff also sought damages for breach of fiduciary duty, fraud, and ultra vires acts.^[13] A jury returned a verdict for the plaintiff on the declaratory judgment, breach of fiduciary duty, and ultra vires claims.^[14] But, before the damages phase, the debtor filed a voluntary petition seeking relief under Ch. 11, subchapter V of the Bankruptcy Code.^[15]

Shortly after the filing, the plaintiff sought relief from the automatic stay to liquidate his claims in the state court.^[16] The debtor responded, asserting the plaintiff would pursue claims that Mr. Christoff breached his fiduciary duty not only to the plaintiff, but to the debtor, and argued these claims were property of the estate.^[17] The bankruptcy court authorized the plaintiff to liquidate his direct damages claim against the debtor and Mr. Christoff.^[18] But the court declined to address whether the breach of fiduciary duty claims were direct or derivative claims.^[19]

That order was not the court’s final word on the issue. On the eve of the state court damages trial, the plaintiff asserted the debtor waived the argument that the claims were derivative. The debtor responded by seeking sanctions against the plaintiff for pursuing derivative claims.^[20]

At the bankruptcy court, the parties agreed that the plaintiff’s damages for distributions he did not receive, interest on those distributions, and potential tax penalties were direct claims.^[21] But the parties disagreed whether claims arising from transfers of real estate, payment of excessive rent, payment of excessive compensation to the debtor’s officers and directors, and lost business value, which the plaintiff characterized as “disguised distributions” to Mr. Christoff, were direct or derivative claims.^[22]

Even though the plaintiff was the only other shareholder, the bankruptcy court determined the “disguised distributions” claims were derivative in nature, and, therefore, property of the debtor’s bankruptcy estate.^[23] The bankruptcy court reasoned that “there is no special injury” where shareholders other than the plaintiff “would have suffered the exact same amount.”^[24]

Still, the issue was not fully resolved. Several months later, in response to the plaintiff’s motion to determine the inapplicability of the automatic stay, the bankruptcy court entered a third order, continuing to refine its ruling and put a finer point on the distinction between direct and derivative claims.^[25] Through its motion, the plaintiff sought clarification that the automatic stay did not apply to the damages claims for his proportionate share of constructive distributions made by the debtor to Mr. Christoff or for his benefit during the time period when the debtor denied the plaintiff’s ownership interest.^[26] The court agreed, concluding that its initial stay relief order encompassed the constructive distribution claims and that such claims were direct claims.^[27] The plaintiff took advantage of the bankruptcy court’s favorable ruling in In re Sticky Holsters, Inc., Case No. 2:23-bk-00962-FMD, 2025 WL 80252, at *1 (Bankr. M.D. Fla. Jan. 13, 2025), and avoided sanctions by settling with the debtor and Mr. Christoff.

The surety in In re D.A.B. Constructors, Inc., Case No. 6:21-bk-04053-GER, 2024 WL 5200457, at *1 (Bankr. M.D. Fla. Dec. 6, 2024), was not as fortunate. Early in the case, the trustee filed a complaint to recover various transfers made by the debtor to the surety and to determine the extent, validity, and priority of the surety’s liens, rights, and interest in various estate assets.^[28] The trustee and the surety settled those claims and agreed the trustee would not oppose or interfere with the surety’s potential indemnity, breach of fiduciary duty, breach of guaranty, and breach of contract claims against the indemnitors.^[29] The parties agreed these causes of action were not property of the bankruptcy estate.^[30]

After the settlement was approved, the surety sued the indemnitors and related parties in the U.S. district court on a new theory.^[31] The complaint, as subsequently amended, asserted claims relating to the indemnitors’ alleged use and transfer of funds, which the surety contended were held in trust for its benefit. But the bankruptcy court had not made any determination as to the character or nature of the funds.^[32]

The surety alleged the debtor’s principals breached their fiduciary duties by using company funds to pay personal loans.^[33] The surety alleged claims for aiding and abetting breach of fiduciary duty, conversion, and embezzlement against the debtor’s lender who was paid from the purported trust funds.^[34] The surety sought various remedies, including to avoid a consent judgment against the principals in favor of the lender, to attach the funds paid by the debtor to the lender, a preliminary injunction, and a declaration with respect to the parties’ rights and obligations under the general agreement of indemnity and the alleged trust funds.^[35]

But the trustee asserted the district court action violated the automatic stay because the claims asserted were derivative claims — claims that would impact the trustee’s administration of the estate.^[36] Unsurprisingly, the surety responded that its claims were direct claims because the funds at issue were trust funds deposited by the surety into the debtor’s bank account.^[37]

The bankruptcy court sided with the trustee and found that the surety violated the automatic stay by filing the district court action and pursuing the claims.^[38] When the surety sought reconsideration of the ruling, the bankruptcy court entered a detailed opinion largely denying the motion.^[39] The bankruptcy court permitted the surety to amend the breach of fiduciary duty claims to theories “not based on general harms to Debtor, duties arising while in the ‘zone of insolvency’ or transfers of the Debtor’s funds which are presumptively property of the estate.”^[40] The court otherwise ruled that the claims must be dismissed with prejudice.^[41]

In particular, the bankruptcy court directed dismissal of the fraudulent transfer claims and the aiding and abetting claims with prejudice because the alleged harm is tied to the depletion of the debtor’s assets.^[42] The bankruptcy court also concluded that the attachment of the funds paid by the debtor to the lender would interfere with the Ch. 7 trustee’s administration of the estate and also stayed the claims for injunctive relief.^[43] Finally, the bankruptcy court directed the dismissal of the declaratory relief count without prejudice to the surety seeking a determination of its rights under the general agreement of indemnity from the bankruptcy court.^[44]

Not surprisingly, the surety’s cavalier approach to whether the claims were direct or derivative claims — and its subsequent failure to correct its errors — proved to be a costly misstep. The bankruptcy court awarded the trustee damages for attorneys’ fees against the surety in excess of $85,000.^[45] In doing so, the bankruptcy court concluded that the surety’s actions were willful because the surety knew about both the bankruptcy case and the trustee’s objections.^[46] The bankruptcy court rejected the surety’s argument that it should not be sanctioned based on the Taggart v. Lorenzen, 587 U.S. 554 (2019), “fair ground of doubt” safe harbor, finding that the “[s]urety had no objectively reasonable basis to include estate causes of action in the District Court Complaint.”^[47] The order awarding the trustee damages for the violation of the automatic stay is on appeal,^[48] but the tale is a cautionary one regardless.

Given the complexity of the analysis as to whether a claim is direct or derivative, a creditor or shareholder should request the bankruptcy court determine the issue to avoid violating the automatic stay. One should do so before advancing non-bankruptcy litigation, particularly if the position is contested by other parties in the bankruptcy. There is little to be gained by taking anything less than a surgical and deliberate approach to evaluating whether a claim is direct or derivative. Actions taken in violation of the automatic stay are void ab initio.^[49] The consequences of a flawed analysis can be significant.

Moreover, simple relief from the automatic stay may not be enough. A party should bring all the facts and theories to the bankruptcy court’s attention and even consider attaching a draft complaint. State court litigators should also regularly consult with bankruptcy counsel with respect to pleadings and arguments they want to advance in the non-bankruptcy litigation. Better yet, consider inviting the bankruptcy attorney to join the trial team to assist with identifying and getting ahead of litigation issues that may arise in the parallel bankruptcy proceedings. These approaches can prevent mistakes that can result in unwanted consequences in the bankruptcy case. The penalties for violating the automatic stay can be significant, as was the case for the surety in D.A.B. Constructors.

This column is submitted on behalf of the Business Law Section, Stephanie Lieb, chair, and Kathleen DiSanto, editor.