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In What State Is the Harm Felt When a Derivative Suit Is Pursued By Creditors?

By Russell C. Silberglied
November 25, 2013

Can a trustee of a litigation trust created under a plan sue in a U.S. bankruptcy court the directors and officers of a non-debtor Canadian parent, when many of the defendant D&Os had rarely set foot in the forum state? According to a recent Tenth Circuit opinion, the answer is yes. Newsome v. Gallacher, 722 F.3d 1257, (10th Cir. 2013). This might surprise directors and officers of Canadian parent companies. As explained below, the holding might be explained, in part, by a misreading of the Delaware Supreme Court's holding in North Am. Catholic Educ. Programming Found. v. Gheewalla, 930 A.2d 92 (Del. 2007).

Background

The plaintiff was a litigation trustee. While the opinion does not specifically so state, it appears that he was appointed pursuant to a confirmed plan of Mahalo Energy USA. The court states that the bankruptcy court appointed the trustee “to administer the legal claims of Mahalo Energy (USA).” Newsome, 722 F.3d at 1262. It also notes that “The bankruptcy court ' gave Newsome charge over Mahalo USA's legal claims, instructing him to administer them 'for the benefit of creditors.'” Id. at 1266.

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