7th Circuit tosses legal fees suit arising from bankruptcy case

An unsecured creditor’s lawsuit against two law firms over legal fees collected for services provided to a bankrupt Fort Wayne company’s estate should not have proceeded, the 7th Circuit Court of Appeals ruled Friday.

GT Automation Group Inc. filed for bankruptcy and sold its assets in exchange for creditor Comerica to forgive a lien of $7.8 million. The successful bidder was Arlington Capital, which acquired GT’s assets with a bid of about $2.7 million.

The bankruptcy trustee, however, came to believe that Arlington may have colluded with GT insiders to keep the price down. The trustee hired Connecticut law firm Bainton McCarthy LLC and Smith Gambrell & Russell LLP of Atlanta to pursue a 11 U.S.C. § 363(n) claim that allows the trustee to void the sale or recover the true value of the assets from colluders.

The GT insiders settled the case but Arlington went to trial and won. It challenged the court’s award of fees to the law firms, which the bankruptcy court denied. The decision was affirmed by the District Court, but the 7th Circuit tossed the case. “Arlington wants us to reverse but it has not shown that it stands to benefit if the Law Firms' fees are denied. So we remand and instruct the district court to dismiss the case for lack of standing,” Judge Ann Claire Williams wrote.

Arlington as the moving party was required to demonstrate standing. “It utterly failed to carry that burden,” Williams wrote in Arlington Capital, LLC v. Bainton McCarthy, LLC, et al., 15-2543.

“Oral argument revealed that Arlington’s true goal has nothing to do with its general unsecured claim for $5,000. Arlington hopes to file a separate lawsuit against the Law Firms for their role in bringing the § 363(n) suit, and thinks it would be useful to have an opinion from us saying that the § 363(n) suit was pointless,” Williams wrote. “Whatever the merits of its contemplated suit, Arlington is not entitled to — and indeed we lack the authority to offer — an advisory opinion to be used as a sword in independent litigation.”