In a recent decision in the case of In re Genger, the U.S. Bankruptcy Court for the Southern District of New York (the court) addressed the distinction between direct claims versus derivative claims in the context of a post-petition release.

Background

A Chapter 7 trustee may pursue any claims or causes of action, including avoidance actions to challenge post-petition transfers of property of the estate, that are property of a debtor’s estate. In a recent decision in the case of In re Genger, Case No. 19-13895, Adv. Proc. No. 21-01180 (JLG), 2025 WL 3510886 (Bankr. S.D.N.Y., Dec. 5, 2025), the U.S. Bankruptcy Court for the Southern District of New York (the court) addressed the distinction between direct claims versus derivative claims in the context of a post-petition release.

In Genger, an individual Chapter 7 debtor (Orly or the debtor) was a beneficiary of a family trust (the Orly Trust). Before commencing her Chapter 7 bankruptcy case, Orly had asserted claims against certain third parties including the former trustee (Dalia) for the Orly Trust, which was established for Orly’s benefit, and one of the other beneficiaries of the Orly Trust (Sagi). Following Orly’s lawsuit but prior to the commencement of Orly’s bankruptcy case, Dalia and Sagi allegedly replaced the acting trustee for the Orly Trust with a new trustee, Michael Oldner.

Following the commencement of Orly’s bankruptcy case, Oldner entered into a series of documents, including agreements that provided broad releases of any and all claims of the Orly Trust and “all of its trustees, directors, officers, employees, agents, affiliates, successors, assigns and beneficiaries, whether or not currently in being, and such beneficiaries’ agents,” see Genger, 2025 WL 3510886, at *3 (the releases). The released parties included Dalia and Sagi.

Eventually, the Chapter 7 trustee for Orly’s estate found out about the releases and filed an adversary complaint seeking to avoid the releases with respect to Orly’s direct and derivative claims as an impermissible post-petition transfer of claims that belonged to the estate. In addition, the Chapter 7 trustee sought a declaration that the releases violated the automatic stay and argued that the estate was entitled to damages because the violation was willful. The Chapter 7 trustee argued that Orly’s direct and derivative claims against “released parties” were property of Orly’s bankruptcy estate, and that the releases were broad enough to purport to release claims that belonged to the estate in violation of the automatic stay. The Chapter 7 trustee further argued that by failing to seek approval from the Bankruptcy Court prior to executing the releases, the defendants had attempted to control property of the estate in violation of Section 362(a)(3) of Title 11 of the U.S. Code (the Bankruptcy Code).

Analysis

The defendants filed a motion to dismiss the Chapter 7 trustee’s complaint and asserted that the releases were only executed on behalf of the Orly Trust itself, that the releases only affected claims of the Orly Trust, and that the releases did not extend to the debtor’s direct causes of action. The defendants further argued that the derivative claims that Orly could assert based on her status as a beneficiary of the Orly Trust did not become property of her bankruptcy estate. Accordingly, they argued that the releases did not violate the automatic stay because only Orly’s derivative claims, claims which belonged to the Orly Trust, were released as part of the releases while the debtor’s personal direct claims, to the extent they existed, were not released.

In opposing the defendants’ motion to dismiss, the Chapter 7 trustee asserted that the language of the releases was broad enough to cover the debtor’s direct claims, and that the only active litigation related to the releases were claims that the debtor had asserted against Dalia and Sagi. The Chapter 7 trustee argued that the defendants had violated the automatic stay by executing the releases after those claims became property of the debtor’s bankruptcy estate. According to the Chapter 7 trustee, the releases were an intentional and willful attempt by the defendants to avoid liability on the debtor’s (now the estate’s) claims in violation of the automatic stay. The Chapter 7 trustee further argued that the releases would “directly and adversely affect some of the debtor’s most valuable litigation claims, and thus property of the Debtor's bankruptcy estate …” Genger, 2025 WL 3510886, at *7, by affecting the debtor’s (now the estate’s) potential recovery from defendants. In addition, the Chapter 7 trustee asserted that the releases were broad enough to apply to the estate’s potential claims that had not yet been asserted based on the wrongful replacement of the former trustee of the Orly Trust with Oldner, the trustee who ultimately executed the releases.

According to the Chapter 7 trustee, the estate could recover as a result of the debtor’s direct claims and her derivative claims based on the Orly Trust trustee’s breach of fiduciary duties. Conceding that damage underlying the estate’s derivative claims had been to the Orly Trust rather than the debtor, the Chapter 7 trustee contended that in light of the alleged fraudulent conduct and breaches of fiduciary duty by the trustee to the Orly Trust, a court could fashion relief in favor of the bankruptcy estate based on its derivative claims and the debtor’s status as a trust beneficiary. Because the defendants had notice of the debtor’s bankruptcy case and the language of the releases arguably purported to release claims that belonged to the debtor, the Chapter 7 trustee also sought both punitive and compensatory damages for a willful violation of the automatic stay.

The defendants responded that the releases only affected debtor’s derivative claims that could be brought on behalf of the Orly Trust or based on an injury to the Orly Trust, and not the debtor’s direct claims, because the releases were granted “on behalf of” and “with respect to” the Orly Trust. The defendants further argued that such derivate claims of the debtor were not property of the estate, and therefore that the Releases did not affect property of the debtor’s bankruptcy estate or violate the automatic stay.

The court determined that the releases did not cover the debtor’s direct causes of action. Observing that the scope of a release is contractual, the court reasoned that the releases could not include the debtor’s direct claims because the Orly Trust did not own or have authority to release those claims. The court next concluded that the debtor’s derivative claims, resulting from damages to the Orly Trust, were not property of the estate. Applying the standard for distinguishing between direct and derivative shareholder actions, the court reasoned that the Orly Trust was the real party in interest and that Section 541(c)(2) of the Bankruptcy Code specifically carves out interests in certain trusts that are nontransferable under nonbankruptcy law. Because the derivative claims were property of the trust and not the debtor, these claims were not property of the debtor’s estate. As a consequence, the court rejected the Chapter 7 trustee’s contentions that the trustee of Orly Trust owed a fiduciary duty to the debtor as a trust beneficiary and, as such, such a claim became property of the debtor’s estate. Accordingly, the court dismissed the Chapter 7 trustee’s claims including with respect to the automatic stay, but held that the releases did not affect the debtor’s direct claims against the released parties.

Takeaways

Despite the result, it is advisable for a Chapter 7 trustee or debtor in possession to challenge releases that purport to affect the estate’s claims, especially in circumstances like those in the Genger case where a replacement trustee became the trustee for a trust established for the benefit of the debtor having done no “independent inquiries or investigation” prior to accepting his position and “made no meaningful efforts of his own to investigate the interests and positions of the trust and its beneficiaries.” Moreover, even though the trustee lost the motion to dismiss, the court’s decision ensured that the debtor’s direct claims were preserved for the benefit of the estate by holding that the releases did not extinguish those claims.

On a final note, the court’s decision may also have implications for various types of derivative claims that are held by a debtor’s estate. For example, an equity holder derivative claim is arguably distinct from derivative claims like those at issue in the Genger case, but the Genger decision could be cited in support of an argument that shareholder derivative claims are not property of the equity holder’s bankruptcy estate. If a bankruptcy court applied the reasoning of Genger to equity holder derivative claims, a debtor or a Chapter 7 trustee would have a limited ability to use the tools that are available in a bankruptcy case to affect the release or settlement of those claims.

Reprinted with permission from The Legal Intelligencer, © ALM Media Properties LLC. All rights reserved.