## Facts

- Jeff Bostic and Joe Bostic incorporated Bostic Brothers Construction, Inc. (the debtor, referred to as Bostic) in 1991.
- Melvin Morris managed Bostic’s construction projects.
- Beginning around 2000, Bostic performed construction work for several limited liability companies owned by Jeff, Joe, Morris, or Morris’s immediate family.
- In January 2003, Jeff Bostic and Melvin Morris became Bostic’s sole shareholders and directors.
- Bostic’s financial condition later worsened, and creditors filed an involuntary Chapter 7 bankruptcy petition against Bostic.
- The Chapter 7 trustee investigated potential claims against insiders, concluding that Jeff and Morris had breached fiduciary duties by failing to use reasonable care to meet Bostic’s obligations and by placing affiliated LLC interests ahead of Bostic’s.
- The trustee prepared, but did not file, a complaint against Jeff and Morris and instead negotiated a settlement under which Jeff, Joe, and Morris agreed to pay $500,000 to the estate in exchange for a release of claims based on their alleged conduct; the bankruptcy court approved the settlement.
- After the settlement, at least one creditor sued Jeff, Joe, Morris, and others in North Carolina state court asserting claims including constructive fraud; the defendants argued those claims belonged to the bankruptcy estate and had been settled, but the state court denied dismissal.
- Two additional creditors later filed North Carolina state-court actions against Jeff, Joe, Morris, and others alleging constructive fraud, aiding and abetting constructive fraud, and violations of North Carolina’s RICO statute.
- The later state-court complaints alleged that while Bostic was insolvent and operating in a manner amounting to dissolution or winding up, Jeff and Morris (with assistance from Joe and others) caused Bostic to enter subcontracts with the plaintiffs and then diverted funds away from paying those creditors, instead paying obligations of insider-related businesses and engaging in other self-interested conduct.
- Jeff, Joe, and Morris returned to the bankruptcy court seeking an order interpreting and enforcing the settlement-approval order to bar the creditors’ state-court suits as released estate claims.

## Issues

1. Whether the creditors’ state-court claims for constructive fraud, aiding and abetting constructive fraud, and North Carolina RICO violations alleged direct injuries to the creditors (personal claims) or injuries belonging to the debtor (derivative claims that became property of the bankruptcy estate and were released in the trustee’s settlement).
2. Whether the bankruptcy court should interpret and enforce its settlement-approval order to preclude the pending state-court actions, or abstain in favor of the state courts.

## Decision

- The bankruptcy court held that the creditors alleged direct, creditor-specific injuries and therefore asserted personal claims rather than estate-owned derivative claims.
- Because the trustee may settle and release only claims that are property of the estate, the trustee’s settlement and the court’s approval order did not extinguish the creditors’ personal causes of action.
- The bankruptcy court exercised jurisdiction to interpret the scope and effect of its own settlement-approval order.
- The court declined to abstain and refused to extend the settlement order to bar the creditors’ state-court lawsuits.

## Legal Principles

- In bankruptcy, the trustee controls claims that are property of the estate, including claims that are derivative of injury to the debtor entity and that affect creditors generally.
- A creditor may pursue a direct (non-estate) claim when the creditor alleges a distinct, particularized injury, even if the debtor’s overall financial collapse also harmed other creditors.
- Under North Carolina law, although directors ordinarily owe fiduciary duties to the corporation, directors may owe fiduciary duties directly to creditors when the corporation is in dissolution or winding up, or in a condition functionally equivalent to winding up.
- A bankruptcy trustee cannot, through settlement, release claims that belong to individual creditors rather than the estate, even when the creditor claims share factual overlap with contemplated estate claims.
- Bankruptcy courts may construe and enforce their own orders, including compromise and settlement approval orders, and may resolve disputes about the scope of releases contained in those orders.

## Conclusion

The court ruled that the trustee’s $500,000 settlement released only estate-owned claims against insiders and did not bar creditors from pursuing personal, creditor-specific claims for constructive fraud, aiding and abetting, and North Carolina RICO based on alleged misconduct during insolvency or winding up, and it interpreted its settlement-approval order accordingly while declining abstention.


In re Bostic Construction, Inc., 435 B.R. 46 (2010)