## Facts

- Senior Cottages of America, LLC developed and managed senior housing projects generating low-income housing tax credits.
- Murray Klane, a controlling owner and manager, directed company operations as Senior Cottages became insolvent and sought to sell projects.
- Klane formed Millennium Properties, LLC and caused Senior Cottages to transfer all or substantially all assets to Millennium.
- Millennium assumed secured debt but allegedly paid no additional consideration to Senior Cottages for the transferred assets.
- The trustee alleged outside counsel advised and structured the transfer, represented parties with conflicts, and knew or should have known the transaction was for inadequate consideration and would impair payment of creditors.
- Minority owners litigated in Minnesota state court; the court found the transfer fraudulent and found Klane improperly diverted cash payments intended for Senior Cottages to Millennium.
- After bankruptcy, the trustee sought to pursue estate claims against the lawyers for legal malpractice and aiding and abetting Klane’s breach of fiduciary duty.

## Issues

1. Whether the bankruptcy trustee had standing under 11 U.S.C. § 541 to assert malpractice and aiding-and-abetting fiduciary-breach claims against the debtor’s former lawyers based on alleged depletion of the debtor’s assets.
2. Whether denial of leave to amend the complaint was proper on the ground that the proposed amended complaint stated only creditor injuries (or was otherwise futile, including under *in pari delicto*).

## Decision

- The Eighth Circuit reversed the district court’s affirmance of the bankruptcy court’s denial of leave to amend and remanded.
- The court held the proposed amended complaint alleged direct injury to Senior Cottages from depletion of corporate assets, making the claims property of the estate under § 541 and giving the trustee standing.
- The court held it was not clear at the pleading stage that *in pari delicto* barred the claims as a matter of law, so amendment should not have been denied as futile.
- Applying the liberal amendment standard under Rule 15 (via Bankruptcy Rule 7015), the court concluded denial of leave to amend was an abuse of discretion.

## Legal Principles

- Under 11 U.S.C. § 541, a bankruptcy estate includes causes of action the debtor could have asserted as of the petition date; the trustee may pursue those estate claims but not claims belonging solely to creditors.
- Depletion or diversion of a corporation’s assets constitutes direct injury to the corporation, even if creditors experience related downstream harm.
- Standing (whether the claim belongs to the estate) is distinct from merits questions under state law and should not be conflated at the pleading stage.
- *In pari delicto* may bar recovery when the plaintiff is equally at fault, but its application can require fact-specific determinations about control, imputation, and possible limits on imputing a manager’s misconduct to the entity.
- Leave to amend should be freely granted absent undue delay, bad faith, undue prejudice, repeated failure to cure deficiencies, or clear futility.

## Conclusion

The Eighth Circuit held that allegations that lawyers assisted a controlling manager in transferring corporate assets for inadequate consideration stated direct harm to the debtor and therefore belonged to the bankruptcy estate, giving the trustee standing; because defenses such as *in pari delicto* were not clearly dispositive on the pleadings, the trustee was entitled to amend and proceed on the proposed claims.


In re Senior Cottages of Am., LLC, 482 F.3d 997 (8th Cir. 2007)