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The Wagoner Doctrine Keeps Rolling

By A. Michael Sabino and Lawrence A. Wander

A truism of bankruptcy is that assets available to pay creditors are few and far between. Among them are causes of action, and thus both debtors and trustees rightly hoard the right to sue third parties. Does the debtor or trustee have standing to sue when the entity brought the harm upon itself? Generally, the answer is no, and thus in this present environment of corporate misdeeds and scandals, litigation against outsiders is foreclosed by the debtor's own misfeasance.

But the rule has been severely tested of late, as a plethora of bankrupts brought down by fraud seek to recover from third parties that might have participated in the wrongdoing. Indeed, as this writing went to press, debtor Enron had just launched a $3 billion dollar lawsuit against its banks, claiming the financiers participated in fraudulent schemes against the company. See Hays, “Enron Suit Strikes Back,” The Houston Chronicle (Thursday, September 25, 2003). Nevertheless, the principle remains largely intact, and for good reason.

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