Judge Craig Goldblatt’s recent decision in the Delaware bankruptcy court carves out a safe haven for creditors amid the Third Circuit’s expanding view of what claims belong to a debtor’s estate. Relying on the Third Circuit’s decision in Whittaker, Clark & Daniels[1], Judge Goldblatt held that certain claims against directors and officers, which are traditionally treated as estate property, instead belong to individual creditors.
The dispute arises from the chapter 11 cases of Joann, an iconic national fabric and hobby retailer. In the nine months between its first and second filings, vendors commenced a state court proceeding asserting that Joann’s directors and officers were guilty of common law fraud and negligent misrepresentation by making false and misleading statements about its financial condition that induced the vendors to extend credit. The case was removed to federal court and transferred to the Delaware bankruptcy court (Judge Goldblatt) with jurisdiction over Joann’s chapter 11 cases.
Joann’s second chapter 11 case involved a sale of substantially all of its assets; after which, Joann filed an adversary proceeding seeking to dismiss the vendors’ action. Joann argued that the claims against its directors and officers were derivative of the company and therefore belonged to the estate. As such, Joann asserted that the claims were transferred to the buyer of its assets.
In distinguishing between derivative and direct claims, courts historically apply a straightforward framework. Under this approach, if applicable non-bankruptcy law would allow the debtor corporation to assert the claim prior to bankruptcy and the alleged injury is to the corporation generally with no particularized injury against any creditor, then courts generally consider the claim derivative and a part of the bankruptcy estate. Since alleged misconduct by officers and directors typically harms creditors only indirectly through injury to the corporation, courts generally view such claims as derivative and, thus, estate property.
As noted by Judge Goldblatt, the Third Circuit found this traditional framework unworkable for some state law claims, such as successor liability, where creditors have a nominal right to sue for secondary harms derived from prepetition injuries to the debtor corporation. To resolve this tension, the Third Circuit, over a series of decisions, shifted the inquiry from whether the debtor could bring the claim prior to bankruptcy to the nature of the claim itself. Judge Goldblatt found the synthesis of the Third Circuit’s evolving case law in Whittaker, which held that claims are direct when the theory of liability is based on a particularized injury directly traceable to the conduct of the defendant, and claims are derivative if the theory of liability is based on an injury to the debtor that resulted in secondary harm to all creditors.
In applying the test to Joann, Judge Goldblatt found that the vendors’ injuries were particularized and traceable to the conduct of the directors and officers, despite the vendors’ claims relying on the same misrepresentations by those directors and officers. In making this finding, Judge Goldblatt focused on the elements of the state law claim asserted and not the facts underlying the claim. He held that since in Ohio (the law applicable to the claims) creditors need to prove justifiable reliance of the misrepresentations of directors and officers, the theory of liability must be particularized to each creditor. Of critical importance to the opinion is the fact that if any creditor failed to establish reliance, then the directors and officers would not be liable to that creditor.
The Joann decision highlights a subtle but important shift in the Third Circuit’s jurisprudence regarding claims against directors and officers. Debtors may no longer be able to rely on the traditional framework to assume that claims against directors and officers will belong to the estate. A loss of these claims could severely impact the value of a struggling estate that relies on potential recoveries to fund a chapter 11 plan or maximize recoveries for creditors generally. Therefore, practitioners in the Third Circuit and elsewhere should carefully review potential claims against directors and officers prior to filing to ensure that they fully understand whether potential claims are estate assets, the potential value of such claims and the potential impact on the feasibility of confirming a plan.
[1] 176 F.4th 241 (2026).
