DGDK Has Obtained a Far-Reaching Victory in a Class Action it Filed on Behalf of Bankruptcy Trustees Against the California State Controller

Danning-Gill has settled and obtained court approval of the Settlement Agreement in a class action it filed nearly four years ago against the California State Controller, on behalf of bankruptcy trustees whose claims to debtor funds that escheated to the State of California prepetition were denied based on the argument that trustees lacked standing to assert such claims. Pursuant to the Settlement Agreement, the Controller has agreed to abandon its long-standing policy of denying trustee claims to escheated funds.

R. Todd Neilson, the Chapter 7 trustee in the consolidated bankruptcy case of Marion “Suge” Knight, Jr. and Death Row Records, Inc., filed the class action to recover escheated funds held in trust by the Controller. The Controller had previously refused to pay such funds to the Trustee, even though Mr. Knight and Death Row Records had owned interests in the funds prior to their bankruptcy filings. In refusing to turn over the funds, the Controller stated, “[i]t is the long-standing position of [the Controller] that once unclaimed property has escheated to the State of California, it is not subject to claims by bankruptcy trustees claiming on behalf of a bankruptcy estate or debtor.” Danning-Gill noted that many other bankruptcy trustees had their claims rejected based on this legally incorrect policy.

On behalf of the Trustee, Danning-Gill asserted that the Controller’s policy conflicted with 11 U.S.C. section 541(a)(1), which states that property of a bankruptcy estate includes the debtor’s legal and equitable interests in property as of the commencement of the case. Because an owner of escheated funds maintains an interest in the funds even after they escheat to the State, that interest becomes property of the debtor’s bankruptcy estate and the funds must be turned over to the debtor’s trustee under 11 U.S.C. section 542. Danning-Gill further asserted that the Controller’s policy violated the automatic stay established by 11 U.S.C. section 362(a)(3), constituting an exercise of control over property of the estate.

The settlement between the Trustee and Controller provides, among other things, that the Controller will no longer engage in the above policy, will pay trustee claims previously denied solely based on the above policy upon resubmission of such applications, and pay attorneys’ fees to Danning-Gill, as class action counsel.