Standing Of A Bankruptcy Trustee To Bring Alter Ego Claims: The General v. Personal Distinction (In re Kwok)

In a truth-is-odder-than-fiction set of facts, the Second Circuit Court of Appeals determines that a Chapter 11 Trustee has authority to pursue an alter ego claim in bankruptcy court.

The Second Circuit’s opinion is HK International Funds Investments (USA) Limited, LLC v. Despins (In re Kwok), Case No. 24-2504 (decided April 6, 2026).

What follows is a summary of the Kwok opinion.

Facts

The Kwok case involves a mega-yacht and a Pomeranian. The Chapter 11 Trustee claims that both belong to Debtor, an individual who is a self-declared “multi-billionaire.”

In the Chapter 11 bankruptcy, Debtor lists the Pomeranian as an asset but claims not to own the yacht—a Cayman Islands-registered boat called the Lady May worth tens of millions of dollars.

The Lady May is titled in the name of Daughter’s Entity, a limited liability company whose only member is Debtor’s Daughter. The Daughter’s Entity:

has no place of business, revenue, bank account, officers, directors, or employees;
maintains no records other than those relating to the Lady May; and
has no business purpose other than owning the Lady May and a smaller vessel called Lady May II that is worth $1,000,000 and is alternatively described as “another yacht” and “a small ‘runner’ boat for the Lady May.”

Before Debtor’s bankruptcy filing, a Creditor seeks to enforce a $116 million state court judgment against Debtor by levying on the Lady May. But Lady May sails to the Bahamas despite a restraining order for the ship to stay put. A contempt action ensues.

In the contempt action, Debtor’s Daughter insists that the Lady May belongs to her Entity. The state court disagrees, explaining that (i) Daughter’s testimony is “internally inconsistent and dissembling,” and (ii) the evidence shows that Debtor controls the yacht, provided the funds to purchase it, and enjoys its use. So, the Court holds Debtor in contempt, emphasizing that Debtor attempted to:

avoid and deceive creditors by parking substantial personal assets with a series of corporations, trusted confidants, and family members; and
engage in other and extensive evasive and contemptuous shell-game machinations.

Debtor’s Bankruptcy

A week later, Debtor files the Chapter 11 personal bankruptcy, claiming to own a handful of electronic appliances, a cell phone, clothing, a few thousand dollars in tax-refund and COVID-relief checks, and a Pomeranian – but not the Lady May.

Adversary Filed by Daughter’s Entity

Daughter’s Entity files an adversary proceeding in Debtor’s bankruptcy:

claiming to be the true owner of the Lady May;
promising to bring the Lady May back to the navigable waters of Connecticut and within the jurisdiction of the Connecticut Bankruptcy Court; and
placing $37 million in escrow as a guarantee, obtaining such money from a British-Virgin-Islands-based entity (which later litigation reveals is controlled by Debtor).

In the adversary filed by Daughter’s Entity, Debtor’s Chapter 11 Trustee counterclaims, alleging that: (i) findings in the contempt proceeding estop Daughter’s Entity from arguing that it (and not Debtor) owns the Lady May; and (ii) Daughter’s Entity is Debtor’s alter ego, so that all assets of Daughter’s Entity (i.e., Lady May, Lady May II, and the $37 million escrow) belong to Debtor’s bankruptcy estate.

The Bankruptcy Court grants summary judgment to Chapter 11 Trustee on the estoppel and alter-ego counterclaims. Daughter’ Entity appeals to the district court, which affirms. Appeal continues to the Second Circuit, which also affirms.

Standing of Bankruptcy Trustee to Bring Alter Ego Claims

The Second Circuit rejects appellant’s argument that the Chapter 11 Trustee lacks standing to pursue the alter ego claim. Here’s why.

Under the Bankruptcy Code, bankruptcy trustees may bring claims founded both on the rights of the debtor and on certain rights of the debtor’s creditors.

–§ 541 & § 544

To assert the debtor’s rights, trustees generally must invoke § 541 of the Bankruptcy Code – which sweeps all legal and equitable interests of the debtor in property as of the commencement of the bankruptcy case into the estate administered by the trustee.

Trustees may also pursue the rights of the debtor’s creditors by turning to other sections of the Bankruptcy Code, including § 544—the “strong-arm” clause that enables a bankruptcy trustee to act as a hypothetical lien creditor as of the day the bankruptcy is filed.

Here, the state law of Delaware governs, because Daughter’s Entity is incorporated there. Delaware law allows creditors to assert the type of alter ego claims the Chapter 11 Trustee is asserting here—and § 544 allows the Chapter 11 Trustee to step into the shoes of creditors to pursue those alter ego claims.

–A General v. Personal Claims Distinction

When alter ego claims are asserted, courts must distinguish between “general” claims and “personal” claims.

A bankruptcy trustee is the proper person to assert an alter ego claim when:

the claim is a general one, with no particularized injury arising from it; and
the claim could be brought by any creditor of the debtor.

This “general” claims approach allows a bankruptcy trustee to exercise the “strong arm” power and recover assets for the benefit of all creditors of the debtor.

By contrast, only creditors – and not a bankruptcy trustee – are entitled to pursue personal claims that belong only to specific sets of creditors harmed in particular ways.

Put simply, bankruptcy trustees cannot assert personal-creditor claims, but § 544 allows bankruptcy trustees to pursue general causes of action that would benefit any hypothetical creditor.

Here, the alter ego claims are general. Such claims increase the basket of assets that could be used to satisfy any and all liabilities owed by the Debtor. As such, they are general claims that enlarge the size of the bankruptcy estate for all creditors – not particular claims that only certain subsets of creditors could assert.

Conclusion

According to the Second Circuit Court of Appeals in its Kwok opinion:

a bankruptcy trustee has standing to pursue alter ego claims, when such claims could have been asserted by any creditor of a debtor on the petition filing date;
that’s the type of alter ego claims that exist in the Kwok case; and
so, the Second Circuit affirms the alter ego judgment that will bring assets of Daughter’s Entity into Debtor’s bankruptcy estate for the benefit of Debtor’s creditors.

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